The Savills Residential Research department began 25 years ago, and in this time the UK housing market has changed and evolved. Some of it, we anticipated.

Back in 1989, very few people foresaw the re-emergence of market renting as an investment asset class but it was a significant reason for us to start researching UK Residential. A pinnacle of achievement is Lucian Cook’s valuation of all UK housing stock (he’s been busy). It shows that nearly a £1 trillion or 19% of UK housing stock value is let on the open market by a variety of so-called ‘private’ landlords.

This shift to market renting is part of underlying financial and demographic trends leading to significant tenure and value shifts. It has been so pronounced that the UK now has a lower rate of owner occupation than the EU average.

Equity release

Back in the 1990s, we started to consider whether high levels of mortgaged owner occupation would prove to be a temporary phenomenon. I was saying that a one-off shift in property ownership from landlords to occupants had been facilitated by post-war expansion of mortgage lending. But, when this debt was paid off, we foresaw the market would become more ‘equity driven’.

This Focus bears out that prediction as the increasing amount of outright ownership and decrease in mortgage debt, as a proportion of housing value, has continued. Our valuation puts UK owner occupied equity at £1.78 trillion but owner occupied mortgage debt at £1.85 trillion.

Now that the once-aspiring owner occupiers of the 1960s and 1970s have paid off their mortgages, not only do they find themselves in rent-free accommodation but many also find themselves sitting on a considerable amount of equity and in homes that may be bigger than their needs.

Neal Hudson has explored the extent to which valuable housing stock could be released for young families were suitable ‘downsizer’ properties to become available. The facilitation of such ‘equity release’ will likely become more important to an ageing population seeking to boost its pensions. We anticipate this sector of the market will become an increasingly important driver of housing market change in the next 25 years.

Have and have-nots

In the longer term, governments may become concerned at the decline in mortgaged owner occupation and increasing disparity between the equity haves and have-nots; especially if it goes hand in hand with increasing numbers of older renters.

The last 25 years have shown that repayment mortgages acted as a form of ‘enforced saving’. A proportion of people’s monthly mortgage payments have been used to acquire an asset. That asset, regardless of cycles and market fluctuations in price, has a permanent value. This value is the money saved by a household, especially in retirement, by not having to pay rent. With the average retirement now lasting 20 years and average rents at £9,000/year, the crudest calculation makes an average UK home worth £180,000 – regardless of what happens to house prices.

This means that the further decline of owner occupation and permanent exclusion of younger generations from homeownership is not in the long-term national interest. In the next quarter-century, we anticipate that increasing efforts will be made to increase it again.

Taken from
Residential Property Focus Q1 2014