Over the past seven years it has become abundantly clear that the credit crunch has fundamentally changed the way the UK housing market operates. Combined with the recent regulation of the mortgage markets, accessibility to the debt required to step on to and up the housing ladder has been fundamentally altered.

Whatever the best intentions of the various political parties, the legacy of the credit crunch means the generational divide in the UK housing market will continue to widen, as private renting grows and homeownership among both the under 35s and 35-49 year olds falls further.

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Seeds of change

The seeds of that change were planted 10 years ago. At the end of 2004, the average UK house price had risen by 63% in just three years, resulting in a significant shift in house price to household income ratios.

Together these two factors mean that the housing market has been, and will continue to be shaped as much by the affordability of a mortgage deposit as by servicing 
that mortgage on a monthly basis.

In our leading article we have looked at what the second of these two drivers means for house prices as interest rates rise, but what the two together mean for transaction levels is as big an issue. In turn, this will impact on how the different generations occupy their homes, whether as homeowners or tenants.

"The generational divide in the UK housing market will continue to widen"

Transactions

At the time of writing, annual transaction levels across the UK have just broken through the 1.2 million mark, up by more than 20% in a year. Encouragingly, despite continued high levels of cash transactions, this has until recently been supported by similar growth in lending for house purchase.

However, transactions remain 28% below the average for the 25 years prior to the credit crunch, and data from the British Bankers Association indicates mortgage approvals have plateaued in the short term at least.

In future, the implementation of the Mortgage Market Review is likely to limit both the number of people who can access mortgage debt and the amount they can borrow. Furthermore, there is little sign that the issue of deposit affordability will be anything but permanent unless there is a major housing correction, something we do not anticipate.

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Younger households

The census tells us that in 2011 private renters accounted for 46% 
of all households under the age of 35 across England and Wales, a figure that rose to 54% in London. Among 35-49 year olds the level of private renting almost doubled between 2001 and 2011, to account for one in five households nationally.

Initiatives such as Help to Buy can only limit the flow of households into the private rented sector to a degree. When the cost of servicing a mortgage rises as interest rates eventually climb, mortgaged owner occupation will continue to fall, while limited accessibility to mortgages means that the bulk of new households will be private renters.

As a result, we are forecasting the number of private rented households in England and Wales will increase by 1.2m over the next five years and levels of owner occupation will fall by 202,000 households. This would mean that by the end of 2019, over 24% of all households across the UK would be in the private rented sector.

Among the under 35s, the proportion of households in the private rented sector would increase to 66%, with homeownership falling to just 16% of the total. Even in the next age band (35-49), homeownership would fall to just 55% of all households, with private renting accounting for 28% of households – rising to 38% in London.

This trend will present opportunities for investors and major challenges for government. More fundamentally, it has the potential to change the way we look at housing in the UK and the role of homeownership in particular.

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Taken from
Residential Property Focus Q4 2014