The gap in the mainstream market between the ‘haves-and-have-nots’ is an issue for any future government.

If the housing market is considered a barometer of the electorate’s satisfaction, then on the face of it there was plenty of good news in 2014: house prices ended the year up 7.2% according to the Nationwide; transactions rose by 16% to more than 1.2 million per year; the number of first-time buyers increased by 21%; stamp duty was reformed and house building activity improved with starts reaching 140,000 for the first time since 2008.

"Almost all of the house price growth of 2014 was realised in the first six months"

Undoubtedly, this has been 
good news for many homeowners and for some aspiring homebuyers. However, it is equally apparent that the gap between the housing 
‘haves-and-have-nots’ remains largely unresolved, something which is exemplified by the tension between ‘desirable’ mortgage regulation and ‘less desirable’ reduced access to homeownership.

This means any government will have a fine balancing act when it comes to housing over the life of the next parliament.

Prior to that, a closer look at the second half of 2014 points to a more subdued housing market in the run-up to the general election, which may again bring housing to the fore of the political debate.

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House prices

Almost all of the house price growth of 2014 was realised in the first six months of the year and prices have been flat since June. Parts of London – that, following a longer term trend, saw by far the strongest price growth in the first half of the year - have now begun to see prices soften according to some measures.

Perhaps the most important constraint of price growth in the second half of the year was the introduction of stricter mortgage affordability testing by the Bank of England.

This limits the risk of buyers over-extending themselves and lenders exposing themselves to too much risk, as and when interest rates rise. 
It also effectively caps the amount home buyers can borrow, so it should come as no surprise that average loan-to-income multiples peaked in June.

It appears likely that we will see static or slight declines in lending multiples in coming years and so house price growth will be limited by income growth in mortgage dependent markets. Our forecast for mainstream UK price growth over the next five years is 19.3% compared to 19.9% for incomes.

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Transaction levels

Compared to house prices, the increase in transactions will be considered more universally as good news. Yet, despite a large increase in activity across all buyer types, the only group that has got anywhere near their pre-recession levels are those without a mortgage.

Much like prices, the number of mortgage approvals and transactions peaked early in the year and have been falling since on a seasonally-adjusted basis. This reflects the incredibly strong start to 2014 following the launch of Help to Buy 2 and so we will probably see transactions level out during the first half of 2015 before continuing their slower paced recovery up to 1.34 million in 2019.

Housebuilding

Given the relationship between total market transactions and private housebuilding, it’s not surprising to see that private housebuilding starts are beginning to level off along with the wider market. Despite significant support for housebuilders and home buyers, this relationship essentially remains unbroken. Developers’ sales rates, though clearly supported by government measures, appear to remain ultimately limited by demand 
in the wider market.

Therefore, whatever the merits of current policy, any serious attempt to substantially increase the rate of housebuilding to the levels required needs an increase in delivery across 
all tenures to break the relationship.

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Looking forward

Overall, the news coming out of the housing market appears to be turning slightly negative ahead of the election, but with the Bank of England limiting the capacity for mortgage lending and interest rate rises on the horizon, the political options for giving the market another short term boost are limited.

To the surprise of many, the Chancellor attempted to do just 
that with his reform of stamp duty in the Autumn Statement. The new system has removed the slab structure and lowered the potential cost for most buyers, which has been almost universally welcomed.

It has been encouraging to see politicians deal with this long overdue reform as the centrepiece of the Autumn Statement. However, it is one small part of a much bigger jigsaw, that in reality needs even more political will to assemble.

Taken from
Residential Property Focus Issue 1 2015