Private starts from April to December 2013 rose by 30 per cent compared with the same period in 2012, although completions have only increased by 4 per cent in the same period.
So far, there have been almost 15,000 loans completed under the scheme and 89 per cent of these have been to first-time buyers. But we know that there is still huge demand out there. The question is: how much and where is it concentrated?
There are estimated to be about 22.5 million households in England in 2013, according to the latest census data. That is around 2 million more than 10 years earlier, but it is about 30 per cent fewer than there were expected to be as recently as 2008. In numbers, that means that an average 70,000 fewer households set up home in England each year, which adds up to about 350,000 households since 2008.
That might sound like good news, given that housing supply is so tight. Even though levels of house building have been lower than we would have liked, surely the fact that there are fewer households than expected means that the pressures on housing supply are also lower. And if that is true, maybe the supply/demand balance in the UK housing market is in a better place than we thought. In reality, however, that is not the case. All the data on households shows us is those who have actually managed to set up independently, rather than those who may have wanted to. The aspiration is still there. CML’s latest survey shows that, even among the 25 to 34-year-old age group, about 80 per cent of people want to be home owners.
There are lots of barriers to home ownership. Undoubtedly, cost is a big issue – both for those setting up for the first time and for households splitting in two. The recession made the labour market less certain, real incomes fell, credit was hard to come by and despite lower house prices, affordability remained restricted. And it is not just the owner-occupied market that is affected. Higher rents, as the credit drought shifted buyer demand to the rental sector, will have prevented household formation for those who wanted to rent initially.
Then there is housing supply. On average, there were just 110,000 new homes built in the private sector in England per year since 2008. That is far short of the actual annual average growth in households of about 160,000 a year, let alone the average expected annual growth of 220,000 a year for England . And when there are fewer places available to set up home, the market simply pushes up the price of buying or renting, which in turn raises the barrier to other prospective home owners – and so it goes on.
Some frustrated households will have compromised, set their sights lower and set up home in less than their ideal home more suitable to their budget. Still others will have become hidden households, living under the same roof as another family, which have increased by a staggering 71 per cent between 2001 and 2011.
Now that the economy and the housing market are on the way to a robust recovery, we should start to see some of these aspiring households returning to the market. But how many are there and in which parts of the country will they return the soonest, putting greater pressure on house prices?
The 350,000 difference between expected and actual households is a place to start, but it is a naive measure of the amount of pent up demand, because it does not factor in how changing economic conditions have influenced behaviour – in particular, migration between areas within the UK. For example, people moving for jobs changes the geographic patterns of demand, increasing it in some areas and reducing it in others. Furthermore, this crude measure tells us nothing about the relative speed with which pent up demand pressures might return to the market, because it takes no account of relative economic or housing market conditions.
Taking these other factors into account gives a different picture. Combining income growth and unemployment as indicators of the economic health of an area with local housing market factors, such as house price-to-income ratios; and overlaying migration flows and rates of building across England gives a more complete picture of the relative strength of local housing markets and how quickly the pent up demand may return to the market.
The most interesting result is the potential buoyancy of the East Midlands and East region of England. When housing markets pick up, focus typically falls on the South, but the East and East Midlands have many factors in their favour. In the East, income is higher and has grown faster than the English average, while the unemployment rate is one of the lowest in the country. Inward migration has been relatively strong too, adding to demand pressure – for owned or rented housing. In the East Midlands, income growth has been stronger than average and affordability should have recovered faster as a result.
In contrast, the Yorkshire and Humber region had the biggest disappointment with respect to the numbers of new households compared to those expected, but that does not mean that it has the most number of households still waiting to return to the market. The region had the highest net out migration over the downturn, which reduced the likely amount of pent up demand. This, combined with higher unemployment and lower-than-average income levels and growth, pushes this region from the top to the bottom of the rankings.
While a lack of supply of new property causing higher prices is frequently quoted as the major reason for lower numbers of households than expected, the results show that the reality is more complex. Economic conditions have more weight, particularly when the behavioural effects are taken into account. Migration from the North to the South has, in general, exacerbated demand pressures, which were already stronger in the South, owing to its faster economic recovery. And while better economic conditions will help the availability of finance, deteriorating affordability means that it is not always the South at the top of the rankings.
Fionnuala Earley is residential research director of Hamptons International
Key points
There are estimated to be about 22.5m households in England in 2013, which is about 30 per cent fewer than there were expected to be as recently as 2008
The 350,000 difference between expected and actual households is a naive measure of the amount of pent up demand. Building in economic and migration factors provide a clearer picture.
Migration from the North to the South has exacerbated demand pressures, which were already stronger in the South.
The East Midlands and East of England have greater potential buoyancy that might be expected.
