There is a temptation for all groups to treat the housing market as a single entity, and judge the UK by reference to what is happening in that part of the market where the problems are most acute. In reality, what we have is a multidimensional market.
Our annual valuation of the UK’s housing stock bears witness to this. Over the past 10 years the value of London’s housing stock has risen by £854bn to more than £1.6trn. By contrast, the value of housing across the three regions of the north of England has fallen by £5bn to just under £900bn.
To suggest there is a housing bubble in Burnley, where the average house price is less than £100,000, just because there are 53 electoral wards across London where the average house price is more than £1m is, frankly, a bit bonkers.
That said, there is little doubt that across significant parts of the UK, house prices are expensive. The implications of this – most notably the difficulty faced by younger generations to get on the housing ladder – are often cited by those who subscribe to the housing bubble theory as a reason why house prices must fall.
The difficulty with this argument is that a lack of access to home ownership is not a catalyst for a price correction but instead a result of a myriad of other factors which keep house prices high. As we regularly hear, these factors include an inherent undersupply of new housing, although in truth this is only one part of a much bigger jigsaw.
The extent to which the value of UK housing is dominated by housing equity and the low cost of servicing the remaining debt is just as important, if not more.
While the value of the UK’s housing stock approached £6.2trn at the end of 2015, the amount of outstanding mortgage debt was a fraction of this figure, standing at around £1.3trn. The value of stock among owner occupiers with no mortgage debt at all stood at more than £2bn. For the remaining 49 per cent of owner occupiers with a mortgage, the average mortgage stood at just over £120,500.
That means the average mortgage interest for someone already on the housing ladder but still with outstanding mortgage debt is £3,652 a year – 20 per cent less than where it was 10 years ago. For most people already on the property ladder, affordability is not a major concern, and as a consequence there are very few forced sellers.
That means we are in a very, very different place to the late 1980s and early 1990s.
There are, of course, questions as to what happens when interest rates rise. All of the signs are that these rate rises are still a little way off and are likely only to be gradual when they do occur, limiting the risk that they will trigger a correction in the market.
Furthermore, the Bank of England has put in place measures to ensure that borrowers do not stretch themselves too far while rates are low. This has been achieved through mortgage regulation both by limiting the amount which can be loaned at high loan-to-income ratios and by stress-testing borrowers’ ability to repay a mortgage at higher interest rates.
While that may feel like shutting the stable door after the horse has bolted, this limits the future risk of a debt-driven housing market bubble by acting as a drag on future house price growth.
It also means we are in a very different place to 2007 and is reflected in a very different market profile. Whereas in the 10 years prior to the credit crunch, housing transactions averaged 1.65m a year, in 2015 they were 1.23m. First-time buyer numbers were at two thirds of the pre-crunch average, with mortgaged home movers at 50 per cent.
Because mortgage regulation limits the amount both can borrow and benign interest rates will continue to support house prices, mortgage deposit levels will stay high. That indicates that transactions rather than prices will act as the balancing adjustment in the housing market in future.
As we have already seen in the London market, this is likely to mean that homeownership among younger households becomes increasingly confined to more affluent parts of society, who more widely spread their search area thereby changing the pattern of hotspots in the market.
The groups who have become more dominant are the cash buyers and buy-to-let investors, who together are trading in numbers 18 per cent above the 10-year pre-credit crunch norm.
In some London locations the wealthiest of equity-rich buyers have propelled house prices at a astonishing rate. This has quickly attracted the attention of house builders who have piled into fringe prime London locations, shifting the dynamic between supply and demand.
More latterly, it has also attracted the attention of the Treasury which has taken the opportunity to load stamp duty onto higher-value properties, while cutting that for the bulk of the market. Both have created headwinds for the prime housing markets and will certainly mean it is much more price sensitive than it has been hitherto. Prices have already adjusted, and further adjustments cannot be entirely ruled out, though it should be remembered that this remains a relatively thin slither of a much wider market.
Of wider relevance are the tax changes to buy-to-let investors. Some lobby groups have seized the opportunity to suggest that these will bring forward a flood of stock to the housing market, destabilising prices.
An additional 3 per cent stamp duty on acquisition may well temper some landlords’ appetite for future investment, but this is unlikely to cause them to liquidate their assets. The limitation of tax relief for interest payments will put pressure on landlords who are highly geared or with poor performing assets. This said, our analysis indicates that only 31 per cent of private rented housing stock is subject to a buy-to-let mortgage. The average loan on that is 54 per cent of the value property it is secured against. Some landlords will rationalise their portfolios and some will exit the sector, but do not expect a deluge of stock to hit the market.
So while there are undoubtedly pressures on the UK housing market, the conspiracy theorists are likely to have to wait for their day in the sun, even if challenges will remain for those looking to get on or trade up the housing ladder.
Lucian Cook is head of Savills UK residential research
Key Points
Even though we sometimes treat the UK housing market as a single entity, what we have is a multidimensional market.
The Bank of England has put in place measures to ensure that borrowers do not stretch themselves too far while rates are low.
An additional 3 per cent stamp duty on acquisition may well temper some landlords’ appetite for future investment.
