The UK housing market has bottomed out and we are now climbing back towards ‘the new normal’, which will arrive in 2017, concludes a new research report by Legal & General Mortgage Club and Cebr
The housing market is fragile and has taken a big hit in the fallout from the credit crisis, which landed globally in 2008. But according to a new study, entitled “A New Normal in the Housing Market”, we could be turning a corner.
The report by Legal & General Mortgage Club and Cebr, which specialises in economic forecasts and analysis, suggests that UK house prices will not recover to peak levels until the first quarter of 2015. And the UK economy is not expected to return to pre-crisis growth levels until the third quarter of 2015. However, we will have to wait another five years to get back to some sort of housing market normality, says the report. And that normality will be very different to the pre-credit crisis.
Cebr identified eight key factors which are preventing the UK housing market from reverting to a ‘normal’ state. According to the survey among 1,100 homeowners, the biggest factors for putting them off buying a property is a weak economy (67 per cent), slow or declining growth in house prices (55 per cent) and restrictive borrowing (53 per cent). A weak labour market (49 per cent), lack of government support (43 per cent), Eurozone uncertainty (39 per cent) and lack of housing being built (30 per cent) were other factors holding back buyers.
Ben Thompson, managing director of the Legal & General Mortgage Club, said: “The past five years have been extraordinarily tough for the housing market, but our new report with Cebr suggests good news is on the way. We’ve hit the bottom and over the next four to five years we will creep back towards recovery in 2017. However, ‘the new normal’ represents a very different housing market to the one we have grown accustomed to in the past.”
Housing transactions
To illustrate just how different the housing market is since the heady days before the credit crunch, the number of housing transactions in England and Wales stood at 1,260,000 in 2007 and fell dramatically in 2008. It has been around the 600,000 mark every year since then.
These days mortgage borrowing is restricted as borrowers generally need a hefty deposit; although the affordability of homes has somewhat improved due to lower costs of borrowing and weak house price growth.
A combination of low interest rates and ‘quantitative easing’, otherwise known as the government printing money, have kept mortgage rates relatively low. And more recently the government and Bank of England’s Funding for Lending Scheme (FLS) is also having an impact. The FLS allows lenders to borrow money cheaply from the Bank of England in order to lend it out to mortgage borrowers and businesses.
So the question is, what will ‘the new normal’ look like in five years time?
House prices
In 2017, the average UK house price is forecast to be £254,000 – 11.9 per cent higher than the 2007 peak of £227,000. This is 17 per cent higher than 2012, where house prices averaged around £217,000. Cebr expects prices to fall or remain broadly flat until mid-2013, then they will slowly climb to £227,000 by 2017.
House prices are expected to grow at an average of 4.1 per cent each year from 2017 to 2027 compared to 11.4 per cent a year between 1997 and 2007. Average house price appreciation is expected to be £12,000 a year between 2017 and 2027. The decade of 2010 to 2019 is forecast to have the weakest house price growth on record since the 1950s.
Mortgage lending
Borrowing conditions are expected to remain strict compared to before the 2008 crisis. Cebr forecasts 674,000 mortgage approvals for house purchase in 2017 compared to 1.25 million in the 2006 peak. This is equivalent to 1,600 new mortgages being approved compared to 3,900 during 2006.
The total value of gross mortgage lending by 2017 is expected to be £212 billion compared to £363 billion in 2007 and a low of £135 billion in 2010. Gross mortgage lending refers to the total value of residential mortgage loans advanced by lenders, including loans for house purchase, further advances and remortgages.
Loan-to-value ratios
The average loan-to-value (LTV) ratio for first-time buyers in 2012 was 80 per cent compared to 90 per cent in the third quarter of 2007. Looking ahead, first-time buyer LTV ratios are expected to approach 90 per cent by 2017; the growth in earnings will be slower and the cost of living higher, which implies it will be even more difficult than it is now to raise a deposit. LTV ratios for existing homeowners are expected to remain broadly the same at around 70 per cent by 2017.
Selling a home
In 2017 it is likely to take longer to sell a home, some nine to ten weeks, which compares to six weeks in mid-2007. This is because of restrictive borrowing conditions and lower housing transaction activity.
Affordability
Affordability of housing is anticipated to be better by 2017 as disposable income growth catches up with house price appreciation. In 2017, the average house price to disposable income ratio is expected to be 5.8, compared to 6.5 during the 2007 peak.
The report anticipates that the cost of borrowing will be lower than during the ‘pre-2008 crisis’ period. By 2017, mortgage rates are expected to be around 3 per cent lower than in the 2007 peak.
However, it will be more difficult to save for a deposit. For example, Cash ISA saving rates are likely to be some 3 per cent lower than 2007 levels.
Home ownership
Another important factor in shaping the housing market is that home ownership is in decline and more people are renting. This trend is likely to continue over the medium to long-term. The homeownership rate is forecast to fall from 68 per cent in 2007 to 57 per cent by 2020 – returning to levels last seen in the 1980s. This implies that there will be 1.6 million fewer households owning a home compared to the 2003 peak of 71 per cent.
The survey found that 18 per cent of homeowners are considering renting as a long-term solution rather than buying a home. Compared to 2007, there are around 31 per cent more households in private rented accommodation, while the number of homeowners has fallen by 2 per cent since then.
House building
In order to accommodate the growing population of the UK, more houses need to be built. But UK house building is undergoing the worst slump on record since World War II. Currently around 130,000 houses are being built each year (2009 to 2012 average). This compares to 250,000 homes built every year in the post-war decade (1946 to1956 average). The highest level of building was undertaken in the 1960s, when houses being built peaked in 1968 at 425,000 a year.
In conclusion to the findings of the report, Ben Thompson said: “These findings show that ‘the new normal’ presents opportunities for many homeowners but challenges for first-time buyers. While house prices are expected to climb slowly from 2013 the cost of borrowing is expected to be lower than during the pre-2008 crisis.
“Meanwhile, mortgage lending is expected to rise but indicators are that it will be more difficult to save for a deposit. Undoubtedly like any period ‘the new normal’ will have its challenges but the hope is that, following the trauma of the crash, what we will have by 2017 is not only a healthier market place but ultimately a more balanced and sustainable one.” wm
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