The real reason house prices are faltering

It’s easy to blame the political upheaval of the last year, but the real damage was done a decade ago.

House price indices have made grim reading over the last month, with Halifax, LSL and Rightmove all reporting a decline. RICS is the latest bearer of bad news, reporting that its headline price growth gauge slipped from +7% to +1%, representing the softest reading since early 2013.

Nevertheless, the national figure conceals diverging trends across parts of the UK. Indeed, house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West.

Sales activity in the housing market has been slipping in the recent months and the most worrying aspect of the latest survey is the suggestion that this could continue for some time to come. One reason for this is the recent series of tax changes, but this is only part of the story. Lack of new build in the wake of the financial crisis is a more fundamental factor weighing on the market. And there are some very real consequences for the economy from all of this including the impact on the ability of people to be mobile when looking for work.

“Sales activity in the housing market has been slipping in the recent months and the most worrying aspect of the latest survey is the suggestion that this could continue for some time to come,” said Simon Rubinsohn, RICS Chief Economist. “One reason for this is the recent series of tax changes, but this is only part of the story.

“Lack of new build in the wake of the financial crisis is a more fundamental factor weighing on the market. And there are some very real consequences for the economy from all of this including the impact on the ability of people to be mobile when looking for work.

“The flatter trend in price growth is arguably a silver lining, but there is no real indication that the housing market will become materially more affordable anytime soon. Hence the need for the government to press ahead with the Build to Rent initiative, as well as continuing to focus on other tenures alongside home ownership to try address this critical issue.”

According to Savills, the UK property market has never been the same since the financial crisis in 2008, when the average UK house price fell by 20% in 16 months.

Ten years on, the crisis and its consequences have dramatically changed the property landscape. It was not until May 2014, for example, that the average UK house price recovered to its pre-credit crunch level, while transactions have only once risen above 1.3 million.

Ten years on from the financial crisis, Savills argues that the events of 2007 will continue to shape the property market for years to come.

In the year to the end of March 2017, the total spend on house purchases was £312 billion. Given persistently reduced transaction levels and changes in how they are made up, this is £30 billion less than was seen 10 years ago.

The amount funded by debt has fallen by even more, some £47 billion. Now, debt accounts for just 43% of house purchase funding, with cash and accumulated equity the dominant source of funding.

This largely reflects the mortgage regulation measures that were introduced because of the credit crunch with the aim of preventing another debt-driven housing market boom.

The debt taken on by home movers, which exceeded £112 billion 10 years ago, now stands at just £70 billion, a 37% decrease. This reflects a situation where people are trading up the housing ladder less frequently.

Compared to the preceding decade, when households could aggressively trade up the housing ladder, there have been 3.8 million fewer such moves by those needing a mortgage in the past 10 years. Any recovery in these numbers has been muted, suggesting this is likely to become a permanent feature of the market.

Much like the rest of the market, cash has become king. With the Bank of England recently acting to ensure that mortgage regulation will be consistently applied by all lenders, across all aspects of the market, that is likely to be the lasting legacy of the credit crunch.

The flatter trend in price growth is arguably a silver lining, but there is no real indication that the housing market will become materially more affordable anytime soon. Hence the need for the government to press ahead with the Build to Rent initiative, as well as continuing to focus on other tenures alongside home ownership to try address this critical issue.

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