The Future of the UK Housing Market; the Think-Tank View

NHF Housing Development Conference

12 July 2011

Andrew Heywood

Housing, Mortgage markets, Regulation, Governance, Europe

• Housing: finance, policy, low-cost homeownership.• Mortgage markets: trends, opportunities, threats.• Regulation: policy, practice, lenders, housing providers.• Governance: effective decision making, strategy, audit.• Europe: housing and mortgage markets, regulation.

Andrew Heywood is an independent consultant specialising in the above areas and an associate of leading consultants Campbell Tickell. He was formerly Deputy Head of Policy at the Council of Mortgage Lenders. Andrew has been at the centre of housing, housing finance and mortgage market developments for many years and has unrivalled contacts amongst policy makers, housing providers and lenders. A visiting fellow of the Smith Institute, Andrew has written and spoken extensively on housing and lending issues. He is Editor of the journal Housing Finance International (www.housingfinance.org. A keen saxophonist , Andrew also runs his own jazz band Afinado (www.Afinado.co.uk)

Andrew Heywood Consulting: a.heywood53@btinternet.com , 01440 730218/07929512057

Andrew Heywood Consulting

The report

The End of the affair: implications of declining home ownership can be downloaded from the Smith Institute

website:

www.smith-institute.org.uk

Setting the scene

• Home ownership levels in England have been declining since 2003.

• They are back to 1991 levels in percentage terms (67.4%) and have declined numerically also.

• There has been a corresponding rise in the Private Rented Sector (PRS) to 15.6%

• The decline in home ownership looks set to continue; on present trends it could be down to 60% by 2025 (c. 45% in London) and the PRS could be over 20% by 2020.

The present position

Tenure characteristics of households England:

• Owner occupiers: 67.4% (14.525 million)

• All social renters: 17.0% (3.675 million)

• Private renters: 15.6% (3.355 million)• Source: English Housing Survey Headline Report 2009-10

The present position

Significant regional and national variations:

• London has only 52.5% home ownership, 25.5% social renters and a PRS at 21.5%.

• Scotland has slightly lower home ownership but more social renting.

• Wales and Northern Ireland have slightly higher levels of home ownership.

The present position

• Home ownership in England is slightly below the EU27 average:

• EU weighted average: 68.2%

• England: 67.4%

• UK: 69%

The present position

• Home ownership is firmly embedded in popular aspirations (though recent surveys suggest that realism is creeping in).

• Home ownership has high political salience; at least at the level of the rhetoric of all three parties. (“The age of aspiration is back!”-Grant Shapps, Housing Minister 8 June 2010).

• Home ownership interacts widely with public policy from the economy to welfare.

The rise (and fall) of home ownership

1918 1939 1981 1988 2003 2009/10

Owner occupiers

23% 32% 57.2% 65.7% 70.9% 67.4%

Social renters

1% 10% 31.7% 25.2% 18.3% 17.0%

Private renting

76% 58% 11.1% 9.1% 11.0% 15.6%

The rise of home ownership

The inter-war years- “homes for heroes”• Government policy was tenure neutral- at least at first.• Over 50,000 council homes were built each year on

average.• The majority of homes were provided by speculative

building, which Government promoted.• In the 30’s the “builders pool” enabled 95% loans on

new homes and introduced working class home ownership- helped by rising incomes and falling house prices.

• The PRS declined rapidly due to retention of wartime rent controls.

The rise of home ownership

Post-War years to 1980:

• Rapid expansion of home ownership; majority of households were home owners by 1971.

• Social rented sector doubled in size from 1950-1870.

• PRS continued its decline.

The rise of home ownership

Causes of tenure change in the post-War period:• Rise in real incomes, development of welfare

state, demographic changes and high levels of secure full-time employment favoured home ownership.

• Mortgage Interest Tax Relief (MITR) gradually became significant after 1963.

• 100,000 council homes built almost every year in 50’s and 60’s.

• Over-regulation hastened the decline of the PRS.

Developments post 1979

1979; Conservative Government under Margaret Thatcher elected but housing policy became essentially bi-partisan post 1983.

• The housing budget reduced from 5.6% of government expenditure to 1.3% by 2000 and was only 2.7% in 2008-09.

• There was a shift from capital to revenue subsidy (housing benefit) for affordable housing.

• Development of social rented housing plummeted and home ownership was promoted as desirable for all but the poorest households.

Developments post 1979

Housing starts 1970-2008

Source: UK Housing Review 2010/11

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Developments post 1979

• MITR was expanded; by 1991 the subsidy amounted to more than the entire housing budget. It was then phased out by 2,000.

• Right to Buy (RTB) released 1.89 million homes into owner occupation by 2009.

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Local Authority RTB sales Registered Provider RTB sales

Developments post 1979

• Without RTB home ownership would have risen only very modestly since 1981 (57.2%).

• Other Low Cost Home Ownership (LCHO) initiatives-mainly shared ownership, probably added less than 2% to home ownership over the 30 years after 1981.

• The Housing Act 1988 established the Assured Shorthold Tenancy (AST) and allowed landlords to charge market rents. The PRS immediately began to expand aided by availability of Buy-to-Let (BTL) mortgage finance on attractive terms from 1996.

Causes of declining home ownership: Affordability

• Affordability a long-term UK problem.

• House price rises exceeded those of earnings consistently since 1970.

• Incomes of high earners have risen fastest.

• Average price to income ratio for first-time buyers (FTBs):

– 1970: 2.45

– 2010: 4.54

Affordability

• Loans advanced to FTBs as a percent of all loans advanced for house purchase 1980-2010 (CML)

Affordability

• The average age of a FTB is now 31.

• The proportion of home owners amongst younger age groups has been falling since the 1980’s

• The proportion of FTBs who are Low to Middle Earners[LMEs]; households earning less than £30,000 pa. has also been falling since the 1980’s- they represent 32% of households but now only account for 19% of all FTBs.

Mortgage finance

• Low interest rates and availability of capital market funding led banks to under-price risk and to expand their assets post-2000. The resultant expansion in lending proved unsustainable: 1.4 million new mortgage loans in 2006 down to 600,000 in 2010.

Source: CML

Mortgage finance

The decline in lending affects particularly:

• High LTV lending; disadvantaging those without access to a substantial deposit of up to 30% of the property value.

• Lending to those with impaired credit histories(sub-prime)

• Lending to those whose incomes are on the margin in terms of servicing a loan.

• Self certification lending (also affected by regulatory scrutiny).

• Lending on less attractive properties in valuation terms.

These changes are likely to particularly affect first-time buyers and those likely to look towards LCHO.

Mortgage finance

• Only 2.2% of loans over 90% LTV in Q4 2010.

• Only 24% of loans over 3 times borrowers income.

• Number of loans to FTBs has halved since 2007

• Over 50% of FTBs take loans of less than 75% LTV.

• Virtually nothing available over 95%.

• The average FTB has to save 94% of their annual income as a deposit.

• The average FTB deposit is 21%.

Mortgage finance

• Lending for shared ownership held up relatively well ( but at lower LTV) but future is uncertain.

• The more conservative mortgage market will not be a temporary phenomenon.

Demographics

• The number of households is set to increase by 250,000 per year.

• However, the main growth is in single adult households and the over 65’s- these groups do not drive rising home ownership.

• Inward migration is at high levels- the UK granted 2.1 million entry visas in 2010. The UK has twice the level of migrants than the EU average. Recent migrants do not buy homes; they rent them.

Changing work patterns

• Labour mobility has increased.

• The proportion of the workforce in full-time secure employment has decreased.

• Security of employment has deteriorated in practice; unemployment is very roughly 4 times the level it was in the period 1950-1970 and has been rising for 30 years.

• These trends support private renting rather than home ownership.

Personal indebtedness

• Individuals in the UK currently have £1.24 trillion secured debt and £212.4 billion unsecured debt-the latter up from £94.9 billion in 2000.

• There is an underlying problem of low/negative equity and potential issues with arrears/possessions if economic conditions deteriorate and interest rates rise.

• Student debt has contributed to lower rates of ownership and later entry amongst younger age groups.

Taxation and benefits

• With the abolition of MITR the balance of taxation has shifted in favour of landlords rather than owner occupiers.

• The 2011 Budget promised further concessions to corporate landlords over SDLT and REITS because of the funding problem in relation to the PRS since the banking crisis.

• The benefit system favours renters; owner occupiers receive less than 10% of all state housing assistance- yet half the poor are home owners.

Pensions and care

• Poor pension provision is a cause of disinvestment in owner occupation amongst the oldest age groups; it will get worse before it gets better.

• Community care costs will rise as longevity increases; again this results in disinvestment from the housing market. (What about the Dilnot Commission?)

A continuing trend

• The trend towards lower levels of home ownership and an expanding PRS looks set to continue.

• Government has rarely managed to transform fundamental tenure trends without resorting to “once only” policies (RTB) or very high levels of expenditure (the post-War public housing programme). Sometimes policy in this area has been subject to unintended consequences (the decline of the PRS 1920-1988).

Implications for government

• Can the decline be reversed? • What about the “Age of Aspiration”?• How is the PRS to be funded and standards

maintained or improved?• What about LCHO? Can open market sales

continue to subsidise affordable rental development?

• Which direction will prices go?• Will a shrinking housing market prove less

volatile?

Implications for Government

• In a rebalanced globalised economy is falling home ownership a bad thing?

• What are the economic effects in terms of spending, saving and investment?

• What about the move towards “asset-based welfare” if those most needing welfare have diminishing assets?

• What are the implications for taxation?

• How will government manage down popular aspirations?

Implications for affordable housing developers

• Tenure shift; will it continue and if so what tenure-mix should HAs build? Does it matter if LCHO is taken up by a more affluent client group?

• LCHO will not disappear but its scale and strategic focus will change over time.

• What type of LCHO properties to build? Developers are going for value rather than volume.

Implications for affordable housing developers

• Should HAs expand their market rental portfolios?

– Less regulation

– Better return than affordable/social rents

– Promotes mixed communities?

– There might even be a cross-subsidy

• But what about the “low to middle earners”?; LCHO plus market renting plus affordable renting still leaves a gap in provision.

Implications for affordable housing developers

What about new affordable supply levels?

• If customer criteria remain the same demand could weaken

• Falling home ownership could imply weaker house prices going forward

• What about cross-subsidy?

• LCHO completions fell dramatically in 20010/11- even with grant.

Implications for affordable housing developers

Do we need a new development model?

Thank you