LONDON – The UK property market fell fast and far when a global financial crisis erupted in 2007, rippling out from a subprime US mortgage market which was stuffed full of risky loans.
The average UK house lost 20% of its value in the 16 months to February 2009, and transaction levels – which had averaged 1.65 million a year in the previous decade – plummeted to 730,000 in the 12 months to June 2016.
A report from property advisors Savills says the impact of the crisis – which pushed the UK into its deepest post-war recession – is still being felt in the UK housing market, with new homeowners increasingly reliant on “the Bank of Mum and Dad,” existing homeowners struggling to trade up the market, and a recent squeeze on mortgage limits slowing growth.
Lucian Cook, director of Savills residential research, said: “The global financial crisis has fundamentally changed the nature of the UK housing market. It’s made getting on the housing ladder heavily dependent on the Bank of Mum and Dad or Help to Buy, has meant homeowners trade the housing market less often, and has placed much greater demands on the private rental sector.”
1. Spending and transactions have slumped
Uncertain economic conditions typically push down the number of houses being bought and sold, and the UK market still hasn’t fully recovered from a post-crisis slump in transaction volumes (Brexit and stamp duty hikes have also had an impact).
In the ten years to March 2017, the total spend on UK house purchases was £312 billion, around £30 billion less than in the previous decade.
2. Cash is king
- Savills Research using CML and HMRC
Equally significant is the bigger role cash now plays in the market. Debt, in the form of mortgages, now accounts for just 43% of house purchase funding, with cash the dominant source of funding (see graphic, right).
This largely reflects the mortgage regulation measures that were introduced after the financial crisis, which aimed to avoid another debt-fuelled housing boom, Savills says.
“Lending constraints look set to be a lasting legacy of the credit crunch, meaning the market will continue to favour more valuable, equity-rich markets,” said Cook.
3. The “Bank of Mum and Dad” is one of the UK’s biggest lenders
What does a cash-dominant, mortgage-tightened market mean? The high deposits now required to purchase a home are making it much harder for first-time buyers to purchase a home.
In turn, that is pushing many to seek money for a deposit in the form of a gift or loan from parents. The so-called “Bank of Mum and Dad” now acts as the UK’s ninth-biggest lender, with family members giving an average of £17,500 each to fund 306,000 property deals worth £77 billion in 2016, according to one study.
Savills reports that the amount of equity put down by first-time buyers exceeded £10 billion in the year to March 2017, of which £4.2 billion was provided either by the Bank of Mum and Dad or the government Help to Buy scheme.
Another effect of this tightened housing market has been a big expansion in the private rented sector, which is expected to see significantly increased demand in years to come.
4. The “trading up” days are over
Gone are the days where households could aggressively trade up the market, and move to a bigger, more expensive property each time.
There has been a sharp decline in interest-only mortgages – an arrangement by which homeowners only pay off the interest on the amount they borrow each month, rather than making capital repayments. Interest-only mortgages accounted for one-third of all new loans in 2007, but tightened rules mean they now represent just 1.2% of all new lending.
Savills says this has made it much harder to finance jumps up the housing ladder, and fewer people are doing it (see graphic, right).
- Savills / CML
“Long gone are the days where an interest-only mortgage would facilitate a move to a bigger, better property,” said the report.
“Not only must home movers factor in the cost of capital repayments when they consider the affordability of making their next move, they also need to have paid off more of their existing mortgage debt and spent longer accumulating equity in their current home.”
The recovery in the numbers of homeowners moving house has been muted, which suggests it is likely to become a “permanent feature of the market,” Savills said.