Ten years ago this summer, an increasing number of US households started to default on their mortgages. What began as a problem with lax lending to low-income or “sub-prime” borrowers became a global contagion threatening to bring down the banking system.
The average UK house price fell 20 per cent in the space of 16 months. The country slipped into recession in the summer of 2008 and only emerged in 2009 after the deepest downturn since the Second World War. In the previous decade 1.65 million homes a year had changed hands, but the number fell nearly 60 per cent to 730,000 in the 12 months to the end of June 2009.
Meanwhile, housebuilding still has not recovered from the crash: the number of new homes started halved between 2007 and 2008, and while numbers have picked up, they are still well below pre-crash levels, according to Countrywide.
Though a distant memory for many, the global financial crisis has “fundamentally altered the shape of the UK housing market”, say analysts at Savills. We explain the five ways in which the housing market has changed.
Equity trumps debt
Before the global financial crisis the housing market was heaving with debt. Interest-only mortgages made up 32 per cent of new loans in 2007, while one in eleven mortgages were for a loan-to-value of more than 100 per cent, according to Savills and Countrywide.
Equity, the portion of the property that you own, now plays a much bigger part in the market. Debt accounts for only 43 per cent of funding for house purchases, with cash and accumulated equity the dominant source of funding.
Interest-only mortgages account for only 1.2 per cent of lending, and lending at 100 per cent or more has ceased to exist. There has been a recovery in the number of lenders willing to offer 95 per cent loan-to-value mortgages; today about 270 such mortgages are available compared with 59 in February 2012.
“What we had pre-crisis, particularly in the run-up to 2007, was a much less regulated mortgage market where there were fewer checks and balances,” says Lucian Cook, the director of residential research at Savills. “Clearly things got out of kilter. Part of that was because we had very strong house price growth in 2003 and 2004. There was a wide range of products with very high levels of affordability relative to incomes.”
Nearly a decade of record-low Bank of England base rates has pushed down mortgage interest rates and made it easier for homeowners to build up equity. The average interest rate on a mortgage was 5.88 per cent in August 2007. Now it is 2.04 per cent.
More stringent rules rushed in by lenders during the crisis, and formalised in regulation during the years since, have had a far-reaching effect on the mortgage market. This includes the Mortgage Market Review, which came into effect in April 2014. It requires lenders to “stress test” mortgage calculations to ensure repayments are affordable at much higher interest rates. They must also take a buyer’s monthly outgoings into account as part of an affordability calculation when deciding how much to lend — rather than simply offering a multiple of a buyer’s income.
“Lending constraints are set to be a lasting legacy of the credit crunch, meaning the market will continue to favour more valuable, equity-rich borrowers,” says Cook.
Fewer steps on the ladder
There has been a big slump in the number of houses changing hands. Before the credit crunch the number of transactions rose steadily to reach 150,000 a month in 2007, according HMRC. In June this year there were 96,910 transactions.
“Eight years after the financial crisis, housing transactions remain 11 per cent below average levels, and homeownership is experiencing a sustained decline. Despite record-low mortgage rates, access to the market is being hindered by increased deposit requirements, which sit at 65 per cent of earnings for first-time buyers, or 110 per cent in London,” say analysts at Jefferies, an investment bank.
In the pre-crisis decade, Cook says households could aggressively trade up the housing ladder, using interest-only mortgages to move to a bigger property. Today, homeowners have far less debt, a collective £70 billion, which is 37 per cent lower than the £112 billion borrowed in 2007.
“Any recovery in these [transaction] numbers has been muted, suggesting this is likely to become a permanent feature of the market,” Cook says. Higher house prices also mean greater stamp duty bills, and the tax is a deterrent to home-movers.
Countrywide, the estate agency, says the average time between home moves has almost doubled since the crisis. “The stock of property on the market is much smaller. It creates a vicious circle. There is nothing to buy, so people are staying put and improving their homes,” says Fionnuala Earley, the agency’s chief economist.
House price divide
During the Noughties house prices grew faster outside of the capital, but by 2007 that trend had reversed. Now “the market is also more divided at a regional level than ever”, according to analysts at Savills. It was not until May 2014 that the average UK house price recovered to its 2007 peak.
According to Nationwide, the average home costs 18 per cent more than it did a decade ago. Yet in parts of the country house prices are still well below where they were ten years ago.
A large gap has formed between the capital and the rest of the UK. Since 2007 the average home in London has risen 78 per cent in value. In parts of the city it has been even more dramatic; in Hackney, east London, house prices have risen by 120 per cent.
London price growth has been double that of the southeast, and four times as much as other regions.
Wales, Yorkshire & Humberside and the northwest are only just into positive price growth ten years post credit crunch. Values in the northeast remain on average 9 per cent lower than before the crisis. In Hartlepool house prices are still 24 per cent lower.
“This has huge implications for mobility across the UK and also leaves affordability particularly stretched in London, with parallels in cities such as Oxford, Cambridge and Brighton,” says Cook.
The Bank of Mum and Dad
Affordability was becoming stretched for first-time buyers before the financial crisis. Yet the situation has worsened — because of lenders’ affordability checks and high house price to earnings ratios. Reliance on parental help has emerged as a force in the housing market. The average deposit raised by a first-time buyer has more than doubled to £26,224 across the UK. In London it has more than quadrupled, to £97,513.
Lower prices for longer?
With affordability stretched and fewer people moving house, the UK seems to be entering a “sustained slowdown” in house prices, according to Halifax.
The average price rose 2.4 per cent in the first quarter compared with last year, the slowest rate of growth since May 2013.
Countrywide analysts say the price gap between regions may narrow. “Last summer was a turning point as price growth in the capital slowed and the gap between prices in London and the rest of the country began to close. If previous cycles are repeated, the next four or five years will leave the rest of the country playing catch-up.”
Savills expects prices to keep growing at a muted pace. Cook says: “Thanks to more prudent lending, the underlying affordability of existing mortgage debt is unlikely to become an issue, so we expect continued slowing of price growth rather than a price correction and a return to more of a needs-based market over the next two years.”