Funding for Lending
Just found the Bank of England’s monthly Funding for Lending Scheme data series and it looks like lenders transferred loans onto their balance sheet in anticipation of FLS.
It also looks like the Q1 2013 lending data will show a slightly positive change in overall lending of approximately £200m compared to a fall of £2,425m in Q4 2012.
First-time buyer mortgage completions may be higher than recent years but they’re still only 60% of 2007 levels & 50% of the 1990’s average
Jobseeker’s Allowance Claimant Count
Although there’s a disconnect with total unemployment, the Jobseeker’s Allowance claimant data is interesting because it provides a relatively timely and localised dataset on the health of the local employment market as we can see from the map showing claimant rate below.
There’s no real surprise in the geographic distribution of claimant rates with a north-south/urban-rural divide apparent. However, when charting up the trend over time I noticed another trend emerging.
While the claimant rate across the UK peaked in 2009/10 and has since stayed flat, at a local authority level there is a real divergence in performance. Many markets are similar to the national trend and the rate has flat-lined but some markets have seen a large fall in claimants (e.g. Tamworth) while other markets have seen the claimant rate continue to rise and reach new highs (Bradford).
Mapping out the change in claimant rate between the 2009/10 peak and current levels shows a slightly different picture than the map of actual claimant rates. The biggest falls in claimants have been in the Midlands while the biggest rises have been in Northern Ireland, the North of England and various urban areas including: Bristol, Cardiff. Nottingham and Norwich.
Are London & the Home Counties responsible for the housing supply crisis?
The change in England’s housing stock over the last decade has been revised higher to 177k per annum when the previous estimate was 161k per annum and the rate of household formation was 158k per annum. That’s no surprise given that the percentage of empty homes (incl. holiday homes) actual increased during the 2001-11 period.
More interestingly the data at a local authority level has also been revised and (because everyone loves a map) I’ve mapped the percentage change in housing stock over the last 11 years below. It is stunning just how low the change in stock has been in many of the outer London boroughs and Home Counties relative to the rest of the country
As the map of three year price growth I tweeted yesterday shows, London and the Home Counties arguably have the highest levels of realisable market demand and further confirms to me that delivering affordably priced family housing in London and the South of England would go a long way to solving the ‘housing supply crisis’.
Hight street banks (again!)
Yet another post on lending by the high street banks but this one has a slightly different twist. Not only has their market share been falling (previous post) but annual net lending has now fallen negative for the first time in the period covered by the dataset.
We’ve known for a while that Lloyds and RBS have been deleveraging but the data from the Bank of England’s Funding for Lending Scheme has indicated that Santander is reducing its exposure to the UK market and today’s BBA data shows that Barclays & HSBC aren’t doing enough new lending to counterbalance this effect.
However, total net lending remains positive (we’ll have to wait till the end of the month to get the BoE data for March) thanks to positive net lending by the other lenders such as the building societies who, the data suggests, have already been through their deleveraging process.
Regional household income & the fall in interest rates
Disposable household income (measured on a per head basis) has remained surprisingly robust during the recession and although it may be weaker than inflation it has remained positive for all regions except for Northern Ireland which saw a -1.9% fall in 2009.
However this hides the fact incomes would have fallen heavily (-4.7% in London & -3.8% nationally) during 2009 if it weren’t for the fall in interest rates as disposable income already includes a deduction for mortgage interest costs.
High st banks and the others (mortgage approvals)
So mortgage approvals for house purchase have remained static on an annual basis for the last four months (610k per annum) according to the Bank of England. However if we combine it with the BBA data, we can see that the “high street banks” have been reducing their mortgage approvals for much longer while other lenders (primarily building societies) have been consistently increasing their approval levels since the 2009 market trough.
Apologies as that’s a story I’ve been touting for a while now but I’ve also run some new analysis showing the average value of mortgage approvals for purchase (data is smoothed over 3 months) as below.
The annual change in those average advances shows their leading effect on the ONS house price index (not surprising given it’s based on mortgage completions) and also points towards a weakening in prices during the early part of this year.
London’s population: not quite record breaking
Despite its recent rapid growth, London’s population in 2011 was actually lower than it was in 1939.
During the postwar period there was a massive decline in people living in the capital and this trend continued until 1991, at which point London’s population was 2.2 million less than in 1939. Most of that loss was concentrated in Inner London boroughs as shown by the map below.
London began growing during the 1990’s and, as of 2011, most Outer London boroughs have larger populations than their pre-war peak while Inner London boroughs haven’t quite reached that level but have grown considerably.
At current growth rates, London’s population will probably overtake it’s historic high at some point during the next ten years.
1 million homes with no usual residents
The 2011 Census identified just over 1 million household spaces with no usual residents and here’s where the highest concentrations of them are:
It’s no surprise to find that they are mostly concentrated in traditional second home hotspots such as the coast and national parks.
However, they aren’t just located in those areas with the greatest concentrations. They are located across England and Wales as the chart below shows.
Update: here’s the historic trend from previous Censuses.
London has seen the greatest decrease in the number of household spaces with no usual residents since 1981 while Wales & the South West have consistently had the largest proportion with no usual residents.
Most regions have actually seen an increase in proportion since 2001, suggesting that changes in how we consume housing (including more second homes) and difficulties in bringing some of this stock back into use may mean that the 1 million homes can’t play a significant part of the solution to the ‘housing crisis’.
Mortgage rates for new borrowers haven’t fallen as sharply as suggested by the new products on the market but this might hide a move towards higher loan-to-value mortgages
No of cash buyers holds at 315k per annum but increase in mortgage dependent buyers causes % to fall
Inequality & the housing market
I am one of the lucky ones; I rent a slightly damp two bed flat with my wife and 18-month-old son but, through a combination of savings and help from our parents, we’ve managed to put together a deposit that is almost two times our joint annual income and currently have a family home under offer. Thanks to Funding for Lending it will cost the same to pay the mortgage on our 3-bed house as the rent on our cramped 2-bed flat.
There is clearly something wrong with a housing market where owner-occupation is designed as the preferred tenure but requires such substantial up-front investment to enter. For those first time buyers who can raise a sufficient deposit, they are still dependent on high levels of debt while the remainder are left to fight it out in the private rented sector or worry about falling benefits and if they have too many bedrooms.
So what is the problem?
The underlying problem facing the market is quite simply that house prices are far too expensive when measured against income and I’m going to explain why this has happened.
To do this, we need to go back in time and understand what actually happened during the bubble. Following the early 1990’s crash, house prices were actually relatively affordable and so, as the economic recovery took place, prices also began to recover back towards their long term average of 2.5 times income (which unsurprisingly is also the level at which most new mortgage lending took place).
That initial house-price growth also coincided with a global compression in interest rates. As rates fell, this enabled lenders to increase the amount they were lending to borrowers while maintaining debt-servicing affordability. From here, a feedback loop emerged where increasing house prices and increased competition in the mortgage market thanks to deregulation and securitisation drove loan-to-income ratios higher and higher until the music stopped in 2007/08.
Throughout this period of increasing house prices and debt levels; we remained fixated on the affordability of our monthly repayment costs (further eased in many cases by interest only mortgages). Unfortunately we failed to fully appreciate a simple mathematical truth:
for any fixed loan-to-value ratio, as the size of your mortgage increases relative to your income, you also need a bigger deposit relative to income.
Throughout the 1990’s, mortgages for first time buyers were available at 2.35 times income and 95% loan-to-value and this meant that prospective purchasers only needed 15% of their income as a deposit. But by the peak of the market in 2007, house prices had risen so high that first time buyers were borrowing 3.36 times their income and needing 37% of their income as a deposit.
The credit crunch then led to a withdrawal of higher loan-to-value mortgages and deposit requirements for first time buyers shot up to 103% of income in 2009 but have since declined to “only” 82%. In London, the typical first time buyer needs to raise a deposit equal to 120% of their income and it is no surprise that this is the market that has seen the strongest rental growth in recent years.
Access to equity
With a market dominated by high house prices and increasing loan-to-income mortgages, access to equity is key. Unfortunately access to equity is constrained by income and financial wealth inequality and has become increasingly so in this low interest rate environment.
The ability of lower income households to raise a deposit is constrained by their ability to save. High housing costs and high inflation have put pressure on incomes and left many households struggling to meet their day-to-day needs let alone put aside a substantial amount of savings (which will generally see a negative real return in a typical bank account).
Meanwhile those higher up the income distribution, many of whom will already be owner occupiers and have access to equity, are better able to save an element of their income and invest it (in say the property market) and achieve positive real income returns.
This in turn widens income inequality and further widens the gap between those that have equity and those that don’t, leaving those that don’t struggling to find stability in a rental market designed to be a temporary stepping off point on the route towards owner occupation.
Recent Market Performance
So, while there are other contributing factors, I believe it is this underlying trend in rising loan-to-income ratios, increasing inequality and dependence on access to equity that has left house prices near to historic highs and access to owner occupation at its most unequal for a generation.
It is therefore no surprise to find that those markets holding substantial amounts of equity (house price to earnings ratios are a good proxy for this) are those that have performed most strongly since the crash. Kensington & Chelsea, the district with the highest house price to earnings ratio of 27.8 times and highly attractive to foreign equity has seen prices rise to 27% above its 2007/08 peak levels while Hartlepool, with the lowest ratio of 3.9 times has seen prices fall to 34% below its 2007/08 peak which is actually lower than they were in 2009.
How do we fix it?
If we are serious about fixing the market then the target should be to improve market affordability & hence accessibility by reducing the house price to income ratio and there are two ways to do this:
• Reduce prices
• Increase incomes
Reducing prices is the easy side of the equation: we could increase mortgage rates back to 5-6%; instate a capital gains tax on all home sales; limit loan-to-income ratios on new mortgages or substantial increase the number of new homes being delivered. Unfortunately, while most of these are quick and easy, they are also politically and/or economically unpalatable.
Since the downturn, the UK has since been looking to the other side of the equation for its panacea. This involves waiting for inflation and income growth to erode the value of housing but unfortunately the economic recovery hasn’t performed as expected and incomes have failed to keep pace with inflation, leading to further squeezes on consumer spending and so, in a market driven by low turnover, prices remain high relative to incomes.
What to do while we wait?
More realistically, without an external trigger bringing forced sales to the market, improving the ratio through income growth has to be the longer-term target. In the meantime we need to improve housing accessibility & security of tenure while the recovery takes place without increasing the overall indebtedness of households or creating any further bubbles. This will be difficult and while I don’t have the full answer, I do have a couple of suggestions that might help to alleviate some of the issues in the market:
I have said very little about the role of new housing supply during this paper, as a lack of supply had little to with house prices increasing by 198%% from 1997 to 2007. Both Ireland and Spain saw price rises of similar scales despite having very different supply profiles to the UK.
While not the root cause of high prices, supply is undoubtedly tight in the UK due to a number of reasons but household projections are both wrong and not suitable as an indicator of housing need. Instead of targeting increases in total delivery, we should instead be targeting those most unaffordable markets with a supply of affordably priced family housing.
For those employment markets with unaffordable housing and where the ability to deliver new housing is physically constrained, investment in appropriate infrastructure to improve access to surrounding residential markets is required.
Private Rented Sector
If the private rented sector is to provide an adequate solution to the deposit constraints faced by prospective first time buyers then we need to recognise its role as a long term tenure rather than the view from the recent past which is as a place of transit between school/university and the first foot on the market. We need to recognise that increasing numbers of young families are faced with the uncertainty of short tenancies, break clauses and increasing rental costs.
Surely the creation of portfolios of privately rented properties that offer long term security of tenure and pre-defined rental reviews would benefit both tenants and present the market as a mature alternative to the commercial property market for institutional investors more focussed on income returns than capital value growth.
A lack of supply?
House price indices in the UK, Ireland and Spain hint at a common cause of the rapid price growth seen during the 2000’s despite having very different new housing supply conditions.
Could it be that the credit bubble is responsible?
Although a lack of supply has limited the correction in the UK.