New report analyses what’s next for a ‘mind blowing’ valuation now nearly four times the size of nation’s economy.
The total value of the UK’s housing stock has topped £6.79 trillion as a new report analyses what’s next for figure now 3.65 times the size of nation’s economy. In its latest residential property focus report, Savills concedes the valuation is “pretty mind blowing” in primarily reflecting house price growth driven by a combination of low interest rates and – for the most part – a strengthening economy. That £6.79tn represents a £1.5tn rise over the past three years alone and pushes private housing wealth over £5tn for the first time. Savills identifies that rise as heavily influenced by London and the South East, which together have accounted for over one third of the growth.
Looking ahead, the report outlines a series of factors pitched as likely to mean that price growth slows, particularly as the implications of Brexit become clear and economic uncertainty feeds into weaker consumer sentiment and tighter household finances. As such, the report says price growth should slow across the country for the next two years or so to pick up as buyers become less cautious. Rising interest rates, though, will put a squeeze on affordability for mortgaged buyers, especially in parts of the country that have seen some of the biggest house price increases.
Savills says this scenario is already starting to play out as, despite strong annual growth, three-month on three-month house price growth fells back to 1.7% in December last year across the UK as a whole. To put that in context, 12 months previously it was 2.4%.
In London, the report reveals the change as more pronounced as the three-month on three-month measure fell from 3.7% to just 1.2% over the same period. But the report downplays the extent by which growth has been riven by rising levels of debt – because of on the lower number of house purchases compared to before the credit crunch. To the report this reduced activity has been “really noticeable” among up-sizers who need a mortgage, unlike cash buyers who now have much greater purchasing power. To put this into numbers, regulation and lender caution means outstanding levels of mortgage debt have risen by just 10% (£120bn) over the past five years. By contrast, the level of privately held housing equity has risen by a chunky 49% in the same period. Combined with a fall in the number of mortgaged owner occupiers, the average outstanding mortgage across England and Wales has risen by £18,500 over the past five years.
As to the average increase in debt levels being driven by London, the report says that, in the capital, the average outstanding mortgage has grown by much more, rising by some 29% – or £60,000 in cash terms – over this period which means that it now stands at over £240,000.
For those getting onto – or trading up – the housing ladder, the figure is higher as London buyers stretch themselves further, essentially by borrowing more relative to their income.The report cites the suggestion by the Council of Mortgage Lenders that the average homebuyer in London borrowed 3.4 times their income in 2011. In 2016 that stood at 4.0. Despite the fact the level of housing equity in London has risen by 71% in the past five years – a figure of £534bn. That means those who need a mortgage are now bumping up against the limits of mortgage regulation. But with interest rates only expected to rise gradually when they do go up, the report says this is likely to act as a drag on house price growth in the future, rather than anything more serious. The report reveals the amount of housing wealth held by homeowners who have completely paid off their mortgage as having risen very significantly, as those who got onto the housing ladder in the second half of the 20th century live longer. This sum is now more than £2.39tn or twice that of the equity held by owner occupiers who have a mortgage. And it means those over the age of 65 now hold an estimated 43% of all owner occupiers’ housing equity – a figure over £1.5tn.
Similarly, according to the report, private landlords have seen the amount of equity they hold increase from £693bn five years ago to around £1.2tn in 2016. They have both increased the amount of stock they own and have benefited from price growth to build a substantial pool of property wealth. By contrast, homeowners under the age of 35 hold less than £200bn of net housing wealth, as the generational divide in housing has widened. Even though they have been moving less often, the main beneficiaries have been 35-49 year old homeowners who have over £500bn of mortgage debt. While the report acknowledges the debt as relatively cheap to service, increasingly those homeowners have extended their home rather than traded up – reflecting the cost of buying a property with an extra bedroom and the availability of mortgage debt to do so.
Savills analysed asking prices from OnTheMarket to show the cost of moving from a two-bedroom to a three-bedroom property averages £77,000 across the local authorities of England and Wales. Across the boroughs of inner London it stands at £220,000 and in outer London at £138,000. All of these numbers increase when looking at a move from a three to a four-bedroom property. This cost has also resulted in an increase in the number of people moving into the commuter zone in search of greater value for money. – a trend Savills expects to speed up as interest rates increase from their current benign levels.
The report does pitch the potential for a change in the pattern of house price growth once the uncertainty around Brexit starts to clear, particularly as the gap in value between London and the rest of the country is currently at an all-time high. Value of housing stock in five of London’s most expensive boroughs fell by £9.6bn in 2016, with the highest amount of price growth in the capital pushed out to the suburban borough of Barnet. More notably in 2016, the total growth in the value of housing in the South East was higher than in London for the first time since 2004. Slough showed the highest percentage price growth anywhere in the country, as needs-based buyers and investors turned their attention to more affordable locations within striking distance of London.
As the uncertainty of Brexit subsides and modest price growth returns, the report expects it to be weighted to London’s hinterland, before rippling more widely across the rest of the UK. And, as it spreads to the Midlands and the North, Savills says it should gain the strongest foothold in more affluent markets first. The report acknowledges the extent to which this has already been seen, specifically referring to the value of housing stock in York as increasing by £3.9bn to £20 billion in the past five years, while the value of housing stock in Solihull rose by £2.6 billion in 2016 alone. By contrast, the value of housing stock in Hartlepool fell by £76m last year.
The report expects the generational divide in housing wealth to become further entrenched, even if government policy slows its growth. This means increased demand for private rented accommodation, despite measures to make residential investment less attractive.
The mortgaged buy to let landlord will, the report says, be squeezed by more stamp duty, a greater exposure to capital gains tax, less income tax relief and greater mortgage regulation. But existing mortgage regulation for those looking to buy their own home is likely to keep deposits high and continue to restrict access to homeownership. For aspiring first-time buyers and second steppers, the report points to continued reliance on the ‘Bank of Mum and Dad’ and schemes such as Help to Buy. The report also expects more downsizing among older homeowners who are looking to unlock and pass on some of their housing wealth to younger generations.
Ultimately, the report says, this shows that there are still opportunities for cash rich buyers as the build to rent sector picks up steam and developers tap into the grey pound – even if that doesn’t mean the same substantial increases in the overall value of housing stock.