CML news & views
Issue no. 22 - 21 November 2013
A million property transactions: what does it mean for the mortgage market?
Following a collapse in the number of housing transactions in the UK in the aftermath of the credit crunch, this year has seen an increase in activity, with the number of purchases rising again to more than one million – for the first time in five years. However, the number of purchases remains significantly lower than before the market downturn. Over three decades preceding the downturn, the number of transactions averaged about 1.5 million a year.
So, is there any significance in the fact that this year – for the first time since 2007 – we will have more than one million property transactions in the UK? This article looks at the causes and consequences of the prolonged decline in market activity, the impact of a relative recovery, and which sections of the market have seen the sharpest decline in activity and are now showing the strongest growth.
What our data shows is that the early stages of the recovery have been driven by first-time buyers, cash purchasers and, to a lesser extent, buy-to-let investors. So far, there has been virtually no increase in the number of transactions by movers – perhaps illustrating the special challenges right now in the housing market for "second steppers."
Trends in transactions
From more than 1.6 million UK property transactions recorded by HM Revenue and Customs in 2007, the number fell by more than 40% in the following year, to 900,000. In each of the next four years, the number of transactions then languished in a narrow range of between 850,000 and 950,000 annually.
We would, of course, expect to see a decline in activity in any housing market downturn. But the contraction in the recent cycle has been more severe. In contrast, at the low point in the preceding downturn – in 1992 and 1993 – there were still more than 1.1 million transactions annually in just England and Wales (in those days, HM Revenue and Customs did not report transactions for the whole of the UK). So, fewer than one million transactions in the whole of the UK for five successive years puts the scale of the more recent contraction in a somewhat different category.
Chart One: Annual transactions in the UK, 000s
Although the recent decline in activity has affected the whole of the UK, it has been more pronounced in some areas than others. During the period of steepest decline in purchases – between 2007 and 2009 – the biggest falls in numbers of transactions were in Northern Ireland (59%), north-east England (55%) and the north west (53%). In the south west (37%) and south east of England (40%), the proportionate fall in the number of sales was on a smaller scale.
In October 2009, our analysis concluded that the cumulative impact of the downturn by that stage meant that as many as 800,000 potential first-time buyers had been unable to enter the market. First-time buyer numbers have remained at low levels ever since, and this has contributed to the decline in UK home-ownership over the last decade.
What caused the decline in activity?
Some of the causes of the fall in the number of transactions in the most recent cycle are typical of former, less severe, market downturns. As before, falling house prices have eroded the potential of existing owners to draw on their existing equity to move up in the property market. During the recent downturn, we have also seen a significant decline in real household incomes.
A particularly important feature of the post-credit crunch downturn, however, has been the shortage of mortgage funding, with lending declining from £363 billion in 2007 to £135 billion in 2010 – or by more than 60%. Sharply reduced funding contributed to a severe tightening of lending criteria, a process that was reinforced by falling house prices.
Chart Two: UK housing transactions by buyer type
Given the shortage of mortgage funding, it is not surprising that we have seen such a sharp decline in transaction numbers. But there have also been some significant differences in the experiences of different types of borrowers, as well as cash buyers, in the recent downturn:
- The number of loans taken out by people moving home declined by more than half from more than 650,000 in 2007 to 315,000 in 2009. However, unlike some other groups of buyers, there has been virtually no recovery in the number of mortgage-funded transactions by movers since that low point. This year, for example, movers are expected to take out only around 325,000 mortgages. That compares with an average of more than 700,000 a year in the (admittedly buoyant) decade preceding the market downturn.
- First-time buyer transactions had already begun to decline before 2007, as affordability pressures began to take their toll. The number of mortgages taken out by this group had declined from more than 530,000 in 2002 to 360,000 by 2007. But the total then declined further in the wider market downturn, falling to below 200,000 in 2009. However, transactions by first-time buyers were among the first to show signs of recovery. The number increased by 13% last year to 218,000 and looks set to grow by almost 25% this year, to around 270,000. Despite this recovery, however, first-time buyer numbers are still languishing at only around half their long-term average of around half a million.
- The decline in mortgage-funded activity meant that cash purchases as a proportion of transactions increased during the credit crunch. More recently, cash transactions have shown signs of further growth. From a total of around 310,000 in 2011, we expect the number to increase to around 370,000 this year.
- Mortgage-funded buy-to-let purchases experienced a particularly severe contraction in the market downturn, but have also bounced back to a greater extent than other sections of the market. The severity of the contraction occurred partly because the sector was affected particularly acutely by the shortage of mortgage funding, and especially the closure of securitisation markets. The result was that the number of loans plummeted by around 75% from more than 345,000 in 2007 to fewer than 90,000 in 2009. But in the two years to 2012, the number of buy-to-let loans increased again by more than 50%, to more than 130,000. And this year, the number of loans in the sector looks set to total around 160,000. But, despite the strength of the recovery in the buy-to-let sector, it has had only a limited effect on the market overall, as it accounts for only around 13% of lending.
The figures show that, within the general picture of a severe contraction in the number of transactions and the beginning of a recovery, the experience has been quite different for different types of buyers. From a low base, the numbers of mortgage-funded first-time buyers and buy-to-let purchasers look set to have grown since 2009 by around 40% and 80% respectively. Over the same period, cash sales are around 25% higher, but mortgage-funded purchases by movers have increased by only around 3%.
The beginnings of recovery?
Part of the reason for a general increase in the number of transactions is the improvement in mortgage availability, with conditions in funding markets improving significantly since the worst days of the credit crunch. Conditions have improved further since the summer of 2012 when the European Central Bank reacted to uncertainty in the Eurozone by pledging “to do whatever it takes to save the euro.”
In the UK, the Bank of England’s funding for lending scheme has reinforced the improvement in funding conditions, and the cost and availability of mortgages. One effect has been that the average rate of a new mortgage has declined to just over 3.1%, or around 70 basis points lower than in the summer of 2012. Availability of higher loan-to-value mortgages has also improved, reinforced by government intervention. And the Bank's forward guidance policy is giving both lenders and consumers greater certainty about future borrowing costs.
This year, there are also signs of continuing improvement in wider economic conditions. Although the economic downturn has been characterised by a significant decline in real incomes, employment growth has been stronger than expected and output is now also increasing, alongside improvements in some key indicators of business and consumer confidence.
All these factors have contributed, to some extent, to the increase in transaction activity, with purchases by first-time buyers and buy-to-let investors, and cash purchases, leading the way.
The challenge for "second steppers"
There are probably a number of reasons why mortgage-funded purchases by movers have so far shown negligible signs of recovery. Buyers in this group often rely on the growth of equity in their existing home to finance their next purchase. In 2008 and 2009, however, house prices fell significantly, and since then they have only risen modestly.
The combination of falling real incomes and the erosion of equity – and the impact of transaction costs – has made it difficult for many in this group to bridge the gap on a scale sufficiently large enough for them to make the next "step up" in the property market.
After a particularly severe contraction, the fact that there will be more than one million transactions this year is welcome. But the experience of different types of buyer is mixed, and recovery is from a low base. We expect improving conditions to lead to further growth in transaction numbers in 2014. We will have more to say about this in December, when we publish our forecasts for mortgage and housing markets, and the more detailed analysis underpinning our predictions.
Transacting in the housing market is about fulfilling aspirations, so confidence is an important factor, although difficult to quantify. People who want to move in response to changing family and employment circumstances have been restricted by affordability constraints, restricted access to mortgages, transaction costs, economic conditions and a lack of confidence in taking on new borrowing commitments. Another key factor, of course, is the cost of housing, and the continuing chronic shortage of supply is likely to buoy up prices and so bear down on transaction numbers for the foreseeable future.