CML news & views

The housing market of the future is likely to see a smaller proportion of home-owners and a higher proportion of tenants, mostly in the private sector. This partly reflects changing consumer preference. But, more particularly, it also reflects affordability pressures that were already building before the credit crisis, and which have subsequently been exacerbated by it.

Meanwhile, a chronic lack of supply of housing of all tenures seems set to persist. Private sector funding constraints and public sector spending cutbacks are likely to produce a significant shortfall in the supply of both housing finance, and housing itself, relative to the demand for it. These were the somewhat stark consensus conclusions emerging from speakers from across the housing spectrum at the CML’s “Future Housing” conference held last week.

Kay Boycott of Shelter, Peter Williams as chair the National Housing and Planning Advisory Unit (NHPAU), and John Stewart for the Home Builders Federation all pointed in their presentations to the significant imbalance between housing supply and new household formation that had already been building in the years before the credit crisis.

Between 1999 and 2009, the number of new homes built each year has ranged from around 130,000 to around 170,000. By contrast, the NHPAU estimates a range of 238,000 to 290,000 new homes needed per year are required to meet housing need – and Shelter’s benchmark analysis in its “Homes for the Future” work suggests an average need of 242,000 homes per year, 40% of which it believes should be “affordable” (that is, provided on a subsidised or below-market-price basis). However you look at the numbers, they suggest a serious shortfall between demand and supply – even in the past when funding was less constrained.

Household projections do not stay static – we are coming into a “baby boomer” period where there is an expectation of a higher number of new households forming over the next decade than over the previous decade. Between 2011 and 2016, an average 272,000 increase in households each year is expected, followed by an average 266,000 between 2016 and 2021. This compares with an average of 199,000 new households each between 1996 and 2001.

Looking ahead, the problem has been worsened by the extra disruption to supply caused by the credit crisis. As John Stewart put it, the backlog of undersupply, added to the pent-up demand suppressed so far by the recession, combined with high levels of projected household growth mean that a serious under-supply crisis emerges. He estimated that from the low point reached in 2009/10, growth in house-building would need to average 18% per year for the new build targets by 2020 to be met. Given that the average rate of growth between 2001 and 2007 – the booming pre credit crunch era – was less than 5% per year, this rate of growth looks somewhere between unrealistic and impossible.

And all of this has social consequences. As Kay Boycott outlined, the impact of the shortage of housing of all tenures manifests itself in a variety of ways. She noted 1.8 million people on housing waiting lists, over a million children living in overcrowded accommodation, and the impact of people having children later as a result of being less settled in their housing at earlier ages, labour mobility being constrained, the condition of the housing stock worsening due to owners and landlords being unwilling or unable to spend on repair and maintenance, and an increasing polarisation between the housing “haves” and “have nots”.

Turning to one very specific group which acts as an important barometer of the housing market generally, the CML’s head of research Bob Pannell looked in depth at first-time buyers – and the group of people who might reasonably be regarded as potential first-time buyers.

The speed and intensity with which the characteristics of the typical first-time buyer have changed are stark. What is most striking is that to get into the market, today’s first-time buyer is putting in a deposit of around £34,000, equivalent to more than their total gross annual household income. Only three years ago the deposit required to enter the market was a much more manageable – but still hefty – 37% of annual household income, at £12,700.

This has resulted in some extraordinary changes in the ability of first-time buyers to enter the market. But change was already well on the way in the first-time buyer market before the credit crunch. That change took various forms, including:

• the phenomenon of first-time buyers who were, in fact, older “returners” to home-ownership, having taken a break from the tenure perhaps because of divorce or changes in circumstances;
  
• the increasing reliance on financial support from parents (an estimated 38% of young first-time buyers in 2006 received help, up from 10% a decade earlier);
  
• an increasing consensus across the generations that it was becoming harder than ever before for people to buy their first home, and a call for government action (79% support) to address the problem; and
  
• a sharp fall in the proportion of young households with mortgages – 36% of under 30s had a mortgage in 2004, 10% lower than a decade earlier.

But since the credit crunch, the picture has tightened further. Despite peak-to-trough falls in house prices nationally of about 20%, the offsetting effect of tighter lending criteria has had a dramatic effect. Not surprisingly, younger adults have become even more reliant on their parents or relatives for financial support. After nudging up to 45% pre-credit crunch, the CML’s estimate is that the proportion of first-time buyers under 30 receiving help has now escalated to around 80%. The overall effect is that for those in the formerly “typical” first-time age bracket of 25-34, the likelihood of buying at the moment is around half its level of a decade ago.

And what does all of this mean for future housing? For the foreseeable future, the picture of continuing constraint in the flow of housing supply, and indeed housing finance supply, looks difficult to avoid. And the effect of this is likely to be that first-time buyers will continue to face significant deposit challenges to enter the market, and that the trend of falling home-owenrship that had already begun before the credit crunch will continue.

Many observers may regard this as a good thing – it is certainly the case that most first-time buyer business currently being undertaken is on far more risk-averse terms than in the past. But, even if you take that view, there are still very real questions about how to deliver a significant enough flow of housing in general, of whatever tenure, to meet the needs of the growing population. While the Treasury’s recent consultation on investment in the private rented sector hints at the government’s expectations and anticipations about what the housing of the future needs to deliver, there is little evidence that people’s aspirations towards home-ownership have actually fallen. It simply seems to be getting more difficult for people to achieve them.

The lending industry has a continuing significant role to play, as it always has had, in fostering the creativity and innovation that can devise new solutions to old problems. And there are many examples of this, as lenders continue to lend across the spectrum – to developers, to housing associations, to home-owners and to private landlords. But there is also a significant role for government, through both the planning system and other means, to help support conditions that will help the market eventually climb out of the housing shortfall that currently exists.