CML news & views

Are we at the end of a golden age of home-ownership? Earlier this month, the Chartered Institute of Housing (CIH) said it believes that we are. It called on the government and housing providers to respond to what has been the first-ever significant decline in owner-occupation by developing a wider range of rented housing options, that it believed might better meet demand for good quality homes.

Over the last century, the UK has seen an almost inexorable rise in owner-occupation. And, in the last 30 years or so, home-ownership has been boosted by two very significant – although quite separate – developments. First, there was the right-to-buy phenomenon, which enjoyed its heyday in the 1980s and over a 25-year period delivered a low-cost route into owner-occupation for more than 2.2 million home-owners.

Then, from the mid-1990s onwards, home-ownership was boosted by a long period of low and stable interests rates, a benign economic backdrop and a well-funded and highly competitive UK mortgage market. These two, overlapping phenomena helped ensure that, between 1980 and the middle of the first decade of the 21st century, the proportion of UK home-owners grew from around 55% to 70%.

In recent years, however, the combination of a sharp economic downturn, persistent affordability problems for first-time buyers and a shortage of mortgage funding have contributed to the first significant decline in home-ownership for more than a century. Between 2003 and 2008-9, the Survey of English Housing showed a fall in the proportion of owner-occupiers, from 70.9% to 67.9%.

So, are we really at the end of a golden age of home-ownership, as the CIH suggests, or are we instead simply suffering a temporary decline in owner-occupation against a challenging economic backdrop? What does the recent fall in the number of owner-occupiers mean for the government’s desire to deliver an age of aspiration? And how can we provide and fund current and future UK housing needs, ensuring that there are affordable homes and the right balance of tenures?

Trends in home-ownership

The last century has seen an almost relentless rise in UK owner-occupation. At the end of the first world war, nearly 80% of households rented their home from a private landlord. Home-ownership has since grown – from 23% in 1918 to almost 71% in 2003 – before settling back to just below 68%. But developments in the last few years have led some to ask if owner-occupation reached its high point in the middle of the last decade and whether the 25-year period from around 1980 marked the golden age of home-ownership, which has now come at an end.

Since the mid-1990s and before the onset of the credit crunch, borrowers and lenders benefited from a prolonged period of low and stable interest rates, and sustained economic growth. A plentiful supply of mortgage funding coincided with improved assessment of affordability and creditworthiness. This combination enabled lenders to help fund an expansion of home-ownership.

This period of successful and sustainable growth in home-ownership came to be reflected in policy development and aspiration. In 2005, the then Labour government pledged to extend home-ownership to 75%. And even though market conditions have deteriorated significantly since then and there has been a sharp reduction in the availability of mortgage funding, the new government continues to declare support for home-ownership. Since the general election in May, the housing minister, Grant Shapps, has spoken of his desire to deliver an age of aspiration, in which owner-occupation will play a central role.

First-time buyers

Although housing aspirations fluctuate over time and may be affected by changing market conditions, the surveys we conducted up to 2007 showed consistently that around 80% of people wanted to be home-owners in the long term. It is difficult to say how aspirations to owner-occupation have been affected since then by market developments and by the long-term affordability problems experienced by first-time buyers. However, it is likely that an overwhelming majority continue to aspire to be home-owners, and that numbers would rise again given a more stable housing market and more readily available mortgage funding.

For much of the long period over which home-ownership has grown, first-time buyers have played a key role. In the 25 years or so up to the turn of the century, first-time buyers typically accounted for around 50% of all loans for house purchase.

Since 2002, however, the proportion of first-time buyers has dropped below this long-term average, to around 35%. This decline illustrates the increasing affordability problems for this group of buyers. For much of the last decade, house prices have been rising much more rapidly than the incomes of first-time buyers, adding to the affordability pressures. 

More recently, affordability has become even more challenging, with first-timers now also usually required to pay larger deposits. Since 2007, the average deposit paid by the first-time buyer has risen from 10% to 25% of the value of the property. As a result of the relentless increase in affordability problems over a decade or more, the number of first-time buyers has declined from around half-a-million at the turn of the century to just under 200,000 last year.

By 2005, affordability problems for first-time buyers were becoming increasingly apparent, and were analysed by Professor Steve Wilcox, of the University of York’s centre for housing policy. He found that at that stage, in 40 local authority areas, 40% of younger working households could afford to pay more than a social sector rent but could not afford to buy at the lowest decile point of local house prices.

The ‘in-betweens’ – low-income households

The plight of those identified by Professor Wilcox – those that are outside the priority need for social housing, but who cannot afford home-ownership – was also highlighted by the CIH as it proclaimed the end of the golden age of home-ownership earlier this month.

It highlighted the growth of a group of households that it called the “in-betweens” – those that are not in sufficient need to access scarce social housing, but who are too poor to get a foot on the housing ladder. “The ‘in-betweens’ do everything the government ask,” said Sarah Webb, CIH chief executive, “working and generally not claiming benefits – but they have been forgotten when it comes to their housing needs and aspirations.”

According to the CIH, the ‘in-betweens’ constitute a range of households, from those at the margins of home-ownership to those who have no independent living options accessible to them. Many, the housing body says, find accommodation in the private rented sector, but may struggle to find quality and security. The better off within the group may benefit from intermediate measures, like shared ownership provided by housing associations, but many are unable to afford these options.

The CIH believes that the recent economic downturn has compounded the difficulties for the ‘in-betweens’, with:

• access to home-ownership remaining difficult for those at the top of this group, and impossible for those at the bottom; and
• the private rented sector unlikely to grow sufficiently to meet increased demand from those for whom social housing is unavailable and owner-occupation, impossible.

The end of the golden age – or beginning of the age of aspiration?

Despite the recent decline in owner-occupation rates, aspirations to home-ownership are likely to remain strong – and may strengthen as the economy and housing market become more stable. But the weak economic backdrop – and continuing shortage of mortgage funding – will make it difficult to achieve growth in home-ownership in the short- to medium-term.

Lenders remain committed to funding housing in all tenures, but there are clearly major challenges for the private and social rented sectors, as well as for home-ownership. 

Earlier this month, we reported a modest increase in buy-to-let lending, which contributes to the availability of private rented housing. In the second quarter of this year, 24,900 buy-to-let mortgages were advanced, 13% up on the first quarter and 15% more than a year earlier.

But, although a turn-up in buy-to-let lending from its low point in the first half of last year is welcome, current levels of activity are only running at  between one-quarter and one-third of the former heyday of buy-to-let in 2006 and 2007. Conditions in the sector have improved somewhat but, like the mainstream mortgage market, buy-to-let lending remains constricted by the funding shortage.

Meanwhile, the shortage of mortgage funding is also afflicting the social housing sector, the problems or which are compounded by the challenging deficit reduction programme, and the additional pressures this imposes on central and local government finances.

Conclusion

Although we have seen a significant decline in the proportion of home-owners, the reduction in absolute numbers has been more modest. Between 2005-6 and 2008-9, the number of owner-occupied households in England declined only by around 200,000, according to the Survey of English Housing, from 14.8 to 14.6 million. Essentially, what we have seen in recent years is an increase in population and the number of households overall, and a strong expansion of the private rented sector to accommodate the higher numbers.

In the past, housing market downturns have often led to protracted weakness in house prices. On this occasion, however, the authorities have responded to the economic downturn with a significant loosening of monetary policy. Reducing interest rates to historically low levels has helped sustain home-ownership, reduce the number of forced sales and underpin house prices.

If there had been a different policy approach, however – and house prices had fallen more sharply as a result – affordability for first-time buyers would have improved more noticeably, perhaps leading to a stronger and quicker recovery in rates of home-ownership. As it is, the policy response on this occasion may have helped existing home-owners – while reinforcing the prospect of a housing market that may only recover very slowly over a number of years.

Given that other countries, such as the US and Australia, have seen home-ownership rates rise after apparently peaking, it is probably too early to state with any confidence that the golden age of home-ownership in the UK has ended.