Published: 1 February 2012 | Author: Bernard Clarke
The difficulties facing prospective first-time buyers are well known and attract considerable attention from policy-makers, the media and the wider public. More restrictive lending criteria, in the wake of challenging funding conditions, have meant much larger deposit requirements. As a result, getting on the first rung of the housing ladder has become much harder, and the number doing so has shrunk considerably.
The unfortunate flip side of the focus on first-time buyers is that we give less thought to how existing home-owners are faring. But existing owner-occupiers wanting to move – a group we distinguish from first-time buyers with the description of "movers" – are numerically more significant and important to understanding the fragility of the wider housing market.
In this article, by CML chief economist Bob Pannell, we look at some of the key factors currently discouraging moves by home-owners. In particular, we consider how movers may have been affected by:
- declining levels of real income and consumer confidence;
- the expansion of the private rented sector and the extent to which this has given movers greater flexibility and choice over when to buy;
- reduced levels of equity, and the way this may be constraining their ability to move up the housing ladder; and
- higher transaction costs, which have a larger proportionate impact when house prices are static or falling and are more difficult to load into the next mortgage deal.
With well over 17 million home-owning households in the UK, an obvious point to make is that this is far from being a homogenous group.
Although there is a very wide spectrum of personal circumstances, whether or not you have a mortgage is an important distinction. A significant number of owner-occupiers (more than 40%) own their homes outright. These households are typically somewhat older, and move much less frequently. But our focus is on those home-owners that still have a mortgage.
Chart One: House purchase loans to first-time buyers and movers
Our regulated mortgage survey data shows that house purchase loans to movers have fallen at a broadly similar rate to first-time buyers since the credit crunch (see Chart One). But why has this been the case?
Some of the factors dampening first-time buyer activity are also affecting would-be movers.
Pressures on movers
Critically, most households have experienced only modest earnings growth over the past few years, and will have seen their real incomes shrink as a result of inflationary pressures. As the Institute for Fiscal Studies has noted, we have experienced the most sustained drop in living standards in 30 years. Allied with uncertainty about jobs and the wider economy, this has undermined consumer confidence, and with it the ability and willingness on the part of households to undertake large purchases.
Meanwhile, the renaissance of the private rented sector over the past 15 years now means that households have much greater choice over the timing of house purchase decisions. Each year, there are significant numbers of household movements – in both directions - between home-ownership and the private rented sector. Even when home-owners need to move, for example for job-related or family reasons, they may be able to defer a sale and switch to renting instead.
Given the subdued nature of the housing market and the difficulty of getting housing chains to form and progress, this considerable discretion on the part of existing home-owners may be depressing the level of sales activity.
But there is a key difference between home-owners and first-time buyers, in how the two groups can be affected by house price movements.
At first glance, this may seem surprising, given that most moves by existing owners are for trading up, and that less rapid house price gains imply less of a gap between sales and purchase price.
The explanation lies in the degree of leverage in mortgage transactions, and the reliance that most home-owners place on the capital gain that comes with house price appreciation.
Given that movers tend to buy more expensive properties, it should come as no surprise that they typically provide much bigger deposits than first-time buyers. But as Chart Two shows, the typical deposit provided by movers is also much higher than first-time buyers, relative to their income levels.
Chart Two: Deposit illustration, movers and FTBs, % of gross incomes
The chart powerfully illustrates how the more restrictive loan-to-value (LTV) lending of recent years has affected the typical first-time buyer. As typical LTVs shrank from 90% to 75% in early 2009, the first-time buyer deposit size more than doubled, easing back a little more recently as credit availability has eased somewhat. By contrast, movers – whose typical LTVs are close to 70% - have been less directly affected.
Although the simple "take away" finding here relates to first-time buyers, this is by no means the whole story.
Chart Three: Sources of finance besides mortgage, by year of purchase, % of households who bought with a mortgage
As can be seen from Chart Three, the proceeds from the sale of a previous home are a key source of finance for the deposit on a property (and have been consistently cited as such by a majority of purchasing households since the mid 1980s).
House price levels
House prices nationally have been broadly flat over the past year or so, but remain 10% or more below their peak levels of late 2007. This contrasts sharply with the 40-50% gain in house prices during the preceding four years. As a result, most households will have less equity than just a few years ago.
The leveraged nature of housing finance is important here. If house prices are 10% lower, a borrower who had a loan with an LTV of 90% or higher previously would have seen their equity disappear, one with an 80% LTV would have seen their equity level halved, another with a 70% LTV would have seen their equity reduced by a third, and so on.
A year ago, we estimated that just over a half of mortgages taken out since the second quarter of 2005 had an equity cushion of less than 30%. House price changes since then are unlikely to have shifted the landscape dramatically. But given that the median LTV for movers is about 70%, it seems reasonable to suppose that a significant proportion of recent house-buyers would be unable to finance a move up to a more expensive home today, unless they also had substantial savings to top up their deposits.
Moving up the property ladder becomes even more of a challenge when would-be buyers face higher transactions costs if they want to buy in higher stamp duty bands and cannot fully load the additional costs into the next mortgage deal.
Interestingly, our regulated mortgage survey figures hint at a significant rationing effect taking place amongst existing home-owners. While the median income of first-time buyers is almost the same as it was five years ago, average incomes for movers are 10% higher, suggesting that lower-income households (and those less able to accumulate savings?) are now also less able to transact.
Moreover, whereas the median age of first-time buyers has been unchanged at 29 years (despite mis-reporting to the contrary), the average age of movers has been edging up, rising from 37 in 2005 to 40 by 2010.
This is a material shift over a short period of time, and may have a number of causes. To some extent, households may simply be deferring house moves in the hope they can secure pay increases or build up financial savings. But we see the main driver as there being less scope for recent buyers (as well as some who bought before the 2007 market peak) to crystallise sizeable equity gains if they sell their property.
Existing home-owners, not just first-time buyers, are finding it difficult to finance their house moves.
Although movers appear to be less susceptible to more restrictive lending conditions, in some cases the reverse is true. The recent weakness of house prices, and the leveraged impact this has on capital gains, may now be opening up a prospective deposit gap, even for some would-be movers, thereby restricting their capacity to fund a move.
The inference that home-owners are deferring or spacing out their house moves sits comfortably with the available evidence, and would help to explain why property turnover levels are currently so low. Another outcome may be that those who are able to call upon the bank of mum and dad – or other means of support – may find that help is needed not only to step on to the property ladder, but to move up it as well.
While some of these effects should unwind as incomes and the wider economy recover, the speed and timing of this is highly uncertain. Moreover, the impact on future debt-service costs associated with higher regulatory costs and the need to return to more normal interest rates over the medium-term may further extend the current period of subdued levels of property transactions.