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  4. Affordability boosts the Northern Ireland market

Affordability boosts the Northern Ireland market


Published: 16 March 2017 | Author: Bob Pannell

At the CML, we are always at pains to emphasise that the notion of a uniform UK housing market is something of a myth. In reality, the averages mask what can be very significant variations, and nowhere is this more marked than in Northern Ireland. Here, the market saw a far more serious post-crunch downturn – and it lasted far longer than elsewhere in the UK.

Northern Ireland’s housing market today is continuing to recover, with new-build prices currently growing strongly, according to the Department of Finance’s index. The most recent figures, for the fourth quarter of last year, show that annual house price growth for newly-built properties is about 14%, compared to 3.7% for existing properties.

The differential growth in prices between new-build and second hand property has continued since the start of 2016, and so cannot be dismissed as a statistical blip. It has been bolstered by a recovery in lending appetite since the credit crisis that has spread to newly-built properties.

But, although Northern Ireland has now experienced a number of years of rising property prices, affordability continues to reflect the region’s pronounced post-credit crunch housing market downturn. 

Negative equity has been Northern Ireland’s biggest housing market problem since the credit crisis, exacerbating problems for households in arrears and adding to the financial challenges for those thinking of moving house. But, although many existing home-owners are still struggling with low or negative equity, there are clear signs that the problem is abating.  

We estimate that the number of borrowers in negative equity had declined to 25,000 by the middle of last year – although that is still the equivalent of 10% of all regulated mortgages in Northern Ireland, with an average shortfall of £32,000. However, recent house price growth means that all these metrics are substantially smaller than estimated as recently as early 2015.

But, while property price growth and the volume of sales are now moving broadly in step with the rest of the UK, both remain materially below their previous high points. House prices are 45% below their peak (according to the Land Registry government index), and activity is barely half its 2006 level. 

The economy and housing market

The broader context is an economy in Northern Ireland that remains one of the poorest performing in the UK. Although the jobs market is the strongest it has been for eight years, Northern Ireland has a relatively low proportion of service sector jobs. Its rate of unemployment – at 5.6% – is the second highest of any of the UK regions. And output per head (as measured by gross value added) is only 73% of the UK average, with recent growth rates comparing unfavourably with other regions.

Given that income differences explain much of the regional variation in property prices, metrics that look at prices relative to incomes or earnings provide a useful comparison. 

Chart 1: First-time buyers’ income multiples relative to previous peak, %

20170316 Chart 1 First-time buyers' income multiples, Q3 2016

Source: CML regulated mortgage survey

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Across much of the UK, typical income multiples for first-time buyers are now at or above their previous peak levels. Although we can see clearly from Chart 1 that southern England is leading the trend, at the other end of the spectrum Northern Ireland stands out as the only region where affordability (according to this metric) compares a lot more favourably with 10 years ago.

With house price to income ratios at gentler levels, young households have benefited from a recovery in lenders’ risk appetite and the availability of competitive mortgage deals over recent years. They have also been supported by government housing initiatives to help first-time buyers.

Northern Ireland does not have an equivalent to the Help to Buy equity loan scheme, operated by the Department for Communities and Local Government. In the three years to September 2016, however, 1,600 households in Northern Ireland were given mortgages with the help of the government’s nationwide Help to Buy mortgage guarantee scheme. The vast majority of these (86%) were first-time buyers. 

The other main support for first-time buyers comes via schemes such as the Co-ownership scheme, Northern Ireland’s version of shared ownership. The Co-ownership scheme has been in existence since 1978 and has helped over 26,000 households in that time.

Support for first-time buyers has helped ensure that they have featured strongly in the recent housing market recovery (see Chart 2). This marks a return towards normality in Northern Ireland, following the very subdued period for first-time buyers in the run-up to the credit crunch.

Chart 2: First-time buyers’ share of regulated house purchases, %

20170316 Chart 2 First-time buyers' share of regulated house purchase, Northern Ireland and UK, %

Source: CML regulated mortgage survey

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Housing construction, demand and supply

Housing starts have picked up noticeably from a fairly low base, but the current annual rate of a little over 6,000 units corresponds to only 0.8% of the Northern Ireland housing stock (down from a peak of 2% in the mid-2000s).

In common with the rest of the UK, there are varying estimates of the disparity between demand for housing and its supply, though the gap is less marked in Northern Ireland than elsewhere. The latest government indicators suggest that 7,200 homes are needed annually. The Housing Supply Forum was formed in 2015 to explore ways of filling the gap: its report, containing a range of recommendations to boost supply, was presented to ministers in January 2016.

In contrast with England, where home-ownership started to ebb from the early 2000s, the tenure continued to expand in Northern Ireland (and in other parts of the UK). Home-ownership rates wobbled after 2004, as house price inflation and affordability pressures intensified, but it was not until 2007 that the rate of home-ownership finally peaked – at a little over 73%.

When the credit crunch hit, the impact on house prices and transactions was much more severe in Northern Ireland than elsewhere in the UK (see Charts 3 and 4). Like its southern neighbour, Northern Ireland suffered a protracted period of falling house prices, the emergence of widespread negative equity and a challenging picture of arrears and possessions.

Chart 3: House price changes, Northern Ireland and UK

20170316 Chart 3 House price changes, Northern Ireland and UK

Source: Land & Property Services/ NISRA

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Chart 4: Property sales, % change, year-on-year

20170316 Chart 4 Chart 4 Property sales, Northern Ireland and GB

Source: HM Revenue & Customs

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It has taken several years for Northern Ireland’s housing market to stabilise. Only since 2014 have we seen a really meaningful recovery in both house prices and property sales.

Other tenures

One consequence of Northern Ireland’s boom-and-bust has been a sharp reversal in home-ownership and a commensurate growth in the private rented sector, which now accounts for over 16% of the housing stock. As in England, private renting now surpasses the social housing sector.

Reflecting this larger role, the Department for Communities is currently consulting on how to make the private rented sector a more attractive housing option for tenants and landlords.

Standards in the private rented sector are overseen by the Northern Ireland Housing Executive (NIHE), a non-departmental body that also acts as the social housing landlord, with a portfolio of 89,000 dwellings. The NIHE also oversees energy standards across all housing.

Like other parts of the UK, buy-to-let activity over the past year has been affected by tax and regulatory changes. In particular, last April’s increase in stamp duty appears to have severely distorted the profile of activity, and this makes it harder to interpret the drop in activity in the second and third quarters of 2016 compared to the corresponding periods a year earlier.

Future prospects

According to the Northern Ireland Courts and Tribunals Service, cases of mortgage arrears have decreased significantly over the past few years, and numbers are at or near the lowest since current records began in 2007. These trends broadly mirror the rest of the UK.

The outlook for the housing market and mortgage lending in Northern Ireland is subject to similar uncertainties as those affecting the rest of the UK.

However, Brexit negotiations pose specific issues for Northern Ireland, not least because it is the only part of the UK that shares a land border with an EU member country.  Its economy also inter-connects closely with both Great Britain and the Republic of Ireland. 

Uncertainty about future governance of the country is also a particular problem in Northern Ireland, which has considerable devolved powers. Those powers are vested in the Assembly, established almost two decades ago, but the Assembly will be unable to function unless the country’s politicians can agree to form a new power-sharing government following the recent election.

Despite the additional uncertainties associated with the property market in Northern Ireland, lending to first-time buyers is holding up, as our latest data shows. For now, housing affordability pressures remain less intense than elsewhere – limiting at least one potential source of vulnerability.

  • In the coming weeks, we will be looking at what is happening in other parts of the UK housing market. The next article in that series, to be published in the next couple of weeks, focuses on developments in Scotland.