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Analysis

Published: 22 May 2015 | Author: Bernard Clarke

  • Total housing wealth was estimated at £4,768 billion in 2014, an increase of 8% over the last year.
  • Only 28% of home-owner and 19% of private landlord housing equity is mortgaged
  • The amount of free equity held by those with a mortgage was £945 billion in 2014.
  • The average outstanding loan-to-value ratio of home-owners with a mortgage was 53% in 2014, up from 50% in 2007.
  • We expect current trends to continue, and household balance sheets to improve further.

Introduction

As we move further away from the financial crisis, conditions in the housing and mortgage market continue to improve. Household balance sheets, on the whole, are getting better, with their total net worth valued at £8,455 billion in 2013, according to the Office for National Statistics (ONS). This is up by £1,251 billion since its pre-crisis peak in 2007 and the figure has almost certainly increased in 2014, with one estimate placing the figure at £9,100 billion for 2014.

Household net worth is made up of assets classified as financial (stocks and shares, pensions, bank deposits etc) and non-financial (housing, land, machinery etc), less financial liabilities such as loans and other debts.

Pensions and bank deposits make up 84% of all household financial assets. Housing makes up 92% of non-financial assets.

Housing wealth has remained fairly stable as a proportion of non-financial assets compared to 2007. However non-financial assets as a proportion of total net worth has fallen slightly, from 61% of total net worth in 2007 to 57% in 2013.

Housing wealth

We are going to look at how housing wealth has evolved in the lead-up to the crisis and where it is now. A note produced in 2011 and updated in 2012 covered this topic and this article aims to build on that earlier work, giving an update with three more years’ data.

The ONS estimates that the total stock of private housing was worth about £4,426 billion in 2013. Our estimate for 2014 puts this figure at £4,768 billion, an increase of about 8% over the last year.

Given that there were around 28 million properties in the UK in 2014 (CML estimate based on figures from the Department for Communities and Local Government) – of which 22.4 million are owned by households (either for primary residence or as a buy-to-let property) – we can look at the value of this stock and how it has changed.

Table 1: Composition of private housing stock by volumes in 2014

 Table of the composition of private housing stock by volumes in 2014 

Source: DCLG, CML calculations

There are 17.7 million owner-occupied homes and 4.6 million properties owned by households which are rented out. These figures exclude social housing and any private housing owned by institutions.

Home-owners in aggregate

During the financial crisis, as house prices fell, the value of the housing stock fell in aggregate too. Though it has recovered since, the value of the total stock only passed its 2007 peak in 2012.

In 2014, we estimate that home-owners had about £3,778 billion in housing wealth (excluding housing in the private rental sector), £285 billion higher than in 2007 or an increase of about 8%. This puts the average value of a property across all home-owners at £213,000 in 2014. A breakdown of housing wealth for home-owners can be seen in Table 2.

Table 2: Composition of private housing stock for home-owners by value in 2014

  Table of composition of private housing stock for home-owners by value in 2014

Source: ONS, Bank of England, CML calculations

If we compare this to a similar period leading up to the crisis, the value of the stock grew by 98% from 2000 to 2007.

The addition of new housing to the existing stock partly explains the size of the pre-crisis increase, as 150,000 more properties were built between 2000 and 2007 than were built between 2007 and 2014. The factor which plays a larger part is the increase in house prices over the two different periods. Between 2000 and 2007, house prices increased by 104%, according to the ONS, whereas they increased 12% between 2007 and 2014.

Chart 1: Housing wealth held by outright owners and mortgage borrowers, £billion

Chart of housing wealth held by outright owners and mortgage borrowers, £billion  

Source: ONS, CML calculations

Download the data

Much of the reduction in housing wealth during the crisis was felt by those who had bought with a mortgage. The effect of this will be somewhat overstated, however, as the number of people with a mortgage has been trending down, while the number of people owning outright has been increasing.

This, coupled with substantially fewer first-time buyers entering the market, has meant mortgaged equity has remained more or less the same over the past seven years, increasing by only about £30 billion in that period, or by 3%. In contrast, the value of housing stock owned outright increased by £350 billion, or 25% in the same period. Again, this will partly reflect the migration of those who redeem their mortgage and add all their equity to the owned outright stock.

Free equity

Taken together, this means the amount of free equity held by those with a mortgage has diminished since 2007, when it stood at £1,045 billion and is currently around £100 billion less at £945 billion – but this has been recovering. Despite this change in the equity position for mortgaged borrowers, analysis carried out by HML suggests there are now 85% fewer borrowers in negative equity than there were four years ago.

Of course, these aggregate figures mask significant variations across age groups and regions. For example, younger people are likely to have larger mortgages relative to the value of their house and less equity. They will also have less overall property wealth, according to analysis carried out by the ONS on the Wealth and Asset survey. Those who own outright will tend to be older, and have homes which are more expensive as a result of accumulated wealth throughout their lifetime.

Looking at all home-owners (including those owning their property outright), the total amount of free equity held increased by £250 billion from £2,460 billion to £2,705 billion. This also means that just 28% of housing wealth has a mortgage secured against it, down slightly from 2007, where 30% of housing wealth had mortgage debt secured against it.

Home-owners with a mortgage benefit from rising house prices as the price of their house and the equity they have increases while their mortgage debt broadly stays the same. However these home-owners also suffer when prices fall, as again their mortgage debt will remain at essentially the same level while their equity is eroded away. In 2007, home-owners with a mortgage had on average a loan-to-value ratio of 50%. As a result of falling house prices, this jumped to 58% in 2008. Since then, it has gradually fallen and stood at 53% in 2014, and so it still remains above the 2007 level. Again, this will have been somewhat affected by the migration of people owning their property outright as they have the lowest loan-to-value ratio, but the overall trend is still visible.

Private renters in aggregate

The value of the private rented sector was £990 billion in 2014 and, in all likelihood, it will exceed £1,000 billion in 2015. This figure has increased by 70% since 2007, with the number of properties in the private rented sector, owned by households, increasing by 53%.

Table 3: Composition of private housing stock for private rented housing by value in 2014

Table of composition of private housing stock for private rented housing by value in 2014

Source: ONS, CML calculations

The proportion of private rented housing owned outright is 65%, while the average loan-to-value of the mortgaged stock is 54%. Taken together, this means that 19% of the total stock, or £188 billion, has a mortgage secured against it. This compares to 21% in 2007. Although this proportion rose in the years directly after the crisis, the main driver was a fall in free equity as a result of falling house prices, rather than an increase in buy-to-let mortgages.

Looking at the average loan-to-value of buy-to-let mortgages, with the proportion of the stock with a mortgage secured against it, shows that buy-to-let mortgages are growing at a much slower pace than the value of the total stock. As with home-owners, when buy-to-let mortgages are redeemed, they become categorised as owning outright and the result is an increase in the amount of equity owned outright.

Chart 2: Housing wealth in private rented housing, £billion

Chart of housing wealth in private rented housing

 

Source: ONS, CML calculations

Download the data

Conclusion

We expect these trends to continue and to see household balance sheets strengthen further. But a new and potentially significant dimension might be industry efforts to support lending into retirement as a means of tapping housing wealth at an older age. For this reason, the CML has launched a task force to look at the issues raised by this and help address them.