Homeownership has been in decline but the majority of the “Baby Boomer” generation households in the UK still own their own home.
The Government is now focusing on reversing the ownership declining trend through policies such as “Right to Buy” and new Starter Homes, plus measures to cool buy-to-let through tax changes and mortgage restrictions.
However, says the latest Savills five year forecast for the UK’s residential housing market, “…this will require balancing the interests of existing homeowners against those of prospective buyers.”
“…the combination of increased costs of borrowing and reduced tax relief on those costs is also likely to temper the fervour of buy-to-let investors… For cash buyers, who continue to make up a much higher proportion of the market, …interest rate rises are not a constraint.”
The result of this balancing act will determine the future shape of the housing market says Savills.
The Baby Boomers have benefited from more than two decades of exceptional house price growth creating substantial amounts of housing equity.
This creates a situation where owners are happy to maintain or even increase prices, whereas for “generation rent” this creates a barrier to buying through the size of deposit they need to obtain.
At the same time, new housebuilding is well below the levels required to satisfy the need for housing at affordable prices, putting further pressure on renting and affordability.
The Private sector housebuilding response is constrained by capacity in the sector, the availability of land and planning restrictions and the level of demand at current price levels.
The Government’s current policies will go some way to resolving these issues but Savills thinks that “…substantially increasing delivery to a level that reverses the decline in homeownership will be a significant challenge for the Government.”
The Scale of the challenge
Research by the Council of Mortgage Lenders shows the true scale of the Government’s challenge:
- 64% of households born in either 1960 or 1970 owned their own home by the age of 35.
- For those born in 1980, the figure falls to 44% and it is predicted that only 39% of those born in 1990 will own their home by the time they reach 35 years old.
Instead of creating a nation of homeownership, a longstanding Conservative policy, it appears successive governments have only managed to create one or two generations of homeowners.
Now, financial realities in a low inflation and high debt economy mean that many will be unable to have the benefit of owning their own home, and as Savills acknowledges, “tackling just one or two parts of the housing market is unlikely to be sufficient and may even end up in worse outcomes for some people.”
The traditional renting demographic will continue to expand, but rental affordability is already stretched for many, so the prospect for rental growth over the next few years is largely limited to underlying wages growth.
Households living in the private rented sector already pay more as a percentage of their income than those living in social housing or homeowning. A high proportion of private tenants are reliant on housing benefit (HB) or live in larger household groups to make ends meet.
In those rental markets that are heavily dependent on housing benefit tenants, including many seaside towns on the south coast, parts of the northern coasts and urban belt, will come under pressure in future as Government policy is for reducing the dependency on housing benefit.
The growth in the trend to sharing for young professionals in the larger cities looks set to continue and grow as the cost of buying limits the number able to move into homeownership.
These are the groups likely to benefit most from the forecast wage recovery, and this factor will drive the majority of rental growth in coming years. However, in some high demand – low supply rental markets such as London, Savills think we will see more people living in larger household groups which would contribute to higher rental growth, albeit for those properties that have the flexibility to allow for this – more HMOs spring to mind.
The social rented sector meanwhile, is likely to come under renewed pressure and:
“looks set to shrink further as people transfer into owner-occupation.
“This suggests the private rented sector will continue to grow in coming years as it remains the only option for those priced out of homeownership but not qualifying to live in the shrinking affordable housing sector.
“This presents a continued opportunity for investors. However, the ability of debt-laden, buy to let investors to take advantage of it will be limited by a combination of increased interest rates and reduced tax relief on the resulting costs of servicing a mortgage.
“This means we need to both continue building new homes across the full spectrum of housing tenures and encourage large-scale institutional investment. Ultimately that would help to ensure that all people have somewhere affordable to live and give them a better chance to save a deposit that may one day turn them into homeowners”, says Savills.
Savills Forecast Insights:
Prime London Residential Markets – At the top end of the London housing market, the number of wards with an average sale price of over £1m has risen from 17 to 50 in five years. The boroughs of Kensington & Chelsea and Westminster account for the vast majority of £1m+ wards, while this year locations including Earls Court, North Kensington, Bayswater and Victoria joined the more established markets such as Chelsea and Mayfair. Beyond central London, the £1m+ market has expanded to include more of Fulham, Highgate, Chiswick, East Sheen and Dulwich. The fundamentals of wealth generation support medium term price growth in the prime London markets. However,this is likely to be muted in the short term as the market, which currently looks fully valued and fully taxed, adjusts to a new fiscal and regulatory backdrop.
Scotland Residential – North of the Border – Scotland’s Residential Property Market – One year on from the Referendum on Scottish Independence, there has been a notable transfer in balance within the residential property market north of the border, with a shift to bottom-up growth. Buyers of homes below £400,000 are now receiving further assistance in the form of favourable rates of LBTT. Meanwhile, buyers of more expensive homes are taking on the burden of the new progressive taxation in Scotland. There were 639 prime sales which registered in Scotland at £400,000 or above between May and July this year. This compares to 925 sales in the same period last year, representing a drop of 31%.
Buy to Let – Buy to Let Tax Relief – A combination of increasing interest rates and a capping of the tax relief on interest payments will significantly reduce the profitability of mortgaged buy to let investments. Over five years we expect the cash surplus on the average buy to let investment to fall from over £2,500 to under £950. This will cause some highly geared buy-to-let investors to rationalise their portfolios and limit the ability of a larger number of others to expand, which is likely to maintain upward pressure on private sector rents.
Inheritance Tax and Downsizing – Our analysis suggests that the over 65s hold roughly 44% (or £1.2tn) of the equity held in owner occupied housing. Increasing the inheritance tax thresholds will allow homeowners to retain more of that housing wealth but is likely to discourage downsizing meaning younger generations have to wait longer to trade up the housing ladder.
Ageing Population – Housing an Ageing Population – Increasing the provision of Retirement Housing from 4.8% of older people to 10% would require an additional 500,000 new homes, while a relatively unambitious target of increasing the provision of Extra Care Housing from 0.6% of older people to 2% would require an additional 130,000 homes.
Read the full Savills Residential Property Focus – November 2015 – here
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