One of the key changes to the housing market in the past five years has been the shift in the dominant source of funding. Since 2008, equity as opposed to mortgage debt has become the major source of funding for housing transactions.
A shift to equity was evident prior to the credit crunch but has accelerated since. In 2001, mortgage debt funded 62% of the cost of all housing transactions, by 2006 that had fallen to 55% and in 2011 it stood at 46%.
Constraints on mortgage debt have been the main catalyst. Higher deposits have been needed to access home ownership, there has been more vigorous vetting of mortgage applications and among home movers the equity rich have been able to fall back on a greater affordability cushion.
Shift to equity
Figures from the Land Registry suggest that across England and Wales as a whole £150 billion was spent on house purchases in the 12 months to the end of September 2011. This compares to a figure of £284 billion at the peak of the market and is some 47% less (see Graph 1).
Generally the shift to equity has favoured the housing markets of London and the South East, where transactions and prices have been the most robust. These two markets hold the greatest pool of housing wealth and together account for 26% of the UK’s housing stock but, at £1.55 trillion, 36% of its value (see Table 1).
At £69 billion, 47 pence in every pound spent on house purchases in England and Wales was directed at these two regions in the twelve months to the end of September 2011. This sum is 54% higher than the collective amount spent on house purchase in the Midlands, Wales and the three government regions that make up the North of England.
Equity rich markets
By this measure the equity rich markets have fared the best. In inner London the amount spent on house purchase was 71% of its level at the peak of the market. In markets such as Surrey, Oxfordshire, Bath and North East Somerset and York that figure stood at 60%. By contrast in Blackpool the value of housing transactions was just 30% of its level at the peak of the market.
The shift to equity has also tended to favour higher value markets where it is most concentrated. The total value of sales in the £100,000 to £200,000 range, at £39 billion, was 52% below the £82 billion total in the year to the end of September 2007 prior to the credit crunch. Meanwhile, sums spent on property worth over £500,000 totalled £34 billion, just 18% below the pre-crunch level.
The only submarket to break new ground was the £1 million+ market of London, where equity (a significant proportion of which is international) is perhaps at its most dominant. In this sector the value of housing transactions was 12% above the level at the previous peak of the market.
In the age of austerity, this has undoubtedly worked to the benefit of the Treasury by sustaining stamp duty land tax receipts, given the higher rates of duty paid on higher value property and the introduction of the 5% rate with effect from April 2011. This should not be forgotten as the concept of a mansion tax is debated in the media and by politicians.
Mortgage reform
As far as the debt side of the equation is concerned, the Financial Services Authority published its latest package of proposed reforms in December. These enshrined three main principles, namely:
1. That mortgages should only be advanced where repayment of debt could be achieved without relying on uncertain house price growth.
2. Resulting affordability assessments should allow for the prospect of interest rate rises.
3. Interest only mortgages should be predominantly assessed on a repayment basis.
Such proposals are far less draconian than earlier consultative documents indicated. But combined with the prospect that both the restrictions on the availability of debt and the cost of funds will increase in the face of the eurozone crisis, this means that equity will reign for some time to come.
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