CML news & views

Looking back, we can see that the turn of the year represented the low point of the current housing market correction. In the first three months of this year, fewer than 30,000 mortgages were taken out by first-time buyers, compared with an average just before the credit crunch approaching 100,000 a quarter. It was the lowest quarterly figure recorded in the 35 years we have been collecting data.

The last housing market correction was also characterised by a dramatic fall in the number of first-time buyers. In that cycle, first-time buyer activity declined between 1990 and 1992 before gradually recovering. But within a few years, there were more first-time buyers than there had been before the market correction.

So, will we see a similar pattern of recovery this time? Will the combination of an eventual fall in unemployment, slow economic recovery and a gradual improvement in the availability of mortgages contribute to a restoration of first-time buyer numbers? And, if so, how quickly will it happen?

Or are we now seeing signs of a more fundamental break with the past? The recovery in first-time buyer numbers since the first quarter of this year perhaps suggests a cyclical pattern similar to the early 1990s. But is there any evidence of a long-term change in aspirations to home-ownership or in access to mortgages for young buyers? 

Signs of recovery

Chart 1: Loans approved for house purchase, 000s

Source: Bank of England 

Chart One shows that monthly house sales have more than doubled from the all-time low figures recorded around the turn of the year. Moreover, since May, monthly totals of house sales have been higher than they were a year before.  

Another sign of recovery is that the rate at which house prices had been falling slowed significantly in the first half of this year. Some indices, notably the Nationwide Building Society’s, now show that house prices have recovered to the level they were a year ago.  The housing market remains weak, so perhaps it is surprising to see firmer sales activity and house prices so early in the cycle.

There is, however, no shortage of factors that may have contributed to a firmer housing market. It could be explained by a combination of seasonal fluctuations, historically low interest rates, better-than-expected unemployment figures, overseas bargain-hunters attracted by the weakness of sterling, the current stamp duty “holiday” for purchases of up to £175,000, a shortage of sellers and the effects of the quantitative easing policy by the Bank of England.

The reality is that most of these factors have contributed to some extent, which makes it unusually difficult to gauge how strong the current upturn is likely to be.

In many ways, the apparent resilience of first-time buyers is one of the remarkable features of the current market. The latest figures from the CML/Banksearch regulated mortgage survey show that the number of first-time buyers is around twice what were admittedly extremely low numbers we saw at the turn of the year. So, how can this be happening, given that one might expect younger households to be among those worst affected by the tighter credit conditions now prevailing in the market?

In an article last year Family help for first-time buyers continues to grow, we documented the intensifying affordability problems for first-time buyers and their increasing reliance on help from parents and other family members. But, given the increasing uncertainty about employment and peak-to-trough falls in house prices of as much as 20%, it is difficult to see how there has been an improvement in the appetite and ability of parents to withdraw equity from their own homes in order to help their children.

Lessons of the past

Chart 2: Buyer propensities by age groups, per 1000 adults

Is there anything we can learn from the last property market downturn about how first-time buyers could be affected by current market developments? Chart Two clearly shows that the recession of the early 1990s had a profound effect on the number of purchases by first-time buyers. But apart from those aged under 25 –presumably those most affected by lifestyle factors such as higher university take-up and the popularity of gap years – the inability to get on the housing ladder in the early 1990s was only temporary.

As we have seen, there has already been a significant pick-up in first-time buyer numbers since the beginning of this year. But does that mean we are seeing a quicker turn-around of the market this time?  Or is it merely a modest and partial recovery from the very low number of first-time buyer purchases in the first three months of 2009?

Table 1: Average annual number of FTBs by age group, 000s 

Table One summarises activity by first-time buyers in different age groups during different periods. As we have already seen, the aftermath of the housing market downturn in the early 1990s saw protracted weakness in first-time buyer activity. Under the realistic assumption that the availability of mortgage funding does not improve dramatically in the short term, it is probably not unreasonable to assume that first-time buyer activity at 2008 levels – our “low” scenario in Table One – will persist for the rest of this year and 2010.

Looking further ahead, it seems more likely that demand from buyers will progressively revert to more typical levels. As a measure of this, we have taken the average seen over the five years to 2003 – that is, before affordability pressures began to restrict the market for first-time buyers. This is the “high” scenario in Table One.

Demographics and mortgage funding

There are two further points to bear in mind. The first is that demographic trends will give a strong impetus to first-time buyer numbers in the future. Over the next decade, the number of 25 to 34 year-olds – the age group accounting for more than half of all first-time buyers – is set to increase by more than 1.5 million to 9.5 million.

Second, we need to consider the availability of mortgage credit, which will be crucial in determining how many first-time buyers are able to get on the property ladder. If funding markets remain in their current dysfunctional state, the number of first-time buyers may remain close to a post-war low.

But if funding channels become unblocked, we could see purchases by first-time buyers restored to more normal rates. This, combined with an expansion in the number of young people, could eventually lift the annual number of first-time buyers above 500,000.

But with the number of first-time buyers totalling less than 200,000 last year, we are currently a long way short of that. Our analysis suggests, however, that as many as 800,000 households that might have expected to become home-owners between 2007 and 2010 may be frustrated in trying to do so. That could influence the future size and shape of home-ownership for many years to come.

While we do not have good up-to-date information about household formation rates, we should not discount the possibility that a wall of pent-up demand is building up, with the potential to burst in to the market and trigger a sharp recovery in house prices. 

Conclusion

In the 1990s, a reduction first in house prices relative income – and then in the cost of borrowing – improved affordability for first-time buyers and eventually contributed to a recovery in their numbers. But the causes of the housing market correction are different this time round, and different circumstances may produce a different outcome.

What we may have seen in recent years is a transition from a market in which one form of affordability constraint for first-time buyers – the price of housing relative to income – has been replaced by another: a shortage of mortgage funding, which has been rationed by the requirement to put down larger deposits.

Even when there were no obvious constraints on mortgage funding, we did not see a rapid surge in first-time buyer numbers in response to the release of pent-up demand in the early 1990s. It is possible, however, that, in those days, a renascent private rental sector acted a shock absorber, providing an alternative to home-ownership for large numbers of recently formed households.

This time around, things could be very different. Recent housing construction rates have been depressed; growth prospects for the private rented sector have been held in check by restricted funding for buy-to-let mortgages; and fiscal retrenchment may place an extra, prolonged burden on household finances. On balance, therefore, a slow and steady recovery in first-time buyer numbers – perhaps as we saw in the 1990s – looks more likely than a quick return to “normal” market conditions.

At the start of this article, we asked whether what has happened in recent years would affect long-term aspirations to home-ownership. Clearly, the confidence of buyers – and perhaps in particular first-time buyers – will have taken a knock. But there is no evidence at this stage of a long-term shift in the desire to be a home-owner. Instead, we are likely to see a slow recovery in the housing market – as the economy, consumer confidence and the availability of mortgage finance slowly improve.

The CML is backing measures to improve security for the small number of tenants whose landlords face possession after letting out a property without the lender’s permission and falling behind with their mortgage payments.

In a submission earlier this month to consultation by the Department for Communities and Local Government (DCLG), we supported measures under which tenants in these circumstances would get up to two months to vacate the property after the lender takes possession of it.

The DCLG is considering action to fill a gap in protection for “unauthorised tenants” – so-called because they do not know they are renting from a landlord who is letting the property without the knowledge or consent of the lender and in breach of his mortgage agreement.

Of the options being considered by the DCLG, we favour one that would give unauthorised tenants the right to be heard at a court hearing, and permit courts to postpone possession giving them a decent period to move.  They would continue to pay their rent during this time, which would contribute to mortgage payments.

We support this option because, with appropriate safeguards and limitations, it gives the court an opportunity to balance fairly the interests of the lender, the borrower/landlord and the tenant.

We believe, however, that moves to improve tenants’ rights should be combined with a requirement for the court to serve notice to the tenants and a government-funded publicity campaign to alert tenants to the importance of such notices.  Tenants must also act responsibly when they receive a notice and continue to pay their rent.

It is important to understand that the government’s action is not linked to the expansion of the buy-to-let market.  Where the lender has advanced a buy-to-let mortgage, it will, of course, expect a tenant occupying the property to have a tenancy agreement, which affords protection as long as the tenant fulfils their obligations. 

We accept the government’s case for action directed primarily at tenants in the owner-occupier sector where the borrower is in breach of their mortgage terms.  But cases are few and far between, and the government’s measures should be proportionate to the nature and extent of the problem.

There is encouraging evidence in the DCLG’s consultation paper that this is indeed the approach the government wants to take.

“The numbers affected are small,” the paper says.  “We want to find a solution that is effective in improving the security of these tenants and is also practical, proportionate and fair for all those involved.  Our objective is to enable unauthorised tenants in this position to receive two months’ notice that they need to vacate the property, while causing the minimum of delay to lenders and borrowers.”

Sluggish housing market conditions have made it even more important for local authorities to stick to guidelines agreed with lenders on the use of planning controls intended to promote low-cost home-ownership.

Lenders understand and support the desires of some planning authorities to try to ensure that properties remain affordable for local people.  Three years ago, we therefore helped draw up a standard section 106 agreement, which would help ensure that any restrictive covenants imposed by planners would not make it unnecessarily difficult to get a mortgage on the property.

If a borrower cannot pay the mortgage and a lender has to take possession of the property, it is obliged to get the best price possible for it and to sell at the earliest opportunity.  But if the planning authority has deviated from the standard agreement, that will be more difficult to achieve.  The problem is exacerbated in current market conditions, where selling property is more difficult in any case.  Deviating from the standard agreement can therefore make it much more difficult to get a mortgage on the property in the first place.

The issue was raised during prime minister’s questions earlier this month when the Liberal Democrat MP for Ceredigion, Mark Williams, told MPs about the problems for constituents trying to get a mortgage when there was a restrictive covenant on the property.  We have now written to Mr Williams, explaining that lenders support section 106 agreements but need them to be used consistently.

Planners considering a restrictive covenant on a new development should therefore discuss their proposals with lenders to ensure they do not create unintended problems in lending on the property.  Using the standard section 106 agreement should help ensure that this does not happen.

We are pleased to welcome the Bank of China (UK) as a member of the CML.  The firm has evolved from the Bank of China’s decision to set up a branch in London in 1929, which was the first time any Chinese bank had set up a financial institution in another country.

The bank has expanded steadily over the years and is now an important member of the City’s banking community, with branches in Birmingham, Manchester, Glasgow and London’s Chinatown.

We are also pleased to welcome the stockbroker Execution Ltd, which has joined the CML as an associate.  Execution is a full-service agency broker, providing a range of services for clients, including execution, sales, trading and research.  Its client includes some of the world’s major investing institutions, including mutual, pension and hedge funds and insurance companies.

The CML now has 136 members and 81 associates.