As the housing crisis worsens, its impact is being felt increasingly across the mortgage market, from the rising house prices of the past few years to worsening affordability for first-time buyers (FTBs).
According to the Home Builders Federation (HBF), only 233,000 new homes were completed in 2021–22, considerably less than the government’s ambition of 300,000 per year, with the situation forecasted to get worse before it gets better.
At 2,456, the number of projects granted planning permission during the second quarter of 2023 was the lowest since the HBF started compiling the figures in 2006.
If we don’t come up with some solutions, we risk a return to the equivalent of the Victorian poorhouse
It has warned that, if the current government’s ‘Not in my backyard’ policies persist, the number of new homes being built each year could plummet to as few as 120,000.
How will the continued shortage of housing further impact the mortgage market, and what, if anything, can help ease the pressure?
“We are so far behind the targets set for new-builds now. It will take decades to catch up,” says Just Mortgages chapter managing director John Doughty.
“The need for housing, however, is not going to let up and no doubt we will hear that housing moves higher up the agenda ahead of the next general election. We keep hearing that our housing market is broken but we aren’t seeing many positive moves to fix it.”
We have weaned ourselves off HTB but the private-sector replacements are struggling to achieve the same traction
Indeed, Labour leader Keir Starmer made a promise, at the party’s recent annual conference, to build 1.5 million new homes within five years of a Labour government coming to power, by reforming planning laws and building on greenbelt land.
“Planning has been a problem that successive governments have promised to tackle but little seems to have materialised as housing got batted about by various departments and used as a political battering ram,” says Doughty.
He explains that there are other reasons, alongside planning, for the UK falling short of its housebuilding targets.
“Lockdown during the pandemic exacerbated the situation. We have seen a skills shortage since leaving the EU and a materials supply problem reported by developers,” he adds.
In terms of solutions, it seems there is no golden bullet.
The typical LTI ratio has increased in the recent past as lenders tweak criteria to assist buyers. This could be adjusted again
In the meantime, the mortgage market may have to adapt, with these conditions potentially persisting for some time.
“Given we do not seem able to build more than 180,000–220,000 homes a year, that [shortage] is likely to continue into the next decade,” says SDL Surveying managing director Simon Jackson.
“The result will be house prices continuing to rise and homeownership remaining a difficult option, taken later and later in life after an extended period of renting.”
Feeling the strain
First-time buyers risk being the ones most affected by a shortage of housing.
“The housing market boils down to basic demand and supply— if demand is greater than supply, property prices will rise,” says SPF Private Clients chief executive Mark Harris.
While HTB has its critics, it was great for getting people onto the housing ladder
“This invariably happens and, if the rate at which prices rise is faster than the income growth needed to support the typical mortgage required to purchase that asset, there is a potential affordability issue,” he says.
“FTBs are typically hit hardest because they don’t have the resources to put down ever-bigger deposits. Likewise, stretched second-steppers, who may have built up some equity in their property, can face a huge step in moving up the ladder.”
The average FTB house price has almost doubled in 10 years, from £148,474 to £288,030, according to Halifax, with the average age of an FTB also increasing, to 32 from 30 a decade ago.
Recent strong wage growth has seen the house-price-to-income ratio for FTBs fall from 5.8 in June 2022 to 5.1 [‘a year later’ ?]. However, this has been offset in the past year by an average increase of 25% in overall mortgage costs for FTBs.
Normally, during times of stretched affordability, one would expect house prices to fall; as many had predicted would happen this year. However, while Halifax reports a fall of 4.7% over the past year, the market has not seen significant declines.
Given we do not seem able to build more than 180,000–220,000 homes a year, the shortage is likely to continue into the next decade
“The systemic undersupply of property in the UK underpins house prices, which for many years have been very high relative to incomes, impacting buyer affordability,” says Intermediary Mortgage Lenders Association executive director Kate Davies.
Although, according to Davies, the mortgage market itself is impacted more by the current financial environment than by the housing crisis, she adds: “Higher [mortgage] rates and stretched affordability might have been expected to bring about a ‘correction’ in property values, whereas the supply/demand imbalance is keeping prices — arguably — artificially high.”
Another Help to Buy scheme?
There have been calls from some for a successor to the government’s Help to Buy (HTB) scheme, to both help more FTBs onto the property ladder and incentivise developers.
“The current lack of government-sponsored FTB initiatives is not helpful,” says Davies.
We must start thinking about the future of ‘Generation Rent’. What happens to PRS tenants still priced out of homeownership in 20 or 30 years’ time?
“As an industry, we have weaned ourselves off HTB but the private-sector replacements are struggling to achieve the same traction. These should be encouraged to continue but, if either major political party is serious about wanting to tackle the housing supply crisis, they will need to devise a genuine solution.”
HTB certainly achieved its aim, helping 328,242 FTBs to purchase a home between 2013 and 2023. However, the current repayment problems being reported by those now reaching the end of their five-year interest-free loan threaten to tarnish its success.
“The jury is still out when it comes to HTB. Was it a good thing in the long term or just a short-term fix? Time will tell,” says Doughty.
“It is evident that HTB allowed many people to enter the market at a higher point on the housing ladder. So, with no HTB, will we see a return to a more traditional market — one where people step onto a low rung of the ladder and work their way up over time?
“If we can get back to this ‘traditional model’, the number of transactions will increase and the mortgage market will be more sustainable over time.”
Planning has been a problem that successive governments have promised to tackle but little seems to have materialised
As Doughty observes, one of the criticisms levied at HTB is that it encouraged FTBs to borrow above their means, with developers looking to boost profits by building bigger homes.
“We need a change in the types of property being built: more FTB homes, smaller family homes, more sustainable community schemes creating community living — not just housing estates,” says Jackson.
“While HTB has its critics, it was great for getting people onto the housing ladder. Any similar scheme must not encourage people to buy houses too big for their needs.
“It could also be linked to a savings scheme, like an extension of the Lifetime Isa where, if you save £4,000 a year, the government will give £1,000 if you use the capital to buy a house,” he suggests.
Lenders may also need to look to longer-term loans or stepped interest rates to make homeownership more affordable, he adds.
Harris agrees that a rethink may be needed in terms of products.
We are so far behind the targets set for new-builds now. It will take decades to catch up
“The typical loan-to-income [LTI] ratio has increased in the recent past as lenders tweak criteria to assist buyers. This could be adjusted again as necessary,” he says.
“Lenders have to manage a fine balancing act: if they change their affordability assessment by reducing stressing, increasing LTIs or broadening income criteria, they must do so while retaining a responsible approach to lending.”
Danger of doing nothing
If the housing crisis is not tackled, it will also have a detrimental impact on the already overstretched private rental sector (PRS).
“Crucially, we must start thinking about the future of ‘Generation Rent’. What happens to PRS tenants still priced out of homeownership in 20 or 30 years’ time?” asks Davies.
“Many thousands will face the impossible combination of rising private rents and very modest pensions. Where are they to live in their old age?
We need a change in the types of property being built: it can’t be just housing estates
“If we don’t come up with some solutions, we risk a return to the equivalent of the Victorian poorhouse. In the 21st century, that would represent a terrible political, social and economic failure,” she warns.
Given the shortage of new-builds in the pipeline, and the lack of an immediate solution, the market is arguably caught up in an escalating problem. This requires both a sense of urgency and a significant re-evaluation by either the current government or any incoming government, and possibly by lenders as well.
Recognising the problem is the easy part; solving it will be much harder.
This article featured in the November 2023 edition of MS.
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