Osborne’s challenge to stop drop in UK home ownership
George Osborne, the UK chancellor, announced in Wednesday’s Autumn Statement the “biggest housebuilding programme since the 1970s”. This included 400,000 new affordable homes in England by 2020, a 3% stamp duty increase for buy-to-let and second home buyers, and a new help-to-buy scheme just for London. The measures are aimed at tackling the “crisis in home ownership in Britain”.
But how bad is the housing situation in the UK?
Pretty bad, at least in comparison with other European countries.
The proportion of the population that owned their home fell in the UK by 8 percentage points to 65 per cent between 2007 and 2014, the largest fall in Europe. The proportion of people who own their own home in the UK is now lower than the average for the European Union or the Eurozone as a whole. The opposite was true just before the crisis.
The international financial crisis resulted in a reduction in home ownership rates in most European countries. Between 2007 and 2014 the rate dropped by four percentage points in the Eurozone and two points in the EU, with contractions of around two points in Spain, Austria and Greece. However no country experienced a contraction similar to that of the UK.
In Europe the changes in home ownership were largely in line with deteriorating financial conditions. High unemployment rates and falling house prices resulted in a shrinking proportion of the population who owned their houses outright, while the proportion of home-owners with a mortgage increased. Ownership fell most among the poorest households.
But different trends were seen in the UK where the fall in home ownership was seen exclusively among those with a mortgage and better-off households were more affected.
A research paper from the Centre for European Policy Study explains the unique pattern in home ownership in the UK, and especially in the London area, as resulting from a combination of high house prices and tightening lending standards.
Despite the financial crisis, house prices in the UK remained persistently high because of wealthy overseas purchasers using the domestic housing market as a ‘safe haven’ investment. Meanwhile, tightening lending conditions, particularly among loan-to value ratios, led to a rapid deterioration in the number of first-time buyers coming into the housing market. Rising numbers of students, migrant workers and young professionals that wished to remain mobile helped boost the renting market in the UK.
In September, the Bank of England pointed to demographic changes and the rising ratio of house prices relative to income as a cause of the fast growth in the buy-to-let sector: “The outstanding stock of buy-to-let mortgage lending has increased by over 40% since 2008. Over the same period, the stock of owner-occupier mortgage lending rose by only 2%”.
The Royal Institution of Chartered Surveyors emphasised the shortage of properties in driving up house prices in the UK.
Regardless of which factor contributed the most, in the UK it became particularly difficult to get a mortgage to purchase a house. The result is that the UK had one of the largest proportions of population living in rented home in Europe last year. Back in 2007, it had the lowest proportion among major European countries and about half that of the Eurozone as a whole.
Home ownership is not an intrinsic positive factor. In Germany for example, the development of a broad rental housing market has been considered essential to easing inter-regional mobility by local regulators. In southern Europe home ownership has traditionally been promoted as a means to ensure social stability and the active involvement of the family in real estate has resulted in extended co-residence and high levels of outright ownership as children inherit the family home through strong intergenerational transfers.
But as the Bank of England emphasised, “the stock of buy-to-let lending might be disproportionately vulnerable to very large falls in house prices”; in other words it poses a risk of magnifying any fall in prices.
Concerns have been raised weather the stamp duty increase for buy-to –let would actually help people entering the property ladder as it could prevent renters saving to buy a property or could push up house prices. But lower international investments in the UK real estate sector and improving lending conditions would probably help reverse the trend.
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