Lacklustre trends in housing market could lead to Generation Rent

Robert Gardner, Nationwide chief economist <em>Picture: Nationwide</em>
Robert Gardner, Nationwide chief economist Picture: Nationwide
The housing market throughout the UK remains firmly in the doldrums with little sign of any imminent recovery. The Scottish market in particular appears to be lagging behind the rest of the UK. That’s the conclusion to be drawn from a raft of statistics published in the last few days.

Take, for example, the latest Scottish House Price Monitor from Lloyds TSB Scotland. It reports that house prices here are now almost identical to those of four years ago. In the three months ending in April, the average price index for domestic property in Scotland fell by 3.6 per cent, and the number of sales is continuing to fall – 18 per cent down on the same quarter last year.

According to Donald MacRae, the bank’s chief economist, “The Scottish economy exited recession at the end of 2009. A slight fall in output in the first quarter of 2010 was followed by robust growth of 1.3 per cent in quarter two and trend growth of 0.5 per cent in quarter three, before a weather-induced fall of 0.4 per cent in the last quarter. Most indicators, including the Bank of Scotland PMI [Purchasing Managers Index], point to a resumption of growth in the first quarter of this year.

“The Scottish housing market has adjusted to the recession with a halving of sales and a period of volatile price movement over the last three-and-a-quarter years. Average house prices in Scotland are now very close to the levels of four years ago. Consumer confidence has fallen due to high levels of retail price inflation in excess of increases in earnings squeezing disposal income. The slow recovery from recession is being expressed in the housing market, principally through low levels of sales and a return to the prices of four years ago.”

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These figures are largely confirmed by those from the Nationwide. It reports that there was a slight rise in prices last month (0.3 per cent), the price of a typical home is currently over 1 per cent lower than a year ago.

Robert Gardner, the Nationwide’s chief economist, shares MacRae’s view: “The property market is continuing to mirror the lacklustre trends evident in the wider economy. House prices increased by 0.3 per cent in May, only just offsetting the 0.2 per cent fall recorded the previous month, and leaving prices 1.2 per cent below the level prevailing in May 2010. At 0.6 per cent, the three month on three month measure of house prices was little changed from the 0.7 per cent pace of increase recorded in April.”

Commenting on these figures, Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors (RICS), added that they provided “further evidence of a largely stagnant residential market. This follows on from numbers on the level of transactions published earlier in the week by HMRC [HM Revenue & Customs] and the British Bankers’ Association, both of which showed a broadly flat trend in sales.”

Much of the lack of movement in housing has to do with consumer confidence. The latest figures from the Nielsen Company and the British Retail Consortium confirm a dramatic decline in this, with confidence in the UK dropping sharply despite growing optimism elsewhere in the world.

Its survey suggests that fears about job prospects are responsible, with three-quarters of British people believing that job prospects here were “not so good or bad”, versus a global average of 49 per cent. It also suggests that we are becoming a nation of savers. Despite low interest rates, the most popular thing to do with spare cash is put it into savings, with 34 per cent of respondents trying to save where possible. However, 30 per cent of respondents said that they had no spare cash, the highest percentage the survey has recorded.

In the view of Chris Morley, group managing director of Nielsen UK & Ireland, “The long hard winter and continuous media coverage of UK debt levels and cuts in the public sector are all taking their toll on consumer confidence in the UK. I would envisage a continuation of lower confidence as consumers are still being very cautious in their spending intentions.”

British Retail Consortium director general, Stephen Robertson, added that “nearly a third of people now say they have no spare money because households are suffering a squeeze between high inflation and low wage growth. In real terms, disposable incomes have fallen for the first time in 30 years. With inflation expected to rise further and average earnings showing only minimal growth, disposable incomes will be under continuing pressure for the rest of the year and beyond. The prospect of interest rates beginning to rise as the housing market weakens can only dent consumer confidence further over the coming months.”

That is backed up by some of the other, forward-looking indicators from the RICS Housing Market Survey. They suggest there is little reason to expect an improvement any time soon. This is the result of a combination of factors including uncertainty over the outlook for the economy. It also argues that an ongoing reluctance from the banks to make finance more readily available is continuing to cast a pall over the sales market.

“This would matter less if the availability of rental property, whether privately let or social, was increasing,” said Simon Rubinsohn. “The upward pressure on rents is a clear indication that this is not the case. Indeed, reforms to financing arrangements for social housing raises significant doubts as to whether new provision can keep pace with need. Although the mood music in government does seem to have shifted more in favour of development in recent months, it is absolutely critical that the rhetoric feeds through into actions. Failure to act is likely to result in the cost of all tenures of housing continuing to rise.”

That has worrying implications for all kinds of housing, emphasised by a report from the National Centre for Social Research (NatCen). Its latest publication, commissioned by the Halifax, suggests that Britain is moving towards to a generation of renters who are giving up on buying their own home. It claims that, if attitudes become reality, the shape of Britain’s housing market will be fundamentally changed within a generation.

Claimed to be “the most in-depth research into the attitudes and behaviour of young people toward home-ownership since the credit crunch”, the NCSR report found that 77 per cent of all young non-homeowners still aspired to owning their own home. Then comes the reality check: “despite this aspiration, nearly half of 20–45 year olds say Britain is becoming more like Europe where renting is seen as the norm and predict Britain will become a nation of renters within the next generation.”

The survey had a large sample – some 8,000 people aged between 21 and 40. It found a widespread perception that banks were not lending. Those interviewed were worried by the size of mortgage deposits necessary. They also found the application process daunting, effectively stopping them from making any significant attempts to buy a home. Only 5 per cent of this group reported that they were making sacrifices to save for a deposit, while 95 per cent said they had no spare cash, no interest in saving for a deposit or were trying to save but failing to do so.

“The phenomenon of ‘Generation Rent’ could have major socio-economic implications” said the report’s author, Alison Blackwell from NCSR. “It would mean fewer homeowners being able to buy and therefore fund the construction of the new homes required in the UK to meet demand, resulting in a slowing down in the housing market. It could open up a widening of the wealth gap that already exists between homeowners and non-homeowners. And people in Generation Rent risk insufficient finances at retirement.”

Her concern was reflected by Stephen Noakes, commercial director at Halifax Mortgages, who stressed that they were doing everything they could to help. “Our research indicates just how many potential first-time buyers are not making it to the application stage,” he said, “because of a fear of being declined. We would like to help aspirational home buyers to realise they do have options, that they can apply for a mortgage, and that it is still possible to get onto the property ladder.”

The research further emphasised that there were great challenges and no easy answers for first-time buyers. The size of the deposit was rated as the biggest single barrier to home ownership, and focus-group comments suggest this prevents people from saving at all. The response of the Halifax has been to launch what it’s calling the First Time Buyer Pledge. This includes a promise to publish a detailed overview of lending criteria both online and in branch.

“Our research indicates that first-time buyers are fearful of the application process,” Noakes said, “so we want them to know that, if they come to us, we can provide them with a personalised promise on how much we can lend them, without leaving a lasting record on their credit profile. In addition, if an application is turned down, we will provide customers with information as to why and, whether they are successful or not, we will provide them with a plan to move forward.”

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