How much have the housing and mortgage markets changed since the financial crisis?
“L P Hartley famously said that, “the past is a foreign country, they do things differently there”. In many respects these sentiments apply to the UK housing market, with a marked difference between current conditions and those prevailing between 2005 and 2007, as illustrated in the tables below.
2005-07 average Latest*
Mortgage approvals (per month) 107,700 50,500
First Time Buyers (per month) 32,400 16,700
First Time Buyer (FTB) share 37% 39%
Average deposit (FTB) 10% 20%
Sources: Bank of England, CML. * Average Jan-Jun 2012. FTB = First Time Buyer
“Perhaps the most dramatic change is in the level of activity. For example, the average number of mortgage approvals is currently running at around 50,000 per month, around half the level prevailing over the 2005-2007 period.
Interestingly, the share of mortgages taken up by first time buyers has actually increased slightly to 39% of the total, up from the 37% prevailing in the pre-crisis period. The more cautious approach of borrowers and lenders is evident in the increase in the average deposit from 10% to 20%.
2005-07 average Latest
House price £167,860 £164,729
House price to earnings ratio 6.06 5.11
Average fixed rate mortgage 5.4% 4.2%
Average variable rate mortgage 5.4% 3.1%
Typical mortgage payment as %
of take home pay (FTB) 40% 29%
Average mortgage term (FTB) 25 28
Sources: Nationwide, CML, ONS. FTB = First Time Buyer.
“Affordability has improved on a number of metrics. Interest rates on both fixed and variable rate mortgages have declined. Together with a modest decline in house prices and a steady rise in average earnings, the monthly repayments for a typical first time buyer with a 20% deposit have declined to around 29% of take home pay, down from 40% before the crisis.
“In practice the decline is slightly more pronounced than this. Borrowers, especially first time buyers, have been increasing the term of their mortgage in recent years. The average term for first time buyers is currently 28 years up from 25 years over the 2005 to 2007 period. While this increases the total amount repaid over the term of the loan, it lowers the monthly repayments.
Will we return to the pre-crisis pattern?
“The evolution of housing market conditions in future is likely to be closely tied to the trajectory of the wider economy. The number of housing transactions should pick up as the UK recovery gathers pace in the years ahead, though this is likely to be a gradual process.
“Policy measures aimed at supporting the availability of credit and lowering the cost of borrowing, such as NewBuy1, and the Funding for Lending2 scheme, should help to provide support. However, much will depend on developments in the labour market. Increased job security, lower unemployment and stronger earnings growth will be needed to generate a sustained upturn in activity.
“Though uncertain, a modest further improvement in affordability is likely. Interest rates will not remain at current lows forever, but rate hikes still appear some way off. Further asset purchases by the Bank of England should also help to keep down longer-term interest rates. In addition, house prices are expected to remain fairly stable over the next two years, while incomes are likely to continue to rise gradually, which will also help to support affordability.“
Taken from the August 2012 Nationwide Building Society House Price Index Report