The housing and mortgage markets for the last 60 years
Written on 31 May 2012 by
John Charcol can’t claim to have been providing mortgage advice over the whole of the last 60 years but, having been formed in 1974, we believe that John Charcol is the longest established mortgage broker in the UK.
House Price Movements
The Nationwide House Price Index is the only UK house price index going back as far as 1952. It was with much foresight that what was then called the Co-operative Permanent Building Society, prior to its name change in 1970, started its house price index in the year Queen Elizabeth came to the throne.
There was little change in prices from 1952 until the mid 1950s, although prices fell slightly in 1953 and 1954. In Q4 1959 the annual increase reached 5% for the first time and despite some small falls on a quarterly basis there was then an unbroken run of increases in every single 12 month period from Q1 1955 to Q2 1990. It is quite amazing that that house prices rose in every single 12 month period for as long as 35 years, but it does help to demonstrate why home ownership became increasingly popular!
As a result of the mad market in 1988/89 house prices rose at an annual rate of 32% in the 1st quarter of 1989 and the index, which started at 100 in 1952, peaked at 3,320 in Q3 1989. The market then collapsed, with the index falling 20% in nominal terms by Q1 1993. However, as there was 20% inflation over this 3½ year period the fall in real terms was far higher. After treading water for 3 years the market started a strong recovery, initially focussed primarily in London and the South, which lasted 11 years, before peaking in Q3 2007. Between Q4 1995 and Q3 2007 prices rose by 262% but have since fallen back 11.6%.
Over the last 60 years the price of the typical house which the index measures has risen by a massive 8,680%! Over the same period the Retail Price Index rose by 2,500%.
Over the last 60 years the number of homes has almost doubled to a little over 27 million, but at the same time the UK population has only increased by 40% (to 62 million).
The proportion of the UK population who are homeowners has risen dramatically from about 30% in 1952 to 66% today. However, it peaked in 2003/04 at 71% and because the subsequent steady downward drift started before the credit crunch it was clearly initiated by other factors, although the current restricted mortgage supply is helping to extend the trend. The private rented sector was about 50% of the market in 1952 but then rapidly declined to around 10% by the early 1990s. This sector has since recovered as a result of the Housing Act, 1988 and the ongoing decline in the social rented sector resulting from the policy of successive governments. It is now around 16% of the market, the same share as the social rented sector has, but the former is increasing as the latter declines.
Thus the current split of housing tenure is two thirds owner occupiers, with the proportion of unencumbered properties steadily increasing as the population ages, and one third rented, with the rental split now 50/50 between the private and social sector.
There are large regional variations in tenure, just as with house prices. In particular owner occupation in London is only 55% and still falling. Not only does London have a much higher proportion of flats than elsewhere in the UK, but also a much more cosmopolitan population.
Factors Influencing Choice of Tenure
I suggest the main reasons for the decline in the proportion of homeowners since 2003/4 have been two things. The rapid increase in immigration, with nearly all immigrants having to rent when they initially come to the UK. In addition, a significant increase in the number of young people going to University. This has two relevant impacts – a later start in working life extends the age at which it is viable to consider buying a property and the student debt incurred means that some want to, or need to, reduce this, or pay it off, before they can afford a mortgage.
The current restrictions on mortgage availability, particularly for the typical first time buyer with only a small deposit, will result in this trend continuing for the next few years, although a large majority of the population still aspire to be homeowners.
Key Drivers of House Prices
High inflation was the single biggest driver of house prices over the last 60 years. After being fairly benign for most of the 1950s and 1960s inflation (RPI) started to accelerate in the late 1960s and hit an annual rate of 26.9% in 1975. People began to realise that the easiest way to benefit from high inflation was by owning their own property as it was the one substantial physical asset people were able to acquire by borrowing, and everyone has to live somewhere.
Although the high interest rates resulting from escalating inflation put a strain on many household finances, most incomes rose rapidly in nominal terms and buying a home with a mortgage resulted in the asset increasing in value in real terms, whilst the value of the money borrowed to acquire it decreased in real terms. A win – win situation for the homeowner, especially as in those days 100% of mortgage interest payments were deductable against income tax. The higher the inflation rate the greater the benefit from the increasing value of one’s home and the reducing real value of the debt on it, as long as the high interest rates were affordable.
A second major factor in the rapid increase in house prices was the collapse of the building society cartel in the early 1980s, the entry of the banks into the mortgage market and the major increase in funding as a result of the liberalisation of the money markets at that time. By the mid 1980s several new mortgage lenders, known as centralised lenders, such as The Mortgage Corporation (remember the adverts from Barry Norman!), had entered the market and were offering loans to people who previously would have struggled to get a mortgage on reasonable terms.
Centralised lenders also brought significant innovation in interest rate options to the market, such as fixed rates (which previously had not been widely available), cap and collar mortgages and stabilised mortgages. This all ended in tears in 1988 when a double whammy hit the market:
Multiple MIRAS (Mortgage Interest Relief at Source) ended after the Chancellor gave four months notice of its demise, resulting in a mad rush between April and August from unmarried couples, and even people who were just friends, to beat the deadline for completion to qualify for tax relief.
· At the same time Bank Rate started to rise rapidly. It doubled in just 18 months in 1988/89, hitting 15% in October 1989, as the UK Government desperately tried to shadow the Deutschmark, a precursor to another event that ended in tears – joining the Exchange Rate Mechanism (ERM) in October 1990. It was only after the UK escaped from the ERM, which became known as the Eternal Recession Mechanism, on White Wednesday, 16 September 1992, that interest rates started to fall and house prices stabilised early the following year. There is a huge sense of déjà vu with the current Euro crisis!
Other Key Mortgage Facts
In the 1990s securitisation became an increasing popular, and cheap, way for major lenders to raise to raise additional funds in the wholesale market, primarily by issuing residential mortgage backed securities (RMBS). As a result the availability of funds for mortgage lending was no longer restricted by the size of retail deposits. When the credit crunch hit in 2007 £360bn out of total residential mortgage lending of c.£1.25trillion was funded through the wholesale markets. This amount has since reduced to £300bn as it became impossible to refinance all the maturing RMBS and lenders were forced to deleverage and/or refinance from retail savings.
As a result gross mortgage lending collapsed in just 2 years from £363bn in 2007 to £143bn in 2009, then £135bn in 2010, with a slight recovery last year to £141bn. Net lending has fallen even more dramatically, from £109bn in 2007 to under £10bn in the last 2 years. As a result of the massive reduction in lenders’ capacity, lending criteria has tightened considerably and many potential first time buyers (and others) now find themselves unable to obtain a mortgage, unless they can tap The Bank of Mum and Dad (or perhaps the bank of Grandma and Grandad). The only sector of the mortgage market where volumes are recovering strongly, albeit after an even larger percentage reduction than the residential market, is the buy to let market. This offers lenders significantly higher returns than the residential market, despite arrears being slightly lower.
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