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The Housing White Paper is expected this week and although it has been delayed, the leaks and briefings give me some hope that it may have been worth the wait. Perhaps most importantly there are clear signs that the government will look beyond home-ownership. This would mark a significant change from Cameron/Osborne housing policy where increasing home-ownership was the priority. This blog is a quick look back at what was driving the Cameron/Osborne focus on home-ownership.

Many were surprised by the government’s focus on housing immediately following the 2015 general election. However, polling by Ipsos MORI shows that housing had risen up the rankings of ‘Most Important Issues Facing Britain’ in the run up to the general election* and it became a ‘Top 5’ issue in the months following the election. Housing was now a political priority but also a political opportunity.

A Crisis of Home-Ownership

As I wrote in July 2015 (Savills Housing Note PDF), the government’s approach to housing was best viewed as trying to solve a crisis in home-ownership. Social housing and private renting took a back seat as the government prioritised home-ownership. This would appear to be exactly what the public want. Surveys continue to show a majority preference for home-ownership in the UK.Tackling housing with a focus on home-ownership was also a political opportunity. Home-owners are more likely to vote Conservative. Helping younger households access home-ownership could create a substantial political dividend in future general elections.

However, it would appear that the Cameron/Osborne government took that logic a step further. Nick Clegg is reported as saying that they treated housing as a ‘petri dish’ for growing voters while social renting was disliked as ‘it just creates Labour voters’. Pay-to-stay, high value council house sales, and expanded right-to-buy looked set to reduce the size of the social housing sector. Affordable housing delivery fell to ’embarrassing’ levels. Home-owner policies like Starter Homes were expanded and looked set to replace the majority of remaining affordable housing delivery.

A More Balanced Approach

That all changed with the vote to leave the EU. The government’s new approach to housing appears to be more balanced and considered. I’m tentatively hopeful that the White Paper will continue in this direction.

It is inevitable that home-ownership will remain the priority given the current demographic, economic, and housing market profile. Although an over-simplification given the electoral system, an approximate breakdown of voters and non voters by housing tenure shows that winning over home-owners is essential for any political party looking to govern.Although home-ownership will be the priority, the current government appears more focused on increasing overall housing delivery rather than any individual tenure. Polling in 2010 on what tenure of new housing people thought was needed in their local area (rather than what tenure they want) suggested that many are open to range of tenures. The one exception is new private rented homes. This could be a challenge for the build-to-rent sector but may reflect the reputation of buy-to-let landlords rather than the tenure itself. 

More recent polling suggests that people are more supportive of new housing development than in the above 2010 based analysis. Even so, local opposition to new housing where it is needed most will still be a challenge. Hopefully the White Paper will offer some solutions to this challenge and others. If not, it will at least provide something for local politicians to blame when planning permission is granted at appeal. *it’s interesting to note the temporary decline in housing’s importance in the months following the launch of Labour’s Lyons Housing Review (which I worked on while on secondment to L&G).

Update 7:11am 6/2: here’s a version of the earlier chart that looks at all potential voters rather than just registered voters.

Every month HM Land Registry publish the latest release of registered sales in their very useful price paid data. With only a month delay, it is tempting to use this data to understand what has happened to transactions in the recent past. However, there can be a time lag in when a sale is registered and this lag can cause misunderstandings.

For example, the chart below shows the latest data for sales registered in December 2016. Only 35% of the sales registered during December actually took place in December. 39% of registered sales took place in November, 8% in October, and 0.2% between 1995 and 2015. This lag in when sales are registered can cause issues when trying to identify recent trends in housing transaction levels. The chart below shows how the total transaction count for recent months changes substantially with each new release of registrations. For example, the first release of sales during October 2016 only contained 39% of the sales now contained within the latest December release. It’s for this reason that the sales data available from the official house price index is two months behind the house price series.This Land Registry Lag can be found across all geographies and price bands. Last year there were a number of press stories about falling sales at the top end of the London market. Unfortunately, some of the analysis behind these articles failed to factor in the lag effect. Although there’s been a significant fall in transactions compared to last year, the trend in sales of £1m+ properties since April 2016 has been broadly flat once the lag effect is considered.

 

Notes: I have used both the standard and additional price paid data for this analysis so as to include all transactions. The Land Registry definitions are:

• Standard Price Paid includes single residential property sold for full market value
• Additional Price Paid entry including transfers under a power of sale/repossessions, buy-to-lets (where they can be identified by a Mortgage) and transfers to non-private individuals.

The longer-term difference between the HMRC and Land Registry transaction counts in the second chart may be explained by these additional exclusion categories

On average 6.8% of housing stock* in England & Wales transacted between 1959 and 2007. In 2016 only 4.4% of stock was sold.

*Ideally I would’ve used private housing stock but the data isn’t available that far back. Housing stock data prior to 1971 is a simple linear interpolation of Census data.

Foreign buyers of new build homes are a popular focus of blame for the London housing crisis*. Last year, the Mayor of London launched an inquiry into the issue. This should help answer some of the outstanding questions, particularly around occupancy and whether foreign buyers help get more homes built.

However, my biggest concern is the scale, cost, and currency of overseas mortgage debt secured against new build homes, particularly by Asian buyers.

A significant proportion of new build sales since the credit crunch have been to Asian buyers. A Savills report from 2013 suggests they accounted for around 45% of new build sales and were particularly active in the £700-£2,000 per sq. ft. market (see Graph 4). Unfortunately most agents have stopped reporting information on overseas buyers in recent years.

These Asian buyers are welcomed by developers as they are prepared to buy off-plan years before completion, something most mortgage dependent domestic buyers can not do. For many developers, selling a large proportion (50%+) of units off-plan is essential to unlock the finance needed to start construction. Since the recession, sales trips to major Asian cities have become the norm for any new major London residential development.

What appears to have not been questioned is where the money for these purchases was coming from. Most commentators simply pointed to the growing middle classes and wealth generated in Asia. The limited statistics available suggested the buyers were cash only as no UK mortgage was required.

However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases.  The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one**.

A quick check of Asian lenders (UOB, DBS, OCBC, Maybank, CIMB) suggests that the borrowing terms available are broadly similar to those for actual UK first time buyers in London. The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples. For example, Singaporeans are now limited to only spending 60% of their gross income on total debt repayments.

It is the cost of servicing their debt that is my biggest concern. Average rental yields in the areas of London with high new build supply suggest that many mortgaged buyers may have just been covering their repayments from their net rent. Indeed, some of those buyers with higher loan-to-value mortgages (e.g. 75%) may have needed to supplement their rental income to cover their costs. This would suggest the buyers were focused on capital appreciation.

The depreciation of the pound since the EU referendum has added further risks. An unknown proportion of buyers have local currency mortgages (the best information I’ve got is from this interesting article). It would appear that some owners will now be covering the shortfall in their local currency repayments thanks to much lower rental income.

That raises the question of why we haven’t seen more signs of stress. The biggest unknown is the scale of the issue. I haven’t found any data on the value or volume of overseas lending in London. In theory, these mortgages should be identifiable as first charges on the Land Registry property record but unfortunately this information is not freely available.

This could possibly just be a minor issue. In the context of the whole London housing market, these new build markets are fairly small. However, the danger is that any risks are highly concentrated in both geography and price. This is particularly a risk as many of those schemes sold off-plan back in 2012-14 should now be nearing completion. After years of strong sales and starts, completions are rising (see Figure 3). Meanwhile London house prices are slowing or falling. Those off-plan buyers will now be approaching the point where they have to decide whether to put up the cash or walk away from their deposit.

Another possible explanation for why we haven’t seen more stress is that owners are being bailed out by the higher rental yields achievable on short term lets. Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.

*This House of Commons Briefing Paper is a useful summary of the concerns and counter-arguments.

**Mainland Chinese buyers appear to be buying with very high loan-to-values and mortgage rates, to the extent that they are almost definitely subsidising their overseas purchase. That may just be the cost of getting money out of the country.

 

There’s a housing market with an under-supply of accommodation that has seen significant foreign investment in recent years. New supply has been growing but is focused on the premium market at high rents. These rents are unaffordable to the majority of potential residents, who instead have to rely on buy-to-let landlords for their accommodation. Unfortunately, after several years of strong growth and record investment, this premium market is now facing considerable uncertainty as Brexit looms.

This market isn’t just found in central London but also in towns and cities across the UK. The purpose built student accommodation market could be in for a tough time when the government limits immigration.

International Students

International students, particularly those from outside the EU, have become an important part of the UK university business model. 19% of students in 2015/16 were from outside the UK. That figure rises to 57% for all full-time postgraduate students and to 67% for all students at LSE.

Unfortunately, a superficial reading of the ONS migration statistics suggests that students are a substantial contributor to current net migration levels. There’s some debate about whether this is accurate. For example, students leaving when their course finishes would not be recorded as leaving for formal study but instead recorded as leaving for a job or to return to their family. Therefore it is inaccurate to compare reasons for migration between inflow and outflow, as per the chart below. The ONS published a useful document last year on the issues in counting international student migrants, particularly when they leave.

Ideally the UK would seek to continue attracting the best and brightest from across the world while encouraging them to stay afterwards. Regrettably, it appears the government are intent on cutting net migration and international students look set to be included in those cuts.

Purpose Built Student Accommodation

The purpose built student accommodation market has benefited from significant investment in recent years. The construction of new schemes has also increased, helped by developers achieving higher land values than competing uses.

Unfortunately, a large proportion of new development was targeted at the premium end of the market. Comprehensive data on student rents is difficult to obtain but a quick snapshot of my local market (Bath) suggests that rooms in houses cost around £100 per week to rent, university accommodation for the next academic year will cost £100-£150 per week, and a sample of three new student developments suggest rents will start at £210 per week. There will be some differences in net cost depending on whether bills are included or not but the new build schemes are clearly targeting the premium market.

International students form a large proportion of demand for purpose built accommodation. Analysis of HESA data for 2015/16 suggests that around 37% of students living in private-sector halls are from overseas. The data isn’t perfect as there can be some confusion over which category a student lives in (definitions here) but similar proportions are found in the limited data available from private sector operators. Meanwhile, anecdotal evidence suggests that newer premium purpose built accommodation has higher than average proportions of overseas students.

Unfortunately, with a focus on the premium end of the market, the purpose built sector is exposed to any future cuts in international student numbers. This is particularly the case for those operators or developments that are directly let to students rather than via leases or nomination agreements with the university.

However, there’s still a substantial need for more purpose built student accommodation in many markets, particularly where family homes could be released back into the owner occupier market (I first wrote about this in 2013).

Therefore, in the event of significantly lower international students, there should still be demand for purpose built student accommodation in these markets. But this demand will be at lower rents than currently being achieved. If that scenario occurs, it remains to be seen whether existing owners will accept lower rental yields or if there will be a re-pricing of assets and possibly forced sales.

University Finances

It’s not just the purpose built student accommodation sector that is at risk in the event of lower international student numbers. University finances are at risk too. The annual surplus generated by UK universities is only equal to 44% of the fees raised from non EU students (unfortunately a split between UK and EU student fees wasn’t publicly available). Lower students numbers would in many cases also lead to lower expenditure but some universities have based substantial future capital investment on growing their international student base. University incomes falling short of forecasts could create considerable issues for the sector, reduce the quality of education for students, and harm the wider economy.

Yesterday’s Land Registry release showed transactions had fallen by -39% in September 2016 compared to September 2015. The Land Registry data isn’t perfect as it excludes some sales and there’s a bit of a lag as sales are registered so this figure could be revised. However, it’s still worth having a quick look at the price profile of falling sales to understand which parts of the market are slowing.

Comparing the distribution of sales by price bands for the two periods shows that although sales at the top end of the market have fallen, there have been far larger falls in lower price bands, both by number and %. 
Further analysis by borough highlights that falling London transactions are not just the result of a slowdown at the top end of the market. The London housing market appears to be facing some significant challenges after a period of very strong house price growth.

Change in number of buyers over last 12 months based on seasonally adjusted data:

• Mortgaged Buy-to-Let: -37%
• Mortgaged Home Movers: -12%
• Cash Only: -4%
• Mortgaged First Time Buyer: +4%

Home-ownership is still the preferred housing tenure in the UK but has been in decline. Analysis by age cohort shows how younger generations are struggling to achieve the aspiration of home-ownership. The analysis of the Labour Force Survey shows that only 40% of household heads born in 1986 owned their own home at the age of 30. This compares to 62% of household heads born in 1966 owning their own home at the age of 30.
With fewer people able to buy their own home and social housing availability constrained, people are living in the private rented sector for longer. Only 7% of household heads born in 1956 lived in the private rented sector at the age of 40. For those household heads born in 1976, around 25% lived in the private rented sector at the age of 40. The current trajectories of younger cohorts suggests that this figure will be even higher when they reach the age of 40. Large numbers of older people living in the private rented sector could create significant challenges for the future as pensions are increasingly relied on to cover the cost of private rents alongside other living costs.

I have used the age of the head of the household for this analysis although there is also an argument to be made for running the analysis on a person basis given the large number of sharing and other mixed households living in the private rented sector.

The home-ownership chart is slightly different to a previous one I published on Twitter last year. The previous chart used two years either side of the year born to remove any volatility whereas the one above only uses one year either side of the year born e.g. 1981 is an average of 1980, 1981 and 1982.

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Change in dwellings prior to 1970 is based on average change between censuses

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