Housing market trends and recent
policies
Daniel Chandler
© Institute for Fiscal Studies
Context
•
Strong upturn in the housing market in 2013
•
Very active area for government policy
•
Concerns raised about:
–
House price ‘bubble’
–
Affordability
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Outline
1. What has been happening to house prices?
–
What do recent trends suggest about a potential ‘bubble’?
2. What impact will Help to Buy have?
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What is a ‘bubble’ and how can we identify one?
•
A ‘bubble’ is when rising prices are driven by expectations of
future price increases
•
Differs from a ‘boom’, where prices are driven by economic
‘fundamentals’, i.e. supply and demand for housing
•
Characteristic features of a ‘bubble’
–
Speculative buying for capital gain
–
Speculative mortgage lending
–
Rising prices followed by decline or collapse
•
A ‘bubble’ and a ‘boom’ might indicate different problems, and
require different solutions
•
How can we identify a bubble?
–
Compare with historical peaks and trends
–
Look directly at supply and demand (why is London different?)
© Institute for Fiscal Studies
UK house prices since 1988
250,000
Nominal
Average price (£)
200,000
- 9%
150,000
-19%
100,000
50,000
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014
© Institute for Fiscal Studies
UK house prices since 1988
250,000
Average price (£)
200,000
Nominal
Real (2013 prices)
-25%
150,000
100,000
50,000
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014
© Institute for Fiscal Studies
Real house price, £ (2013 prices)
House prices in London
400,000
Nominal
350,000
300,000
Real (2013 prices)
250,000
200,000
150,000
100,000
50,000
1988
1989
1990
1991
1993
1994
1995
1996
1998
1999
2000
2001
2003
2004
2005
2006
2008
2009
2010
2011
2013
0
Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014
© Institute for Fiscal Studies
-17%
Real house price, £ (2013 prices)
Real house prices in the UK and London
400,000
UK (real, 2013 prices)
350,000
London (real, 2013 prices)
300,000
UK trend (3.6% growth)
250,000
London trend (4.5% growth)
200,000
-17%
150,000
100,000
50,000
1988
1989
1990
1991
1993
1994
1995
1996
1998
1999
2000
2001
2003
2004
2005
2006
2008
2009
2010
2011
2013
0
Notes and sources: see Figure 5.6 of The IFS Green Budget: February 2014
© Institute for Fiscal Studies
-13%
Why are prices growing faster in London?
•
•
Short run
–
London’s economy has performed better than UK average since 2007
on some measures e.g. total output, employment
–
Large flows of foreign investment, increased since 2007
Long run
–
Population growing faster than housing stock in London (in contrast
to England as a whole)
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Prices growing significantly faster than earnings
in London
Nominal house-price-to-earnings ratio for first-time buyers
8
6
UK
London
UK trend
London trend
5
4
3
2
1
0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Price-to-earnings ratio
7
Notes and sources: see Figure 5.7 of The IFS Green Budget: February 2014
© Institute for Fiscal Studies
+ 17%
Help to Buy - overview
• Aim: describe two components, explain rationale and objectives,
initial assessment of impact
• Equity loan: loans of up to 20% on newly built homes (launched
Apr 2013)
– No interest for first five years; govt shares in capital gains and losses
– £3.5bn over 3 years; 74,000 properties
• Mortgage guarantee: provides mortgage lenders the option of
govt-backed insurance on high LTV loans (launched Oct 2013)
– Lenders pay a fee calculated to cover expected costs
– £12bn contingent liability to fund £130bn or loans over 3 years
• Eligibility is very broad for both schemes
– Properties worth <£600k
– Residential only, no second homes
– Borrowers have to pass mortgage ‘affordability’ checks
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Help to Buy - objectives
• Increase affordability of homeownership
– Address deposit constraint (enable purchase with 5% deposit)
– Major reduction in availability of high LTV loans
– Equity loan: top-up ‘deposit’
– Mortgage guarantee: increase availability of high LTV loans,
correcting perceived ‘market failure’ in market for high LTV lending
• Stimulate housing supply
– Equity loan: direct stimulate spending on and demand for new builds
– Mortgage guarantee: no direct link; potential indirect impact via
increase in demand/activity
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Help to Buy: equity loan, assessment
•
Impact on affordability
– Concerns policy not targeted at those who need help to get on
property ladder (FTBs, low-income households/‘starter’ homes)
– Available data suggests this is not major issue:
• 92% of loans made to FTBs
• Above average incomes, but lower than typical house purchaser
• Average purchase price of £195k, close national average (£170k)
• Impact on supply
– Will the scheme generate ‘additional’ demand?
– How will supply respond?
• Supply historically not very responsive
• But may be spare capacity in short term
– So far: increase in construction, but hard to isolate impact
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Help to Buy: mortgage guarantee, assessment
• Impact on affordability
– Has the scheme increased availability or reduced costs of high LTV
mortgages?
– Bank of England survey reports increased availability, linked to policy
– Reduction in interest rates, though impact of policy less clear
• Impact on supply
– No direct link to supply of new homes, has caused concern
– Short term upward pressure on prices is likely (given rel fixed supply)
– Eventual impact depends on additional demand and supply response
– Given supply concerns, could target purchases of new builds only
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Summary
• Strong growth in house prices in 2013
• No clear evidence of ‘bubble’ based on comparisons of real prices
with previous peak and trends
• Faster growth in London partially explained by strong economy,
foreign investment and population growth, though prices growing
faster than earnings is potential source for concern
• Help to Buy is likely to improve affordability in the short term
• Uncertainty around impact on supply (and prices)
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