The Financial Crisis and Housing
Market Stability: lessons from
disparate systems
Bernard Vorms and Christine Whitehead ANIL
and LSE/CCHPR
ENHR International Conference
Toulouse
July 5th – 8th 2011
The Impact of the Financial Crisis on Owneroccupation in the UK and France
• The position in 2007
• Short run effects of the financial crisis in
the UK and France
• Financial effects and real effects
• Longer term implications
Pre-Crisis Events in the UK
• Very rapid rises in house prices – out of line with
fundamentals from 2005?
• Growth in sub and near prime lending – but nothing like
as apparently out of control as in the early 1990s
• Growth in wholesale funding –in 2007 17% of gross
advances but 75% of net advances
• Northern Rock – a UK made crisis in September 2007
• Some decline in proportions of first time buyers from
2005
• Housing investment started to fall before the crisis in
2007 (peak in starts early 2006 though peak in
completions 3rd quarter 2007)
Immediate Effects on Housing
and Mortgage Market
• Near removal of sub prime market – 1.6% credit impaired 2008: 3;
0.35% 2009: 3
• Near removal of mortgage backed securities market - negative net
advances 2009 and 2010
• Expectations of continuing house price rises reversed. House price
down 9% 2007-2009
• Massive reductions in transactions (down 50% 2007-2009) and
mortgage lending (down 60% 2007-2009; Buy to Let down 80%)
• Output levels – starts down 70% from 2006:1 to 2009:1;
completions down 50% from 2007:4 to 2010:1
BUT
• Interest rates also down (base rate 5.75% to 2009: March 0.5%) –
helping existing mortgagors but not first time buyers
Second Round Effects: Consumers
• More general recession – lower levels of activity;
increased unemployment; but mainly short time/wage
reductions
• Impact on existing owner-occupiers much less than
expected – lower interest rates allowed repayments to
remain affordable; refinancing market worked relatively
well – so were able to remortgage; no incentive to take
homes into possession
• Main concern in the existing owner-occupier market
owners is the problems for second round movers – the
UK system has worked by large volumes of transactions
and people starting in small property and moving up but
large proportion will have little more equity than for their
first home – so can’t filter up the existing stock leaving
housing available for first time buyers
Impact on First-time Buyers
• Major problems for first time buyers. Potential
entrants require far higher deposits and face far more
stringent terms and conditions;
• Also uncertainty about future house prices and future
jobs is reducing demand – so question as to the
relative impact of demand and supply of funds
• Currently thought to be one million ‘missing’ owneroccupiers
• But an alternative available in the private rented
sector helped by the Buy to Let expansion in the
early 2000s
• But rents now rising rapidly as transfer of demand
from owner-occupation and new build below
household formation rates
Lending to FTBs (loans advanced)
Typical FTB deposit illustration
Second Round Effects: New Supply
• Relatively small overhang of completed or near
complete dwellings. But many, especially large
regeneration, projects mothballed
• Overhang of over optimistic land prices – rightdowns difficult to organise without major
bankruptcies (bank ownership etc.)
• Lack of funding for development – including lack
of a presale rental market
• Lack of an equity base to support new activity
• Significant reductions in new investment
Declines in housing investment
Quarterly housing starts and
completions
Started: pri vate
Started:Al l
Compl eted: Pri vate
Compl eted: Al l
2 0 Q4
10
Q
1
3
Q
2
Q
2 0 Q4
09
Q
1
3
Q
2
Q
2 0 Q4
08
Q
1
3
Q
2
Q
3
Q
2
Q
2 0 Q4
07
Q
1
20
06
Q
1
60,000
50,000
40,000
30,000
20,000
10,000
0
Availability of funding – demand or supply?
•
•
•
•
•
Gross advances down to 37% of 2007 levels
Net advances down to 8% of 2007 levels
Wholesale funding only 5% of gross lending
Interest rates down 40% to an average of 3.6%
Numbers of loans roughly halved – percentage
of first time buyer roughly constant
• Percentage advance for first time buyers down
from 90% average in 2007 to 79% at beginning
of 2011
Government involvement
• Large scale supply subsidies brought forward for
2009 and 2010 - but now massive reductions in
supply subsidies
• Some small schemes to help mortgagors in
difficulties
• Homebuy Direct and now First Buy – help for
developers and first time buyers through shared
equity schemes partially funded by government
• Increased regulation in the mortgage market but
pressure to expand first time buyer loans
Longer term trends in owneroccupation in England
• Owner-occupation reached its peak in 2003, at
almost 71%. Because of cohort effects it was
predicted to go to around 73% and government
was looking for 75% plus
• Yet the proportion of those buying with a
mortgage was higher in 1991, suggesting some
slowdown in entry. Since 2006 this downward
trend has strengthened
• Age related ownership rates have showed
declines among younger households since the
crisis in the early 1990s
Figure 1: Home ownership rates by age, England: 1984-2008
(%)
80
60
40
20
0
1984
<25 years
1989
1994
25-29 years
1999
2004
30-34 years
2008
All households
Long term or short term?
• Current owner-occupation level is exactly the EU
average
• Signs that affordability problems are keeping
younger households out of owner-occupation
• Availability of credit benefits existing owneroccupiers more than first time buyers – enabling
existing owners to increase consumption and/or
become landlords for their children
• Those who do enter at younger ages tend to be
helped by their family
• But is renting a better option for these groups?
Figure 5: Home ownership rates and 2 and 10 year aspirations
Home ownership, 2 and 10 year preferences
85
80
75
70
65
60
55
1983
1986
1989
1992
1995
Actual
1998
2 year
2001
2004
10 year
Source: YouGov (2010), MORI (1996-99), BMRB other; CLG.
2007
2010
Into the Future: UK
• New build rates at best static and industry
capital base massively adversely affected
• Number of households still projected to rise;
• FSA Housing Market Review could exclude large
numbers of potential purchasers from obtaining
funding
• Wholesale market still very difficult and
alternative uses of funds more profitable
• Owner-occupation rates likely to continue to fall
Conclusions
• The medium term crisis relates to funding availability and
regulatory change – cannot significantly expand lending
to either rental or ownership in current environment
• Potential for equity based partial ownership approaches
to reduce costs still appears limited (shared equity;
institutional investment in housing)
• Supply side cannot readily improve without funding for
demand and developers
• So potential for volatility and intergenerational inequities
increasing
• But longer term case for owner-occupation rates not far
below those of mid 2000s quite strong because of
fundamental benefits of control, lifetime expenditure
patterns and savings to government.