Credit Crunch – A Positive Impact on Housing?

Credit Crunch – A Positive Impact on Housing?

James Shelley takes a look at how the financial crisis continues to impact on the UK’s housing market – and not necessarily for the worst.

Ten years on and not only is the UK’s property market still feeling the effects of the credit crunch, but it is also likely to be shaped by its consequences for some time yet.

According to the latest report by Savills, the average UK house price did not recover to its pre-crisis level until May 2014 while transactions, which had slumped to 730,000 by June 2009, have managed to climb above 1.3 million only once.
Reduced spending is a key factor in the way the housing market has evolved, with lower transaction levels accounting for a £30 billion drop in total house purchases over 10 years. At the same time, a tightening of mortgage regulations to prevent another debt-fuelled housing boom means that debt now accounts for only 43% of house purchase funding. Cash and accumulated equity have emerged as the primary sources of funding.

Limits on permitted borrowings meant that first-time buyers needed to put down a higher deposit and younger people, in particular, struggled to save the money to fund their first home. The government took action by launching the Help to Buy scheme and this, along with a new advent in the world of finance, the ‘Bank of Mum and Dad’, look set to stay.

Deterred by the higher deposits required to purchase a home, many would-be buyers have turned to private rental. This has fuelled growth in the sector such that today more people from a variety of social and economic backgrounds are not only choosing to rent, but are also renting for longer. Have we become too hung up on property ownership? Perhaps a time is coming where UK citizens will share the views of people in many European countries where renting is the norm.

Today, the aspirations of those already on the housing ladder are lower. The time when homebuyers would readily take on an interest-only mortgage to move to a bigger, better property looks to have been consigned to history. Now, as well as ensuring that they can afford the capital repayments, families cannot contemplate moving home unless they have accumulated sufficient equity in their current home and paid off a greater proportion of their existing mortgage. Is a tightening on borrowing a negative consequence of the financial crisis, if it means families avoid the stress associated with covering a huge mortgage, especially in an uncertain economic climate where jobs for life are all but extinct?

Along with increases in stamp duty charges and restricted tax relief on interest payments, stricter lending criteria have impacted the buy-to-let sector. Again, there are fewer transactions as the buying power of landlords who require a mortgage to fund their investment has been affected. Again, tighter regulation has served to remind people that property ownership requires a major financial commitment and should not be looked upon as an easy way to get rich quick.

These lasting side-effects of the financial crisis have created a climate in which everyone is encouraged to think twice. Families who can afford to buy a property will continue to do so, but if people are deterred from taking huge risks with mortgages they might never repay, is this necessarily a bad outcome?

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