On 21 November, the Council for Mortgage Lenders (CML), an industry body, released a new set of data which they used to argue showed that a recovery is underway in the British housing market. Most notably, they claimed that this recovery is being driven largely by first-time buyers, a group who have endured a torrid time since the beginning of the economic downturn in 2007 as banks and building societies have become extremely reluctant to lend them money.
Is the situation really starting to improve for first-time buyers? Or do the CML figures actually tell a different story?
A million transactions
The headline statistic from the CML data was that the overall number of housing transactions has risen above 1 million for the first time since the beginning of the recession in 2007. The CML explained that over the three decades prior to the downturn there had been an average of around 1.5 million housing transactions per year, but after hitting 1.6 million in 2007 this figure plummeted to just 900,000 the following year, and has been languishing in the doldrums ever since. The annual number of housing transactions has remained below a million for the longest period in decades, much longer than during the previous recessions which Britain has endured in the early 1970s and 1990s.
A downturn in the overall volume of activity is especially harmful to people who are trying to enter the market for the first time. The CML estimates that as many as 800,000 potential first-time buyers would have got on the property ladder between 2008 and 2013 but they missed out because of problems with securing funding and finding suitable properties which were for sale. Lenders became especially risk-averse following the onset of the recession, which led to the total value of mortgage lending falling by 60% between 2007 and 2010.
So, what evidence do the CML have to suggest that things have improved for first-time buyers? According to these new statistics, the number of mortgage-funded first-time buyers has risen by 40% since 2009, while the number of transactions involving first-time buyers grew by 13% last year and is set to rise a further 25% this year. The CML attributes this improvement to a range of factors, including the government’s Funding for Lending scheme, which has made it cheaper for the lenders themselves to borrow, in addition to Help to Buy (which is starting to have some impact) and the general improvement which the economy is beginning to enjoy.
A false improvement?
However, these figures are far from the full story, and the tone adopted by the CML is only cautiously optimistic as a result. They note that first-time buyers have been facing significant problems which actually predate the 2007 downturn, so the recent improvement in their circumstances has come from a low base:
“First-time buyer transactions had already begun to decline before 2007, as affordability pressures began to take their toll. The number of mortgages taken out by this group had declined from more than 530,000 in 2002 to 360,000 by 2007. But the total then declined further in the wider market downturn, falling to below 200,000 in 2009…[Despite the recent recovery mentioned above], however, first-time buyer numbers are still languishing at only around half their long-term average of around half a million.”
The CML statistics also contain information about two other interesting phenomena. Firstly, they show that the buy-to-let (BTL) sector has also witnessed an upturn in levels of borrowing and the number of transactions over the last year. BTL grew rapidly in the years leading up to the downturn, aided by generous tax advantages compared to other forms of investment, and the realisation on the part of investors that it offered better returns than most of the alternatives, such as pension funds and equities. However, the CML data shows that funding dried up quickly once the crisis hit, before it has recently started to bounce back again:
“The number of [BTL] loans plummeted by around 75% from more than 345,000 in 2007 to fewer than 90,000 in 2009. But in the two years to 2012, the number of buy-to-let loans increased again by more than 50%, to more than 130,000. And this year, the number of loans in the sector looks set to total around 160,000. But, despite the strength of the recovery in the buy-to-let sector, it has had only a limited effect on the market overall, as it accounts for only around 13% of lending.”
It says elsewhere in the CML release that, as a percentage, the recovery in BTL lending since 2009 has actually been twice as great as the recovery in lending to first-time buyers, suggesting that landlords are continuing to out-compete first-time buyers as they often target similar types of property. However, the influence of BTL on the recent recovery in housing transactions may be even greater than the CML acknowledges, as there has also been a notable upturn in the volume of cash transactions.
The figures show that cash transactions – property purchases which don’t involve a mortgage – now account for nearly 30% of the total, up from around 20% before the downturn. The CML says that they expect this growth to continue, with the total number of cash transactions reaching a new high of 370,000 by the end of this year. Cash transactions create an obvious headache for statisticians, because the lack of documentation they involve makes it much harder to work out what kind of people are buying the properties (of course, for some cash purchasers this is undoubtedly part of their appeal). However, anecdotal evidence suggests that property investors – including BTL landlords – are likely to account for a high proportion of cash buyers because they already have access to the necessary capital, and not having to wait for a mortgage to be approved can make it quicker and easier to tie up a deal. This was confirmed by a study conducted by the Financial Times and estate agents Savills earlier this year, which found that cash purchasers were mostly foreign investors and BTL landlords.
If this is correct than the influence of BTL landlords on the housing market – and the extent to which they are out-competing first-time buyers – may be being significantly under-recognised by bodies such as the CML. It certainly seems unlikely that too many first-time buyers would be able to buy houses in cash, for the obvious reason that few of them would have enough money.
Despite a small improvement in the number of first-time buyers who have successfully taken out mortgages, it seems clear that young people trying to get on Britain’s housing ladder still face far too many obstacles. Above all, housing remains too expensive because of an overall shortage of supply, which is the pessimistic note the CML release chooses to end on: “The continuing chronic shortage of supply is likely to buoy up prices and so bear down on transaction numbers for the foreseeable future.” Until we do something serious to address this problem, too many people will remain locked out of Britain’s housing market for the long haul.