The housing market paradox

Earlier this year the housing market was effectively closed as house moves were restricted between mid-March to mid-June.

By Jordan Buchanan, Chief Economist at PropertyPal
Wednesday, 2nd December 2020, 6:00 am
Jordan Buchanan, Chief Economist at PropertyPal
Jordan Buchanan, Chief Economist at PropertyPal

Earlier this year the housing market was effectively closed as house moves were restricted between mid-March to mid-June.

All activity slowed, or ceased, across the suite of services, from viewings and surveys to conveyancing and mortgage lending. This resulted in a sizeable 67% reduction in transaction volumes compared to last year. What happened following the re-opening of the market has exceeded everyone’s expectations. In a rather paradoxical position, the housing market is booming whilst the economic backdrop is deteriorating.

With the market closed during a popular time to buy there was likely to be a partial rebound in activity upon re-opening, irrespective of the wider economic concern. Furthermore, constrained spending choices of households throughout easter to early summer meant many were accruing larger savings. These additional funds have been redirected to housing decisions as priorities and behaviors adapted. Add onto that a stamp duty holiday just as activity was returning and there is a clearer understanding of the recent buoyancy in the sales market and associated upwards movement on house prices.

Post lockdown sales across Northern Ireland from April to October 2020

The number of properties ‘sale agreed’ on PropertyPal during the third quarter increased by 44% compared to last year. There was a notable increase in sales of four and five+ bedroom properties by 63% and 60% respectively as wealthier buyers entered the market. The Warren area of Donaghadee has been the most popular location to purchase over the last seven months, closely followed by the Windsor area in Central Belfast, Mallusk in Newtownabbey and the White Mountain area on the outskirts of Lisburn. The North Coast continues to grow in popularity recording almost 300 homes sales across Portstewart, Portrush and Atlantic. Not to be overlooked, Belfast remains the most popular overall location, particularly across Eastern and Southern areas, suggesting proximity to the capital remains firmly on buyer’s preferences.

Housing market activity has been sufficiently strong over the past few months that mortgage lenders have increased interest rates on new home loans. This is a common tactic as they aim to reduce their mortgage applications to focus on servicing existing business commitments.

An uptick in mortgage rates now appears to be a universal approach and is a significant reversal on recent trends. Prior to the pandemic, lenders had been slashing rates to record lows to gain market share. To further reduce application levels, they may also alter eligibility and credit score criteria, restrict finance for certain property styles or else simply remove mortgage products entirely. The latter has been widespread in recent months for low deposit home loans. Tighter credit conditions mean first time buyers now require approximately £20,000, equivalent to a 15 per cent deposit, to get on the housing ladder. Fewer than half of first-time buyers have this level of savings to fund a home purchase in recent years.

To address the growing affordability and mortgage market challenges, Boris Johnson announced the government’s plan to turn ‘generation rent into generation buy’ at the Conservative party conference earlier this year.

With little detail of the policy, the principle appears to be granting state backed 95 per cent mortgages to overcome the deposit barrier.

Furthermore, pensions minister, Guy Opperman went a step further suggesting that first time buyers’ may be permitted early access to their pension pots to put towards the deposit. For most young people, current pension commitments are not going to be enough to fund a comfortable retirement based on recent trends. Using a decade worth of pension contributions to buy a home could be perceived as risky at the best of times, not least in the current economic environment. After all, one of the main reason banks and building societies have raised interest rates and tightened low deposit credit is because of concerns for potential house price reductions.

Lenders have a responsibility for safe lending practices and to protect buyers - a major lesson from 2007/08.

Younger people are more exposed to job losses in the current crisis and using pension funds i.e. future financial security, to buy a house in the current higher risk environment could prove costly for individuals. Perhaps, instead of stamp duty tax breaks-which first time buyers were already exempt from for houses up to £300,000, or redirecting pension funds purposed for later life, the underlying affordability issue could be better addressed by building affordable homes on a much greater scale.

The Social Market Foundation (SMF) have written a compelling argument for this solution. The c£4bn cost set aside for the England and Northern Ireland stamp duty holiday has undoubtedly been a stimulus for the market supporting transactions and prices. But rising prices erodes further chances of home ownership for younger people, a trend compounded by the current mortgage environment. It too is argued that the stamp duty holiday simply brings forward activity that would have happened anyway and sales will lull after the tax holiday ends in March 2021.

Furthermore, given the price structure of the two jurisdictions, it is also a much larger tax break for Southern England than it is for Northern Ireland residents. The SMF suggest that the stamp duty funds could have been better used to announce an ambitious plan to build more high-quality social homes. For context, between 1970 and 1990 there were approximately 4,500 social or public homes built each year in Northern Ireland. This compares to recent delivery levels of approximately 1,500 social homes each year. A mass scale social house building investment could even be targeted at lower income key workers who kept society functioning earlier this year.

Rather than ‘clap for carers’, why not provide a low-cost home to our essential workers- from care and medical staff to retail and shelf stackers.

Sonia Sodha in a recent article in the Guardian suggests that anyone aged 18-28 should get a guaranteed five-year social housing tenancy to allow them to save more for a deposit, referencing the governments ‘homes fit for heroes’ social housebuilding pledge in the aftermath of the second world war.

Social housing development can also act as an economic stimulus, supporting construction activity and wider auxiliary services. The NI Federation of Housing Associations estimate the social housing sector contributes almost £1bn to the economy. Northern Ireland’s social housing waiting list had been growing before the pandemic and the recessionary impacts will only exacerbate those existing challenges. At a time of economic uncertainty and financial anxiety across swathes of the population, concerns for a home should not be one of them. Of encouragement, the Department for Communities Minister, Carál Ní Chuilín, has announced a suite of ambitious housing policies aimed to address such issues, including a restructuring of the Housing Executive that would enable it to build new homes for the first time since 2002.

In addition, Co-Ownership has been granted a four year £145m funding package to help a further 4,000 people get on the housing ladder and there is forthcoming legislation to improve safety, security and the quality of homes for those in the private rented sector.

These are welcome and important policy interventions but will require an overhaul of persistent barriers to housing delivery which pre-date the pandemic.

The waste water and sewerage infrastructure capacity has not been resolved, ongoing land acquisition pressures including the release of public sector land for affordable and social housing, sustainable development goals, professional skills development for construction professionals and skilled tradesmen and continued refinements to the planning system to ensure housing delivery objectives.

Northern Ireland’s housing system requires transformation.

The government could play a pivotal role in supporting the economic recovery whilst simultaneously supporting those most exposed to the damage, by investing heavily in social and affordable housing.

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