The coronavirus economic shock has already caused UK house prices to wobble – and they may yet tumble if the narrative worsens. As the virus changes society and the way we live, it will inevitably change the factors that drive the demand and supply of the UK housing market. But, let’s assume/hope the UK wriggles out of the coronavirus crisis largely intact and there is still a housing market to address in coming years!
It’s long been recognised that the UK’s housing market suffers from huge inefficiencies in terms of the of supply-side dynamics; the failure to build enough homes, the blunderings of the planning process, and the absence of effective policy. However, the demand side of the UK housing market equation is equally incoherent.
Everyone would like a home, but fewer and fewer purchasers can buy them. In an economy where the number of households is increasing, often the only viable option is to rent. It’s sub-optimal for many individuals; putting money into someone else’s pocket, with none of the benefits of home ownership and greater tenure insecurity.
The problem is not that people can’t afford to borrow money to buy homes – interest rates have never been so low. The issue is the severely limited availability of finance. I’d argue the lack of readily available finance is as much a problem as the lack of housing supply.
The supply of mortgages is massively constrained. A single black mark on their credit history makes a borrower unfinanceable – no matter what the cause or how trifling it may be. Banks are still applying the same ‘three times salary’ tests and demanding 20% LTV down-payments they put in place decades ago – tests which made some sense when interest rates were 10% but are just a block to activity when rates are now 1%.