17th April 2014
Trade body, the Council of Mortgage Lenders looks at how UK house price averages change without the influence of the Capital…
The London housing market is attracting significant attention at the moment – not least because house prices are rising rapidly in the capital.
This is causing unease among commentators about the extent to which an overseas cash-fuelled housing “bubble” may be emerging. It is also something of a policy conundrum in that, in contrast to the rest of the UK, the mortgage market may exert less overall influence on how the London market behaves than it does elsewhere.
But what do the housing and mortgage markets look like if we take London out of the equation? The sheer enormity of the London market means that it influences UK averages quite considerably – even more so if we include the South East as well.
If we take it that as a starting premise the notion that the London market is, simply, different to the rest of the UK .
On this basis, we look at the characteristics of the rest of the UK housing market – excluding London.
If we look at house prices, we can see a particularly marked “London effect”, and one that has grown over time.
Although the various house price indices all vary in terms of their methodology and precise fluctuations, they all show the same direction of travel and similar regional variation. Using the Nationwide index, we can see that house price growth in London at 18% far exceeds the UK average of 9%, but also that if London is excluded then the “rest of the UK” average would be closer to 8%.
Put a different way, out of the total 9% annual house price growth in the UK, 1% of the rise is accounted for purely because of the influence that London data has on the overall average.
As an aside, it is worth noting that by the end of 2014, it was only in London and the South East that house prices had actually recovered to their 2007 peak.
There is a wide gulf in house price experiences since 2007 – with prices at the end of the first quarter of 2014 20% above their previous peak levels in London, but still 11% below their peak in the North West.
No wonder that we hear so much feedback from our members whose businesses are national in scope, or those whose businesses are geographically focused on markets outside the South East, that they simply do not recognise the picture of house price resurgence that is so often painted by the inevitable shorthand of national averages.
Finally on house prices, it is interesting to take a long-term view on how increasingly divergent the trend in the “Life outside London” market has become since the 1970s. Until the mid-1980s the London market and the rest of the UK experienced virtually identical rates of change.
In the housing market cycle of the late 1980s, house prices in London and the South East climbed more rapidly than in the rest of the UK, but subsequently returned to converge for a static period through the mid-1990s. Since the late 1990s, the rate of growth in London and the South East has significantly exceeded that in the rest of the UK. Absolute price levels and rates of growth are both currently further apart than they have ever been.
The so-called “ripple effect” – the typical pattern of house price recovery spreading from London and the South East to the rest of the UK – is once again underway. But what is different this time, compared with the previous housing market cycle, is that growth has accelerated more rapidly in London, and lagged more markedly beyond, than in the past.
The London effect on first-time buyers
The typical first-time buyer is another interesting example of how the UK average is influenced by Londoners. While the UK average first-time buyer may borrow nearly £119,000, the “life outside London” average first-time buyer borrows a more modest £110,000 – even before taking account of the fact that this figure in itself masks huge regional variations.
Put another way, 7.4% of the average UK loan size is accounted for purely because London borrowers borrow more (the typical London first-time buyer actually borrows nearly £199,000). Similarly, the stated UK average income of first-time buyers is inflated by around 7% by Londoners, whose median income is higher.
Outside London, the typical first-time buyer borrows an average 85% of the value of their property. But, because London first-time buyers typically put down 25% in deposit, the UK average loan-to-value ratio for first-time buyers is only 80%.
First-time buyer characteristics: 2013 Q4
|Average loan size (median)||£118,750||£110,000||£198,855|
|Average income multiple||3.40||3.33||3.79|
Source: CML RMS
Help to Buy mortgage guarantee – what London effect?
Despite concerns in some quarters that the Help to Buy schemes might further stoke the London market, their actual effect so far seems to be very muted in London. This is one aspect of the housing market that does not seem to be writ larger in London than elsewhere.
Out of 17,395 Help to Buy completions by the end of January (14,823 equity loan and 2,572 mortgage guarantee), over three quarters were outside London and the South East. The average price of property being bought under Help to Buy was £203,000 for equity loan and £148,000 for mortgage guarantee. Nevertheless, at £287,000, the 118 London buyers who have so far completed on a Help to Buy mortgage guarantee-backed loan paid nearly double that.
What other effects do we see if we exclude London?
We have recently published our second quarter of aggregate data on outstanding residential mortgage lending broken down by postcode. According to that survey, which incorporates lending data from seven participating large lenders, of the £897 billion total outstanding lending in Great Britain among these lenders, £230 billion (26%) was in London.
A number of media stories highlighted the postcode lending breakdown in different ways – including noting that the amount of mortgage lending outstanding in South West London exceeded the total amount of mortgage debt in Wales. Certainly, as an indicator of the mortgage stock (rather than the flow of new lending, which most of our data relates to), the postcode lending breakdown reinforces that the concentration of outstanding lending in London is extremely strong, even though owner-occupation is lower than elsewhere.
When we look at tenure, when London is excluded, the tenure pattern in the rest of the UK follows a path very similar to that in the UK overall – increasing to the mid-2000s and then falling. However, when London is excluded, a larger proportion of households own their own home (67% compared to 65% in the UK overall), while there is a marginally lower incidence of private renting (16% compared to 17% in the UK overall).
In conclusion the vast majority of the housing market – and the lending to it – exists outside London, and much of it is experiencing nothing like the euphoric conditions that are filling the London media column inches and broadcast news at the moment.
However, as we show here, because London is nevertheless a large market, and a disproportionately high-value one relative to the rest of the UK, the London experience does influence national data, sometimes quite significantly. This is before we even consider the vastly different characteristics of different geographical markets across the UK.
By disregarding London from national data, we begin to see a different picture for the “Life outside London” rest of the UK. Without London, owner-occupation levels are higher, house prices are lower, and first-time buyers have lower income multiples (but also lower deposits) than their national averages show with London included.
There is probably no one-size-fits-all set of policies that works for all geographical locations and all variables in market conditions. Equally, it is reassuring to see that recent policy interventions in the mortgage and housing markets in the form of Help to Buy so far appear to be having the effect of reaching those parts of the UK where stimulus and assistance still look appropriate, while showing no evidence of contributing any significant part to the London market’s current buoyancy.