Financialisation of Housing
The fall in global interest rates has played an important role in the substantial rise of UK house prices over the last thirty years. The fall in interest rates was seen in most developed economies across the world but not all saw a similar rise in house prices. There are numerous reasons for this including the responsiveness of new supply but the links between the UK’s economy, lenders, and housing market make UK house prices very susceptible to any changes in macro-economic conditions, banking regulation, and housing policy.
All the post-war housing booms and busts featured a combination of these factors but the late 1990s/early 2000s have had a lasting impact. It’s more likely that looser mortgage lending conditions followed rather than led house price rises during the boom but it’s clear that the massive increase in the volume of lending (chart below) along with relaxed lending criteria (higher loan-to-income and loan-to-value ratios, income self-certification, interest-only, and sub-prime lending amongst others) contributed to rising house prices.
The combination of rapidly rising house prices, an advantageous tax system, and readily available mortgage debt enabled more people to move home, buy second homes, and buy investment properties. Many did so under the assumption that house prices would continue to rise in the future and saw significant benefits when prices did. Housing was increasingly viewed by many as a financial asset rather than just a home.
The financialisation of housing may have benefited most home-owners but there are many others who have been negatively impacted by it. For example, the growth in landlords and the private rented sector was enabled by the introduction of the assured shorthold tenancy and the buy-to-let mortgage lending market. Prospective first-time buyers soon found themselves competing with and being outbid by investors.
First-time buyers are no longer being outbid by investors thanks to a combination of tax changes and the greater availability of higher loan-to-value mortgages. This has seen first-time buyers take the place of investors in most markets outside London. As the chart below shows, it appears the rise in private rented households has levelled out in the last couple of years but it’s still important to understand how these changes have negatively impacted people.
It’s not just first-time buyers that investors have priced out. The financialisation of property also coincided with the rapid growth in the number of students attending higher education. The growth in student numbers was far greater than could be housed in existing university accommodation and so local markets were left to deal with the surplus of rental demand. Potential home movers found themselves crowded out by investors able to pay much higher prices thanks to the rents generated by squeezing students into what had been family homes. While the activity of investors has diminished in most markets and the growth in purpose-built accommodation has helped, the high concentrations of student households living in family homes has had a lasting effect on many local housing markets.
Many of the problems described in this report fit into more than one issue. For example, the student housing issue above is not just about financialisation but also housing distribution. This is also the case for second homes. The conditions created by the financialisation of housing enabled more people to buy second homes in city centres, and desirable rural and coastal locations. This has had a direct effect on house price affordability in many of these locations, leaving local residents less able to afford to buy in their local markets.