Building new homes is an essential part of making housing available for everyone that needs it. However, the lack of new homes is only part of the problem as they only account for around 10-12% of all residential transactions. The second-hand market tends to provide most of the available housing supply at any given time. Unfortunately, turnover in the existing stock is low with UK residential transactions stuck at around 1.2 million per year for the last five years. That equates to around 4.2% of total stock selling each year compared to a pre-2008 average of 6.8% (chart below).
While turnover at a national level has remained stuck at around 1.2 million transactions per year, there has been considerable geographic divergence in recent years. Changes to stamp duty, unaffordable house prices, and changes in buyer sentiment (in part due to Brexit) have negatively impacted on London and other higher house price areas. Transactions in London are down 20% over the last five years with bigger percentage fall in central boroughs. Meanwhile transactions in the midlands and north of England have seen the opposite effect. Activity by investors may have been hit but first-time buyers have been able to replace them, for example transactions across the North West are up 17% over the last five years.
Low housing turnover is an issue because, amongst other things, it can limit labour mobility, reduce the tax base for stamp duty, hurt economic activity linked to household moves and result in a poor allocation of homes, as households adjust more slowly to their changing needs. This last point is related to the popular notion of the housing ladder.
The housing ladder suggests an ability for households to move from first-time buyer, through a step or steps to the family home, a possible downsizing move for empty-nesters, followed by a possible move to a retirement home. For many years this housing ladder has characterised and informed the understanding of the housing market and guided government policy. This can be seen in its frequent references in policies targeting first-time buyers and home-ownership.
It is true that more people are successfully getting on the housing ladder. Home-ownership is increasing again and, as the chart below shows, first-time buyer numbers have nearly recovered back to their pre-crash peak. However, the number of mortgaged movers is still 50% below their 2006/07 levels and has shown no sign of improving since 2010. It appears the housing ladder is broken thanks to a combination of factors including lending conditions, income growth, housing equity growth, and house price affordability.
A broken housing ladder has consequences for policies and solutions that seek to encourage first-time buyers into home-ownership but do not give enough consideration to the buyer’s ability to move freely when their circumstances change. For example, home-ownership products like micro-flats may be brilliantly designed for one or two people but can quickly become unacceptable when the owner’s circumstances change. Other financial products designed to increase home-ownership may also limit buyers’ ability to move up the ladder as their gains in housing equity are limited or higher costs prevent saving. Home-ownership is the aspiration for most people but reaching for it too soon could have longer term consequences for some.