Equity Replaces Mortgage Debt as Dominant Funding Source in the Housing Market.

22 January 2013

Since 2008 equity has replaced mortgage debt as the major source of funding for housing transactions. This is apparent from the figures released by Savills Research which states that in 2001 mortgage debt funded 62% of housing transactions, by 2006 this was reduced to 55% and in 2011 it stood at just 46%.

The mortgage debt percentage refers to the degree to which housing transactions in the UK have been funded by way of a mortgage, whilst equity relates to the percentage of housing transactions that have occurred by way of a personal transfer of capital. 

The noticeable shift in funding can be attributed to the UK’s poor economic position, as banks became increasingly unwilling to lend. Constraints such as higher initial deposit requirements has meant that only the equity rich are able to afford the purchase of property. As a result many potential buyers are looking instead to rent property. 

Such is the economic climate in the UK there are relatively few people in the fortunate position to afford property funded mainly through personal equity. This is evidenced from the Land Registry figures that show England and Wales as a whole spent £150 billion on house purchases compared to a figure of £284 billion at the peak of the market (first half 2007). 

Between 2010 and 2011 housing prices have fallen by 2% across the UK. However, in areas in which housing is predominantly funded through equity there has been an increase in property prices. 

London is a prime example of such an equity driven market. Due to its recognition as a world city, London is seen as having a safe haven status. This allows areas such as Kensington and Chelsea to have an increase of 2.8% property value in 2011, which is anomalous when comparing to general annual housing price in the UK. 

This fluctuation in property prices within London may seem at odds with the significantly reduced wealth that the City’s economy is currently producing. However, high earning London professionals receiving large bonuses are no longer the driving factor affecting the property prices.  

It is the small hedge fund and private offices within the west end that are generating the most cash flow to the London property market as opposed to the larger firms located in places such as Canary Wharf in the East. 

Another significant contributing factor is the international purchase of London property as a means of investment or wealth preserver due to the City’s stable property value. 

Unfortunately other than to the South East of London in areas such as Surrey there has been little spread of the City’s wealth to neighbouring areas. Savills Research notes that areas such as London and the South East that are less constrained by mortgage debt have on average returned to their peak of 2007 whilst areas such as Blackpool and Newcastle who are heavily funded through mortgage debt have fallen over 20% below this point. With the UK’s current economic situation not set to improve any point soon this divide is predicted to widen even further over the next five years.  

Whilst it is clear there are significant regional differences in property prices throughout the UK there are also strong localised differences within regions. London can again be used as a prime example of such a disparity, with Kensington housing stock rising by 40% in the last 5 years to £65 billion while that of areas such as Dagenham has fallen by 2% to just under £7.5 billion. Savills Research states that such figures show an East-West divide, with the driving force behind these differences being the difference in concentration of equity rich and mortgage dependant markets. 

In summary the UK property market reflects the current economic climate of the country, with property transactions remaining significantly less in comparison to the peak in 2007. Housing transactions have been predominantly limited to those equity rich buyers. Such equity rich buyers have tended to favour the grade A stock that the country has to offer such as property in Kensington which can be viewed as a relatively safe investment. This has therefore led to property prices in high end value locations in London and the South East substantially outperforming all other areas of the UK. 

For additional information please contact Edward Worthy on 01245 228124 or worthye@gepp.co.uk