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Memorandum from the West Midlands Local Government
Association and
This submission focuses on the first of these points of inquiry.
1. A
Short Summary 1.1. In brief
the submission comprises: · The Regional Planning context. · House prices changes in the West Midlands Region 2000-2007. · The effect of the credit crunch on the West Midlands Housing Market since the second half of 2007. · The Credit Crunch and the longer term Implications for Strategy and Financial Planning · West Midlands conclusions for the short run
2. Regional
Planning Context 2.1. The
West Midlands Regional Assembly has submitted its Regional Spatial Strategy
Phase 2 Revision in Dec 2007. This is with the Government Office of the West
Midlands for consultation until 8th Dec 2008. The Preferred Option
accepts a growth target for new housing to 2026 of 365,600 new homes. The
target is subject to review especially to establish whether further growth is
possible or necessary in the latter ten years to 2026. 3. West Midlands Housing Market and Recent
Changes[1] 3.1. The achievement of the Government's housebuilding
targets, both for market and for social housing are likely to be affected by
the current market conditions. During the second half of 2007,
the housing market in the UK started to experience a downturn, the impacts of
which are now being keenly felt. Crucially, the downturn has led to a reduction
in activity and investment, not only in the housing market, but also in the
wider economy. 3.2. It is necessary to view the
recent decline in the wider context of house price rises over the last 15
years. Data from the Regulated Mortgage Survey shows that average house prices
in the West Midlands have increased every year since 1992[2]. 3.3. Table 1: Change in house prices and house sales in the West Midlands and England, 2000-2007
Source: Land
Registry, 2008. House prices. 3.4. Table 1 shows that between 2000 and 2007,
the average property price in the West Midlands increased 108.0%, compared to a
101.3% increase for England as a whole. The number of sales also increased, by
8.4% for the West Midlands and 9.2% for England. 3.5. In the West Midlands, the highest mean
house prices are found in Stratford-on-Avon (£275,218) and Malvern Hills
(£266,987). The mean house price in the latter has increased by £139,026 over
the period, the largest increase in the region. 3.6. In
contrast, mean house prices are lowest in Stoke-on-Trent (£103,601) and Sandwell
(£132,580). Both of these districts have seen high rates of house price growth
(142.3% and 136.4% respectively), however, the low base means that this equates
to difference of £61,000 in the case of Stoke-on-Trent, and £76,485 for
Sandwell. 4. Start of the housing crisis -
'sub-prime' and the 'credit crunch' 4.1. The
current housing downturn was initiated by events in the United States (US),
with the collapse of the sub-prime sector. 4.2. The
lack of confidence in the banking industry has translated into a lack of confidence
in the housing market. 4.3. With
a narrower range of mortgage products available, fewer first-time buyers have been
able to secure credit for house purchases. As a result, demand for houses has
decreased. Potential homeowners have been put off making a house purchase,
while those looking to move home have opted to delay their decisions. 4.4. Several
datasets provide an indication of this decline in activity. Data from the Council
of Mortgage Lenders (CML) shows that the number of loans for house purchase
declined markedly between October 2007 and February 2008, with signs of a
slight recovery in April and May 2008. Although part of this is a seasonal
effect, Figure 1, below shows that, at the start of 2008, the number of loans
in the West Midlands is far below the equivalent values for the same months in
previous years. Overall, the number of loans approved in the first five months
of 2008 is just over 40% fewer than at the start of 2007. 4.5. As
a result of the lack of availability of mortgages and the uncertainty
experienced by first-time buyers, demand for property has decreased causing the
number of house sales to drop. Figure 1 demonstrates that, when compared with
the same month in 2007, there were 3,768 fewer sales in April 2008[3]. It is worth noting that
although the pattern of property sales closely matches the number of approved
loans, the number of sales is higher as approximately one-fifth of sales are
paid for using cash.
4.6.
*House sales
data is based on sales entered on the Land Registry database by 20 June 2008.
However, due to delays in the registration of property sales information on the
number of sales in May 2008 was incomplete, as such it has not been included. Source: Council of Mortgage Lenders, 2008. and Land Registry, 2008.
4.7. Data
from the CML provides other indicators of falling activity in the housing
market.
· the value of loans for house purchase in the West Midlands fell from £10,866m to £10,094m[4].
· the number of loans to first-time buyers fell by 11.0% to 29,200[5].
· average first-time buyer borrowing increased from 3.22 to 3.31 times income. This compares with 2.36 times income in 2000[6].
· the proportion of income spent on interest payments increased for first-time buyers, from 16.9% to 19.4%. This is highest proportion since 1991, and compares with lows of 10.5% in 1996 and 11.8% in 2002[7].
4.8. As
a result of stricter lending criteria, 100% mortgages and 100%+ mortgages have
disappeared. Indeed, many lenders have now reduced the loan-to-value (LTV)
ratios they are willing to consider for potential customers. In the West
Midlands, first-time buyers had, on average, borrowed 90% of the value of their
property in each month between May 2005 and November 2007. Since that time the
median LTV ratio has fallen to 87% in May 2008[8] reflecting the fact that
lenders are less willing to take-on first-time buyers unable to provide large
deposits. 4.9. The
fall in demand for property, brought about by the lack of affordable credit and
the uncertainty felt by potential homebuyers, has resulted in house price falls
in some areas and for some property types. According to the Nationwide Building
Society, the average house price started to fall in October 2007, and by June
2008 was 6.3% lower than in June 2007, although there has been some suggestion
that the rate of decline is starting to slow[9]. 4.10. Data from the Land Registry shows a similar, slightly delayed[10] pattern, with the average
actual price paid for property peaking in October 2007 and subsequently falling
(Figure 2). Prices have now fallen to the point where they are lower than for the
same period in 2007. In April 2008, the mean house price in the West Midlands was
approximately £2,300 below the price in April 2007, while in May 2008 it was slightly
over £3,750 below value for the equivalent month in 2007. 5. The Credit Crunch and the Longer
term Implications for Strategy and Financial Planning 5.1. The
period covered by the RSS Phase 2 time horizon is to 2026. It is reasonably safe
to say that the major part of this period, and especially the early years will
be overshadowed at least, probably dominated, by the effects of the banking and
mortgage crisis which has now broken upon the markets. For this reason it is
inappropriate to attempt to estimate the rate of achievement in new house
building or the strategic priorities against which it should be put by merely
looking back at past trends, and investment strategies born in very different
market conditions. Even strategies drawn up in the period of growth may no
longer be relevant or in touch with reality as it now appears. 5.2. However
some points will remain more reliable.
Examples of these are the demographic requirements for housing, though
even here difficulties in housing supply will have some impact upon new
household formation. Thus the overall housing requirement projections can still
be taken as broadly valid. The migration issues will be subject to both policy
and economic climate, so that variable and its relationship to Regional
strategy will need some reconsideration. 5.3. Equally
key goals of the West Midlands RSS
remain as rational and significant in an economic downturn as in a period of
growth. However the way the RSS policies
can be met may need reworking to cope with the wider economic climate and the
specific problems of the housebuilding sector and funding home ownership.
5.4. Many
other variables will however be impacted. Thus the rate at which liquidity and
confidence return to the financial markets will be slow and subject to national
and international policy aimed at detoxification of banking liabilities. The
process of creating new clean systems for mortgage funding will take time to
build up. These are sometimes referred to as 'Quaker Banking' with known
savers, operating in spatially close housing market areas where risk and
liability are closely managed within the savings and liquidity built up after
isolating toxic debt accounts. 5.5. The
time taken for the confidence to return is likely to be a key feature in the period
up to 2016 the mid way point in the RSS plan period, as will be the size and
operational characteristics of the post - recovery mortgage market. 5.6. Associated
with this process will be the effect on the housing building and construction
sector. That capacity is being lost is evident. The full extent of the
contraction is not yet apparent. Over a period of a few years the contraction
will then leave the industry with a smaller skill base and a limited capacity
to retrain, re-equip and mobilise for a higher rate of development. It will
therefore take time to build up to completion rates which were taken as the
norm in 2007 and were then under pressure to rise. The use of foreign
contractors and foreign labour may help to mitigate this loss of capacity, however
the recent trends underpinned by a fall in sterling and greater demand in
Eastern Europe has eroded the supply of labour from this source, a trend that
is likely to continue for the foreseeable future. 5.7. The
role played by affordable housing will change. The levels of shared ownership/
shared equity in new schemes seem unlikely to continue as before. Social rent
can be expected to become dominant. If the pent up demographic requirement is
not met by post recovery housing supply then there will be an upward price
pressure, moderated by the size and new approach of the mortgage industry. The
importance of funding social rented housing during this period will be very
significant in ameliorating potentially serious pressures in communities and
the economy. It must be noted here that
the dominance of social rent within the National Affordable Housing Programme
could potentially significantly change the outputs from the programme, as
social rent is more expensive to deliver per unit than shared ownership / shared
equity products. 5.8. The
growth in the buy-to-let market has meant significant recent growth in the
number of units in the private rented sector, easing pressure on the public
rented sector. The availability of
credit has encouraged a raft of amateur investors to enter the market. As the cost of finance increases on
re-mortgaging and the possibility of capital growth disappears, there will be
contraction in this sector as investors withdraw, unlikely to return given the
more stringent credit controls. 5.9. There
is also the possibility of a backlash against certain types of housing
i.e. apartments (particularly in city centres), given the nature of this
stock and their bespoke design in certain instances to maximise investment
return rather than occupiers needs/demands will mean there will be a strong
resistance from developers / banks alike to this type of development over this
timeframe. Apartments have formed a
record high proportion of new stock, this has buoyed the number of new build
completions and is another reason why housing numbers will fall as a result of
the credit crunch, as this type of scheme, often consented will fail to be
delivered. 5.10. The
wider economy is also a backdrop where the key features are changing from those
against which the Government's Housing Green Paper 2007 targets for house
building were developed. These will need a more comprehensive re -assessment
through the RSS and Single Integrated Regional Strategy process than can be
projected here. However the severe drop in house sales will gradually and
cumulatively freeze labour mobility degrading industrial performance across
many sectors. In the West Midlands Region the effect of this on the operation
of the Regional Economic Strategy is important. 5.11. The
use of public capital funding will need to consider where best and most
effectively to intervene to address the most serious effects of the West
Midlands regional economic conditions and to help reinforce and bolster the
recovery in a variety of sectors as their ultimate post recovery position
becomes clear. Given these major trends and the still uncertain outcomes or
timescales the long term strategic planning process for Spatial Strategy and
for the strategic regional deployment of public funding over the next ten years
has to reflect a sensitivity to these current and future circumstances. 6. West
Midlands Short Run Conclusions 6.1. It is clear that in light of the rapidly changing market conditions, the West Midlands Region needs to respond to the most pressing aspects:
· ensure affordable housing is continued to be delivered and at the necessary rates and in the areas required · enable householders to maintain ownership (i.e. mortgage rescue packages) throughout the difficult economic climate · give support to RSLs, to ensure they maintain capacity to deliver · give support to the homebuilding industry, to ensure value skills are retained for when the economic climate improves
November 2008 [1] Based upon
[2] Royal
Bank of [3] Note that May 2008 data is not used for the comparison because, due to delays in the registration of house sales. [4] Council of Mortgage Lenders, 2008. Gross mortgage lending by type of advance. [online] last accessed 7 July 2008 at URL: http://www.cml.org.uk/cml/filegrab/1ML1.xls?ref=4623 [5] Council of Mortgage Lenders, 2008. First-time buyers; lending and affordability. [online] last accessed 7 July 2008 at URL: http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624 [6] Council of Mortgage Lenders, 2008. First-time buyers; lending and affordability. [online] last accessed 7 July 2008 at URL: http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624 [7] Council of Mortgage Lenders, 2008. First-time buyers; lending and affordability. [online] last accessed 7 July 2008 at URL: http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624 [8] Council of Mortgage Lenders, 2008. First-time buyers; lending and affordability. [online] last accessed 7 July 2008 at URL: http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624
[9] Nationwide Building Society, 2008. http://www.nationwide.co.uk/hpi/historical/June_2008.pdf
[10] There is a lag between the information provided by the Nationwide, which is based on an earlier stage of the house purchase, and the Land Registry data, which is based on actual prices paid.
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