Memorandum by West Midlands Local Government
Association and West Midlands Regional Assembly (CRED 11)
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 2000-07.
— 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
December 2007. This is with the Government Office of the West
Midlands for consultation until 8 December 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
10 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, 2000-07
| 2000
| 2007 | Difference 2000 to 2007
|
Area | Mean
house
price
|
Total
Sales | Mean
house
price
|
Total
Sales | Mean
house
price
|
%
change |
Total
Sales
|
%
change |
| West Midlands | £84,294 |
101,778 | £175,314 | 110,341
| £91,020 | 108.0 | 8,563
| 8.4 |
| England | £110,589 | 1,084,979
| £222,621 | 1,185,044 |
£112,031 | 101.3 | 100,065
| 9.2 |
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
Figure 1
NUMBER OF LOANS FOR HOUSE PURCHASE, JAN 2002 TO MAY 2007,
AND NUMBER OF PROPERTY SALES, APRIL 2006 TO APRIL 2008 (WEST MIDLANDS)
* 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.
From 2006 to 2007:
— the value of loans for house purchase in the West
Midlands fell from £10,866 million to £10,094 million;[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] and
— 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 ie 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 10 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 (ie
mortgage rescue packages) throughout the difficult economic climate;
— give support to RSLs, to ensure they maintain
capacity to deliver; and
— give support to the homebuilding industry, to
ensure value skills are retained for when the economic climate
improves.
November 2008
1
Based upon West Midlands Regional Assembly. Annual Monitoring
Report 2007 Regional Housing Market Summary pg 7ff. Back
2
Royal Bank of Scotland, 2008. Update on Trading and Capital. http://www.rbs.com/content/media_centre/trading_update.pdf Back
3
Note that May 2008 data is not used for the comparison because,
due to delays in the registration of house sales. Back
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 Back
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 Back
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 Back
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 Back
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 Back
9
Nationwide Building Society, 2008. http://www.nationwide.co.uk/hpi/historical/June_2008.pdf Back
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. Back
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