More House Buyers are Using Cash
One of the primary complaints about the UK housing market is the fact that it has isolated first-time buyers from the market. With prices continuously climbing due to low supply and high demand together with relatively low wages, first-time buyers can’t pay for rent and save enough for a deposit.
The broken housing market needed a fix and in 2014 the Financial Policy Committee made changes to the Mortgage Market Review affordability rules, which restricted mortgage supply and offered control to interest rates. With the introduction of government lending schemes like Help to Buy, it was anticipated that first-time buyers would gain a competitive edge in the housing market but some suggest that the market is not adjusting as planned and there is still a striking divide between ‘the haves’ and ‘the haves not.’
IMLA says that UK buyers spent 261bn in 2016 and 42% of that was cold-hard cash. The trade body reported that 109bn of cash was spent in 2016, an increase of 57% since 2013. During the same period, lending has only increased by 32%. This growing trend of cash to purchase houses could have profound social and economical consequences.
The beginning of 2016 has suggested a step towards a level playing field. Buyer affordability (the percentage of income spent on mortgage interest) has improved and people are more easily able to obtain to a mortgage due to the low rates. However, the number of home movers has declined.
The growing influence of cash in the property market could result in pushing first-time buyers farther way from getting on the ladder. For those who rely on the lending schemes and small deposits, house buyers who can offer 50% cash for the property could push them out.
The market has cooled over the last year with stagnate housing prices and a shift in interest rate expectations. Now that the importance of cash is starting to affect the market – it’s important to ask the question: are current restrictions on lending still appropriate?
Incomes are stagnating and although prices are climbing at a slower rate, they continue to increase with 3.8% increase in the last year. Now that cash has become almost half of the markets income – the market is continuing to expose social inequality as home ownership becomes unattainable for those without a high income, a cash offer or established property equity.
The current housing market is putting the burden on lenders to establish innovative lending products for clients while simultaneously balancing the increasingly tighter regulations. Although the IMLA report suggests that a third of the annual growth in property lending as been for first time buyers, the growing influence of cash from other house buyers could create another obstacle.
The flexible lending products, such as family guarantors, are making property purchases more attainable for buyers without cash or equity, but they will not solve the social implications of the current property market.