Why is the housing market so slow?
With mortgage approvals at their lowest for 18 months, weakness of demand and high prices contribute to stagnation
Demand for home loans has been weak, but new figures from the Bank of England showed the number of mortgages approved in June was the lowest for 18 months. It’s unlikely that the weather or the extra bank holiday made that much difference to the 10% year-on-year drop in approvals for home purchases. Instead, the June data simply underscored how one of the driving forces behind growth in the bubble years has stalled. Approvals are currently running at roughly half their monthly average over the past couple of decades.
This sluggishness is perhaps not that surprising. Prices climbed so high in the boom that first-time buyers would have struggled to get a foot on the ladder even had banks and building societies not tightened up their lending criteria. The end of 100% mortgages, the need to put down a chunky deposit and the high level of unemployment among young people have all ensured that the flow of new buyers has been limited. In recent months, mortgage rates have been creeping up, which has further depressed demand both for house purchases and for re-mortgaging.
What does take some explaining is why the market mechanism is not working. If demand is low, the economic textbooks say that there should be a fall in prices so that unsold properties can be shifted. This, though, is not happening because the weakness of demand is being matched by weakness in the supply of homes for sale. Private sector housebuilding is low, and unlike the recession of the early 1990s there is not a massive flow of forced sales caused by rapidly rising unemployment and repossessions.
For the most part, lenders are taking a relaxed approach to those falling behind with their home loan payments, and low interest rates mean that the slice of household income that has to be set aside for the monthly mortgage payment is lower than it was during the crash of the early 1990s.
What that means is that sellers are holding out for the asking price, and since that is higher than potential buyers are prepared or can afford to pay, the market is stuck in a low-activity equilibrium. Prices are coming down, but much more slowly than might be expected given that the number of monthly approvals has fallen by more than 50% since the recent peak.
One of the aims of the Bank of England’s new funding for lending scheme is designed to improve the supply of mortgage funds, and this may help to boost the number of approvals over the coming months. But the FLS is no magic bullet. With Britain in a double-dip recession, confidence among potential buyers is low and likely to remain so. They will insist on lower prices at a time when sellers are happy to sit tight. As a result, the property market – big enough to have a marked impact on the economy’s overall growth rate – is going nowhere fast.