The increased demand for housing in the UK

Aug 27, 2013 in Uncategorised

The UK has always had an above-average demand for property, which can largely be attributed to its population density (the volume of inhabitants versus land size). In fact, after discounting Europe’s disproportionately minuscule countries – including San Marino, Vatican City and Monaco – the UK has the third densest population in the whole of Europe – behind only Belgium and the Netherlands.

Put quite simply, this means there are more people per square mile in the UK than in most other EU countries. For this reason, housing has long been an issue, with less space to home people coupled with legislation to protect some of the UK’s most precious and well-loved natural resources.

Not only that, the UK’s population has, since the mid-1990s, grown at a faster rate overall than France or Germany, which both have significantly more land mass. This illustrates it’s not just a historic issue, but one that looks set to continue for quite some time yet.

So what, more recently, has caused the UK’s housing demand to continue rising, and what is the market set to look like in future?

The credit crunch

The global financial collapse of 2007 had a huge impact on housing not just in the UK but across most of the developed world. Prices plummeted – after years of rapid inflation – and the selling market ground to a halt.

Much of this could be attributed to the new dangers posed to mortgage lenders with future price uncertainty. This was because, should a mortgage be offered that a buyer ends up defaulting on, the repossessed house may not then be worth the value offered up in the original mortgage – resulting in a loss for the lender.

With mortgages increasingly difficult to obtain, millions of would-be buyers ended up entering the private rented sector (PRS), being unable to stump up the 30 or 40 per cent mortgages being asked of them.

Two methods then emerged to boost the housing market and also provide much needed stock: Help to Buy and build-to-let schemes.

Build to let would see housebuilders tasked with building brand new housing developments or blocks of flats with the view to rent them out to tenants upon completion rather than selling them on for a profit. The housebuilder themselves could undertake the letting or it would be passed on to a third party – often the latter as this provided them with the short-term capital boost to press on with the next build.

Help to Buy came a little later, being delivered by George Osborne during his 2013 Budget. It would see the government offer loans that took much of the risk away from housebuilders and banks. It worked by getting lenders to offer 75 per cent mortgages, before the government provided the remaining 20 per cent. Buyers would then only need to cover the remaining five per cent.

This scheme could provide lenders with much more security on their investment, whilst buyers would then not need deposits in the tens of thousands of pounds just to get on the property ladder. In the months that followed Osborne’s announcement, housebuilders hailed the scheme as a success as it boosted their order books significantly. It also sent the number of property developments in the UK soaring, sating demand from those who – for the last few years – had been stuck in the PRS.

Letting demand

As noted above, demand in recent years hasn’t just been on homes to buy but also to let. Countless homeowners have approached their letting agents to list their home for sale, only to be advised that renting could be a much more profitable option. Demand was high so rents climbed and the risk of lengthy void periods (when a property is empty) was greatly reduced.

This, of course, requires a markedly different approach than selling. First of all, there is the red tape and bureaucracy of having to change the mortgage from owner-occupier to landlord. Then came the marketing and decision-making, with options concerning whether to manage the property or hand that over to the letting agents. A landlord that manages a property his or herself may end up pocketing more of the rent yields, but then have more responsibility. Thus, any boiler repairs, structural inefficiencies and repairs to rubber roofs, for example, needs to be undertaken (and paid for) by the landlord and not the tenant.

In addition, properties being advertised to let also need an energy performance certificate so those thinking of putting an offer know how much their bills are expected to be.

With all these considerations, it’s little surprise that demand for good quality rental properties soared as letting agents looked to fill their books with the best rental properties and distance themselves from unscrupulous landlords trying to make a quick but ill-gotten profit on the buoyant market.

Future housing demand

With housebuilders reporting strong growth in their sector, it would be understandable to think this will sate the ever-growing demand for housing and see figures level out. Official statistics from the ONS, however, could put paid to this before it even gets going.

It has forecast the UK population to reach 64.8 million by 2015, then 67.2, 69.4, 71.4 and 73.2 million over the subsequent five year periods. If these accounts prove to be accurate, it would signal a huge rise of around half a million new residents every single year. Based on ONS figures released at the same time as the population figures, this would equate to well over 200,000 new households.

When considering this statistic, it becomes apparent that demand for housebuilders will need to be high (and sustained) in order to effectively manage the rapid population growth. Not forgetting that whilst the population is increasing, the UK will not be getting any bigger, so thought will have to go toward new locations for developments.

Whatever the future holds, it seems the UK’s historically large housing demand is showing no signs of slowing any time soon.