Social forces change the very fabric of house market

Residential property has seen phenomenal growth over the past decade, largely due to a low interest rate environment, which enables homebuyers to borrow more, low unemployment and robust earnings growth.

But bubbling below the financial credentials of a buoyant economy are a wealth of social and demographic factors which are also providing significant support for house prices. And these social factors look likely to underpin a robust property market for years to come, according to experts.

Economists say the rise in the number of households due to an ageing population, high levels of immigration, growing numbers of divorce cases and a propensity to delay settling down is driving up demand which in turn is pushing up prices.

These factors are compounded by the fact that the supply of new households is nowhere near matching the growth in demand. Also, the rise of buy-to-let, the increase in people owning second homes and fewer people moving, which is further limiting supply, are also helping to shore up prices.

But now, with at least one imminent interest rate rise on the cards and banks stretching how much they will lend homebuyers to unprecedented levels, all eyes are on whether house prices might finally overheat.

PricewaterhouseCoopers says that going on past models of house price trends the current market looks overvalued by around 25 per cent. But John Hawksworth, head of macroeconomics at PwC, says that once other factors have been taken into account such as immigration, disparity between supply and demand and the availability of affordable credit then property values look a lot more realistic.

Ed Stansfield, property economist at Capital Economics, says: “At the moment property prices are rising and confidence in the market seems inexhaustible. The whole issue surrounding undersupply as well helps to boost expectations even further and fuel higher rises.”

Milan Khatri, chief economist at the Royal Institute of Chartered Surveyors, believes the key social factor behind the growth in property prices is the flood of immigration, particularly from eastern European countries.

“Population growth has been a big economic shock. The level of immigration has been vastly underestimated,” he says.

According to figures out this week from the Office of National Statistics, the UK population is growing by 500 people every day.

A more subtle but also significant driver of house prices is the rapid growth in the number of households. The number of households in Great Britain has risen by almost 2m since 1996. This growth is forecast to accelerate over the next 10 years, with the number of households expected to reach around 27.5m by 2016, compared with 25m today.

Khatri says: “There are more and more single households as people are living longer, more people are getting divorced and living separately, and people are settling down and marrying later in life.

“This means that even if the population numbers remain static, demand for housing would still be on the rise, irrespective of the economy.”

And as demand keeps rising, the shortfall of available properties is becoming ever-wider.

The government has set a target of building 200,000 new properties each year. The housebuilding sector is currently churning out around 140,000 annually.

Ray Boulger, senior technical adviser at John Charcol, the mortgage broker, says that new households are growing at a
rate of 40,000-50,000 each year.

“This might not have a huge impact over a single year but over a number of years it really starts to look significant,” he says.

Fionnuala Earley, group economist at Nationwide, says: “There is all this pent-up demand due to lack of affordability and a limited supply. Property prices are acting as a kind of steam relief.”

Another main issue is the rise of the buy-to-let landlord. Buyers looking for investment properties are typically looking for similar properties to first-time buyers, which has meant that over the past few years this section of the market has been awash with money.

“Investment demand has been a big factor in the recent pick-up in property prices,” says Earley.

Boulger says that because of planning restrictions, developers have been building a lot more flats than houses. These new- build flats are being snapped up by buy-to-let investors, who are often buying in bulk and can therefore negotiate discounts. But as developers are generally loath to bring prices down, they may offer incentives such as cashback on completion and free furnishings. Boulger says this over-inflates the property’s price in the market and helps to push up prices of similar properties.

Richard Donnell, director of research at Hometrack, the housing information business, says even more pressure is being put on house prices as fewer people are wanting to move.

He says the volume of property coming on to the market has halved over the past six months compared with last year and 2004. “Last year, turnover in the housing market equated to just 5.5 per cent of stock, the equivalent of households moving only once every 18 years. This compares to an average of 9.4 per cent during the 1980s,” says Donnell.

He believes this trend is set to continue for the foreseeable future as the value of debt erodes more slowly in a low inflation environment. Also, higher transaction costs such as stamp duty, are acting as a disincentive for homeowners to move. More people, particularly in properties worth more than £250,000 and £500,000 where stamp duty on purchases rises to 3 per cent and 4 per cent respectively, are choosing to refurbish or extend existing properties rather than move.

Less liquidity could mean that people are willing to pay over the odds and could lead to more short-term volatility in prices. Also, the lack of people moving up the housing chain means there are fewer smaller properties for those taking their first step on to the ladder.

But the big question is whether these factors will be enough to hold off any potential dip in property prices caused by the expected interest rate rises.

Khatri says: “To some extent the fact that the property market has proved so resilient to the August rate rise suggests that these social factors are really important.”

Earley says: “If prices do begin to fall, then these other supportive factors would come into force. If properties become more affordable then there would be plenty of demand to mop up any excess supply, which would in turn drive prices again.”