Spotlight Bridging the Gap in Housing November 2013

Savills World Research UK Residential Spotlight Bridging the Gap in Housing November 2013 SUMMARY Over two million households excluded from the property market by the credit crunch Excluded households: over 500,000 households a year have been prevented from moving onto or up the housing ladder by the effects of the credit crunch since 2009. The biggest concentrations of excluded households are found in lower value markets. 200,000 of these would have been first-time buyers who are now renting privately. Left Behind: most of this group is unlikely to benefit from the strengthening property market as economic confidence returns. Their lack of housing equity and their inability to save for a deposit will continue to prevent them from buying or trading up. Help to Buy: the short-term Government scheme will not make a material difference to the bulk of excluded households whose median incomes fall below the 45,000 average incomes of those currently accessing the scheme. House price growth: Savills forecasts that UK house prices will rise by 25.2% over the next five years. We expect even bigger growth in the South East, South West and East of England. Price rises will place bigger barriers to participation in the housing market. Rent Rises: We forecast rental growth of 21% over the next five years, which will make it harder for tenants to save for a deposit. We forecast rental growth of 21% over the next five years Susan Emmett, Savills Research savills.co.uk/research 01

Spotlight Bridging the Gap in Housing Half a million households are being excluded from the property market a year Our analysis comparing average transaction levels following the credit crunch with an extended period running up to the peak of the market in 2007 shows a shortfall of 527,000 transactions a year. This suggests more than half a million households a year would have stepped on or up the housing ladder in a fully functioning market. These excluded households can be found across the country. Affordability is undoubtedly most Graph 1 Mortgage availability & transactions collapsed post credit crunch Annual transactions/completions 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Source: HMRC, CML stretched in London and the South East where prices are highest. Strong price growth in London, in particular, has priced many off the property ladder. Failure to save for a large enough deposit, to satisfy lenders more stringent criteria post credit crunch, remains the greatest barrier to homeownership. The north and south of England have suffered a similar number of total shortfalls with declines of 165,290 and 179,116 respectively. Even in London where the market has been buoyant relative to the rest of the country, transactions are down by almost 60,000 a year, suggesting a considerable number Transactions Mortgage Completions Q4 1979 Q1 1981 Q2 1982 Q3 1983 Q4 1984 Q1 1986 Q2 1987 Q3 1988 Q4 1989 Q1 1990 Q2 1991 Q3 1992 Q4 1993 Q1 1994 Q2 1995 Q3 1996 Q4 1997 Q1 1998 Q2 1999 Q3 2000 Q4 2001 Q1 2002 Q2 2003 Q3 2004 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2009 Q1 2010 Q2 2011 Q3 2012 Q4 2013 Graph 2 The profile of the shortfall varies by region 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Need more social housing provision London Midlands & Wales South of England North of England of households are not participating in the property market. The falls represent a larger percentage of total private housing stock in lower value markets, where buyers have less access to savings or housing equity and are therefore more likely to end up renting privately. Stronger population growth in London and the South will increase the pressure for privately rented homes in those markets. As the economy improves and confidence returns to more parts of the market, we expect to see the increased transaction levels continue to be concentrated in higher value markets. The lack of savings or equity is likely to leave excluded households even further behind as house prices climb. Many of those priced out of the owner occupier market may still aspire to own their own home like their parents before them, but face huge barriers that will not easily disappear. Shifting tenures Levels of homeownership began to decline in the early 21st century, before the credit crunch began, pushing more people into the private rented sector. Meanwhile, the social rented sector continued its relative decline with the number of those renting privately overtaking social tenants in 2011. There were 4.3 million households in the private rented sector in the UK in 2011. Savills expects the number to grow by one million over the next five years. Although renting privately continues to be regarded as a short-term measure, more people are renting for longer. The biggest group of private tenants is aged between 25 and 34. However, the fastest growing group of private tenants are aged between 35 and 44, a quarter of which are young families. They are what we call Generation Rent, and we expect many will never own their own home. 0 Under 20k 20k to 30k Source: Savills Research using HM Land Registry 30k to 40k 40k to 50k 50k to 60k 60k to 70k 70k to 80k 80k to 90k 90k to 100k The mismatch between supply and demand is driving up rents and forcing tenants into sometimes poor quality rental housing with little security of tenure. 02

November 2013 Graph 3 The rise of the private rented sector Proportion of dwelling stock 80% 70% 60% 50% 40% 30% 20% 10% 0% 1918 1923 1928 1933 Source: CLG & Savills Research 1943 1948 1953 1958 Social rented Private rented Owner occupied 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Now is the time for housing associations to tackle a different kind of housing need Susan Emmett, Savills Research kind of housing need. With homeownership now in decline, housing associations could broaden their tenant base and provide a proportion of their housing at market rather than social rent. Our exclusive survey of 2,300 tenants conducted by YouGov revealed that there was a greater desire for longer term tenancies among those over 35, while younger tenants prefer flexibility. The survey also showed that the search for better quality housing was the main reason renters move. We interpret this as a search for better standard of accommodation, better design and higher specification. These findings provide an opportunity for housing associations offering market rent homes to distinguish themselves from the average buy-to-let landlord. Housing need Households excluded from the property market are unlikely to qualify for state help today as social housing provision is focussed on the most vulnerable. However, a generation ago, support for housing was available for a wider range of families. According to a new report by the National Housing Federation, The Politics of Housing, in 1979, 20% of households in the top decile of the income distribution lived in social housing, compared with close to zero by 2004-05. The shift towards the private sector as the main provider of housing for those who can afford it, coincided with the rise in homeownership in the latter part of the twentieth century. Change in social attitudes towards housing and welfare, as well as cut backs in affordable housing grants, means that the social sector is unlikely to become the main provider of housing. Now is the time for housing associations to tackle a different As this would be in addition to their current operations, the additional rental income could be used to cross subsidise other tenures. Lower value markets The largest concentrations of excluded households are found in the North West, North East and Yorkshire and the Humber. Although the South East has suffered a similar shortfall in the number of transactions since the credit crunch, the decrease represents a smaller percentage of the total market. We have taken a closer look at six different markets where the numbers of excluded households are significant these include Manchester, Leeds, Swindon, Peterborough, Greenwich and Medway. The six markets we have profiled have a large percentage of table 1 Profile of local markets with high concentrations of excluded households Excluded households (per annum) Excluded households as % of all private stock House price to earnings ratio Average house price of excluded households % in private rented sector (2011) House price vs peak (Sept 2013) Swindon 2,691 3.70% 5.52 130,958 17% -15% Peterborough 2,467 4.20% 5.13 114,295 20% -21% Manchester 6,353 4.60% 4.71 126,423 30% -23% Leeds 8,579 3.50% 5.6 132,916 19% -21% Greenwich 2,154 3.30% 8.11 215,924 21% 1% Medway 2,994 3.30% 5.89 130,929 18% -13% Source: Savills Research, HM Land Registry, CLG, Rightmove, ONS savills.co.uk/research 03

Spotlight Bridging the Gap in Housing Help to buy This short-term Government initiative to aid home buying may slow the decline in homeownership but it will not alter the shape of the market. We still expect the private rented sector to grow by 200,000 households a year over the medium term. Although there is no set income required to participate in Help to Buy, Government figures show that those borrowing through the scheme have an average household income of 45,000, which is in line with the incomes of the average first-time buyers already accessing the market. We do not expect this to change. With the exception of London, our analysis suggests the average income of the excluded households we are defining, falls well below that. In the South of England the median income of an excluded household is 36,710, in the Midlands and Wales it is 25,410 and in the North of England it is 22,662. In London the median income of an excluded household is 54,756. Government figures revealed that those borrowing through Help to Buy, which allows buyers to purchase with a 5% deposit, are buying homes worth on average 163,000 and paying 900 a month. However, our calculation shows that by putting down a larger deposit and benefitting from a more competitive mortgage rate, the average first-time buyer is purchasing a more expensive home at 197,000 but paying less ( 740) on a monthly basis. Interest rates are at an all time low. Monthly payments can only rise. A strengthening economy and falling unemployment increases the likelihood that the Bank of England will raise interest rates in 2015, rather than in 2016. Mortgage rates could rise sooner. Borrowers who overstretch themselves now may find themselves unable to manage later, particularly in markets where house prices are high relative to income. table 2 True cost of Help to Buy2 House Price Annual Income Monthly Repayment Help to Buy(2) 163,000 45,000 900 Graph 4 The collapse in transactions is greatest in lower value price bands Number of transactions 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Source: HMRC Under 100k 100k to 200k people renting privately. With the exception of Greenwich, property values are all still well below 2007 peak levels. The rents that these households can pay under normal affordability conditions result in a rent that is competitive with market rents in our six sample markets. The average rent that they could pay sits between the median two bed and median three bed rent in all markets except Leeds, where it is actually in excess of the three bed market rent. These rental levels equate to a gross yield of 6.0% which is very similar to the national average yield of 5.8% and so offers a competitive return. When considering the issue of development viability, in reality a detailed site by site appraisal would be required. However, in lieu of this we have simply compared the house price profile of the excluded households to the profile of recent new build sales. It is encouraging that there is overlap between the shortfall and recent delivery, indicating that it should be possible to viably build new supply to meet this shortfall. 200k to 300k Price Band 300k to 500k Pre crunch Post crunch 500k to 1m Over 1m Additionally, the lower risk profile of and hence lower funding costs of the registered provider sector should help RPs to compete for land in these markets. Building for demand in the private rented sector should also remove any risk around sales rates inherent when building for owner occupier demand. Housebuilding When building rates in England reached a peak at just over 350,000 homes in 1968, the public sector was delivering almost half of all new homes. With only 115,000 new homes built in 2012, housebuilding levels in England are currently half of those needed to meet the formation of new households which is expected to rise by 221,000 a year. Since the beginning of 2010, there have been 388,000 completions in England. Of those, only 22% have been delivered by housing associations and a tiny 1% built by local authorities. Savills expect private housebuilding to rise, boosted by the equity loan element of Help to Buy and an improving economy. Despite the increase in activity, it is unlikely that All First Time Buyers Source: ONS, Gov.UK 197,000 47,000 740 The lower risk profile of registered providers should help them compete for land Neal Hudson, Savills Research 04

November 2013 private housebuilders will deliver the necessary volumes to meet the demands of a growing population. The decline in capacity from Small and Medium Enterprises (SMEs) and regional housebuilders, which played a significant part in the delivery of homes in previous housebuilding upturns, has left a gap. Could housing associations and local authorities step up to the breach and provide much needed new housing? Government cut backs are prompting the public sector to develop a new approach to funding and finance. Homebuilding is a way of converting surplus land into reliable income streams and maximising resources. By creating a self-sustaining portfolio delivering market rent, housing associations can build another business line. How housing associations compete with private enterprise for land, particularly when it comes to building for rent rather than market sale, has been the subject of much debate. This is likely to intensify as the housing market improves and land values rise. Planning flexibility around affordable housing provision and how need is met, could improve the viability of a greater number of sites and permit the development of homes for market rent aimed at excluded households. Negotiations over the release of public sector land should not be confined to present day land values but look at the bigger picture. Increasingly, housing must be regarded in terms of infrastructure, particularly when it comes to regeneration. An increase in housebuilding will not only provide a greater number of needed homes but also create jobs and support the economy. n table 3 What they can pay vs. market rents What they could pay* (monthly rent) Cost of monthly rent (2 bed) Cost of monthly rent (3 bed) Swindon 655 571 692 Peterborough 571 542 604 Manchester 632 558 657 Leeds 665 572 641 Greenwich 1,080 977 1,131 Medway 655 639 732 Source: Savills Research, HM Land Registry, Rightmove Graph 5 Private housing completions Private Enterprise Housing Associations Local Authorities 400,000 350,000 300,000 Housing completions 250,000 200,000 150,000 100,000 50,000 0 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: CLG savills.co.uk/research 05

Spotlight Bridging the Gap in Housing OUTLOOK The challenge for Housing Associations Changing attitudes to welfare and falling grant levels are prompting housing associations to assess their role. The need by registered providers to examine their charitable purpose comes at a time of low housing building levels and growing housing need. Despite the improving economy and strengthening housing market, we believe that the excluded households we have defined in this document will continue to struggle to participate in the property market. Help to Buy will not help all those excluded from the property market by the credit crunch. The data so far suggests that the take up of both the equity loan part of the scheme aimed at buyers of new build and the mortgage guarantee, which allows buyers to purchase homes priced up to 600,000, has been in lower value markets. It is also stimulating higher levels of building. This is welcome news. However, our analysis suggests that outside London, the median incomes of the excluded households we have defined, falls below the household incomes of those currently moving on and up the ladder through Help to Buy. We expect that Help to Buy will support some 400,000 transactions over its three year lifespan 75,000 sales of new build through the equity loan scheme and 325,000 loans using the mortgage guarantee element of the scheme. At an average of 133,000 transactions a year, this falls well below the current annual 500,000 shortfall we have identified. An improving mortgage market, supported by Funding for Lending and a strengthening economy is likely to boost the levels of transactions further. However, a gap will still remain. It is therefore time for a new approach to housing that looks beyond homeownership as the tenancy of choice. While it is unlikely that we will see the return of social sector as the main provider of housing, as we saw in the 1970s, it seems increasingly clear that for many ordinary households aspirations of homeownership will not be realised. Despite the increase in housebuilding from the private sector, more is needed to meet the demands of a growing population. As the economy improves a lot of new supply from the private sector will be aimed at market sale. However, the demand for privately rented homes remains strong. Bolstering the private rented sector with higher quality housing at market rents is therefore key to providing the levels of housing the country needs. Housing associations are well positioned to take on this challenge. Please contact us for further information Research Housing Susan Emmett UK Residential 020 3107 5460 semmett@savills.com Twitter: @saemmett Neal Hudson UK Residential 020 7409 8865 nhudson@savills.com Jacqui Daly UK Investment 020 7016 3779 jdaly@savills.com Jim Ward UK Development 020 7409 8841 jward@savills.com Robert Grundy Head of Housing 020 7409 5995 rgrundy@savills.com Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 200 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. 06

November 2013 This publication The data used in the charts and tables is the latest available at the time of going to press. Sources are included for all the charts. We have used a standard set of notes and abbreviations throughout the document. savills.co.uk/research 07

33 Margaret Street London W1G 0JD 020 7499 8644 savills.co.uk