The unprecedented economic conditions, owing to the coronavirus pandemic, and a messy Brexit has created unusual circumstances in the UK housing market. The real estate prices are high, and mortgage applications have spiked up, while the approval rate of mortgages has drastically gone down.
COVID-19 and its Impact on the UK Housing Market
COVID-19 has brought about a fundamental shift in the demand for homes. With more people working from home and looking for space and government initiatives to support the economy, investors are more inclined towards putting their money in a safe place, including houses. As a result, the housing prices in the UK are rising at its fastest annual pace since 2016. The annual growth rate of housing prices stood at 7.3% in September 2020, the fastest rate since June 2016. Moreover, the average price of a house is continuing its upward trend, with a jump of 1.6% in September 2020 compared to August 2020.
Due to the unstoppable rally in the housing prices, mortgage applications have also surged to their highest in the past 12 years. The lenders received more mortgage applications from first-time homebuyers than any time since 2008. However, the cost of mortgages is high despite the base rates being slashed to historical lows.
The challenges faced by first-time homebuyers have compounded due to the coronavirus pandemic. Several lenders are withdrawing their low-deposit loans considering the global economic uncertainty, a dramatic uptick in unemployment, and negative equity of borrowers. Not many financial institutions are supporting mortgages with 90%-95% of the property’s value anymore. If any, they have become highly expensive due to the higher risks involved. Overall, lending has become riskier with a rise in unemployment and financial uncertainties, making lenders more cautious and less lenient. As a result, the approval rate of mortgages has fallen by 90% since the beginning of the COVID-19 pandemic.
The demand from existing home buyers is up 53% from the previous year, while first-time buyer metric has seen little growth. The lack of growth in the number from first-time buyers planning to buy homes is due to the economic pain caused Covid-19 pandemic. The pandemic has not left them in a better financial position. Saving and investing three months of expenses over a long-term to finance a home, coupled with rising house prices may seem almost impossible at this time. If the UK economy does not recover and job loses become more widespread, the financial squeeze from households will lead to more pressure on house prices.
State Backing and Parental Banks Coming to the Rescue
The soaring demand for more expensive houses may be a temporary phenomenon and may die down as the employment support measures of the government are scaled back later in the year, yet the rising concerns need to be addressed.
The solution to the unusual state of the UK housing market will require state backing to support homebuyers. However, the situation will be overwhelming for the authorities as there are over 2 million expected beneficiaries, with each requiring an average mortgage of approximately £185,000. This is a grave concern and needs serious redressal. Without proper planning of the government, the billions of pounds of guarantees expected from the banks and lenders will only end up pushing the home prices further up.
The other alternative for lower-income individuals is the mom and dad banks. As many homebuyers struggle with the financial fallouts, they may turn to friends and family for loans to buy homes, instead of mortgages. According to a study by Legal & General, about 23% of the home purchases in 2020 are expected to be funded by friends and family, compared to 19% in 2019. The research indicates financial help of over £50 billion is expected to come from mom and dad banks, towards 175,000 home transactions in 2020.