The Decline of Home Ownership

In my Money Week column this week, I've been looking at the decline of home ownership, and what it means. Here's a taster....



There aren’t many things that everyone in the country can agree on. We’re not likely to win the Euro 2012 championship with Fabio Capello still in charge of the team perhaps. Possibly that Pippa Middleton has a stunning, er, figure. And, of course, that owning your own house is what everyone aspires to – and the bigger the house, and the smaller the mortgage, the better.
Except that now even that last one might have to be scratched from the list. After nearly half a century during which the British increasingly owned their own homes, and when home ownership has been held up as the summit of social aspiration, fewer of us now own the place we live in every year.
Home ownership is now falling sharply in the UK, as it is in the US as well. That trend is well-established, and likely to accelerate over the coming decade. For the financial services industry that has huge implications it has barely even begun to take on board yet. The banking and savings industry is largely built around helping people to own their own home, and allowing them to borrow money against it once they do. If that is no longer a mainstream aspiration, it will have to re-organise itself completely.
The decline in home ownership is already well-established. The peak in owner-occupation was reached all the way back in 2003, when it hit 70.9% of English households. Since then, it has been going down at a steady rate of about 0.5% a year, which has bought it down to 67.5% for 2010, the latest date for which numbers are available. Owner occupation is now back to the same levels it was in 1991, so in effect there has been no growth for 20 years.
Don’t expect that to change soon – if anything the trend is likely to accelerate.
For starters, government subsidies have been steadily withdrawn. You used to get tax relief on mortgage interest payments, so that in effect the government paid part of your mortgage for you. That was steadily withdrawn, and finally abolished about ten years ago. These days, steadily rising council taxes and stamp duties mean that far from subsidising home ownership, the government now actively penalises it.
Next, houses are still very expensive. The long-term figures suggest the average house should be worth 3.5 times the average salary. They are still way above that. One reason why people aren’t buying homes any more is that they are too expensive – and until that starts to change, owner occupation rates aren’t going to rise.
Thirdly, and most importantly, the days of easy debt are well and truly over. The housing boom was largely fuelled by borrowed money, but that too is now much harder to come by. In the UK, the average deposit on a first home is £26,000, a big sum when there are student debts to pay, and real wages are falling. Pushing owner-occupation levels up to 70%-plus was only really possible when there were 125% self-cert mortgages available – in other words by lending money to people who couldn’t really afford it. The banks are not going to be doing that again for a long time – and that means that ownership will be restricted to a narrower range of people.
Take all those three factors together, and it is hardly surprising that owning your own house is less popular than it used to be. Where the numbers will settle exactly, we don’t know yet. But it is not going to be anything like the levels we were used to.
So what does that mean for financial services? There are three big points.
First, mortgage lending is not going to be the dominant force it once was. Mortgages have been a huge industry in the UK, employing tens of thousands of brokers, advisers and solicitors. It has been the major revenue source for the High Street banks and the building societies. But lower home ownership means fewer new mortgages. It’s already happening. Back in 2001, 41% of households had a mortgage. It is already down to 35%, and on current trends it is going to keep on falling. There will be less business for everyone in the industry. A lot of those jobs are going to disappear, and the profits with them
Second, lending is going to be a lot harder. Banks won’t be able to dish out money against people’s houses the way they used to. Fewer people will own their house, and those that do will probably be higher up the income scale, and so won’t need credit the way younger, cash-strapped people do. A lot of the personal lending industry is going to vanish. That which remains will have to find new and smarter ways of judging whether people are a good credit risk or not – because they won’t simply be able to take a charge over people’s houses and threaten to take them it if they don’t pay.
Lastly, and perhaps most importantly, renting will be a huge growth industry. Just because home ownerships is in decline it doesn’t mean people are going to start sleeping rough. They’ll still be living in apartments and houses, it is just that other people will own them, and they’ll be paying rent instead of mortgages. There are already more people in private rented property than local authority or social housing. The buy-to-let sector, which took such a knock during the credit crunch, is going to bounce back strongly. New private rental corporations, owning huge numbers of properties, are going to start emerging. The banks will need to start lending to them. And many of the brokers will need to turn themselves into letting agents instead.
There will be opportunities as well as threats, just as there are with any big social change. The traditional building societies will be hit hardest: their entire business was about helping ordinary people onto the property ladder. But the whole financial services industry is going to be knocked – unless it finds a way to re-invent itself fast.