Home ownership in UK
According to Ford, Burrows and Nettleton (2001, p.10), home ownership in the UK has undergone a significant change over the past few decades. After the end of World War II, most UK citizens were renters. During this period, home ownership was less than 40% of all households (Ford, Burrows & Nettleton, 2001, p. 10). For example, in 1953 home ownership stood at 32%. In the 1970s and 1980s, there was an increased preference for home ownership. This arose from increased realization of the benefits associated with home ownership. Some of the benefits associated with home ownership include increased security since one will not be asked to vacate and living in a rent free home after retirement. In addition, there is a high probability of ones wealth increasing as a result of rise in house prices.
By 1979, 59% of UK households owned homes. This trend continued into the 1980s. Ford, Burrows and Nettleton (2001, p.10) assert that the growth resulted from policy initiatives by the government such as the 1980 Housing Act. One of the components of the Act included the Right to Buy (RTB) scheme which entailed disposal of local authority houses. The council houses were disposed off to the tenants at a discounted rate hence making it possible for most households to afford a home. Another factor which contributed to the growth of home ownership during 1980s is the liberalization of financial markets. The resultant effect was an increment in the rate of competition between home financing institutions such as building societies and banks. This led to growth in mortgage lending. The RTB scheme made it possible for older generations to purchase homes while liberalization of financial markets increased the borrowing capacity amongst the young people. According to Lund (2006, p.54), RTB was successful in enabling individuals to own homes.
Over the past two decades, UK has experienced a rapid economic growth leading into an increment in the level of disposable income amongst the households (Riley, n.d, p.15). The resultant effect is that a large number of households can afford to purchase homes as first-time-buyers. According to Ford, Burrows and Nettleton (2001, p.10), change in home ownership over the past 2 decades has resulted from socio-economic growth in the UK. In 2001, 16 million households who account for 68% of UK households owned homes. Of these, 11 million household financed the purchase of their homes using mortgages. However, from 2002, the rate of growth in home ownership in the UK has stagnated around 70%.
According to Stephens, Ford, Spencer, Wallace, Wilcox and Williams (2008, p. 3), a difference exists with regard to support for home-ownership across generations. For example, only 44% of UK citizens aged between 18 to 25 years recommend home-ownership. On the other hand, 75% of individuals aged 50-64 years recommend home ownership. Findings of a study conducted by Housing Finance (2000, p.3) revealed that home ownership increased with age and family type. In most cases, home ownership amongst couples is relatively high compared to single person households. In addition, the rate of home ownership amongst older and educated citizens is relatively high. As a result, there has been a significant decline in the number of people entering the housing market. For example, first time buyers who use mortgage to purchase homes averaged 45% in 1980s. However, the rate declined to 29% in 2003 (Taylor, 2008, p.6). One of the reasons for the increment in the support for home ownership during 1980s compared to 1990s and 2000s amongst the young is that their population was relatively high (Leather & Mackintosh, 1992, p. 2).
According to National Housing and Planning Advice Unit [hereafter referred to as NHPAU] (2009, p.14), most of the people in belonged to the ‘baby boom’ generation during 1980s. A large number of people were in their 20s and 30s which increased demand for home ownership. The demand for homes was facilitated by subsidies created by contributions through the local housing authority (Balchin & Rhoden, p. 88).Since then; this population has undergone a significant decline. Despite the decline in support for home-ownership during the1990s and 2000s, aspiration for home-ownership is relatively high. From 2000, there has been an increased recovery in the support for home-ownership.
According to Stephens et al (2008, p. 5), 82% of households interviewed in 2005 considered home ownership to be their preferred tenure. A survey conducted indicated that household ownership in England increased from 43% to 68% during the period ranging from 1961 to 2008. In addition, home ownership rose from 20.2 million to 21.5 million during the period ranging from 1999 to 2009. The graph below illustrates the change in home ownership from 1999 to 2009.
Effect of recession on the housing market
The 2007 economic recession led to a slump in the housing market. In 2008, prices declined with 16.2%. This culminated into a rise in demand since most house holds could afford to buy a house. However, the crisis made it difficult for households to obtain credit such as mortgages from financial institutions. A report by the Bank of England indicated that mortgage approvals declined to 27,000 by November 2008 (Great Britain Parliament, 2006, p. 175). In addition, the crisis led to a significant reduction in the supply of houses since it became costly for construction companies.
Changes in UK housing market
There is an indirect relationship between the demand for house and price. The average house price in UK has been on an upward trend since 1959. It is estimated that house prices have increased with a margin of 273% since 1959. The highest price increase was recorded during 2000s which saw price increase with 62%.
According to Forrest, Kennett, and Leather (1999, p. 13), home ownership is affected by an individual’s income. Some of the reasons for the rapid change in the UK housing industry over the past two decades include increase in population leading to rise in demand for homes, changes in interest rate, changes in households’ income and availability of credit. During the 2008-2009 financial crises, there was a significant reduction in availability of credit in UK. This led to a fall in demand for housing culminating into a decline in house price. Technological innovations over the past decades have also contributed to growth of UK housing industry by increasing the rate at which new homes are constructed. Social trends for example late marriages have also played a significant role in increasing demand for houses. Other factors which affect the housing market include government legislation, subsidies and building cost.
Repairs and maintenance in owner occupation
Chanter and Swallow (2007, p.31) assert that housing maintenance account for approximately 50 per cent of the total cost incurred in repair and maintenance. According to Chanter and Swallow (2007, p.31), the existing income and an individual’s savings are the major source of finance used by home owner to repair their homes. Due to the economic crisis, most organizations laid off their employees in an effort to cut down their operation cost. This led to loss of employment for most households and hence their income. In addition, the economic crisis has led to a decline in household level of savings. This means that only a few home owners are able to undertake repair and maintenance.
Home-ownership by region
According to Mullins and Murie (2006, p. 377), home ownership in the UK varies from one region to another. Regions such as East, East Midlands, and South East regions have an owner occupation rate of 73% compared to London which has an owner occupation rate of 53% of the total number of households. The table below gives a summary of owner occupation in UK.
Housing affordability
Home ownership in the UK is relatively high compared to other European Union member countries such as Netherlands, France and Sweden despite the rate stagnating at 70% (United Nations Human Settlement Programme, 2005, p.67). However, homeownership in the future will greatly be determined by affordability. Over the past few years, there has been increment in pressure with regard to home affordability. For example, in 2004, housing prices increased to new peaks to hit 186,000 pounds. In addition, the proportion of housing prices to individual earning has increased significantly. For example, by 2007, the UK housing market reached the peak of its cycle after 17 years. House prices had increased 5 times more than the households earning.
Affordability improved modestly later in the year as result of growth in individual’s disposable income and decline in the rate of interest. According to Great Britain Parliament (2006, p.185), affordability has become a real challenge in the UK especially amongst first-time-buyers. A large number of individuals are not able to access home-ownership. According to a report by Great Britain Parliament (2006, p.185), there has been a significant reduction in the number of first-time-buyers since the beginning of the decade. First-time-buyers have declined significantly to approximately 330,000 buyers annually from 550, 000 buyers at the beginning of the decade. The gap between the willingness of financial institutions to advance credit to first-time-buyers based on their repayment ability and the price of home has widened significantly. According to Housing Finance (2009, p. 10), this is it challenging for households to afford homes. Findings of a study conducted by NPHAU revealed that 35% of individuals aged 25 to 29 years remain in their family homes since they cannot afford to buy a home.
Access to home ownership
One of the long term challenges facing first-time-buyers is access to home-ownership. Affordability challenges, have limited individuals ability to access home ownership. In order to access the housing market, first-time-buyers are required to offer large amounts of deposits. According to Great Britain Parliament (2006, p. 185), first-time-buyers are required to deposit 17,000 pounds in 2004. This is approximately more than the total gross annual household earnings with a margin of 50%. The proportion of deposit required has increased with a margin of 25% for the last five years. In 2007, first-time-owners were required to deposit 29,000 pounds.
In order to meet the deposit required, first-time-buyers seek finances from various sources such as from their family. According to a survey conducted by Financial Times in 2005, approximately 50% of first-time-buyers receive financial assistance from their families. This is relatively high considering that only 30% of first-time-buyers sought assistance from their families 3 years ago (Great Britain Parliament, 2006, p. 185). Due to the recent economic recession, there was a significant reduction in individuals’ wealth. In 2008, the amount of deposit required for one to be eligible for a mortgage was increased to 60,000 dollars. The decision was motivated by a reduction in credit availability. As a result, the ability of first-time-buyers to own homes has greatly been reduced. Increase in house prices is likely to culminate into a decline in supply of homes due to reduction in demand arising from affordability challenges (Great Britain Parliament, 2006, p. 185).
In 1991, mortgage lending had declined to 42.2 billion. However, the next 16 years were characterized by a significant growth in mortgages to 363.8 billion. The 2007 financial crises led to a decline in financial institutions lending capacity. The lending segments devoted to financing house purchases have significantly reduced their lending capacity culminating into a decline in demand for houses. According to Stephen et al (2008, p. 13), it is not yet clear regarding the extent to which the UK economy will recover from the 2007 economic recession in order to for credit availability to be improved. This means that sustainability of home ownership is greatly affected.
Arrears and repossessions
As a result of the global financial crisis, the UK has experienced soaring arrears amongst home owners (Great Britain Parliament, 2009, p.121). Most home owners who acquired their homes using mortgage experienced serious arrears since they could not be able to repay their mortgage. This arose from the fact that the economic crisis made most home owners being cash strapped. The economic crisis made most people to lose their income through job lay offs or reduction in income from self employment. As a result of defaulting in their mortgage repayment, most home owners lost their properties through repossessions.
A report by Council of Mortgage Lenders (CML) in 2010 indicated a decline in the level of arrears and repossessions amongst home owners in the UK. During the 3rd quarter in 2010, 8900 homes were repossessed by financial institutions. This represents a decline with a margin of 5% compared to the 2nd quarter in which 9,400 homes were repossessed. By September 2010, mortgage arrears had declined. Only 176,000 mortgages had arrears of more than 2.5% compared to 178,200 mortgage arrears by the end of June. One of the factors which contributed to the decline in repossessions and arrears is the low rate of interest. According to Doling (2006, p.227), mortgage arrears and repossessions are very sensitive to changes in interest rate. However, there is a high probability of the trend being reversed as a result of rise in the interest rate (Great Britain Parliament, 2009, p.121). This is evident in that more repossessions orders are being issued. It is expected that 180,000 arrear cases and 40,000 repossessions will be undertaken by the end of 2011. This means that sustainability of home ownership is not assured.
Government rescue schemes
In an effort to promote home ownership, the UK government has formulated a number of schemes. Examples of these schemes include the Scottish and Welsh scheme. The Scottish scheme offers subsidy to various housing associations to buy homes of members whose house are at risk of being repossessed. The house is then offered for rent to the former owner. On the other hand, the Welsh scheme prevents home owners from becoming homeless. Through Bank of England, the UK bank has introduced a special liquidity scheme. The objective of the scheme is to increase liquidity amongst financial institutions so as to enhance their lending capacity. In addition, the government increased eligibility for first-time-buyers by reducing the amount of deposit required hence increasing the probability of owning a home (Stephens et al, 2008, p. 5).
Conclusion
From the analysis, sustainability of home ownership in UK has negatively been affected by the 2007 economic recession. For example, the economic crises negatively affected the housing market by increasing the house prices. In addition, there was a reduction in the financial institutions lending capacity with regard to house purchase. Coupled with decline in the households’ income, affordability has significantly been reduced especially amongst first-time-buyers. In addition, mortgage home owners are faced with the risk of their homes being repossessed as a result of default in their mortgage repayment. Economic recession tends to increase mortgage defaults and hence repossessions. However, there is a high probability of home ownership improving due to government rescue schemes.
Reference List
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