How we think about UK Housing 

The topic of house prices and their direction of travel is a hot topic that receives a lot of attention both from the media and broader society. It can evoke an emotive response which is not surprising given that a person’s home is usually their largest financial asset. In this piece, we will not attempt to predict future prices – instead, we outline the Carraighill residential property framework through the supply and demand factors as it applies to the UK market. 

We focus on what factors influence changes in the house price-to-income ratio, rather than inferring that prices are cheap or expensive based on the absolute level of the ratio 

Demandside factors: 

1. Population growth and the level of household formation: The UK population has grown in recent years, with migration being a key driver since the mid1980s. Its contribution accelerated in the 2000s following the accession of many CEE countries into the EUThe new points-based migration system introduced on Jan 1st, 2021 poses a medium-term risk to this growth outlook. It will cause friction for EU citizens (Ireland is exempt) as they will now need a job offer at an appropriate skill level with minimum salary of £20,480.  

There is no change in the approach for non-EU citizens, who are now coming to the UK in growing numbers (primarily for third level education) In particular, any short-term EU risk may be offset by the higher level of migrants expected in the coming years.   

Finally, household size (number of people per household) has modestly fallen in the UK from 2.42 persons in 1996 to 2.39 persons in 2020. We expect this trend to continue, albeit at a slow pace.  

2. Mortgage availability and debt serviceability: Progressively lower mortgage rates has continued to aid borrower affordability in the UK. Although higher LTV front book rates spiked in 2020 due to the large banks withdrawing from the market, we think this is a temporary phenomenon. The recently introduced UK Mortgage Guarantee Scheme and the falling loan-to-deposits ratio of UK banks (now at 88% versus 98% in 2019) should push frontbook mortgage rates lower in time. This will allow additional firsttime buyers into the market, which should stimulate demand.  

3. Employment levels: Job creation is expected to grow only modestly in the coming years (COVID-19 induced job losses were limited due to government support). Current UK job vacancy data are recovering modestly. This is arguably a weaker outlook, although job growth related to the highend UKrelated migration may surprise us on this point. 

4. Government supportsThe most important UK government support is the HelptoBuy scheme, which began in 2013 and is designed to make homebuying more accessible. The home must be a new build with a maximum price of £600,000 (this amount is changing in April 2021, depending on the region). The scheme is attractive for borrowers as you pay a deposit of 5% of the purchase price, and the government lends you up to 20% (40% in London). Equity loan fees are not charged for the first five years. In the sixth year, a fee of 1.75% is applied, which increases 2% every year indexed to CPI. This scheme is due to end in 2023. However, there is likely to be significant pressure on the government to extend this. It recently introduced a mortgage guarantee scheme designed to help creditworthy households struggling to save for the higher mortgage deposits required by lenders. It will be open for new mortgage applications from April 2021 to December 2022. 

Supplyside factors: 

1. Property price changes: Higher prices incentivise builders to construct additional houses, which increases supply. UK house prices nationally are up 8.5% YoY, according to the land registry. This should translate into higher selling prices for the housebuilders, which allows margins to expand.  

2. Number of houses built: There has been an undersupply of housing for many years in the UKTo address this, the conservative government has set a target of 300,000 new homes a year. UK completions fell in 2020 amid the COVID-19 pandemic as sites across the UK were shut in April 2020Since then, there has been a rapid recovery with building rates close to old levelsHowever, the 20-30% fall on a yearly basis in 2020 will further exacerbate this supply/ demand imbalance. 

3. Ease and cost of planning: The planning permission process in the UK can vary by region and is generally timeconsuming and antiquated. To address this issue, the UK government has released a consultation paper that proposes reforming the planning system. It should bring a new focus to design and sustainability, improve the system of developer contributions to infrastructure, and ensure more land is available for development where it is needed. These steps should help support the delivery of new housing in the UK in the long-term. 

4. Other supply factors: Several other factors can influence supply, such as the availability of a skilled workforce, construction costs and credit access for builders.   


Several measures of heightened demand are currently evident in the UK market, including: 

  • Mortgage approvals have recovered to surpass pre-pandemic levels. Positive YoY growth was recorded in December 2020 after months of decline. 
  • New buyer enquiries have reached record highs. 
  • Compared to the available stock on the market (sales-to-stock) ratio, the number of home sales is at its highest point since 2016, suggesting quick turnover within the market. 

The increased housing demand and corresponding supply constraints induced by COVID-19 has led UK house price growth to reach 8.5% YoY at the end of 2020. This is the highest point in over a decade. Carraighill is constructive on the medium-term outlook for UK housing as the factors we outlined above remain accommodative.  

If you would like to access any of the reports mentioned in this article, Carraighill Research Access enables you to access these and other thematic and sectoral research through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.