Cashflow has become king and mortgages a less dominant feature of the housing market, with most sales now financed by equity.
A new report, from Savills, says that the shift away from mortgages to equity has been a key change in the market.
It says that in 2001, mortgage debt funded 62% of all housing transactions. By 2006, it had fallen to 55% and last year it stood at 46%.
The report says that constraints on mortgage debt have been the main catalyst – citing bigger mortgages and more rigorous vetting of mortgage applications.
It estimates that in the year to the end of September 2011, based on Land Registry figures, £150bn was spent on house purchase. That was 47% less than the £284bn spent at the peak of the market.
Lucian Cook, of Savills research, said: “Equity has replaced debt as the dominant source of funding of house purchase. It favours high-value markets, particularly those in the South of England.”
The new research also says that equity will reign for some time to come, because of new proposed reforms.
The Financial Services Authority wants mortgages only to be lent where they can be repaid without borrowers having to rely on house prices going up. The FSA also wants lenders to account for future interest rises and, whilst not banning interest-only mortgages, wants these to be assessed on the basis of repayment.
The report says that the biggest consequence of the shift from debt to equity has been the growth of the private rented sector. It estimates that the value of private rented housing stock in the UK has risen by 42% in the last five years to just over £900bn.
It says further growth is inevitable, with ‘many potential large-scale landlords and housing providers’ still waiting in the wings. Savills expects the private rented sector to expand to 20%-23% of housing stock in England by the end of 2016.
The report also warns that the UK property industry needs to adjust to the new reality. It says: “The valuation of residential property is still predicated on the old mortgage-funded, owner-occupied world.”
However, the report adds, if UK housing is “to attract new forms of funding, as it must in the new age of debt drought, we have to understand equity and the cash it can generate”.
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