Climbing Britain’s Housing Ladder Just Gets Harder

(Bloomberg Opinion) -- The cost-of-living crisis is dominating headlines, but there is little evidence yet that the U.K. property market has taken a hit. Thursday's release of the Nationwide Building Society's house price index posted a 14.3% annual gain, the most in nearly two decades.

A rising tide is lifting all assets globally, but some — particularly the bigger properties in the U.K. — are benefiting much more than others as the pandemic dynamic of remote working continues to drive demand for more living space. The switch from urban centers toward leafy suburbs and even more remote rural areas is still the dominant trend.

How long the property market can defy wage levels falling behind the actual cost of living is unclear, as there is usually a lag between economic conditions worsening and asset prices sliding. By the time house prices stop rising, it's usually far too late into a downturn to do much about it. It will catch up with us but probably not for at least another year.

Detached houses have risen 23% since the start of the pandemic, significantly more than the 14% gains seen for apartments. London remains the most expensive region, but in growth terms it is the poor cousin with half the annual gains of the best performer, Wales, which tops the charts with over 15% annual gains.

Pity the first-time buyer whose dreams of getting on that bottom rung get further out of reach. Not only are home prices rising well above already-too-high consumer inflation, but mortgage rates are being ratcheted up as the Bank of England drives its benchmark higher.

Even finding a suitable home has become a scramble. “Properties finding a buyer within the first week is at an all-time high for this time of year," with more than twice the number of buyers as sellers, according to the property portal Rightmove. Realistically, there is only one way for prices to go in a cramped island with stringent planning restrictions. And building your own home has got substantially more expensive as materials prices have soared. The chances of either a surge in affordable home building or a substantive relaxation in planning rules looks a distant prospect in this current parliamentary term as there is simply too much other crisis firefighting to contend with.

This poses a problem for the government's flagship policy of leveling up — narrowing the gap between London and less-prosperous areas in the North. As many opt to move to a cheaper region to get the space required, they're pricing out locals.

There is one silver lining: readily available credit if the buyer has a sufficient cash deposit and can meet loan-to-income eligibility. One in 10 of new mortgages is at the risky loan-to-value bucket of more than 90% and has yet to reach the pre-pandemic levels of nearly one in six. There is still a competitive range of mortgage products despite higher interest rates with five-year fixed rates on offer at around 2%, still amazingly cheap money but only for those with large deposits — more than 20%. The major mortgage-lending banks are sitting on a huge pile of ring-fenced deposits, fueled by a surge in personal saving and prudential regulations on financial institutions imposed during the pandemic, that need to be invested. Safe secured lending like housing is top of their list.

With less than half of U.K. homes having any debt on them and close to all new lending in the past three years being longer-term fixed-rate mortgages the sensitivity to rising interest rates is much lower than in the past. Nonetheless, a fall in real incomes will eventually have to bear weight, particularly on the lower end of the price scale. For the foreseeable future it is not going to be anything other than one rule for the lucky few and further misery for aspirant young workers. This version of capitalism is not working for the many.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.