Failures by successive governments to build enough houses, a rising population, and limited availability of land have created a perfect storm, which has seen average house prices reach record levels. Although house prices have the occasional lull, the trend is for the price of housing to consistently rise, placing more pressure on the housing market, particularly in London and the South East. Many first time buyers require a deposit of up to 6 times their annual wage before they can enter the housing market. Traditional lenders have simultaneously reduced lending to many small and medium house builders, adding further fuel to the housing crisis.
The Failure of Government
In June 2007, Gordon Brown pledged to construct 3 million new homes by 2020 in order to deal with Britain’s deepening housing crisis. However, the financial crash which occurred in 2008 had a significant impact on the ability of banks and other traditional lenders to finance new house building projects.
In September 2015, David Cameron announced that the government planned to build 1 million new homes by the end of that parliament. However, the target of 200,000 homes per year was missed, with only 189,650 new homes built during the first 12 months of the parliament.
The Impact of the Financial Crash
UK gross mortgage lending, pre- and post-financial crash.
New regulations meant that banks were more risk averse when considering loans and mortgages, and had to hold a larger percentage of their capital in reserve. This led to a dramatic drop in mortgage lending. In 2007, just before the financial crash, mortgage lending reached a peak of £247 million. In 2010, in the wake of the credit crunch, mortgage lending had fallen to just £133 million a year. This drop in mortgage lending stalled demand for new properties, which slowed the rate at which house builders constructed new properties, and further drove up house prices across the UK. Although there has been a slight recovery in the rate of mortgage lending from traditional banks, current levels of lending are still far below pre-crash levels.
An Alternative Finance Solution
With traditional lenders such as banks and building societies exiting the lending market, a gap was created. This was quickly filled by non-traditional lenders, who were offering a range of alternative finance solutions to those who wished to access finance so they could develop existing property, or construct new homes. Asset-backed securitisation and digital peer-to-peer lending became an increasingly popular way for landowners and developers to access the funds needed to commence their building projects, and provided an alternative for those looking to purchase a property. Alternative finance has continued to expand, and is now responsible for over 14% of property loans. The sector is beginning to play a major role in helping to maintain a competitive but fair housing market in the UK, by supplying the funds needed by house builders and buyers who may otherwise not be able to access them.