Prime market becoming increasingly mortgage free and ‘cash driven’

Some 55% of prime property owners do not have a mortgage compared to 41% at the start of the century meaning recession is less likely to produce price falls on the same scale as mortgage-reliant, mainstream markets, says Middleton Advisors.

The new research, undertaken by Yolande Barnes Consulting, looks at the differences between the prime and mainstream markets over recent years.

Mark Parkinson (main picture), MD of Middleton Advisors, says: “There has been a clear shift in how both markets are behaving, with notable changes in particular to the prime markets, pre-dating the pandemic.”

The geographical distribution of equity-rich households is different to that of households reliant on mortgage debt. Lending is heavily linked to workplaces and commuting patterns. Even after Covid, borrowers still seem to be tied to the workplace and their source of income.

MINORITY

That means local wages and national interest rates will continue to hold sway over those, now minority, markets.

In areas with high levels of housing equity, significant proportions of the housing market have little or no reliance on borrowing.

Increasingly, these areas behave less like ‘mainstream’ markets; the driving factors of house price growth in these areas are more akin to those which have governed prime housing markets over the past few decades.

Factors including the opportunity cost of capital, availability of equity and sentiment of cash buyers, which used to be drivers only of prime markets but are now prevalent in the equity-rich mainstream markets.

In the event of recession, these markets are less likely to be supplied by repossessions.

Supply may be much more restricted as a result and sellers more inclined to withdraw from weak markets.”

Supply may be much more restricted as a result and sellers more inclined to withdraw from weak markets.

This means that recession is less likely to produce price falls on the same scale as mortgage-reliant, mainstream markets but more likely to result in significantly lower levels of turnover.

Parkinson adds: “Just as prime London has behaved differently from the rest of the country in the past, so the ‘new prime’ places will behave differently from the mortgaged markets in future.

“The divergence of experiences between the ‘equity haves’ (EH) and ‘equity have nots’ (EHN) will be a major headache for policy makers and planners, and an important consideration for any housing market participant, including buyers.”

EXPOSED

The research reveals EHN areas are going to be more exposed to recessionary effects impacting affordability. They are more likely to experience higher levels of repossessions and turnover generally, so will be more susceptible areas to register price falls over the next two to five years.

EH areas, on the other hand, could see more stagnation and less efficient land use. The market will be dependent on investment performance, confidence, and other external drivers, but may be among the first markets to show growth as the economy recovers.