Home ownership at lowest level in 20 years

Constant headlines on the ups and downs of house prices are masking two trends set to dominate 2011: a long-term fall in home ownership and a resulting boom in the private rental market.

Last year saw UK owner-occupation fall to 68%, its lowest level for two decades and well below its 2003 peak of 71%. More people are renting as a result, despite a shortage of lettings properties pushing rents up by as much as 20% in the past year.

"Many have turned to the rental market because they fear further price reductions in the housing [sales] market or they cannot obtain the finance to buy," says Jeremy Leaf of the Royal Institution of Chartered Surveyors. In the latest RICS housing market survey a Sussex lettings agent is quoted as saying rents have risen 19% since last winter and a Cambridgeshire agent says: "Rents increased at their fastest rate for many years."

Meanwhile, property industry analysts say the sales market is, at best, stagnating and will see price falls for at least the next 12 months.

CB Richard Ellis, a consultancy, says sales volumes in 2011 will stay 25% below long-term averages with "moderately declining prices". Dawn Carritt of estate agent Jackson-Stops & Staff says: "There are some regions and sectors which could still see a drop of 10% as a result of the austerity measures."

Carter Jonas, another estate agency, forecasts a 5% fall in mainstream house prices in 2011, but warns it is unlikely to stop there. Catherine Penman, the firm's head of research, says: "Isolated bubbles of activity will buck the trend, although overall we also predict a fall in values of circa 3% in 2012."

Most agents believe those locations with higher proportions of public sector staff, predominantly the Midlands, Wales and the north of England, will see the most significant drops in house purchases and property values.

Exceptions are central London and wealthy enclaves across the country. In these locations, prices have already risen to near or even above their 2007 pre-recession levels because they attract foreign buyers, those who do not need mortgages, and those not working in the vulnerable public sector.

Henry Pryor, an analyst who runs www.housingexpert.net, believes buyers are in the driving seat for 2011.

"The total number of homes for sale has grown all year and is now 44% higher than a year ago. At 975,000 the total is pretty close to the long-term average of just over a million," he says. But, while the choice is great, "the number [of homes] actually selling has fallen by 11%," he adds.

Last week's VAT rise from 17.5% to 20% is a further disincentive to buy, increasing fees for most estate agents, surveyors, conveyancing solicitors and removals firms. On top of that, in Scotland – where sellers are obliged to obtain a survey and energy assessment – the compulsory £500 home reports must now be paid for up front instead of being deferred until after a sale is concluded.

The consequence will probably be yet more demand for rental property from frustrated buyers unable to get mortgages or raise a deposit on a home.

Research from property search website www.zoopla.co.uk says it is already more expensive to rent an average two-bedroom flat in the UK's 50 largest cities and towns than to buy – the difference, of course, is that renters do not have to find the typical 20% deposits required by mortgage lenders.

Dorian Gonsalves of Belvoir, a large lettings agency with more than 140 offices, says recent rent increases of 3% or more per month may continue if demand increases from frustrated first-time buyers and from those hit by spending cuts moving to find work.

"These factors will result in landlords being attracted back to the buy-to-let market as they see better yields combined with lower purchases prices. There will also be the return of the accidental landlord who is unable or unwilling to sell their property and turns to the rental market as a viable alternative," says Gonsalves.

The buy-to-let bonanza is likely to frustrate the housing minister, Grant Shapps, whose new year plea was for people to stop looking at property as a long-term investment or an alternative to a pension.

More bad news for the government came with this weekend's figures from English local authorities showing that, despite the abandoning of Labour's planning restrictions, the number of applications to build new homes in the quarter from October to Christmas was the second lowest for almost five years.

Abroad, ownership is down from 71% to 69% in the US, and 92% to just 82% in Spain, while Germany remains at just 47%. Whatever happens to prices in the UK in the coming year, the real story may be that the British love affair with home ownership is finally over.