Market Insight - November 2015
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Splashing the Cash

Focus Economy Sales Lettings Market Indicators


Splashing the Cash
Despite increasing house prices, cash transaction are on the rise...

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The number of homes sold to cash buyers reached an all-time high, with two fifths of homes sold in the last 12 months purchased with cash. This might come as a surprise to some, since house prices have been widely labelled as unaffordable with mortgages, never mind solely with cash. Through a record 420,000 cash sales in the last 12 months, £110 billion was spent on purchases which is a third more than in 2007. With the number of owners without mortgages overtaking those with mortgages for the first time, it makes you wonder how people have accumulated all this cash.

Rising house prices, particularly in London and the South, may hold a key to the increase in cash buyers. Higher values mean that some are able to sell their home, pay off their mortgage and buy a property in a cheaper area with cash. This is likely to benefit downsizing households who are able to sell their home at a much higher price than they originally paid for it and purchase a smaller, or even multiple smaller properties. After all, with prices expected to increase at about 4.5 per cent next year that’s a much better return than on cash in the bank.

Furthermore, with 60 per cent of one bedroom properties purchased bought with cash, it could indicate that rising house prices have allowed homeowners to remortgage their existing property in order to purchase another with cash. The rise in the average value of remortgages since 2013 coincides with the pickup in the number of cash sales. This implies that at least a proportion of the cash sales recorded are financed by remortgaged loans on other properties. With some households
able to release cash by remortgaging, some parents are able to buy properties for their children or even buy investment properties. 

Another reason for an increase in cash sales could be due to the tighter lending controls in the mortgage market. April 2014’s Mortgage Market Review (MMR) and prudential regulations for banks have made it harder for people with tighter finances to get approved for a mortgage. Statistics show that mortgage lending numbers have declined by around 3 per cent since the introduction of the MMR, but cash buyers have increased by 8 per cent. Although cash buying has increased in all parts of the country, London has seen the largest growth in cash buyer activity. Normally, higher prices put off cash buyers, but cash sales as a proportion of total sales have increased from a low of 27 per cent in Q1 2012 to 38 per cent in Q1 2015. The South West continues to be the region with the highest proportion of cash buyers, with 45 per cent of homes bought with cash in the last 12 months. This is driven by downsizing retirees and holiday home buying.

The number of cash buyers is still going up and there could be many reasons for this. Tighter credit conditions since the mortgage market review have clearly played a part, but so has the increase in house prices – especially in London. It seems that more people could be taking the chance to release cash from existing property – by downsizing or remortgaging – and buying another property outright. Whatever the reasons, it shows that there is still confidence in property as an investment and with interest rates still at such low levels, the returns aren’t bad either.

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