In the years before the financial crisis, up to a quarter of transactions were financed by cash. Immediately after the crisis, the proportion of cash transactions grew but not because the total number of cash transactions increased. It was because the total number of mortgaged transactions fell away sharply.
More recently, both the number and proportion of cash transactions has grown. In 2014, they surpassed pre-crash levels. And by that stage, the proportion of cash purchases was likely to have been at its highest level post-war.
By contrast, the number of purchases in the regulated mortgage market remains significantly lower than in 2007.
It is likely that the pick-up in cash transactions recently is being supported by changes in demographics. An ageing population tends to produce more cash transactions.
We’ve used survey data from YouGov and cash transactions data from the Land Registry for England and Wales for the second quarter of 2014, to help us take a closer at this section of the market.
Regional differences in cash purchases
The South West has the highest proportion of cash buyers in any region of England and Wales. On the flipside, London has the lowest proportion of cash transactions. Apart from those two regions, there is a fairly similar split between how a transaction is financed, mortgage or cash, across other regions.
The average price of a transaction in the second quarter of 2014 stood at roughly £258,000 for England and Wales. Transactions financed by cash were on average £255,000 while transactions funded by a mortgage were just under £260,000. The small difference between the two is down to the mix of properties, as cash buyers are more like to purchase flats, while buyers with a mortgage favour semi-detached properties.
There were some variations between different regions that were masked by the national averages for the price of a transaction. There were only two regions in which cash transactions were for higher priced properties than those funded with a mortgage: London and the South West. Generally, the difference between the price of cash and mortgage-funded transaction was small, except in London.
The London market
The dynamics of the London market are unique compared to the rest of the country. An average transaction in the capital is nearly double the national average.
One reason the average cash transaction is higher in London compared to a mortgaged transaction is because of the very high value of cash transactions in central London. While few in number, they are large in value terms. As an example, the average price of a cash transaction in the three most expensive boroughs in London, which also happen to be the three most central, stood at just over £1,600,000.
The same boroughs also have the highest proportion of cash transactions. They are Chelsea and Kensington, Westminster and the City of London. Since the number of transactions in these boroughs is very low, the average proportion of cash transactions for London as a whole remains largely unaffected.
The proportion of cash transactions falls away rapidly as we move further out from central London, and the majority of boroughs in London have relatively fewer transactions financed by cash than the UK average. This shows the limited role cash plays in all but the most central London boroughs.
Who’s buying with cash?
Nearly three out of four respondents said the cash they used to buy a property came from the sale of another residential property.
Other cash buyers cited savings and inheritance as the other two most common ways of financing their transaction.
The vast majority of cash buyers were aged 55 and over, and were downsizing or moving to a property of about the same value.
This behaviour is typical of people at or close to retirement, who are moving to more suitable accommodation. Activity in this age group is likely to continue to grow, as the Office for National Statistics population projections forecast an increase of one million more people aged between 55 and 64 over the next five years. This is likely to lead to more cash transactions, as most of these people own their homes outright, according to the English Housing Survey.
This is not to say that those near retirement are driving transactions in central London. But it does show that cash transactions across most of the country have similar characteristics to their mortgaged counterparts, except they are financed by selling a former property or through savings and inheritance.
The original article can be found on the CML’s website.