Cash buyers are propping up the market.

I have discovered a little secret – The Council of Mortgage lenders has recorded the three month rolling average of the share of property sales made to cash buyers – since April 2005. The results (click here) confirm that typically around 27,000 residential transactions each month involve buyers who don’t take out a mortgage. These may be older people trading down, people buying with the proceeds of a divorce settlement perhaps or even lottery winners!

This monthly total has remained pretty constant over the past six years with a modest spread peaking in December 2006 at 39,780 and just 18,000 in January 2009.

What is perhaps more interesting is that whilst the number of cash buyers has remained pretty constant each month, the proportion of the total number of sales that they represent has not. Over the past six years roughly 28% of all sales each month have been to cash buyers but this increased dramatically during last year to peak in January this year at a whopping 40%!

Most cash buyers make no checks on the price they pay for a home. Whilst a mortgage valuation is done for the benefit of the lender, at least someone taking out a mortgage gets their negotiating skills checked to ensure that the loan-to-value is based on a real value and not on some absurd price negotiated by a widow in her 60’s who has never bought a house before.

Cash buyers are now almost all there is propping up house prices and buyers who need mortgage finance are finding it harder and harder to participate. We are unlikely to see a material change to this until either lenders become more generous with their terms, raise the loan-to-value ratio or the the multiple of income they will advance or unless house prices fall. There seems little prospect of banks relaxing their terms which leaves prices as the only variable. Even the banks think that it will be house prices that suffer with Halifax in February predicting a modest fall by the end of the year.