Future tense

21 November 2011 | By Robert Thickett

With continued turmoil in the eurozone, bank profits plummeting and UK growth forecasts slashed, it’s an uncertain time for the economy. The mortgage market also has the additional headache of regulation to contend with from the Mortgage Market Review to Basel III and the European mortgage directive.

To analyse what these colossal changes and market turmoil mean for brokers in 2012, Mortgage Strategy, in association with Abbey for Intermediaries, invited the sharpest minds in the industry to a round table discussion. Is the mortgage market on the road to doom next year, will it recover or is it going to be even worse?

Speaking in this week’s discussion - front row (from left): Barry Naisbitt, chief economist, Santander UK - Peter Brodnicki, chief executive officer, Mortgage Advice Bureau - Dev Malle, sales director, Personal Touch Financial Services back row (from left): Nicholas Potter, head of mortgage acquisition product and pricing, Santander UK - Ray Boulger, senior technical manager, John Charcol - Grenville Turner, group chief executive, Countrywide - John Malone, executive chairman, PMS - Adrian Whittaker, key accounts director, Abbey for Intermediaries - Bob Hunt, chief executive, Paradigm Mortgages - Simon Embley, chief executive, LSL Property Services

Q. With expectations that unemployment will breach the three million mark in 2012, what effect will this have on demand for mortgages?

John Malone: We’ve got a lot of sympathy for people who find themselves unemployed or face potential unemployment next year. But in a market where we will probably only have between £125bn and £135bn of gross lending next year, there will still be a lot of people looking to buy and sell houses, so I’d rather concentrate on those who will be working as there is still a significant amount of business for the industry to complete over the next 12 months.

Grenville Turner: Unemployment is regional in terms of its impact. The low level of transactions we have means that many of the people who are uncertain about their jobs are the ones who aren’t moving anyway. So the prospect of future unemployment has already been priced in when it comes to transactions. There is also the fact that someone facing unemployment may have to actually move house due to their circumstances. So I don’t think unemployment will have a dramatic impact.

Q. How big will the mortgage market be in 2012? Will we see the £132bn in lending that has been predicted for this year and next?

Peter Brodnicki: At a recent conference we had a figure of between £90bn and £132bn - the upside was that it stays as it is, with about 20 different downsides. I would go for a flat market, unless something dramatic happens.

Barry Naisbitt: Everyone is trying to depress me by coming in lower than the number I have, but next year looks rather like this year. We get excited by precise numbers but when you look at gross lending month-on-month over the last two years, it’s between £10bn and £12bn a month. My guess is that will continue. I agree with the point about uncertainty but do we think next year will be more uncertain than this year was when it started?

At the beginning of this year we had public sector job cuts and uncertainty over what was going to happen. Now we have a new set of uncertainties and whether they are more damaging or not is hard to judge. If you look at what happened three years ago when the number of loans fell sharply, the market has been fairly flat - house purchase loans are up 2% to 3% and remortgage loans are up 19% year-on-year but still at lower levels than before the crisis. So I would see transactions at a similar level next year rather than the market taking a step down.

Q. What would it take to increase gross lending in 2012? Would we need to see lenders increase LTVs?

Ray Boulger: The key to next year is how bad the contagion will be when Greece defaults. The fact that European Union politicians are not prepared to accept the inevitable and allow Greece to leave the eurozone gracefully means the market will take over. If the Greek people vote the package down, that’s going to crystallise the situation. Until that happens there’s going to be a lot of uncertainty. What is interesting is that the yield curve has been getting shallower, which means it will be feasible for lenders to offer more competitive longer-term fixes.

So while the 25-year market is not where one would expect much activity I feel there is scope for more activity in the 10-year market. And a wider choice of mortgage products might tempt more people to remortgage. But if the banking crisis gets as bad as I expect, we will see major lenders cutting back on lending next year.

While smaller lenders will increase their lending, I don’t see them hiking it enough to counteract the extent to which bigger lenders cut back. So I can see lending being lower next year. I’d say £130bn is optimistic and if there’s less competition, that’s not good for the areas of the market that lenders consider to be high risk.

Nicholas Potter: In terms of boosting gross lending, it’s a question of innovation and as Ray mentioned it would have to be more than just LTV. Customer choice has returned in terms of lenders but also product type, so some shift has already started, not 25-year deals but in terms of five, seven and 10-year deals. If you look at this year it has been small innovations like ’track and fix’ deals that have been successful, rather than massive dynamic shifts - innovations that allow customers greater choice but not necessarily at high LTVs. The range of 90% LTV products is now pretty good and if a customer has a 10% deposit they have choice.

Q. If you were to design a product that would boost the number of borrowers at 90% LTV, what would it look like?

Potter: There is some development in terms of indemnity products. There’s a future for products that enable low-deposit lending without all the risk being assumed by the lender, such as mortgage indemnity guarantee products and those with housing associations that are relatively new to the market. There will be more of those next year.

Dev Malle: What are your thoughts on groups such as the self-employed? Is a public sector worker more of a risk than a self-employed one? Lenders’ criteria still seem to be against the self-employed.

Malone: And yet public sector workers in certain areas might find themselves out of a job.

Malle: Are scorecards sophisticated enough to take that into account on a regional basis?

Potter: I can’t speak of other lenders, but ours is.

Adrian Whittaker: We need to see what the trends are before we make any change to our risk profiling. It’s difficult to say we believe that a certain sector is high or low risk because there are lots of other factors to take into account. For example, this year we thought there would be a high number of repossessions - that hasn’t come to bear so we’ve been wrong in that assumption. So I think that’s why we are just exercising caution.

Bob Hunt: I think the attitude to risk within lenders stifles innovation.

Q. In terms of the government’s pledge to kick-start the housing market and reform planning laws, will this affect the housing market in 2012?

Boulger: Planning reforms will not affect next year or 2013 as decisions take so long to come through.

Simon Embley: The issue at the moment is that house builders still have debts on their balance sheets and are building to demand rather than speculation. Even if you change the planning rules, they are not going to change their strategy of deleveraging their balance sheet and making money out of margin rather than volume.

Malone: They have changed the type of homes being built from apartment flats to family homes.

Embley: Where they have a choice, builders are focussing on regions where they think growth is going to come from a shortage of housing. Planning changes will take a long time to take effect and we need to see the economy recover before it will influence the number of properties built, as it will need builders to be in a different position and mindset.

Boulger: Smaller developers are in a worse position. They are finding it impossible to borrow money. Big builders have managed to cope with their balance sheets, which are probably going to get better. I don’t know the proportion of the market made up by smaller developers but it isn’t going to be much for the foreseeable future.

Turner: It’s a bigger market now and if you take out the top 10 builders, they probably account for up to 45% or 50% of all new starts. Planning policy will slow things because when rules are changed it gives someone reasons to appeal. It will be kicked into the long grass for at least three years and that will create more uncertainty.

Q. What are the prospects for young buyers?

Embley: If we want to get really depressed we should talk about the young. They already need up to £40,000 to get through university, then they have to get a job in an environment where people are working longer and retiring later, and then they need a 20% deposit worth about £70,000 to get on to the housing ladder.

Boulger: I’m not sure people working longer means fewer jobs for the young. If older people keep working then they spend more money and that subsequently creates more jobs.

Naisbitt: We all tend to assume that there are the same number of jobs available at all times, so that if more people stay on working there are fewer jobs around. The labour market is more dynamic than that. And not everyone will want to work until they are 67 anyway.

Embley: Isn’t the issue more about perception rather than reality? We are creating a legacy for young people and we may see more social unrest among them. The other end of that spectrum is the rental market and we are seeing rents increase rapidly. Buy-to-let is going to be a major growth area for lenders because I can’t see how young people can break out of this cycle while we have LTV and criteria restrictions. We are seeing structural shifts in housing with no social housing being built. There are fewer owner-occupiers who are choosing to get out of jail by renting.

Turner: I don’t think getting a mortgage is the issue because young people aren’t even thinking about buying a house for a decade. First-time buyers are stuffed but actually they are solving that problem by buying later. People are renting more and that’s a cultural shift in the market, which is no different to the rest of Europe, where it’s normal to rent into your 30s and 40s. The UK has been unusual in having so many buyers. On the back of that the buy-to-let market is likely to continue to be buoyant as that sector is only going to be serviced by private investors. It’s only going to go up in the next five years.

Q. So if consumers are going to buy their first home later, do brokers need to be better at targeting financial products at those who are renting rather than buying?

Embley: We are only just waking up to those areas now. Take for example contents insurance for tenants - we used to quote customers £100 a month for general insurance because we didn’t have a specialist product. It was inappropriate for someone renting, so now we have designed an affordable product with an insurer. There are so many things we could be doing to provide products to both tenants and landlords going forward.

Malle: There are lots of myths that need to be dispelled, such as single people not having life cover. It’s not about life cover but critical illness cover because cancer rates have improved and sufferers might be off work for some time. With unemployment rising there is scope to sell unemployment cover even to those in the public sector. There are lots of areas for intermediaries to target and a multiple product relationship creates loyalty.

Brodnicki: Our business comes from estate agencies where sales are stable and that business is being outdone by healthy lettings agencies, which creates another customer base. They are the future first-time buyers. We are finding that those first-time buyers who are saving aren’t buying at the moment because they still think it’s risky and they appreciate that the market will stay flat for some time.

There is no desperation to get on the ladder. So we are starting to communicate with future first-time buyers from the lettings agency and not just selling products but altering perceptions. Many first-time buyers believe it is harder to get a mortgage than it actually could be. It might be a long-term process but it will bring business to you and the clients will approach you first. Everyone has to be smarter about how they market to different client bases and think long term rather than just selling to the guy who walks through the door.

Hunt: Housing is affordable if people have the confidence and ability to save a deposit.

Q. What areas can lenders target to get the housing market moving again?

Malone: I always focus on first-time sellers because they are the people who create movement in the property market. Once you get properties on the market from first-time sellers, they are moving up and creating first-time buyer opportunities. The lack of properties is creating the problem for people looking for homes.

I would like to see something to help first-time sellers move to the next stage. Lenders have to be brave but that is where you will start some momentum in the market, even if it’s only a little. There are lots of people who will want to move home but they are trapped because they bought at a high LTV and when criteria was lax. We’ve had this conversation with the product providers but equally we need to have the regulator explaining that the market is constipated because there is no transactional movement.

Whittaker: We are looking to lend more next year and there won’t be many lenders doing that. We don’t know what form it will take yet in terms of innovation but we are putting up supply in 2012. We want to see a buoyant market so it’s not in our interests to see other lenders not lending.

Embley: My concern is that consumer confidence is as low as it was in 2008. It can change quickly - in 2009 we had a pretty good market that followed the demise of Lehman Brothers in September 2008, so people have short memories.

But this year we had an awful end to October. The number of transactions falling through is up slightly but it is a general malaise with consumers being cautious. The more bad news there is, the more cautious consumers are. So the market constipation we’re talking about could get worse in the next year. Globally we need to have some better news coming through.

Brodnicki: Customer sentiment has dropped in the last year so we are in the same place as last year despite more activity.

Turner: It’s such a regional market, though. Our Q3 2011 results were the best since Q3 2007 but that’s because we’ve increased our focus on London and the South-East, because that is where the growth has been. We’re doing well in Scotland and London but everything in between is harder. It’s down to confidence, inward investment and the strength of overseas markets.

Malone: We are a percentage or two up on this time last year. We are encouraged by that so it echoes Countrywide’s experience.

Turner: There are fewer of us around and those that remain have learnt to live in a new environment.

Embley: My concern is about transactions today that will start to exchange in Q1 2012. The supply of stock hasn’t been this bad for years.

Q. Are there any first-time seller products in the pipeline?

Whittaker: We are looking at a variety of things but if the confidence isn’t there a new product will not solve anything.

Malone: It is up to us to manage confidence. We can’t all take on the national press but we have a part to play.

Hunt: I wonder whether lenders work together enough to publicise guarantor mortgages. It shouldn’t be just about lenders taking risk in innovating but all of us building public confidence.

Brodnicki: We are seeing some deals such as Saffron Building Society doing a 100% LTV product with a 25% guarantee. ING Direct is looking at proving rental income and there is also Nationwide’s ’save to buy’ product.

Malle: But all this is playing at the margins and scratching the surface. Unless the big players enact some creative criteria changes, there will be no impact on gross lending.

Malone: There are also some sizeable lenders that can be more innovative, look at their risk profile and have discussions with the FSA.

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