Reading the market's future

24 January 2011 | By Samuel Dale

Former Prime Minister Margaret Thatcher had a vision to turn Britain into a property-owning democracy. In the decades since she left power her vision was realised, with about 70% of the nation owning their own home.

This opening up of home ownership has become such a feature of British life that any change to this ideal is controversial. In Europe there is a different attitude towards property, with renting seen as more acceptable and fewer owners.

But could Britain be about to become more French or German in its attitude in 2011?

Government cuts to social housing and housing benefits is accelerating an exodus from the social sector. Meanwhile, funding for owner-occupiers is constrained and with regulation on the horizon this could get worse. In this context Capital Economics predicts the private rented sector will reach 17% of the market within five years, compared with 14.2% now.

John Heron, managing director of Paragon Mortgages, agrees that demand for private rented accommodation is growing rapidly.

“There is no doubt we will see demand in the private rented sector grow significantly in the next five years and it is a huge opportunity for landlords,” he says.

“The biggest obstacle is access to finance for professional landlords rather than amateurs because only the former can fill the level of demand on the sector.”

The return of Paragon to new lending last year may have improved the financing situation but only slightly. Yet buy-to-let mortgages are ready to increase their market share this year, with Santander and other banks actively considering entering the sector.

Paragon’s research shows 20% of broker business came from buy-to-let in Q3 of 2010 and many brokers are predicting an increase this year.

Melanie Bien, director at Private Finance, says there is demand but landlords need the finance to grow their portfolios.

“Buy-to-let could do well because of demand for private rented accommodation but it depends on the accessibility of finance,” she says. “If a lender as cautious as Paragon feel it is prudent to return that should encourage others to enter the sector.”

Andy Young, managing director at The Business Mortgage Company, agrees. He thinks buy-to-let will grow from about £10bn in 2010 to about £12bn in 2011.

“The market as a whole will remain static but I think we will see buy-to-let taking up a greater share with more lenders getting involved,” he says. “It gives lenders a great opportunity to increase their margins without compromising on risk.”

Paul Diggle, property economist at Capital Economics, predicts the private rental sector will grow in 2011 due to short-term factors such as involuntary renting.

“In the longer term it could depend on a shift in attitudes to home ownership, the implementation of mortgage regulation and the accessibility of credit,” he says.

“There is also reason to believe institutional investors could play a more prominent role if yet more people find it harder to get on the housing ladder.”

The reasons individuals are finding it difficult to buy their own homes is the high cost of housing and the persistent inaccessibility of mortgage credit.

Earlier this year housing minister Grant Shapps hinted that he could use the levers of government to control house prices by building more homes. But in its quarterly report the Home Building Federation reported a fall in permissions granted for new build.

Tim Collins, head of external affairs at the HBF, says permissions dropped from 40,000 in Q1 of 2010 to 30,000 in Q3.

“As the Localism Bill and National Planning Framework slowly make their way through the government process it is vital that the current lack of activity - not helped by the vacuum in policy guidance - is reversed,” he says.

“The presumption in favour of development has to come across loud and clear from central government.”

Stephen Smith, head of housing at Legal & General, believes house prices will remain fairly stable because of supply.

“Factors have not changed and if the housing minister wants prices to decline slowly in real terms something radical will have to be done to increase new house building,” he says.

Peter Bolton King, chief executive of the National Association of Estate Agents, says large price falls are pessimistic.

“While there may be ups and downs in the market during the year, prices at the end of 2011 will be roughly on a par with current levels,” he says. “It must be remembered there is no such thing as a single market. Some areas and property types will remain desirable while others will not.”

The boom in house prices during the previous decade now means the average age of a first-time buyer without parental help is 37 and Shapps’ age of aspiration looks like a hope rather than reality.

But judging by his rhetoric on government controls, Shapps isn’t pleased about the involuntary renters that high house prices creates and wants individuals to own the homes. The property-owning democracy is still the aim but it remains to be seen whether moderate house price inflation and home building is enough to stop the shift.

Other than house prices the other hot topic is when the next interest rate rise is coming. Capital Economics is predicting no rise at all this year and believes inflation, which hit 3.7% in December before the VAT rise, is temporary.

“Even if there is a rate rise it will only be token and it could be reversed if the economy starts to suffer which we believe it would,” says Diggle.

But with rising swap rates already anticipating a base rate rise after jumping more than 0.5% since November, the market could be adjusting to an imminent increase.

The pulling of some fixed deals by Paragon this month and Skipton and Halifax bumping up fixed rates are evidence that the prospect of a base rate rise is already being reflected in mortgage pricing.

Mark Bolsom, head of the UK trading desk at Travelex Global Business Payments, says the data will heap pressure on the Bank of England to raise rates.

“The Bank is in a tricky situation,” he says. “As food prices and oil costs continue to rise, it is now looking increasingly likely that consumer price inflation will hit 4% in Q1.”

Any increase could lead to more remortgage activity, which could mean a better second half for brokers.

Kevin Duffy, managing director of Mortgageforce, says if brokers can get through to June the conditions will improve.

“We are budgeting for 40% of business in the first half and 60% in the second,” he says. “The remortgage market will be more encouraging come summer when rates will surely have risen. Some SVRs will have increased regardless of whether the base rate does.”

But even a minor remortgage revival would only mask the underlying problem in the mortgage market, which is a lack of funding. Money difficulties remain even without government loan repayments and the government is being urged to do more to encourage mortgage lending by the HBF.

“The government must ensure the return of both project and mortgage funding - particularly for first-time buyers,” says Collins. “It must address the wider issues affecting mortgage supply. This includes encouraging new entrants to the market, ending the discrimination against new-build in the terms offered by lenders and mitigating the impact of the emergency finance repayments on lenders’ lending capacity.”

A spokesman for Kensington says the funding situation is far better this year but conditions remain tough.

“Capital markets are opening up and the smaller players who are getting funding will start to challenge the big lenders,” he says. “It may not happen on a great scale but it is a step forward.”

Wholesale markets eased slightly last year with Kensington’s parent company Investec securing a £200m securitisation in September. The Royal Bank of Scotland also launched a £4.7bn prime offering in the same month and Paragon relaunched with a warehouse facility from Macquarie Bank.

Despite these encouraging signs the Council of Mortgage Lenders is warning that repayment of official government support schemes could intensify the pressure on funding once more.

In November last year firms had repaid £75bn from the £185bn facility and there are commitments to repay a further £120bn through the Treasury’s Credit Guarantee Scheme. The SLS is scheduled to expire in January 2012, while commitments under the CGS are due to be repaid by 2014. The Bank insists neither scheme will be extended.

However, RBS says the SLS was used only for liquidity and its lending facilities have been kept separate so its repayments will not affect mortgage lending.

Tony Ward, managing director of Home Funding, says the total bad debt burden for banks by 2012 is between £440bn and £500bn - close to half the funding requirement for 2010/12.

“Asset disposals will help the refinancing of particular banks such as Lloyds Banking Group, RBS and Northern Rock but someone will have to raise the finance to buy the assets so there will be no increase in liquidity,” he says.

In his controversial Treasury Select Committee appearance earlier this month Bob Diamond, chief executive of Barclays, told MPs there was a disconnect between the demand to lend and to repay loans and build capital buffers.

But the Basel III proposals to build a capital buffer of 7% will not affect banks this year and most British banks have buffers of 10% or more anyway. Yet lenders are criticised by politicians for not lending enough. Prime Minister David Cameron has slammed them for being too cautious and preventing the housing market from progressing. He says the pendulum has now swung too far the other way as opposed to the profligacy of the boom times.

But the Bank’s Credit Conditions Survey for Q4 shows an increasing appetite for lenders to lend. There was also a rise in the average LTV and a suggestion that funding costs were falling.

John Malone, executive chairman of PMS, says the Bank is keen to keep property prices down and brokers will have to tough it out again in 2011.

“I don’t think there will be any innovation in the mortgage market this year which will make it hard for brokers,” he says. “But if we can get through 2010 and this year then there is some cause for optimism in the coming years.”

PMS predicts gross lending to be between £125bn and £135 next year, lower than the CML’s forecast of £135bn.

So funding is going to be the big issue of 2011 once again and the amount banks lend is going to be crucial to the housing market. The constraints on funding help explain the angry response to the Financial Services Authority’s Mortgage Market Review, particularly the responsible lending paper released last July. If nothing else, it has achieved a rare display of unity among the housing industry against the financial regulator.

The CML, the Building Societies Association, Association of Mortgage Intermediaries, NAEA and politicians have all expressed strong opposition to the MMR.

Shapps has criticised it for being a step too far and warned the FSA against being overly prescriptive but at Mortgage Strategy’s Mortgage Masters event earlier this month, Lynda Blackwell, mortgage policy manager at the FSA, reminded the industry this was only a consultation.

She also hit out at the dissenters, describing them as unhelpful, and asked for constructive remarks rather than simple criticism.

But there have also been signs that the FSA is stalling over implementation of its controversial proposals. Individual registration has been delayed until 2012/13 although the FSA says the transition to the new regulatory structure is to blame and there is no policy reason for delay.

Blackwell also stresses the consultation stage is just that, with nothing from the controversial responsible lending paper yet confirmed and that the 25-year term to assess affordability is likely to be changed.

Bill Warren, managing director of Bill Warren Compliance, does not think the FSA has the will or resources to implement all its proposed changes this year.

“But there will be a negative impact on the industry because of the uncertainty surrounding the market,” he says.

The unity of the housing industry and pressure from politicians has pushed housing further up the political agenda. Rob Jupp, managing director of Brightstar Financial, says the lack of mortgage lending is a growing issue.

“The inability of people to buy a home will become more important in three or four years,” he says. “At the next general election in 2015 being able to buy a home will be at the top of the political agenda.”

Earlier this month Shapps met FSA chief executive Hector Sants to discuss his concerns about mortgage regulation. There was also a parliamentary debate on regulation where MPs quizzed Mark Hoban, financial secretary to the Treasury, on the proposals.

Conservative MP Robert Syms argues that in its current form the MMR will have a disastrous effect on the economy, borrowers and first-time buyers. But Hoban has countered that the MMR is an essential step to ensure consumers and lenders are protected.

Nick Baxter, partner at Baxter Business Consultants, says it is likely that there will be delays to the regulator’s plans.

“The FSA is realising that these proposals will have a significant impact on lenders’ ability to lend,” he says. “The strength of feedback has probably surprised it. The FSA didn’t fully understand the consequences so it is right it should reconsider.

“It also seems inappropriate to come up with radical changes when it won’t be around for much longer. The new regulator may have different views on interest-only loans, for example.”

Another reason for a delay could be the release of a European directive on mortgage lending expected in March.

The Treasury and FSA both say they are working closely with the European Commission as it formulates policy and will change their own rules accordingly. There is also the prospect that European regulation could seriously alter the MMR because it can overrule FSA regulation.

With no timetable in place for the MMR, the battle over regulation will rage on through 2011 but it is unlikely to be a year for serious implementation of any rules.

The tide of opposition to any regulation that may restrict home ownership shows the depth of allegiance Britain has to property ownership. There are big cultural and demographic shifts in the housing market and although the trend points towards more renting there is political resistance.

In his opening speech as housing minister Shapps spoke of an age of aspiration and this sentiment is one that seems to chime with the housing market, but it must be questioned for its substance.

The move towards a higher proportion of renters and a shift away from individual ownership provides huge challenges for those in the housing market. But the mortgage market has seen enough upheaval to adapt itself and the estimated 10,000 brokers that remain are survivors.

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