With data and opinion both conflicted on the health of the mortgage market, is lending really heading downhill or on a longer-term path to growth?
The mortgage market has had a turbulent 2017 so far and, at the half-way mark, many think it may have to withstand further storms.
New-home transactions are down, appetite for buy-to-let is dwindling and there have been warnings that uncertain economic and political conditions may hit lending.
The tone was set by the Council of Mortgage Lenders in one of its final statements in late June before it became part of UK Finance earlier this month. Paul Smee, CML chief executive until the amalgamation, warned that lending growth was set to weaken in the second half of the year.
After announcing a 12 per cent increase in lending between April and May, he added: “We expect this trend to continue, but not as strongly, as the factors supporting lending are blunted by less favourable economic conditions.”
Nevertheless, the trade body told Mortgage Strategy before it became part of UK Finance that it was maintaining its forecast for gross lending of £248bn in 2017, which it had made before the turn of the year. However, it had not conducted further analysis to reaffirm that number.
Some brokers report the emergence of a stumbling block caused by the increasing number of borrowers with tightened budgets.
Cherry Mortgage & Finance broker Matthew Fleming-Duffy says: “We are receiving more enquiries where we just cannot help. Affordability issues are common.”
The CML highlighted a slowdown in house purchase activity as another obstacle to growth, although economic factors may underpin this too.
“A lacklustre housing market obviously reflects on purchase activity and, after two years in which remortgaging increased by about 20 per cent a year, 2017 has seen a marked slowdown,” says John Charcol senior technical director Ray Boulger.
“As more lenders engage with brokers on product transfers, that market, estimated to be about £100bn per year, is likely to see growth at the expense of the remortgage market. However, as product transfer numbers are not yet published, it may be hard to identify its extent.”
Meanwhile, the Bank of England’s decision to toughen stress tests could also prove a stumbling block for growth. Instead of banks and building societies testing borrowers’ ability to repay a mortgage at 3 percentage points above their rate, they must now test at 3 percentage points above that lender’s standard variable rate. Had this principle applied in 2016, about 0.5 per cent of mortgages that were approved would have been declined.
Despite the potential obstacles, demand for lending could be maintained by ongoing low mortgage rates – notwithstanding the anomaly of Atom Bank’s super-cheap deals in April, led by its 1.29 per cent five-year fix.
“Although we can’t expect another ‘Atom’ soon, the persistent competition continues to see rates tweaked and nudged downwards,” says London & Country associate director of communications David Hollingworth.
Earlier this month, HSBC launched a table-topping two-year tracker at 0.99 per cent at 60 per cent loan-to-value. Its £999 fee puts it ahead of Yorkshire Building Society’s similar deal that comes with a £1,495 fee.
So what does the short- to mid-term future hold for UK mortgage lending?
“I think rates are likely to get cheaper before they increase,” says Trinity Financial product and communications director Aaron Strutt.
“Lenders are arguably as keen as they have ever been to attract new customers. We have had a busy year and, with the ongoing rate war, hopefully the remainder of the year will be as busy.”
Private Finance director Shaun Church adds: “Despite the lack of housing supply, demand from buyers will be supported by low mortgage rates and an expanding range of products.”
Of course, the market could change radically if the Bank base rate were to rise from its historic low of 0.25 per cent. The spectre of a rise was brought into sharp focus last month after the BoE’s Monetary Policy Committee voted 5-3 in favour of holding rates.
The three votes for an increase were the closest the Bank rate had come to a rise since 2007.
Investment specialist Hargreaves Lansdown says there is even the possibility of a rate increase by the end of the summer. That said, there have been similar suggestions over several years with no rises forthcoming.
Once the rate increase happens, borrowers could face rising costs. However, some may be spurred at last to escape expensive standard variable rates, fearing the end of the mega-low rate environment.
Hollingworth says: “It may need a rise to shock more borrowers into a move. But the ongoing discussion and hint of uncertainty are only likely to see more people consider whether they are getting the best value from their mortgage. That is likely to be exacerbated by the squeeze on incomes now being felt.”
The economic storm clouds include a sharp pick-up in inflation, which hit 2.9 per cent in May, putting a strain on household budgets. Given that wage growth in April was only 2.1 per cent, salaries are not keeping pace with rising prices, which makes a real-terms fall in wages.
Strained household finances are one of the reasons cited for the slowdown in the housing market, underpinning much of lending activity.
Nationwide chief economist Robert Gardner says: “The emerging squeeze on household incomes appears to be exerting a drag on housing market activity in recent months.
“The number of mortgages approved for house purchase has slowed a little and surveyors report that new-buyer enquiries have softened.”
Looking ahead, the former CML predicted a dip in housing transactions in the second half of the year, which may explain its fear of a slowdown in lending growth. Pointing to a fall in house purchase approvals from 69,000 in January to 65,000 in April, it said this was a good indication of future transactions.
Although the trade body’s final gross lending figures before its merger showed the market generating £20.1bn of home loans in May – a 12 per cent increase on both April 2017 and the same period last year – it added that the upturn was largely the result of remortgaging and first-time buyer growth, with house purchases suffering.
In fact, while FTB demand has grown – in the year to April, transactions were up by 8 per cent on the previous 12-month period – homemoving is down by 9 per cent over the same timeframe.
In a June market commentary on its website, the CML said: “The housing market has stalled, as activity has been subdued for the past few months.
“The low number of homemovers naturally limits the number of properties that come up for sale. This can dampen activity further if would-be movers/FTBs don’t find properties they would like to move to.”
However, some argue that comparing the first half of 2017 to the first half of 2016 is unfair when determining the health of the housing market. It is argued the rush to beat the stamp duty changes in April last year created an abnormally buoyant market in the preceding weeks, which can make comparative statistics for the first quarter of 2017 seem worse than they are.
Official government figures for Q1 2017 show there were 269,740 property transactions, significantly down on the 346,710 recorded for the same period last year. Nevertheless, this year’s figure is an increase from the 247,780 transactions two years ago, in Q1 2015, which may provide a fairer comparison.
“Two equally correct headlines could be ‘Q1 housing transactions 22.2 per cent down on last year’ or ‘Q1 housing transactions 8.9 per cent up on 2015’,” says Boulger.
The reduction in transactions this year – whether a sign of ill health or not – has also been attributed to the uncertain economic climate caused by the triggering of Article 50 and the announcement of the snap general election that produced a hung parliament last month.
Fleming-Duffy says: “Generally speaking, any form of political uncertainty affects the housing market. Large housebuilders, banks and consumers look to longer-term stability when making big decisions and a lack of cohesive governmental leadership can unnerve us.”
Strutt adds: “Some estate agents are quiet at the moment and the political environment does not help.”
However, some experts note that the underlying market is healthy despite the downturn.
Mortgage Advice Bureau head of lending Brian Murphy explains: “When the election was announced, the housing market was resilient and highly likely to maintain momentum, given ongoing demand coupled with paucity of properties coming to market and mortgage rates at or near all-time lows.”
In fact there are signs of recovery already. The latest Nationwide house price index, for June, showed typical values up by 1.1 per cent, reversing three months of decline. However, Gardner cautions that monthly growth rates can be volatile.
Alex Gosling, CEO of estate agent HouseSimple.com, adds: “While the politicians argue among themselves, people have to get on with their lives and that includes moving house.”
The BTL sector draws little disagreement about its future, having taken a tumble following numerous external overhauls.
Since April 2016, anyone buying a second home has had to pay an additional 3 percentage points in stamp duty. Furthermore, in April this year, landlords lost their first chunk of tax relief in a process that means that, by 2020, they will no longer receive any higher-rate relief on mortgage interest.
Meanwhile, lending criteria have also got tougher this year.
Given these changes to the sector, the former CML said in June it predicted £35bn of BTL lending in 2017 and £33bn in 2018, a decrease from its forecast last December of £38bn for both years. This compares to £40bn of sales in 2016.
Brokers are feeling this too. Strutt says: “Our BTL business has reduced significantly. There is still a huge amount of confusion about the next tax regime and, with even more rules for professional landlords about to hit, the market is likely to get more tricky.”
The changes to the BTL tax regime were intended, of course, to help FTBs by removing some of the demand for property.
“FTBs are finally able to compete with landlords and the signs are that demand will remain strong throughout the year,” says One 77 Mortgages managing director Alastair McKee.
“With many landlords still reeling from the raft of tax and stress-testing changes, FTBs see an opportunity and are taking it.”
Government schemes such as Help to Buy Isa and Lifetime Isa, which were launched this year, are also intended to help FTBs save for a property and they include a bonus from the state.
However, huge struggles remain because of high house prices. Research by estate agent eMoov in May put them at just over six times income, on average.
“Many FTBs are struggling, particularly in London and the South-east,” says Strutt. He adds, however, that they fare better outside this expensive region.
Thus there is no single narrative for FTBs, which perhaps can also be said of the wider market given the conflicting opinions and data.
One thing is certain: the mortgage industry will keenly await the outcome of this developing tale, with hopes that predictions of a decline in lending are proved wrong.
Key 2017 lending data
2016 total: £246bn
FIrst 2017 prediction (made in December 2016): £248bn
Second 2017 prediction: £248bn
2016 total: £40bn
First 2017 prediction (made in December 2016): £38bn
Revised 2017 prediction: £35bn
NATIONWIDE HOUSE PRICE INDEX
Annual price rise to June 2017: 3.1 per cent
Rise forecast for 2017: 2 per cent