In 2009 and 2010 liquid savings flows were around 50% of their normal level and the latest 12 months have shown significant improvement.
Retail savings were running at around £60bn a year in 2007/08 before falling to £25bn in 2010.
Low interest rates and the need to maintain consumption in the face of subdued income growth have all helped to depress the liquid savings market.
But 2011 seemed to mark a shift towards a more positive outlook for liquid savings and for lenders ability to fund mortgage lending from the retail sector. However, the level of competition for these retail funds is difficult to overstate. During the worst of the recession the banking sector dominated the liquid savings market.
The incredible reliance on wholesale funding that we saw from 2000 to 2007 is unlikely to ever return
Banks achieved above 90% market share in 2009 and 2010 and although their share fell in 2011 towards 70% this is still around their usual asset based share of the market, based on share of outstanding savings balances.
The mutual sector has seen a sharp improvement in flows during 2011 as several key players have concentrated on reducing their exposure to short-term wholesale markets and putting more emphasis on attractive longer term fixed rate retail savings.
One of the most worrying aspects of the market has been the continued strong growth in the presence of National Savings and Investments in the market. Given that the funding market is already difficult for most lenders NS&I’s strong holding is not particularly helpful at present.
In 2010 NS&I achieved a market share of around 8% which is 1% below its usual asset based share. But in 2011 this share rose to more than 12%, significantly greater than usual but perhaps not entirely surprising given the acute public sector deficit problems.
Improvement in the retail savings market is particularly welcome for those lenders dependent on them for mortgage funding. As we know the wholesale markets remain difficult for many lenders particularly the unsecured wholesale markets.
The chart below shows the estimated retail funding gap for lenders based on the difference between lending to the household sector and the savings deposited by the household sector.
In 2007/08 this funding peaked at just under £360bn. During 2007 net mortgage lending was more than £100bn while savings flows were less than £60bn a year.
Since the start of the housing market slump in 2008 the rapid decline in net mortgage lending combined with some growth in retail savings has narrowed this gap to around £300bn in 2011.
If as we suspect the mortgage market continues to show only modest growth in the next few years and savings market flows follow the path outlined we expect the funding gap to halve by 2020 to less than £150bn.
A gap of this size will be much easier to fund in wholesale terms but it will also provide more balance in the overall funding position of lenders.
Our central forecast shows only modest growth in personal borrowing and a gentle outlook for interest rates from 2014/15 but clearly if the economy returns towards trend growth at a faster pace we would expect interest rates to increase more quickly.
A higher economic growth scenario will accelerate any decline in the funding gap as stronger retail savings will offset any higher levels of mortgage demand.
The central forecast shows the funding gap slowly decline to less than £150bn by 2020 but the alternative scenario shows this reaching less than £70bn in the same time frame.
We expect the retail savings market to remain the main battleground for mortgage lenders and particularly any new entrants to the mortgage market.
The mutual sector has shown itself to be adept at managing its position in this market. Higher interest rates once the economic recovery is well on its way will be welcomed by the market.
The incredible over-reliance on wholesale funding we saw in from 2000 to 2007 is unlikely to return. As John Kenneth Galbraith says in his book The Great Crash 1929, “memory is far better than law”.