Last week I listed some of the big issues I predict will impact the mortgage market during the next five years. This week I’m adding to the list. Probably the biggest question on everyone’s lips is what impact the Retail Distribution Review will have.
It is too simple to say that the RDR won’t affect the way the UK mortgage market operates.
With financial advice for more complex products being fee based – and advisers confident to charge the consumer directly for the service they provide – I can see pressures for change building up in the mortgage advisory market.
Whether these come from firms themselves adopting the ways of working of their IFA colleagues, or from lenders deciding to test the water and follow the example of the investment providers, it is difficult to say.
Thankfully the Mortgage Market Review has not been prescriptive on this matter and seems to propose a structure whereby the market can evolve.
Currently many advisers have moved from procuration fees only and now charge a fee for the advice service alongside the proc fee they may receive from lenders. I would suggest that over the next five years that balance will change further.
Are we falling out of love with owner occupation?
Owner occupation in the UK, at around 70%, is just higher than the average for the European Union, but in recent years there has been a slowing in the growth witnessed over the past six decades.
House price pressures will remain with small changes in demand causing disproportionate volatility
This began in 2006 and was attributed more to difficulties over affordability for first-time buyers rather than a decline in desire to become home owners.
But perhaps over the following few years that attitude has changed.
Affordability is better now than for the past seven years, according to the Halifax. If you can get the deposit together that is.
And saddled with student debt, not a feature of previous generations, younger people could be forgiven for not looking to take on another huge debt just to live in a home of a particular tenure.
Another factor adding to this has been the level of debt repayment over the past couple of years and with that an increase in the number of UK homes owned outright rather than with a mortgage.
Council of Mortgage Lenders statistics show a fall in mortgages outstanding in the UK since 2007 as well.
Given this trend, and the apparent level of disinterest among the younger generation for financial services, how are advisory firms to react?
This is possibly one of the biggest challenges we face.
How can we provide financial services advice profitably and effectively in the increasing private rented sector to these renting consumers who have almost as much need for life and lifestyle protection as any mortgage borrower?
How can we engage and get them interested ?
Answers on a postcard please.
Shortage of homes
Will the housing shortage have been rectified in five years’ time?
It seems unlikely. The damage done to the construction industry by the recession and subsequent confusion over the new government’s policy on housing targets – central targets abolished in May but later in the year challenged and overturned in court – could take many years to unwind.
It seems we will still be a long way short of the sort of levels of house building proposed in the Barker Review of 2004, and we will not be close to keeping up with the demand of new household formation.
But in an interview with The Observer in January, housing minister Grant Shapps said there would be much to be gained by having stability in house prices for a few years and that it would be a “rational market” if house prices drifted down in real terms over a number of years.
The subsequent discussion of this statement has focussed on the dynamics of supply and demand and that such an outcome can realistically only be achieved with much more house building. And there is a direct cause and effect.
The Barker Report suggested that to reduce house price inflation to under 2% would require 70,000 homes per annum to be built in addition to the level of 125,000 completions in 2003.
Do we think we’ll get back to 200,000 completions a year and make up the shortfall of the intervening years? I don’t think so.
And so house price pressures will remain in the UK economy with small changes in demand causing disproportionate volatility in prices. In this environment consumers will need advice more than ever.
The pace of change in technology is staggering. Constant contact on the hardware side through innovative devices, 3G and 4G and wi-fi hotspots, and on the software side through social networks, 24-hour news and Twitter.
It is unclear where all this is taking us. Just bear in mind YouTube has only been around for just over five years, and that five years ago iPhones and iPads and other tablet PCs were just a twinkle in a designer’s eye.
The sheer connectedness of people and their access to information will drive consumer behaviours in ways we cannot imagine.
And the challenge for financial services advisers will be to keep pace with this change – understanding what technology is capable of and harnessing it for maximum impact.
Legal & General’s estate agents are using iPads as sales presenters when visiting vendors, and we have mortgage sourcing available on iPhones too with the Legal & General Mortgage Club App.
But we are probably just scratching the surface of what we could do with these tools. The next five years will bring massive changes in the way mortgage and protection products are distributed. But the need for advice will remain, and these technology innovations should be harnessed to deliver this advice.
Change is the constant
Any one of the subjects that I have set out could form the basis of a brainstorming session for the management of an advisory firm. Taking all of them together, one thing is certain – it’s not going to be dull in our market.