The concept of time travel has fascinated people for centuries and many have wondered what they could do with such a power.
Some in the mortgage market would no doubt gladly hop straight back to 2005 and relive the glory days – former head of specialist lending at HBOS Michael Bolton’s 40th birthday bash at the top of the Gherkin or Mortgage Strategy’s 2007 Dubai summit.
Those days are gone but what if we could travel into the future and see what the housing market will look like in 10 years’ time?
Will home ownership be out of reach for the ordinary family and will mortgage brokers still exist in their thousands?
In a recent Lending Zone roundtable, Bolton said it was absurd brokers even exist in today’s market, never mind a decade hence.
Judging by the comments on Mortgage Strategy Online, many brokers are equally pessimistic about the future.
So let us fast-forward to get a sense of what the housing market will look like in the future and what it means for brokers.
Housing minister Grant Shapps is positive about the next few years, branding it the age of aspiration when he took the job in 2010.
A YouGov poll shows 81% of those polled share the aspiration for home ownership, with 74% expecting to buy in the next two years.
The problem is that this jars with the reality of falling home ownership and a rise in private renting.
A Cambridge University study commissioned by Shelter and the Resolution Foundation made gloomy reading for the majority.
About one in three households now has a mortgage. The study predicts that by 2025 that will fall to just one in four – a 27% fall from its 43% peak in the 1990s.
Meanwhile, the size of the private rented sector is expected to rocket from just 7% in 1994 to 22% in 2025.
In London, 36% of the population is expected to be renting in 13 years’ time, illustrating the sharp increase in the sector.
This vision of the future is based on the current weak economy continuing for a decade and existing housing policies.
In an October 2010 speech, Bank of England governor Sir Mervyn King warned that Britain had lived through its nice decade and must now endure a sober 10 years.
“The next decade will not be nice,” he said. “History suggests that after a financial crisis the hangover lasts for a while. So the next decade is likely to be sober – a decade of savings, orderly budgets, and equitable rebalancing.”
We are only two years into that decade and Sir Mervyn himself has just voted for £50bn more quantitative easing at the Monetary Policy Committee, so we are not out of the woods yet.
With the eurozone in a state of perpetual turmoil, Britain back in recession and the global financial system in a state of paralysis, it may be at least five years before we get back to sustained growth.
The weak economy has exacerbated the problem but Britain had a chronic shortage of homes long before the crash and the supply is still deteriorating.
Construction plummeted 4.8% in Q1 2012, far more than the fall in gross domestic product of 0.2%.
The construction sector is in a serious recession after falling 0.5% in Q4 2012 and housing is estimated to make up one sixth of the figures.
The number of affordable housing starts fell 68% year on year in March from 57,648 in 2010/11 to just 19,967 in 2011/12. Affordable housing is defined as social rented, affordable rented and intermediate housing such as shared equity and shared ownership.
Despite the fall, the government is arguing that its target of building 170,000 affordable homes by 2015 is on track.
Housing completions also dropped off to 59,541, compared with 64,277 in 2010/11.
For brokers, it means house prices have rocketed and low LTV lending means mortgages are priced out of reach for the average buyer.
The government is trying to generate building from FirstBuy, a shared equity scheme, and NewBuy, its plan to provide 95% LTV mortgages by insuring lenders for the risk between 86% and 95%.
The impact on house building will not be known for some time but the government is targeting an extra 100,000 homes by 2015 through NewBuy.
The government has also launched its Get Britain Building fund, which provides loans to builders ready to start work but unable to do so because of access to finance.
The fund was a winner in the March Budget, with an extra £150m pumped into it due to high demand, bringing the total pot to £400m.
There are also plans to boost self-build homes, with Shapps showing a particular fondness for the sector.
The National Self-Build Association estimates the sector could grow by 141% in the next three years, as more lenders provide finance.
Brokers have an opportunity to place complex and technical deals for self-builders, as the sector has government support to grow.
Finally, and perhaps most significantly, the government has overhauled planning regulations, shredding the rulebook from 1,400 pages to just 52.
The new National Planning Policy Framework introduces a presumption in favour of sustainable development, which has stoked controversy over fears it would concrete over the countryside.
The aim is to encourage building and avoid local opposition if building is strategically important to the country.
The key to homebuilding is available finance for home buyers to buy and builders to build – otherwise it is impossible.
NewBuy may direct some money towards building and first-time buyers but it will not encourage more lending overall. The Get Britain Building fund will get some projects off the ground but with only £400m in the pot, it will not shake the market.
The biggest impact for mortgage lending this year could be the government’s funding for lending scheme revealed last week.
It will provide banks with unlimited cheap loans specifically to lend to home buyers and small businesses.
It could stimulate more mortgage lending this year and help curb the increasing rates seen over the past six months.
However, the scheme is seen as an emergency measure brought in as the eurozone crisis threatens to spark another credit crunch.
Another severe credit crunch and more regulation could mean lending will stagnate over the next decade.
Michael Coogan, former director-general of the Council of Mortgage Lenders and consultant at Deloitte, believes we are already living in the new normal of gross lending.
“The overall market has been steady for three years now so we are already in the new normal, while bank deleveraging means there may even be negative net lending some time over the next few years,” he says.
“I can’t see consumers looking to transact so much that we will see a market of £150bn or £200bn a year gross lending as some would like over the next 10 years.
He adds: “There will be fewer active lenders and new entrants will want to control carefully business flows in their mortgage applications, while the regulator will want to check they are being sensible in new markets.
“The big five or six lenders will affect the market the most. If one or two decide to step back, then it will have a big impact on the market.
“However, there are opportunities for businesses that want to fill a gap in the market. Big lenders will have to manage their capital requirements, liquidity, deleveraging, past legacy problems and more regulatory requirements from two regulators – the Prudential Regulation Authority and the Financial Conduct Authority.”
As well as less lending than before, Coogan predicts a market with more expensive rates and less innovation.
“I don’t see the price of mortgages becoming any cheaper for consumers over the next 10 years, meaning mortgages will cost more than pre-2007 rates as there is better pricing for risk,” he says. “If interest rates go up, then borrowers will face higher initial costs combined with higher variable interest rates.”
He also expresses concern over the FCA’s potential approach to conduct regulation. He believes a more interventionist regulator may stifle innovation as firms take a risk-averse rather than risk-management approach.
A subdued mortgage market can have a big impact on home ownership and families and individuals may not be capable of buying their own home in a future housing market.
The English Housing Survey 2010/11 shows 14.5 million owner-occupiers, down from its peak of 14.8 million in 2006.
In its report, Housing options and solutions for young people in 2020, the Joseph Rowntree Foundation estimates the number of young people owning their own properties in 2020 is expected to decrease by 1.1 million to 1.3 million in 2020.
It also believes the number of young people living with parents in owner-occupied accommodation will increase by about 550,000 to 3.7 million in 2020.
“Without a sustained and long-term increase in new housing supply, demand-side initiatives to help aspiring home-owners risk maintaining the inflated house prices they are meant to overcome,” it states.
Much depends on house prices and the ability of government and regulators to successfully charter a slow decline of prices to make them affordable once again.
Another option experiencing decline is social housing, which in 1980 offered more than 5.4m homes.
Since former prime minister Margaret Thatcher first introduced the Right to Buy scheme, the number of council homes as a share of the UK’s housing stock has fallen. The English Housing Survey shows it has dropped to just 3.8m in 2010/11, slightly more than the private rented sector.
The government has resurrected Right to Buy, with £75,000 discounts and a pledge to rebuild one affordable home in place of every council home sold.
Perhaps more significant is an overhaul of the benefit system and the changing nature of social housing.
“Right to Buy will change the nature of government-owned stock from pure social housing with long tenancies and low rents to those with higher rents and fewer tenancy rights,” says Ben Pattinson, policy and research officer of UK housing at the Building and Social Housing Foundation.
Pattinson believes tenancies will last between two and five years rather than for lifetimes.
The result is that social housing now resembles a system of affordable rents at 80% of market rates.
It is a radical change and the BSHF expects rents to rise considerably for new tenants and overall in the long term.
“Increasingly, those who were in social housing are now in private renting as the local authority has more leeway to put them into the private sector,” says Pattinson.
He believes social housing will face significant changes over the next 10 years through government cuts to grants, lack of building and the nature of council homes.
The decline is not necessarily a negative, argue Tim Leunig and Richard Ollerenshaw in a report for the 2020 Public Services Trust at the RSA, Low house prices and owner occupation: A better alternative to social housing.
“Social housing tenants are less likely to be happy with their housing than either owner occupiers or private renters,” the authors claim.
“Even when we take personal characteristics into account, people in social housing are less likely to be in work, and more likely to lose their jobs. There is only a one in 100 chance that someone in social housing and both their neighbours are in work.”
Private rented sector
A decline in home ownership and social housing can only lead to a rise in the private rented sector and the consensus is that in 10 years’ time, it will be bigger.
The size of the private rented sector has grown from just 1.8m homes in 1990 to 3.6m in 2010/11.
John Heron, managing director of Paragon Mortgages, says there is a sustained change in housing demand, meaning the UK will be renting more and buying less.
“There is already good evidence that owner-occupation has peaked, while we have seen a marked reduction in social housing and it continues to come down,” he says.
“The gap is being filled by private rented properties and it is bound to create new pressures in the sector, whether it is supply or rental demand.”
Some of the new pressures could involve longer tenures for tenants or further regulation and taxation of landlords.
David Lawrenson, founder of Lettingfocus.com, believes the growth in private renting could lead to a change in the tax regime.
“We will see a change to the tax regime because if any sector earns lots of money, the government will want to tax it,” he says.
“Taxation could be imposed on landlords’ current revenue rather than capital gains. The capital gains tax is at a good rate, so there could be a shift.”
Lawrenson believes the quality of housing has improved because of more competition between landlords but it could be incentivised further through taxation.
“It’s hard to say whether that will mean tenants need different lengths or types of tenure without some in-depth research among those who will be renting.”
Andy Young, managing director at TBMC, does not think longer tenures should be compulsory, as many value the flexibility.
“Every tenant is different, so it is a good area to remain flexible and any rules and regulations imposing longer tenures could make it inflexible,” he says.
Young also believes landlords are regulated significantly already and, as it is a commercial sector, should be left alone.
The growth in demand for the private rented sector has benefited a number of others, including buy-to-let mortgages and private landlords. A number of lenders have made significant long-term changes to their systems to set themselves up for buy-to-let lending over the next few years.
Santander launched into buy-to-let late last year about the same time as Yorkshire Building Society and Metro Bank.
A number of banks have also pledged major increases – Barclays is promising to triple its lending and Co-operative Bank says it will quadruple its buy-to-let.
This could be time for brokers to get in on the act, considering the profound changes towards more landlords being mortgage customers.
Young believes brokers looking to the sector should start by targeting professional landlords and using letting agents.
“Most private rental properties are owned by professional landlords with large portfolios, so the best strategy for ongoing and repeat business is to focus on them,” he says.
“It will give you remortgage opportunities and as they increase the size of their portfolio, there is repeat business too.
Young also believes letting agents are a good starting point for any broker looking to move into the sector.
“Very few letting agents have mortgage facilities and they clearly have a significant number of landlords on their books,” he says. “Setting up business relationships with referrals on a commission share can be useful.
“It’s a quick way to get into landlords and has the added benefit of using the brand name of the letting agent that already has an affinity with clients. You are not going in cold.”
The future of the housing market could look very different to today with less lending, higher mortgage rates and more private renting.
The life of a mortgage broker will be different and many will look to buy-to-let as a way to cash in on the growth in renting.
In a tough mortgage market there are also opportunities for brokers, as clients find it difficult to get themselves a deal.
The new normal may be a bleaker world than 2005 but Sir Mervyn’s sober decade means the surviving brokers will be ready to capitalise.
Those who have weathered the storm have shown their adaptability through more insurance sales or introducing a fee system, or both.
Many will still long to travel back to the glory days of dishing out mortgages to everyone with a salary but it makes more sense to look to the future.
Challenges for house builders
Home builders federation
The main constraint has been the lack of affordable mortgages. If people can’t buy, builders can’t build
These are challenging times for house builders. We are building just over 100,000 homes a year in England against an estimated need for 240,000. There remain significant constraints on supply. A lack of viable, developable land coming through the planning system has been a problem for many years.
The main short-term constraint has been the lack of affordable mortgages, specifically where buyers can’t afford the deposits required. If people can’t buy, builders can’t build.
Five million people are now on local authority waiting lists, first-time buyers’ ages are soaring, and young people having to stay with their parents into their thirties.
Home ownership levels are falling and from a peak of more than 72% in 2001, it is estimated they could fall to less than 64% by 2021.
We know from surveys over the past few years that demand is high and it is obvious that whatever the tenure, we need to provide homes for our growing population.
The government has now introduced its long awaited localism-based planning system, with the controversial National Planning Policy Framework. This hands a lot of power for housing to local authorities and with that comes responsibility, so now they have to deliver.
Government must ensure local authorities undertake rigorous housing assessments and draw up real and viable plans to meet their established need.
If it is supported by the presumption in favour of development where councils fail to draw up deliverable plans, then we may see more land for required homes coming through the system.
Government also needs to deliver on its promise to cut regulatory costs for house building sites.
Developments should make a contribution to local services and be as energy efficient as possible – but we must make sure the total of all these demands doesn’t prevent the development taking place at all.
We have seen some positive government initiatives on the demand side. NewBuy is helping people able to buy with a 5% deposit and we are confident that over the coming years it will help deliver tens of thousands of sales and lead to an increased level of building.
FirstBuy, the government-backed shared equity scheme, has also proved successful and will continue to the people without the income for a 95% mortgage.
Money set out for the scheme has all but been used up and with the value for money of the policy undeniable, we will be pushing for a further funding allocation.
So there are reasons to be cautiously optimistic. The building blocks are largely in place and if existing policies address the constraints on supply, we could see the fall in output of recent years start to be reversed.
Pain for aspiring homeowners
Head of policy
Renters are no longer ’Generation Rent’ – young twenty-somethings -but families who vote
Long-term, structural changes are taking place in the housing market and by 2020 it will be more polarised than ever, as a report commissioned by Shelter and Resolution Foundation recently showed. The research, by Cambridge University, shows that if Britain’s economy remains weak the slow decline in mortgaged homeownership over the past two decades, which has already locked out more than a million households, will continue.
Low levels of house building, constrained mortgage finance and low income growth will mean that in 2025 just one in four households – 27% – will own a mortgage, down from 43% in the early 1990s. Meanwhile, the number of households owning outright will increase.
The key trend Cambridge highlighted is that private renting will become a way of life for British families. Over the past five years alone there has been a 41% increase in the private rental market as people are locked out of homeownership and unable to access social housing.
The growth in families with children over the same period is particularly stark – a massive 86%.
Social housing will still play a role in 2020, particularly among low and middle-income families, and in London where it supports a large workforce. But a key question is how affordable it will be.
From 2012, all new social housing rents will be relabelled ’affordable rent’ and let at up to 80% of market rates, compared with the 40% or 50% tenants pay now.
The new Right to Buy will reduce the number of social homes in the immediate term while the government’s promised ’like for like’ replacements come on stream – if indeed this happens.
Rental Britain is here to stay. Renters are no longer just ’Generation Rent’ – young twenty-somethings flat-sharing until they get something better – but families who vote.
Undoubtedly, home ownership is still what most people aspire to, but the chances of owning with a mortgage look slimmer. All political parties need to adapt to what this means.
And what about the mortgage market? Rental Britain means there’s an untapped market for better mortgage products for shared ownership and other intermediate options for those who cannot buy conventionally.
Already, shared owners who would have moved to full ownership in order to sell and move on are finding they can’t, and the market has started to respond by enabling them to sell shares to first time buyers.
Another big unknown is what will happen in 20 or 30 years when ’Generation Rent’ hits retirement age and needs to pay housing costs with no capital cushion.
The industry will have to respond to the fundamental shifts that are changing Britain’s housing market.