Market defies pessimists and the outlook is stable

The intermediary market is at the heart of HBOS’ mortgage business. More than 70% of our mortgage business is now introduced through brokers.

We have an excellent combination of new and established colleagues in our top team determined to continue to make life difficult for our competitors. We have defined more distinct boundaries between the intermediary brands and it’s especially pleasing to see TMB launching so strongly back into the mortgage market, focussing particularly on the packaging sector.

The specialist sector is one of the fastest growing areas of the UK mortgage market. Social and cultural changes make specialist lending an exciting business. As a result, it seems that barely a week goes by without another lender entering these markets. This is something we relish. Competition is great for everyone and we’re proud, but not complacent, of our position in having leading specialist brands in these areas.

Regulation has brought with it a range of challenges, not least the additional cost pressures on all our businesses. Investment in technology and a determination to constantly address and improve our processes have become even more important. Organisations that tackle these issues head on will be the long-term winners.

This activity has been set against the backdrop of a changing market. All through 2005 our conversations with investors have been dominated by the economy and the possibility, in many investors’ minds, that the UK consumer is about to be swamped by debt, with significant serious implications for the housing market.

Of course that hasn’t happened and is now relatively unlikely.

The housing market has clearly cooled but just as interest rates have started to turn down, so we have seen clear evidence of a stable, if less active, housing market. Specialist products have done well this year. For example, buy-to-let has held steady, reflecting the fact that the average buy-to-let investor is committed to staying in the market for 10 to 15 years.

So what about the future? House prices look likely to outperform our own forecast in 2005. In other words, the market is slightly better than what we thought it would be. Despite what we have seen in the past few weeks I wouldn’t put money on the market racing away next year.

As the Monetary Policy Committee becomes more and more confident that oil price inflation has a fundamentally deflationary impact on the economy, so will it return more enthusiastically to a rate cutting agenda. It seems that won’t happen in 2005 but if it does not, it will happen very early next year.

In unsecured lending, we are seeing is a mixture of two things. First, consumers understand they now have enough outstanding on their credit cards and their personal loans – and we should always remember that consumers are not daft. They are capable of making those judgments.

Second, banks are reacting to a turn in the cycle by tightening unsecured credit lines. A lot of what we have seen in terms of arrears in this market is a function of that tightening rather than anything else.

But either because first-time buyers are returning to the housing market or because we see the scope for increased substitution of unsecured lending with secured lending, the prospects for volumes in 2006 are stronger in the secured market than in the unsecured sector.

So, the market continues to defy the pessimists and the fundamentals that have supported the economy remain strong.

James Crosby is chief executive of HBOS