Will the multitude of obstacles facing the market hamper its growth this year?
The mortgage and housing markets face an uphill struggle to accelerate to their true potential this year, according to the Council of Mortgage Lenders. While far from enough to send the market into reverse – steady growth is still being predicted – the sector faces a series of roadblocks in the form of buy-to-let being shunted into gridlock, affordability pressures and a shortage of new homes.
The frustration within the industry is that expansion could be greater if conditions were more favourable. Even the Government’s attempts to turbo-charge the first-time buyer market will not be enough to send the overall –sector into top gear just yet, it is claimed.
The CML expects gross mortgage lending of £237bn in 2016, up from 2015’s estimated total of £214bn. That would mean a 10 per cent rise, up from the five per cent jump last year.
Yet this compares to predictions made a year ago of £222bn in 2015 and £240bn in 2016.
The trade body expects the number of residential property transactions to be 1.25 million this year, compared to 1.22 million in 2015 – an increase of just two per cent.
The CML says in its 2016 forecast that “growth prospects for this year and next have been trimmed back slightly, given the weaker global outlook. Despite this, economic fundamentals in the UK look strong and set to continue. This is helping to underpin the housing market”.
UK economic conditions remain relatively positive. The jobs market recently posted the highest proportion of working-age people in work since records began more than 40 years ago.
The current rate of unemployment of 5.2 per cent is the lowest since 2006. Mortgage arrears are also expected to remain fairly flat at just over 100,000 a year, according to the CML.
But the council adds: “Looking ahead, we see only limited market growth potential over the next two years. The main factors restricting activity are the already elevated levels of house prices relative to earnings, regulation in the home-owner market and uncertainty around BTL. Reinforcing our relatively subdued activity forecast is the lack of properties on the market for sale.”
Buy-to-let is one sector that has taken a bashing. Chancellor George Osborne revealed in November’s Autumn Statement that he would increase stamp duty for investors, intended as another shot in the arm for the first-time buyer market by reducing demand from landlords.
Osborne said at the time: “People buying a home to let should not be squeezing out families who can’t afford a home to buy.”
From April, anyone buying an additional home faces a steep hike in stamp duty as they will pay 3 percentage points more than those buying a first or only home, unless the home costs £40,000 or less, in which case they will continue to pay nothing.
Someone buying a £275,000 property to rent would face an increase in stamp duty from £3,750 to £12,000 – nearly four times as much. This will lead to a fall in demand for buy-to-let due to increased costs, it is claimed.
The move comes hot on the heels of measures outlined in July’s Summer Budget, which will see a cap on mortgage interest tax breaks and will be phased in from April next year. Landlords can currently claim tax relief at their marginal rate but this will be restricted to the basic rate of 20 per cent.
The CML says: “Inevitably, these will adversely impact the rate of growth in the sector and even cause lending volumes to ease back.”
The council predicts the number of BTL home purchases will fall from 116,000 in 2015 to 105,000 in 2016 and 90,000 in 2017, though it expects BTL remortgage activity to grow.
Old Mutual Wealth financial planning expert Rachael Griffin says: “Many landlords are already concerned that the margins on BTL investment are being squeezed, and for some this may be the final nail in the coffin. It could trigger a wave of sell-offs from BTL landlords looking to avoid the additional surcharge in April 2016.”
Not everyone thinks the future is clear-cut, especially if investors believe BTL gains are large enough to withstand the gale blown at them by the rise in costs.
“This is the fourteenth change to property taxes over the past four years,” explains Jo Bateson, tax partner at accountancy firm KPMG.
“Recent experience has shown that individuals have opted to pay the higher taxes rather than investing differently. However, time will tell whether this additional change has finally tipped the balance.”
However, as Bateson says, things could go either way. She adds: “These measures might dampen demand for the kind of properties that are marketed as BTL investments. And -investors may decide to re-evaluate the -attractiveness of the residential market.” While BTL purchases may eventually drop off, it is claimed that the stamp duty rise may lead to a temporary surge in demand for homes in the months preceding the April hike.
Doug Crawford, chief executive of conveyancing specialist My Home Move, believes the changes will “turbo-charge the housing market over the next few months as BTL landlords and holiday home buyers race to beat the deadline before the changes bite in April”.
He adds: “This will inevitably push up property prices in the short term, especially in locations popular with BTL investors, such as London.”
Mark Harris, chief executive of SPF Private Clients, is playing down the impact. He states: “The government has changed the political spectrum to a very pro-home ownership agenda – but with a minor swing from the accidental/amateur landlord to a small element of first-time buyers, we don’t see much else changing.”
So will we get anywhere near the growth in house prices experienced in 2015? The Halifax House Price Index pointed last month to a 9 per cent rise throughout the year, up from 7.8 per cent in the whole of 2014. Some think such growth levels are unachievable in 2016.
“We’re projecting the market to grow year-on-year, with maximum growth of around three to five per cent,” says Graham Sellar, head of business development at Santander Mortgages.
“BTL has underpinned a lot of the growth seen in 2015. In 2016, we think the mix of the market will shift slightly towards growth in the first-time buyer and re-mortgage markets.”
While a slowing of house price inflation may help those further down the housing ladder, a chronic lack of supply is still hampering them. Government figures show that in the 2014/15 financial year, house builders began constructing 167,000 new homes. This is up from 161,000 a year earlier and 127,000 going back two years. Yet despite the growth, many experts believe that figure needs to hit 250,000 for supply to keep pace with demand.
The Government has talked for many years of the need to build more homes, the original Help to Buy scheme was one way in which it encouraged building, and it revealed further plans in its Autumn Statement.
Osborne announced a new Help to Buy Shared Ownership plan, starting in April, to remove many of the current shared ownership restrictions, such as who can buy, who can build the properties and who a shared ownership owner can sell their property to.
Another scheme, London Help to Buy, beginning in ‘early 2016’ will allow Londoners with a five per cent deposit to get an interest-free loan for five years worth up to 40 per cent of the value of a newly-built home. This compares to a maximum 20 per cent loan on standard Help to Buy, with the difference reflecting the higher cost of purchasing in the capital. In all, the Chancellor promises the Government will help to deliver 400,000 affordable new homes by the end of the decade.
The CML says the Government is adding “more firepower” to house building but forecasts there will be no immediate benefit: “On balance, we think these initiatives will exercise a progressive but only moderate stimulus from the second half of 2016 onwards.”
While it is early days, these specific plans have been met with measured praise, though a common theme from the housing and mortgage industries is that planning regulations hinder builders. –Notably, insiders argue that over-regulation and excessive regulatory costs slow down the pace.
Stewart Baseley, executive chairman of the Home Builders Federation, says: “The Government is clearly committed to increasing housing supply and home ownership. Measures introduced in recent years have led to a big increase in house building levels but the scale of the challenge requires further action to close the gap between demand and supply.
“The Chancellor’s announcements will provide extra impetus to deliver further increases in housing supply. Further reforms of the planning –system to increase the supply of smaller sites, to ensure local plans deliver, and to increase the rate at which planning permissions are processed – as well as releasing more public land – would be a huge step towards speeding up the rate at which builders can build.”
Wherever you look, there are many critics of housing policy, in particular that a key reason why first-time buyers find it so difficult to climb on to the housing ladder is that a lack of supply is keeping prices high.
Latest Halifax figures show the average cost of a UK home is over £208,000 – almost eight times the national average wage of £26,500.
The CML says: “House prices relative to earnings have been elevated for a considerable time, making it difficult for both first-time buyers to build a large enough deposit to get on the housing ladder and for potential home movers to trade up.
“This is likely to weigh on demand as house price inflation continues to outstrip income growth across large parts of the country.”
Mark Hayward, National Association of Estate Agents managing director, adds: “This lack of housing is why first-time buyers are feeling pushed out.
“To help FTBs find their feet, supply needs to be addressed. Osborne’s announcement that he’ll be building 200,000 new starter-homes is a good place to start, but until the wheels are put into motion we just won’t see a substantial change for first-time buyers.”
This group is seen by many as a key national priority, as first-timers have been for many years. The launch of Help to Buy ISAs in December was a sign of just that. They have been heralded as a huge step in enabling more first-time buyers to become able to afford a home of their own because the state will give thousands of pounds per person to achieve that dream.
These ISAs allow first timers to save up to £200 a month (on top of an initial £1,000), with the Government topping the fund up by 25 per cent at the point at which they buy a home worth up to £450,000 in London or £250,000 elsewhere, with a cap of a £3,000 bonus.
Those in the industry agree that the focus on first-time buyers is required.
Hayward says: “It seems as though FTBs are at the top of the government’s agenda following the further helpful initiatives announced during the Autumn Statement – which means we might finally begin to see FTBs cutting through the market.”
However, it may take time for the scheme to make an impact on the number of first-time buyers entering the market because of the way it is structured. As savers can stash away £1,200 in the first month and £200 in each subsequent month, once interest is added it will take about four and a half years to save the £12,000 needed to get a £3,000 Government handout.
“It is unlikely to give any noticeable boost to 2016 numbers,” explains David Hollingworth, communications director at London & Country. He adds: “That said, Help to Buy ISAs will be a great help in encouraging first-time buyers of the future to start taking their first practical steps towards saving for a deposit. Helping them feel there is a real point to saving, given the 25 per cent uplift, will foster the saving habit which is so necessary for any first-time buyer these days.”
Help to Buy ISAs have been supported by banks too, with all the major players offering a deal. Halifax is the stand-out, paying four per cent interest.
While such programmes will make it easier for first-timers to buy a property, some have speculated that it could lead to a rise in house prices given the boost Help to Buy ISAs will give to demand. Of course, such an outcome may make it even more difficult for those starting out on the ladder, especially if any hikes exceed the £3,000 gain they may get. “It can be argued that the original H2B did cause an element of house-price inflation,” says Harris.
While the future for first-time buyers is unclear, so too is the outlook for the great unknown of the entire economy: the base rate.
It has been stuck at its historic low of 0.5 per cent since March 2009, despite many false dawns over the year predicting ‘imminent rises’.
The latest such noises have appeared following the US Federal Reserve’s decision to increase interest rates across the Atlantic last month, for the first time since 2006, by a quarter of a percentage point.
Some question whether this could lead to a rise in the UK in the first half of 2016. The CML expects the wait to be longer, though not as long as others believe. It says: “Although financial markets currently see the first rate rise coming at the start of 2017, our view is slightly more hawkish as we see the second half of 2016 as more likely.”
Harris adds: “We don’t expect rates to change in 2016 as the economy is still too weak.”
On rates for borrowers, he thinks we may have already seen the bottom of the market: “Mortgage rates will fluctuate as lenders attempt to achieve targets or market share against increased competition. However, we still see an upward trend in best buys from the best pricing at end of 2014 and early 2015.”
Andy Knee, chief executive of legal specialist LMS, believes the expected stable interest rate environment in 2015 will facilitate demand and therefore a market uplift: “The market remains below pre-recession levels, so it’s full steam ahead for the mortgage and remortgage markets in 2016, boosted by greater economic prosperity and plummeting unemployment.
“With little chance of a base rate rise – at least until the end of 2016 – borrowers will be able to continue to take advantage of the competitive rates currently available,” he says. “The stage is set for the growth in the market to continue with competitive rates allowing for huge savings.”
Whether the scale of that growth can match the market’s true potential remains to be seen, though for the industry’s sake, at least the market is entering 2016 with talk of growth. The outlook has looked much worse in previous years, not so long ago.
Key regulations in 2016
Ray Boulger, senior technical manager at John Charcol
The EU’s Mortgage Credit Directive must be implemented by lenders by March. It will no doubt prove useful for many of the other 27 EU countries that currently have no mortgage regulation, but for the UK it is a nuisance, to put it mildly. It adds nothing more to consumer protection than the MMR but has resulted in the industry having to waste time and money complying, particularly with IT.
One of the FCA’s objectives is to improve consumer outcomes, which conflicts with a few MCD requirements. Fortunately, the FCA and Treasury have been pragmatic in how they interpret the requirements to mitigate the negative impact.
Three MCD requirements initially looked likely to lead to worse consumer outcomes, but sensible interpretation by the FCA and some lenders has mitigated the impact These are:
Consumer buy-to-let. The EU has invented an artificial difference between what it now wants us to call investment BTL and consumer BTL, with the latter broadly defined as a property not initially bought with the intention of letting it. This threatened to reduce lender choice for those remortgaging on to BTL after a let to buy or inheriting a property. However, most lenders have decided to offer consumer BTL with the same criteria as investment BTL. so the only impact for most will be an extra question to answer.
Foreign currency mortgages. Because the MCD requires borrowers with some income in a foreign currency to have the option to switch their mortgage to that currency, if the currency in question then fluctuates by more than 20 per cent against sterling, most lenders were expected to cease lending to such borrowers. But the FCA has accepted the requirements of the MCD can be met by allowing borrowers in this situation to remortgage.
Cooling-off period. The FCA was able to choose when the seven days started and has set it from when the mortgage offer is issued. Most people don’t want to complete within seven days of the offer and any who do are allowed to waive the notice period, so it is difficult to see what this requirement achieves.
Also following the MCD, second charge lending will be regulated in line with first charges. However, the Treasury was always planning to do this and it would probably have happened sooner if it hadn’t waited for the MCD to avoid having two bites at the cherry.
Key 2016 predictions
- Gross lending to rise from £214bn in 2015 to £237bn in 2016 – CML
- Property transactions to rise from 1.22m in 2015 to 1.25m in 2016 – CML
- Arrears to be steady at about 100,000 per year – CML
- Buy to let to contract – various
- First time buyer numbers to grow (but not immediately) – various
- Base rate to rise? No-one truly knows