A new Prime Minister. A rise in interest rates. House price growth. A decline in gross mortgage lending. Further consolidation in the mortgage market. More lenders providing point of sale offers. The end of decisions in principle (DIP). Greater mobile phone technology. The resignation of Jose Mourinho and the reformation of the Spice Girls. These are just a few points that may well happen in 2007, along with the fact that it will be a tougher year for intermediaries and packagers, and the winners will be those who find cost and time savings through greater use of technology.
When you make predictions for the future, you never get everything right. Who would have guessed that in 2006, for example, that Nationwide and Portman Building Societies would merge? Other than a few outsiders, not many. Who would have guessed that proposals to Self Invested Personal Pensions (SIPPs), which could have seen buy-to-let properties bought via a pension, get overturned at the last minute? Would anyone have predicted the outcome of the Home Information Pack debate?
So the moral is, expect the unexpected. Just ask Michael Fish, who famously said, ‘there’s no hurricane coming’. It is vital that intermediaries keep abreast of the environment – in terms of socio-economic and technological changes as well as those at a more micro level within our own market. This will help them plan for the future, which should include contingency planning too, because there are so many variables that can such affect plans. This is why economists adopted the Latin phrase ‘ceteris paribus’, which effectively means ‘all things remaining equal’. So on that note, here are my predictions for 2007, ceteris paribus.
Economic outlook
In 2006, we saw interest rates rise for the first time since August 2001. With inflation still above the Monetary Policy Committee’s target, the market is fully expecting a further rate rise in 2007 and this could be as early as February and we could even see a rate of 5.50 per cent in 2007. From this fence that I sit on, it is difficult to see a Bank Base Rate higher than that, but I wouldn’t rule it out nor would I rule out rates reaching 5.50 per cent before a later reduction.
In 2006 we saw unemployment grow and this will continue in 2007. Some commentators would like us to think that this growth in unemployment levels is due to a weakening economy. It isn’t. The reason for this is that the number of people looking for work is growing at a faster rate than jobs are being created, partly due to recent large scale immigration. About 250,000 new jobs are created each year, but over the last 12 months the labour force has grown by 520,000. So as supply outstrips demand, unemployment has risen.
Although the economy is not weakening, intermediaries should be conscious of a rising jobless total. We could expect, therefore, a bit of credit downturn in the second half of 2007, due to this point and due to a rising interest rate environment biting. Yes, many people will be on fixed rates, but many will see their rates expire in 2007 and face a mild payment shock. This can easily become an opportunity for proactive intermediaries, because a rising rate environment will mean less inertia and greater demand for more advice and remortgaging.
Mortgage matters
On the subject of remortgaging, lenders’ retention programmes could lead to a further decline in remortgage business and an overall decline in gross lending. While one or two lenders have indicated they will work with intermediaries to deliver their retention goals, I suggest an air of caution here – don’t believe the hype. As a result, I believe there will be less remortgaging and gross lending will decline, but net lending will increase. Therefore, brokers and packagers should retain control of their own destiny, rather than rely on others.
The Council of Mortgage Lenders (CML) has a different view and predicting gross lending to be £360 billion this year and next, as well as an increase in net lending. What actually happens, we’ll have to wait and see, but if intermediaries plan for a worst case scenario, rather than be complacent, they will be better positioned.
So, if gross lending is to fall, where are the opportunities for mortgage intermediaries and packagers? Well in truth, there are many. I fully expect to see a continuation of the upward trend in the share of the market now commanded by intermediaries. Regulation and technology has helped this trend, so if mortgage intermediaries can generate a larger slice of the pie, at the expense of the high street, then they will win. And they can do this through technology and the more specialist product areas.
Product opportunities
Focusing first on mortgage products, there are two areas which will continue to reap rewards for intermediaries this year: buy-to-let and non-conforming. The CML is predicting that buy-to-let borrowing will rise faster then for home buying and account for 13 per cent and 14 per cent of gross lending in 2007 and 2008 respectively – an increase on 2006. Buy-to-let is a great intermediary product because intermediaries can sell their clients more than one mortgage. Over the years we have seen a number of new landlords enter the market and many build on their portfolios – a trend that will continue.
Despite other scaremongering stories, buy-to-let will continue to have a strong demand and will counter the continued lack of first-time buyers. But there is a caveat. In certain areas, rents have not risen in line with house price growth, which has meant the rental assessments did not always stack up. This led to the innovation of 100 per cent and 110 per cent rental assessments to solve the problem. However, with interest rates rising, it could create similar problems, so I fully expect new buy-to-let products to counter such an issue.
Moving onto non-conforming, this sector has blossomed in the last couple of years. We have seen a greater understanding of the market, and this sector will continue to grow in 2007, especially in near-prime.
In 2006, we saw mortgage arrears rise as well as the number of repossessions. As mentioned previously, with unemployment and interest rates rising, more people will experience challenges with their mortgage repayments today, eventually leading to a large non-conforming sector.
Similarly, the market will grow because insolvencies (bankruptcies and Individual Voluntary Arrangements) are on the up, partly due to the Enterprise Act and partly due to changing attitudes to debt. Defaults also reached an all time high in 2006 and CCJs increased too. Add to this student debt, rising divorce rates and an overall changing attitude towards a buy now, pay later society and it’s easy to see why the non-conforming market will grow. The stigma has gone and technology makes life easy too.
So in 2007, buy-to-let and non-conforming are key product areas.
Technology talks
Technology has been mentioned a few times within this article already. And there is a reason for that. It’s because technology is so important in today’s competitive market. In 2007, we will see more technological advances and more intermediaries and packagers embrace technology, in order to make their businesses more effective and profitable.
In the second half of 2006, GMAC-RFC became the first lender to provide point-of-sale offers, using automated valuation models. More lenders will emulate this model to retain a competitive position and as competition hots up, I expect further consolidation among mortgage lenders and distributors this year.
Back to technology, more and more intermediaries will be using these advanced systems too, as they realise that the faster the offer (and completion) the less phone calls they make, the less administration and the more sales they make too. If gross lending does decline and competition increases, then technology will become even more important.
Technology will also help the intermediary sector increase its market share. Technology enhances the service provided, it doesn’t replace it, so anecdotal evidence suggests that intermediaries using point-of-sale technology have increased their business due to more word of mouth referrals.
I expect 2007 will continue to see the slow, drawn-out death of DIPs. To be honest, I am surprised they still exist, so with more advanced alternatives the decline of DIPs will be accelerated. I also predict more intermediaries will go wireless in 2007, and take ‘Mohammed to the mountain’. Clients are busy too, so WAP (wireless) technology now allows brokers to take their laptops to places like Starbucks and give an instant offer. And with mobile phone technology changing, we will see this happen on phones and Blackberrys in the future – who knows, even in 2007.
Summary
With a forecast and a summary, I feel like Michael Fish, but I expect my outlook won’t be as drastically wrong. The market will be tougher in 2007, with rate rises on the way. And who knows, a new Prime Minister could create the unexpected change to the market. Nonetheless, in 2007, intermediaries can increase their business with buy-to-let, non-conforming and greater adoption of technology.
