Another six months into another whirlwind year. The evolution of the mortgage market continues apace with technology a significant factor in the industry’s rapid growth and highly competitive client offerings. There have been a number of recurring themes since January, and many will remain so for 2007 and beyond.
You couldn’t make it up
Home Information Packs (HIPs) seems as good – or as bad – a place to start. Frankly, you couldn’t make this story up. With more twists and turns than a Dashiell Hammett novel, the HIP went from debacle to eventual disaster. With the date of 1 June 2007 firmly in mind, HIP providers and the property industry as a whole was gearing up for launch. The only problem was a last-minute dramatic plot twist with Ruth Kelly’s announcement of a postponement to 1 August and then only for four-bedroom houses. How on earth did we end up in this mess?
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The issue for HIPs is that they now seem to be fatally holed below the waterline. There surely was plenty of time to decide if enough energy inspectors would be available. One thing is for sure – that the housing market is in long need of a radical change. It is going to be very hard to see how this can happen without the HIP. After all, the path to here is 10 long years. If not HIPs, then where next?
Trouble in America
Back in February and March, the alarm bells were sounding and the ripples spreading of non-conforming problems in the US. The problems in the US are, of course, regrettable, but the chances of anything similar happening in the UK are very remote. There are key differences in the markets that were not highlighted sufficiently well.
The US had a tradition of long-term fixed mortgage rates of 15 or up to 30 years, however the rise of the adjustable rate mortgage from almost nowhere has been a big factor in the recent problems. Following the dot com bust, rates fell to as little as 1 per cent. With roll-up and low start type mortgages being taken up with a slack attitude to affordability, when reality hits, it hits hard. Americans, not simply those that have non-conforming characteristics, have simply borrowed more money then they are realistically capable of repaying. Property prices have fallen heavily in many areas. This can’t be solely laid at the door of the non-conforming lenders. This was simply a boom that consumers exploited to the full. The problem is that rates have adjusted to a normal level and that’s what has and is causing the pain.
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The real differences between the US and the UK markets are clear. Property prices remain steady and there’s not the over-exuberant borrowing that has taken place in the US. Plus an often overlooked factor is the continuing shift in UK demographics, particularly the growth of ‘singletons’, which will continue to be essential in driving the market.
Reality check
The UK has seen its own reality check. The Monetary Policy Committee (MPC) has been steadily raising rates since last August. The most recent 0.25 per cent rise was in May 2007. Rate rises are, as always, unwelcome but a necessity. The hot money is on a further 0.25 per cent in 2007, perhaps late Summer or early Autumn. If so, that will mean more pain for mortgage customers. Lenders can’t ignore the fact that these rises will begin to make borrowing customers twinge. Let’s look forward to some rate cuts in 2008. My only question is has the MPC given itself a problem by solely targeting inflation? Time will tell.
Buy-to-let
One issue that seems to be constantly on the agenda is the continuing highly competitive mortgage deals. The customer quite simply never had it so good, with product options to suit virtually every customer scenario at frankly amazing mortgage rates. This type of competition is a sure sign of a healthy and vibrant mortgage market.
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One sector that continues to grow and prosper is buy-to-let. From modest beginning in the mid to late 1990s this market still has the power to amaze. The facts are very compelling. Council of Mortgage Lenders’ figures show the growth in the buy-to-let market over the last three years has all but doubled from over 400,000 in 2003 to over 700,000 in 2005. Consumer demand remains strong and shows no sign of abating. Demand has in large part been driven by significant sociological changes in the UK. A phrase I loathe but none the less will use is ‘singletons’. The growing change in relationships, with a growing tendency to live alone, an aging population, and entering into marriage later are all creating immense pressures on the housing market. Add into the mix that nationally we are well ‘behind the eight ball’ with plugging the growing house building gap.
A further attraction of the buy-to-let market are those responding to changes in other financial sectors. The poor public perception of pensions has created a new class of landlord, one that wishes to invest for their retirement. Again, factor in that since the dot com bust, uncertain stock market returns are providing investors with alternatives. Property for investment continues to look attractive and landlords look to have a strong appetite.
There is little evidence that the newer landlords are not property professionals and therefore not in the market for the long term. Again these comments are misinformed and wide of the mark. Surveys continue to show that landlords are in for the long haul.
Affordability
In the residential market affordability continues to be a major issue. First-time buyer activity continues to languish at levels far below 2001. Plus with median income multiples of 3.21 and with mortgage payments 16.8 per cent of first-time buyers’ income the highest for many years, the fact is that property prices remain strong and look to be stable. No wonder first-time buyers are having such a difficult time.
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The answer? Well that’s a pretty tough one. With prices at current levels it seems that these numbers won’t improve anytime soon. Lenders need to be innovative with the treatment of income and schemes that use the parents’ income to get their offspring on the property ladder are very welcome. One thing that looks a dead cert is time will sweep away income multiples. Increasing numbers of lenders are moving to affordability based calculations. This makes far more sense than the rigidity of the income multiple system.
On the housing availability front some things never change. Even with Gordon Brown’s announcement of 100,000 house in eco towns versus what is needed to fill the housing gasp continues to grow. The UK needs to build a city the size of Leeds between 2000 and 2010, to fill this gap requires the political will to do so. 100,000 homes is a start but a long way short of what is needed. The challenge politically is that the demand is strongest in the South East of England. There will some big challenges ahead.
Brokers still dominate the mortgage market. 2007 so far has proved to be another busy and successful year. The much predicted demise of packagers in 2004 has been proved false. The packager sector is in rude health and continues to deliver enormous mortgage volumes. There have been some interesting developments in this sector with GE taking a stake in Solent and Kensington disposing of TML.
Technology continues to be an important factor in the industry’s success. The rate of technological change has been dramatic to say the least. Lenders continue to deliver to the market technological solutions that improve brokers’ lives. Can anyone remember how we managed before the web?
The success of the market continues, with lending records smashed again in March 2007. Yet gain the industry has done what it does so well – provided an excellent service to customers by delivering the products they need. One thing I know is that the second half of 2007 will be just as interesting as the first. mi
