The UK mortgage market is on the up according to a raft of new reports and anecdotal evidence from brokers at the sharp end dealing with customers. The Council of Mortgage Lenders (CML) announced a record amount of lending in January with gross mortgages totalling £23 billion, almost a third more than January 2005.
Right on cue, estate agency Hometrack reported that UK house prices in February rose by 0.4 per cent, which although only a slight increase, shows a sustained pattern of growth since the back end of 2005. Hometrack also said that rising prices were being driven by demand for property outstripping supply. This was quickly followed by figures from Hamptons International showing that the company had experienced a surge in remortgage activity.
Brokers that Mortgage Introducer has spoken to are also reporting increased business, with enquiries from new customers as well as activity from existing clients either looking to extend their borrowing or secure a better deal. Although much of the business being done is for remortgages, brokers say the number of purchase mortgages is on the up and there has also been a flurry of activity from first-time buyers (FTBs)
Broker Rod Murdison, of London based Murdison & Browning, says that many first-time buyers will have recognised that property prices have begun to increase and will therefore be keen to buy before the rises start to escalate. Murdison explains: “For the first time in 18 months I have had enquiries out of the blue, and a number of those were first-time buyers.
“From their point of view, they have not been in the market for two years, so that means they have two years’ worth of salary increases in-hand and two years’ worth of additional savings in the bank, which will increase their buying power. With prices beginning to pick up, they won’t want to miss the boat.”
Murdison points out that although potential first-time buyers might have more money in their pockets, it doesn’t necessarily mean that homes are more affordable for them. According to the Nationwide House Price Index at the end of last year, even during a supposedly slow 2005, house prices still rose by an average of 1.8 per cent nationally. Although certain areas did see dramatic falls, such as the prime minister’s constituency of Sedgefield, in Durham, which recorded a fall in property prices of 12 per cent in 2005.
FTB challenges
Perhaps more indicative of the challenges FTBs face were Nationwide’s findings on affordability. The building society found that in London, average mortgage repayments were swallowing up almost two-thirds of the average take-home salary. This is compared with Scotland where average mortgage repayments work out at around a third of take-home pay. Unsurprisingly, given the affordability of its property compared to elsewhere in the country, Scotland saw a 9 per cent rise in property prices during 2005.
But Murdison says there is little the mortgage industry can do to ease things for FTBs. “Brokers and lenders are in a huge cleft stick situation. If a lender were to break ranks and offer a mortgage with higher multiples, they would be castigated in the press and inundated with more business than they could handle. Yet I know from my own experiences that there are would-be first-time buyers out there that are actually paying more in rent than their monthly mortgage repayments would be, yet because of the income multiples they can’t get a mortgage.”
Murdison says that the one area that has seen a slight reduction in business is amongst buy-to-let investors, where only existing landlords seem to be showing any interest in remortgaging or buying.
He explains: “These are people with at least two or more properties on their books, and they are not worried about finding new tenants or rising property prices. They see all their spare capital as wasted money, so they are starting to re-finance their current properties and re-invest in other properties.”
Sustainable growth?
It would perhaps be unfair to dampen the spirits of those heralding the revival of the UK property market, and the upswing of the mortgage industry along with it, but there must be some concern over whether the upturn is sustainable and, more to the point, could it trigger another dose of spiralling house price inflation, which in turn could drive up consumer spending and borrowing.
It was just this mix of factors that led to the Bank of England upping interest rates almost two years ago, which started the cool down of both property prices and consumer spending. Will the government or the Bank of England need to step in again at some point in the near future to steady potentially rocketing house prices?
Murdison believes that the government, and to a degree the Bank of England, will be content to let the property sector and market forces find their own level, describing any possible government intervention as a ‘blunt stick to poke a frog’. “You can poke the frog, but you have no idea what it will do. It my jump forwards, it might jump backwards. Or it might just sit there,” he explains.
But it was only 12 months ago the tabloid papers were full of warnings of an impending property crash after the double digit rises of the previous two years came to a grinding halt and the scale of borrowing off the back of property equity became worryingly apparent. Luckily that scenario never happened – so was it a classic case of talking down the market?
David Hollingworth head of communications at London & Country (L&C) disagrees, saying: “People predicted a cooling off of house prices, and that is what happened – and we needed it.” He adds: “There is a possibility that an upturn in the market could start to boot up house prices again, and that would be of concern. But we have to look at what might happen with interest rates as that will have an impact as well.”
Hollingworth suggests that it was the concern over predictions of a price crash, plus the very real interest rate hikes, that dented consumer confidence over the last 12 to 18 months. He says that confidence is returning now: “The current climate is positive and has been since the end of last year. L&C is very busy and the remortgage sector is very buoyant, although we are now seeing signs that the purchase business is improving as well.”
New developments
The positive mood has extended to lenders, a number of whom have recently released new products on to the market, while others have announced new service developments, such as Alliance & Leicester, which announced this week that it is to offer non-conforming, near-prime, self-cert and buy-to-let mortgages.
Hollingsworth says that borrowers coming to the market now will have a wide choice of competitive deals and good rates, particularly those looking to fix their mortgage for a few more years. But he agrees with Murdison that it is still not a solution for the first-time buyer affordability problem.
He says: “I think we will see a continuation of lenders looking at guarantors for first-time buyers, but it is not realistic to think that all first-time buyers will be able to get on the ladder immediately. I hope we don’t see house prices running away from them, so they have time to get a foothold soon.”
Perhaps the underlying strength of the current upturn in property is the apparent health of the UK’s economy in general, which although not booming, certainly seems stable. Announcing January’s lending figures, the CML also pointed to a steady economy, saying that house buying had remained robust due to consumer confidence in the market and the expectation that interest rates will remain stable.
Michael Coogan, CML director-general, said: “Mortgage lending in all categories has been strong in recent months. This reflects the fact that consumers are feeling more certain about the future of the housing market and confident that house prices are unlikely to fall.
“The interest rate outlook for the near future is for stable rates. Our recent figures show that the majority of new borrowers are taking out fixed rate loans to provide payment certainty at affordable cost. The mortgage market looks set for continued steady growth against a backdrop of pretty positive economic conditions.”
Mounting debts
However, although the general economic outlook looks steady, there are signs that the past 18 months of spending, extending of debt and even fairly modest rises in interest rates, have taken their toll on people. Bankruptcies and insolvencies rose in 2005, with particular growth in the number of individual insolvencies. This means there will be a large number of borrowers out there that are either facing difficulties, or at least will be looking to consolidate sizeable chunks of debt into their mortgages.
According to Alison Hutchinson, managing director of Kensington Mortgages, this could at least help to keep a lid on house price inflation. She says: “I don’t see the market suddenly running away and I believe that the modest growth will be in pockets. For example, with average LTV across the country still being just over 50 per cent and the unsecured debt mountain now being over £1.1trillion, the demand for remortgages to enable customers to better afford and clean up their outstanding debts is a natural expectation.”
Hutchinson says that even if borrowers have not suffered major problems with debt management over the past 18 months, relatively minor issues such as a missed mortgage repayment could go against them if they turned to a mainstream lender for a new mortgage.
She says that this could translate into more business for specialist lenders like Kensington, a view supported by the amount of activity amongst new specialist lenders. Hutchinson says: “The recent end of year announcements showing bad debt charges from some of the UK’s largest banks are at the highest they have been for many years, which is just one of the signs that would support this expectation.
“This should not have been a surprise to the market, but it does suggest that more consumers are increasingly going to have a less than clean payment history, increasing the demand in the specialist-lending market. Some consumers will struggle to pay back all their outstanding debt as they had originally planned and will therefore look towards specialist lenders for help. This demand, along with increased supply as the number of lenders in the market continues to rise, means that this will be interesting segment to keep your eye on over the coming year.”
Changing demographics
The UK’s changing demographics could also have an impact on how the property market develops over the next few years, and also what steps brokers and lenders must take to keep up.
For example, the number of self-employed people, currently sitting at 3.5 million, is rising by around 200,000 a year. Many of the newly self-employed will be setting up their own businesses as a result of redundancy, whilst others will be pursuing temporary, contract or interim employment roles. This will mean more borrowers with complicated income patterns that lenders will need to accommodate.
And, as Nationwide’s House Price Index shows, the new property hot spots are moving further North, so people will have to look further and farther a field to find an affordable property. This will not only mean price increases in previously quiet areas, it will also cause changes in the personal circumstances of borrowers that lenders and brokers with have to deal with.
Yet this is still a positive time, and after 18 months of uncertainty on top of the upheaval caused by regulation, it is certainly welcome. For brokers the key is to capitalise on consumer confidence and the availability of good products at keen rates, and turn the positive feeling into sales.
Paul Beadle is a freelance journalist
