Figures from the Ministry of Housing, Communities and Local Government show housing starts in England remained reasonably robust in 2018, however, it’s unlikely that this indicates an entrenched trend towards increased building rates.

The imminent removal of Help to Buy will weigh on developer appetite from later this year and data from the House Builders Federation already shows sharp falls in new build site visits and net reservations.  Capital Economics notes that builders have increased their use of sales incentives while price pressures on new build are growing.  They are predicting a ‘gentle decline’ in housing starts both in 2019 and 2020.

Gross mortgage lending in the residential market during 2018 was £267.5 billion, a rise of 3.8 per cent on 2017, according to UK Finance figures. January’s lending figures were also reasonable, showing that year on year we have a consistent market.  Research house Pantheon Economics raised the prospect of a poor first quarter this year however, pointing to the slowdown that preceded the Brexit referendum in 2016. Mortgage approvals fell 9 per cent in the four months to June 2016 and by a further 7 per cent in the two months after the vote in spite of very competitive mortgage pricing.

There is no doubt that early signs coming from AMI members suggest that the purchase market is already feeling tricky while estate agents are noticeably quiet. RICS reported average stock levels at 42 per branch in December.

The housing market is already pointing to a slowdown in the first half of 2019. The latest RICS report shows that new buyer enquiries are falling rapidly, despite rumoured high levels of activity in the on-line property sales search engines… New instructions meanwhile dropped again, keeping this measure in negative territory for the past six months.

Capital Economics meanwhile is predicting a ‘weak outlook’ with transactions taking a hit and house prices stagnating. The research house is also predicting that remortgages will peak in 2019 and fall back the following year, putting further pressure on volumes.

Construction is also under the cosh. RICS construction market survey showed the balance of respondents reporting a rise in workload fell to 11 per cent in Q4 from 20 per cent in Q3 2018. The deterioration was broad-based across all sectors, but was particularly severe in the commercial and industrial sectors where activity stalled for the first time in six years. This, according to surveyors, is down largely to uncertainty over Brexit.

Depressed activity in the housing market will feed into GDP. The Bank of England noted in its November Inflation Report that around a fifth of housing investment is accounted for by spending associated with property transactions, including estate agent and legal fees. Spending on dwellings has risen recently – likely due to the inhibiting cost of stamp duty in areas with high capital values – but housing starts remain broadly flat. The Bank expects housing investment to be ‘modest’ in the near term. AMI concurs; the mortgage market is therefore likely to be largely supported by remortgage in the first half of 2019.

 

Mortgage competition

Mortgage pricing has never been keener and competition between high street lenders, particularly at the prime end of the market, is vicious. We expect this to continue into 2019 as pressure on lenders to move money out by way of mortgages is only likely to increase.  If anything, competition to secure the most prime customers may even increase as fears rise about house prices and job security in the wake of either Brexit or uncertainty caused by no Brexit yet.  Because of this we also expect even some of the larger lenders to move further along the risk curve, away from the cautious space they have occupied for the last decade.

This will put pressure on smaller lenders which lack access to capital market funding. Unable to compete on price, there may be increasing pressure to loosen lending criteria.  LTVs and acceptable levels of adverse will be two areas that the market should keep an eye on if we are to avoid criteria creep.  This has significant risk at this stage in the economic cycle.

 

Funding

A number of lenders have reported funding challenges in the past few months, either suspending new lending or in the worst case scenario, entering administration. Wholesale funding lines are reportedly seeking returns that are undeliverable in the existing UK market; residential mortgage backed securitisation all but stopped in the second half of 2018, despite a couple of notable exceptions.  Experience and strong credentials in these markets is essential to get a decent price.

There is a real and increasing challenge presented by significantly higher interest rates in the US.  The rates of return available in global markets now exceeds those in the UK – in spite of the underlying quality of residential mortgage assets.  Venture capital, private equity and hedge funds are seeking returns that are hard to find without moving to riskier lending criteria and models. It is our understanding that both the Financial Conduct Authority and the Prudential Regulation Authority are watching this closely.  The issue appears to be that funders are looking for returns at a rate of risk that is not attainable in the UK at this point.

The situation presents a conundrum for the mortgage market: hot money looking for a return, regulators limiting returns and the potential for property markets to be starved of funding in certain corners of the lender market. It is no co-incidence that savings rates have improved markedly over the past six months as wholesale funding falters and lenders with the option to raise retail deposits are forced to compete more aggressively to get money onto their balance sheets.

It is a set of circumstances that shifts continuously, but unwinding quantitative easing and the cheap money provided to lenders under the Term Funding Scheme and Funding for Lending was always going to be hard.  Lenders are already planning how to jump these hurdles and for some, it might be a case of “too high”.

 

Product transfers

AMI is happy that the FCA and PRA will increase their oversight of the product transfer market following UK Finance’s decision to publish quarterly lending figures for its members in 2018. AMI has long argued for increased transparency in this part of the lending market and believes it will provide better outcomes for consumers if regulators and the wider industry understand how existing customers transferred internally onto new deals are dealt with.

The PRA and FCA are now jointly consulting on the best way to capture sufficient data from lenders, with proposals suggesting lenders will need to report internal product transfers, further advances and any additional information on outstanding debt secured against the property with that same lender. Reversion rates will also be required.  This move is welcomed by AMI and should support a more informed approach to dealing with the loyalty penalty issue raised by Citizens Advice in September last year.

AMI believes that UK Finance is now committed to disclose the split between intermediated, advised and execution-only on product transfer lending. We are also of the view that more work needs to be done to consider the activity required to justify a product transfer or a remortgage.  A full fact-find and suitability might be a step too far.  The initial discussion of the best price on the favoured PT versus a similar cheapest remortgage product does not require full income evidencing, affordability and documentation.  This would only be necessary to secure a remortgage, so if the product transfer is the right route, surely a simple process is deliverable to make it easier for the consumer and the broker.

Currently intermediaries earn a far lower procuration fee on most product transfers, resulting in a bigger margin available to lenders securing this type of refinance over remortgage. This potentially risks creating a bias within lenders, which are pushing for product transfers over remortgage and purchase business. It is natural that lenders should wish to protect profit and retain their customer, particularly when there is so much pressure on their direct business and branch closures are ongoing.

However, AMI believes that this might side-step the spirit of the Mortgage Market Review rules that support the value of advice. The past two years have seen more lenders begin to pay product transfer procuration fees. This is welcome, but it has also exposed just how significant this part of the market is.  A potential bias driven by cheaper pricing on product transfer rates than on traditional remortgage rates could be created and lenders and brokers should assess and measure this as part of their product monitoring.  There is little information available to test this theory, which is why AMI is pleased that the FCA has agreed lenders must start to submit lending figures on this critical segment of the market. At the same time, it must not overlook any unintended consequences created by the banks’ control over customers taking product transfers. While keener pricing offers customers lower payments, it should not be forgotten that value consists of more than just price.  Consumers’ circumstances continue to develop and evolve making the need for on-going advice essential.

Robert Sinclair

March 2019