Increased competition among lenders combined with low base rates and therefore lower interest rates is creating pressure on the margins that bolster their mortgage books. However, there is another factor at play, which is having a major impact on a lender’s growth prospects; the liquidity of housing stock.
Over the past five years almost two thirds of prime lending has been accounted for by the home purchase market. Overall we have seen 1.2m housing transactions in 2015 which is the same as the annual average over the last 40 years. However, over the same period, the stock of homes has grown by 11 million, which means market liquidity is falling. In fact, just 5% of the overall stock of homes are transacting, the equivalent to a home purchase move by households once every 20 years.
There are a number of structural, demographic and market factors combining to limit transaction volumes. Prolonged low inflation erodes debt more slowly in real terms meaning households have to stay in a home for longer as they pay down their debt, while the UK’s ageing population means there is greater focus on borrowing for retirement.
Furthermore, higher levels of stamp duty have added to the cost of moving in London and the South East particularly, while also reducing buy-to-let demand. Add to this greater mortgage regulation, notably stricter affordability tests, and we have several major reasons that might put someone off moving home.
Investors buying homes and converting them into rental properties as pseudo annuities, has exacerbated the supply problem further by taking more housing out of circulation. The profile of buyers setting prices has also changed over the last decade with cash buyers accounting for 25% of all sales (although this represents a mix of investors and conventional homeowners). Investors buying with a mortgage account for 11% of sales and that share has been rising steadily. However, this could slow as lenders move to increase interest cover ratios and regulation by the Bank of England looms.
So what about the number of first-time-buyer transactions? They’re close to the levels seen in 2007, largely due to the bank of mum and dad and the impact of Help to Buy, but getting equity will remain a problem for first-time buyers and will depend on the prospects of HTB.
However, it is the lack of movement among existing home owners that is the most significant factor. By taking advantage of lower rates and avoiding taking on more debt to move up the ladder, existing homeowners with a mortgage now account for the lowest share of home sales for a decade.
So what does all this mean for lenders? Housing turnover is likely to hold at current rates with higher levels of activity in the midlands and northern parts of the country offsetting slower growth in sales in London and the south east. Savvy lenders will look to shift their focus to these regional markets, where loans are likely to be smaller but should ultimately lead to more originations and consequently higher levels of gross lending, albeit at higher operating costs.
Greater attention should also be paid to growth in emerging segments such as equity release, which as a product posted a record year in 2015 as more homeowners looked to convert equity they have built in their home into income. Although, it’s crucial that appropriate governance policies are put in place to ensure continued trust, success and to reduce any risk of mis-selling scandals in the future.
Ultimately with lenders expected to write more individual loans at lower values to meet their growth targets, adjustments will have to be made to operations to increase business efficiency and to ensure greater cost efficiency. The readjustment could lead to some aches and pains but at the end of the day lenders will find it’s worth it.
