This year has been another roller-coaster ride for the UK economy, but sectors such as the mortgage industry again exceeded all expectations as interest rates reached their lowest point for 48 years and the industry experienced record figures during the year. By the end of 2003 gross lending is likely to top £270bn and lenders are achieving their highest number of completions ever.
But, going back to the start of the year, despite predictions based on a weak global outlook and the uncertainty of a conflict in Iraq, conditions in the housing market remained steady. Economists predicted at the time that the key risks for the sector would be threefold: a sharp rise in interest rates, a significant increase in unemployment or a large fall in consumer confidence. So what did happen?
Starting with interest rates, we have seen little change throughout the year. In January, the Bank of England base rate was 4%. It was reduced to 3.75% in February and again in July to 3.5%. Just recently in November it was raised back up again to 3.75% – and in December the rate was held – but it is crucial to remember that it is still lower than at the beginning of the year.
A combination of factors determined these interest rate changes. The Iraqi conflict contributed to keeping stock-market levels depressed, slowing down what was already a weak global economy. This resulted in the Bank’s decision to reduce rates in February and July in an attempt to stimulate consumer confidence and ultimately the economy.
Yet while Bank base rates showed little change during the year, fixed rates were more slightly more volatile, particularly in the second half of the year as money market rates were re-priced to reflect anticipated hikes in the base rate. This was perhaps one reason why fixed rates were less popular in 2003, with borrowers preferring discounts and tracker rates.
Low interest rates meant that consumers were spending more and when it came to saving, bricks and mortar appealed more than traditional investment types. This was good news for the housing market and in particular this contributed to the continued rise in the buy to let market.
Other factors influencing the market include consumer confidence which remained strong primarily due to low unemployment figures. This, together with low interest rates, kept the market buoyant during 2003. Then as we reached November, it was clear that the global economy was showing signs of a recovery but there were concerns that consumer debt was spiraling out of control. With a need to keep a tight grip on inflation and keep the 2.5% target in sight, the Monetary Policy Committee voted to raise base rates to 3.75%.
One of the year’s most talked about topics – and one that continued to dominate the media – was by how much house prices would rise and could such growth be sustained. Most economists predicted around 10%-15%, but we have seen this exceeded as annual house price inflation reached just over 16% in October. However, towards the end of the year we began to see a slowdown in house price inflation in certain areas, notably the more expensive parts of the country.
One area in particular that defied expectations was the buy-to-let market which continued to go from strength to strength. However, for those in the industry this was not really a surprise. For some time, lenders have been highlighting the built-in market stabilisers within the buy-to-let sector, which should prevent any market crash. This is because landlords can gain from strong capital growth in the good times and be protected with greater rental yields when the market slows down, as there are more tenants in the market who wish to rent for longer periods. And as landlords have gained experience in the market, they have been buying additional properties to let and portfolios of four or more properties are now quite common.
Tomorrow’s first-time buyers (FTBs) are today’s tenants in the rental sector and this group helped fuel demand for rental properties this year and is likely to do so for some time. But in the residential market the importance of the FTB seems to have reduced as it is now current home owners who are driving the market through remortgaging and moving home – but how long that can be sustained remains to be seen.
Focussing on FTBs, a report from the Council of Mortgage Lenders in June noted that the earnings of FTBs had risen by more than overall average earnings in the UK. This suggested that buyers who were able to get on the property ladder had higher earnings potential and that other FTBs were being priced out of the market.
Also, the proportion of borrowers with a low loan to value ratio – under 75% – increased, with evidence that first time buyers were saving larger deposits than ever before. Many of these appeared to obtain their deposits as a gift from parents and other family members, some who were remortgaging their own homes to raise the funds.
With FTBs finding it hard to get on the property ladder, and with house prices growing fast, the Government commissioned two reports during the year to look at ways in which market stability could be created.
The Miles report is looking into the viability of 25-year fixed mortgages, while the Barker report is examining property supply problems in the UK. Both reports are likely to have been published by the time this article goes to press, and it will be interesting to see how the industry reacts to the findings. Then, of course, we recently heard the Deputy Prime Minister, John Prescott, announce that the Government was putting aside a £5bn housing allocation “as part of its commitment to affordable housing, key workers and decent homes.”
The year cannot be reviewed without looking at the subject of regulation. The Financial Services Authority continued with its program of updating the industry on the regulatory requirements leading up to, and post-Mortgage Day in October 2004. Through its consultation papers it released proposals on the conduct of business rules; standards that firms must meet, training and competence, and details for appointed representative status. The industry responded to the proposals in a positive way.
In essence, regulation will mean a shift away from a ‘guidance led’ environment, to one that is rule based. Firms will have responsibilities for things such as record keeping, dealing with customer complaints, and maintaining competency and training standards. Intermediaries were encouraged to start planning for the future – and to consider whether they wanted to become directly authorised, appointed representatives or introducer appointed representatives.
In the Autumn the final rules were issued. There was much speculation about which route intermediaries would take, with the general consensus being that they would become appointed representatives and join one of the networks, but now the split is more even.
In April, the Association of Mortgage Intermediaries (AMI) finally opened its doors for business, and a significant number of members joined throughout the year. A division of the Association of Independent Financial Advisers (AIFA), it was set up to determine policy on matters relating to mortgage intermediation, and to provide representation and support to intermediaries in the run up to regulation.
On the whole the mortgage industry is still looking good, although the market may well become slightly smaller next year. Interest rates are largely expected to rise, but by no more than 0.75%. This will be to keep inflation in check. These rate rises will not be sufficient on their own to dampen the market or affect consumer confidence, as the employment outlook remains healthy.
House prices will continue to rise, but by no more than 10% next year while mortgage lending will probably decrease to between £235bn and £255bn next year. In twelve months’ time we will be able to see if these predictions were right.
Ray Boulger, senior technical manager at Charcol:
“The key thing that stood out from a product perspective this year, was the volatility of fixed rate products. Between January and March, they went down, then shot up again. In June, they came down, but then continued to rise steadily from July onwards.”
Godfrey Blight, sales director at GMAC RFC:
“The last year has been the best ever for GMAC RFC. Over the last 12 months we have experienced a big market with steady demand. Instead of peaks and troughs, we’ve seen a high, but nevertheless even, demand that remained consistent over the period.”
Money market rate hikes caused fixed rates to rise and become less popular.
Landlords have become more astute and four or more properties are now common.
Statutory regulation is not expected to decimate small independent firms as was feared at the start of the year.