At the start of last year we posed the question, are mortgage lenders going after impossible targets? With gross mortgage lending up 12% to £246bn in 2016 on flat housing turnover, we look ahead and consider lenders’ opportunities for lending growth in 2017.
Demand for home purchase remains strong, for now…
The number of approvals for home purchase was broadly flat in 2016 compared to the average for the last three years, in line with unchanged sales volumes. Rising house prices accounted for a modest increase in the value of loans originated.
Looking ahead there is a balance between how much the London housing market slows and the extent to which this is offset by rising activity across the rest of the country. We expect housing transactions in London to fall over 2017 in response to weaker demand and act as a brake on slowing house price growth.
The impetus for house price growth is set to come from large regional cities like Birmingham and Manchester where affordability is more attractive and house price growth has clear upsides so long as the economy continues to grow.
While there are fears over rising inflation and a squeeze on incomes we believe house price growth could surprise on the upside in 2017. This will provide important support for lending growth over the year ahead.
Remortgaging emerging as a key battle ground
Re-mortgaging picked up in 2016 as rates bottomed out at record low levels. The volume of remortgaging approvals was up 14% to the highest level for eight years and the value of approvals grew 20%. Fears of inflation leading to higher mortgage rates is likely to encourage greater remortgaging activity over 2017.
The remortgage space has already emerged as the main battle ground for lenders that are committed to streamlining the customer journey and reducing the time to yes. The digital channel will grow in importance as the competition for remortgaging business hots up. The role of automated valuations and other collateral data to inform underwriting decisions and support an enhanced customer experience will only grow in importance.
Buy-to-let far from dead
Despite the hike in Stamp Duty Land Tax, changes to tax relief and tougher underwriting standards, the buy to let market is far from dead but it has certainly lost its sheen. Lending volumes for new purchases are running 33% lower compared to the average over 2014 and 2015 as investors assess the impact of the myriad of so many policy changes. A key consideration for lenders will be how best to respond to the regulator’s requirement for tougher underwriting standards.
In our view the net effect of all the changes will be to push new investment into lower capital value, higher yielding markets. The risk profile of new originations will change and this is something lenders will need to assess in more detail.
Will equity release be a factor?
Adapting to changing market conditions and the constraints of regulation will be a key theme for 2017. The availability of high loan to value (LTV) products has supported increasing first time buyer transactions in recent years, but higher capital values impact affordability calculations and this could slow the rate of growth over 2017.
For lenders this means greater attention should be paid to equity release and the lending into retirement market as older borrowers will look to pass down equity to help younger generations join the property ladder. Although equity release only represents a narrow proportion of the market it posted a record year in 2016 and looks set to grow further in 2017.
Unlocking demand from emerging segments such as this should be an important objective for lenders in 2017, as well as taking an innovative, digital-led approach to increasing customer engagement and holding onto the right business in core areas.