Read the latest Council of Mortgage Lenders (CML) market commentary and you will see one word that jumps out and effectively sums up the UK housing market at the moment – that word is ‘subdued’. You can understand why the lender trade body does not want to use stronger words such as ‘underperforming’ or even ‘depressed’ but in the aftermath of the EU referendum vote, one has to wonder how close we are to such a description being true.
The CML itself effectively says that, when it comes to the purchase market in particular, we are some way off recent historical precedent. Indeed, this isn’t just in the owner-occupier space but also in buy to let, and a fact that might surprise former chancellor George Osborne, the first-time buyer market as well. It would seem that his policies aimed at curbing buy-to-let lending in order to put first-timers on a ‘level playing field’ with landlords are (perhaps unsurprisingly) not working.
A damp squib?
As many of us within the market said at the time, deliberately introducing policies designed to stop buy-to-let activity would not necessarily deliver a boost for first-time buyers. After all, increasing Stamp Duty on additional properties was never going to miraculously throw money into the savings accounts of potential first-timers for their deposit, neither was it going to boost lenders’ appetite in this sector, nor was it going to suddenly loosen the affordability measures and criteria lenders have to operate to. Not forgetting the supply-side issues which are not being confronted, and haven’t for many years.
In effect, Osborne’s measures have just meant less house purchase activity, not more first-time buyers getting on to the ladder.
Given the state of the purchase market it is perhaps not surprising lenders are currently looking at the remortgage market as a saving grace, while also contemplating moving into other niche areas to lend and secure margin. Why else would the CML, again in its market commentary, say that the ‘mix of lending is moving towards remortgage activity’, and why else would we be hearing from the FCA about its growing concern that lenders are (once again) consistently focusing on lending to the credit impaired?
From a buy-to-let market perspective, it has been the remortgage opportunity that appears most attractive at present. Certainly, now that the results of the Prudential Regulation Authority’s standards for buy-to-let underwriting have been revealed, one might expect demand for existing remortgage products to rise significantly. Advisers will know that when the underwriting changes are announced, and their start date, the ability to secure their clients the loan amounts they want at competitive price levels will be severely curtailed.
Protecting lender margin
The move towards more credit-adverse lending is an interesting one, if not obvious, given that many lenders are not going to see the traditional ‘take home’ from buy-to-let activity that they have in the past. You have to secure the business and margin from somewhere, and there are clearly lenders who feel that the only comparable sector to secure this is within the adverse market.
Unfortunately for them we have a regulator intent on not letting the pre-credit crunch mistakes of the past happen again – and why should they? However, while I don’t believe we’ll see an immediate ‘race to the bottom’, I get the feeling that non-specialist operators who feel they have to try and cover all bases will look at those clients with adverse as a risk worth taking if they are to make up for lost buy-to-let margin. Not so much a race to the bottom but a slow slide close to it. Again, whether they have the skills, experience and nous to effectively weigh up the risks, and stay on the right side of the regulator, is a big ask especially for those with no history in these ‘higher risk’ markets.
It looks like we could see some fingers burnt and one wonders if the regulator won’t opt for pre-emptive measures rather than let this type of lending activity get out of hand. In the meantime, with opportunities few and far between, the importance of the remortgage market has perhaps never been so high – for those that can make a deal work, now is certainly the time to act.
