The mortgage market is a unique phenomenon. Those of us who have been part of it for long enough have learned that, just when you think you’ve seen it all, something else comes along you could never have predicted, and changes the rules of the game all over again.
That happened in 2008, with the credit crunch, and the industry has changed beyond all recognition from the heady era of self-certification and 110% mortgages which preceded that, in order to protect consumers and lenders alike, and rightly so.
We might have had reason to think things were starting to finally settle down after the significant adjustment which followed the financial crisis when, in 2020, the worldwide COVID-19 pandemic – combined with the UK’s exit from the European Union coming into force – shuffled the deck for us yet again. In fact, you could argue it was factors like these which set off the next chain reaction we’re responding to now and, ultimately, what I believe will prove to be a whole new paradigm for the mortgage market.
The pandemic increased the accumulation of personal savings and affected global supply chains, creating the pent-up demand which is feeding the burgeoning inflation driving monetary policy now.
The combination of these things and geo-political events including the outbreak of a European war between Russia and Ukraine, the disastrous mini budget of 2022 and now conflict in the Middle East, has sown the seeds for some of today’s challenges, including, at its height, double-digit inflation and the rollercoaster ride that has been market rates for some months now.
Where the mortgage market is concerned, we saw a period of remarkable buoyancy as the fiscal catalyst and social stimulus which followed COVID led to a huge shift in housing demand, with the cost of borrowing at historic lows. House prices rose rapidly as a result, by a whopping 20.4% on average in the three years to February 2023 according to research by the Halifax.
This has ultimately forced the Bank of England to take the steps which have dominated the headlines over the past year – successive Bank Base Rate rises designed to curb inflation which, among other moves, have essentially rewritten the economic logic of the preceding 10 years. This has hit consumers hard over the past 18 months, with GFK’s consumer confidence measure hitting a record low of -44 in August 2022, fuelled by the cost-of-living squeeze affecting everything from energy prices to shopping essentials and – combined with higher interest rates – ultimately impacting people’s chances of owning their own homes. This influential score had recovered to -19 by January, thanks to more positive news around inflation, but nevertheless sentiment remains fragile.
Historically high rental costs, which have increased by up to almost 7% over the past 12 months, have placed would-be first-time buyers, in particular, in a catch 22 position, making it harder still to save for a deposit. According to figures released by the Generation Rent campaign group last July, that goal now takes almost a decade – up from 6.8 years in 2012. While house prices coming down a little from their recent highs has cooled the affordability dynamic a little, the gap is still pronounced, as is the differential between earnings and house prices. This problem is likely to remain as constrained supply will most likely keep prices relatively high. No surprise, then, that, as of May, c. 22.4% of families had an adult child living with them, according to the Office for National Statistics.
Meanwhile, the average mortgage rate increased from under 2% to a shade under 6% (albeit now starting to reduce) with as many as two million people expected to see their fixed rate deals expire by the end of 2024. The Institute for Fiscal Studies (IFS) calculates that around 1.5 million households will see their mortgage rate increase by more than £275 a month, and that around 20% of discretionary income will now have to be used to service mortgage debt.
These increases are another headwind which will disproportionately affect the younger generation, especially those in their 30s. These households are likely to have to borrow much more than previous generations, if, indeed, they can.
In general, borrowers are showing incredible resilience in the face of such challenges – although arrears are ticking up, the fact they haven’t risen more reflects the better risk and affordability control measures introduced following the credit crunch; and the value people continue to place on owning their own homes. However, this is no time for industry complacency, and we must rise to the challenge in supporting borrowers through this historic set of difficulties.
What could all this mean for lenders and borrowers?
The Mortgage Market Forecasts 2024/25 report issued by trade body UK Finance at the end of last year predicted further a further contraction in the mortgage market, with gross lending dropping by a further five per cent, lending for house purchase and external remortgage by eight per cent and buy-to-let falling by 13 per cent. However, activity so far this year has defied those expectations and the sudden one per cent fall in market rates over the festive season triggered pent-up demand for both residential and buy-to-let mortgages. In fact, figures from CACI show that, at the end of January, the size of the residential mortgage market had increased year-on-year by 36%, with the buy-to-let market up 31%. The really encouraging thing is that we are seeing an uptick in purchase and remortgage activity, and it’s to be hoped that we’re able to sustain this positive progress. However, there is no room for complacency and, whatever happens, lenders will be working hard to drive value for borrowers despite the market backdrop, and innovating to provide new kinds of product options which cater for changing social dynamics and enable them to carve out new niches.
Our industry has already risen to so many, shifting challenges, with fast-paced responses to support and protect customers, grow safely and adapt to change. Our own solutions have included things like our joint borrower, sole proprietor offering designed to help family members, help each other; and top slicing for buy-to-let mortgages, allowing landlords to add other forms of income into the mid to better meet affordability requirements.
However, we are now well into uncharted territory and we need to push ourselves, even more, to find new solutions. Perhaps we need to think differently about the whole concept of a mortgage, and indeed homeownership, to give more people a fighting chance.
This could be through enabling intergenerational wealth transfer, amongst other things
To start to plot out the next 15-20 years, I think we need to stand back and look at how we have responded to some truly unprecedented events. As an industry we’ve shown an incredible propensity to change and make things happen. However, there is so much more potential and opportunity for us to seize, both individually and through greater cross-industry collaboration.
Our goal? Flying the flag for the right to homeownership and providing more reasons to be cheerful to the borrowers we serve.
David Morris is chief commercial officer for Yorkshire Building Society,
