The beginning of 2014 saw the housing and mortgage markets continue the momentum in recovery that had begun at the end of 2013. The revival was marked by a rising number of transactions and in particular the return of first-time buyers (FTBs) to the market.
The low interest rate environment continued with the base rate staying at 0.5 per cent. Nevertheless, the economy continued to improve with unemployment dropping to 7.1 per cent, around the level at which Bank of England (BoE) Governor, Mark Carney had suggested rate rises would be considered. However, in January, the BoE made it clear that 7 per cent unemployment was “a threshold, not a trigger” and the fears of imminent rises subsided.
In March, the Budget included an extension to the Help to Buy scheme, which had been due to end in 2016. It will now continue until 2020. However, unexpected pension rule changes meaning people no longer had to buy an annuity had some unintended effects on the equity release market. Many providers rely on annuity sales to fund their equity release lending and sought to slow things down while they worked out how they were going to respond. Nevertheless, the market passed the £1bn mark in the first three quarters of 2014 – 95 per cent of the total value of the market in the whole of 2013.
MMR impact
As the deadline for implementation of the long-anticipated Mortgage Market Review (MMR) rules approached in April, a survey of lenders and brokers suggested they were worried about the possible impact on the market. Lenders began to declare themselves MMR-compliant and came in for some stick when they published the list of household expenditures that would be taken into account when considering affordability. The new regime came into force on 26 April.
However, there was growing unease that the market might be overheating. Rising house prices – in London in particular – led to warnings from the BoE that there were signs of a bubble. In May, a report from the Resolution Foundation suggested that modest interest rate rises could cause significant affordability pressures for some 2.3m UK households.
In June, in a speech at Mansion House, chancellor George Osborne announced new powers for the FPC: No more than 15 per cent of individual lenders’ new loans should be at 4.5 times income. Also, lenders must stress test borrowers’ ability to pay if the base rate were at least 3 percentage points higher during the first five years of the loan. The powers were due to come into force in October, but many lenders sought to comply with immediate effect.
Hot July
In 2014, monthly figures for gross mortgage lending peaked at £19.7bn in July, up 10 per cent on June’s figures and up 18 per cent on July 2013. Not surprisingly, the number of FTB purchases also reached an annual high in the same month. It had risen steadily from 21,800 in January to a high of 30,200 in July, worth £4.6bn. This was up 3 per cent from 28,600 in June and up 25 per cent on the previous 12 months. It is probably safe to attribute the decline in numbers in the following months to the effects of the new MMR regime.
Despite the clear dampening effect of the MMR, the CML also revised its mortgage forecasts upwards in July, raising its estimate for total gross mortgage lending for 2014 from £195bn (forecast in December 2013) to £208bn. The graph shows the movement in gross lending monthly figures.
As the year moved into its third quarter, a price war among lenders seeking to meet end of year targets led to record low fixed and discounted rates. Yorkshire and Chelsea, for example, launched two-year fixed rates of 1.47 per cent and 1.44 per cent. However, both had maximum LTVs of 65 per cent and fees of £845 and £1,545 respectively. Many lenders also increased brokers’ procuration fees, citing their competitive position and their commitment to the intermediary sector.
However, commentators suggest that the emphasis placed on advice under the new regime was likely to prompt lenders to begin cosying up to brokers once again.
Other effects of the MMR have also become clearer. There is anecdotal evidence that borrowers are having to wait two or three weeks for an appointment with an adviser at a High Street lender, mortgage transactions are taking longer, and many would-be borrowers are struggling to meet the new stricter criteria.
One intermediary suggests that most lenders are spending twice the time on mortgage transactions now compared with pre-MMR days, effectively doubling their fixed costs. A general slowing of the market towards the end of the year has also become more apparent. In November, Nationwide reported that mortgage approvals were down 20 per cent in September compared with the start of the year. Such statistics suggest concerns about an overheating market have more or less disappeared for the time being, as have any suggestions that interest rate rises are imminent.
