After a long period when the UK Government sought to maintain the benefits of our national AAA rating, Moody’s was the first credit rating agency to announce a downgrade late last month. This was not a surprise in an environment of a sluggish, no-growth economy and senior Bank of England officials pressing for more quantitative easing.
Indeed there has even been a debate on whether to move to a negative bank base rate as an exceptional policy response. This would create some interesting challenges for firms on how they treat their savers and borrowers. More than two-thirds of borrowers are on variable rates, many of which would track down if rates fell further. Some borrowers may even reach a point where their mortgage monthly payment could fall to as little as 1p.
Overall mortgage lending in 2012 undershot expectations with gross lending of £142.6bn, compared to £140.8bn in 2011. Net lending was down to only £7.4bn, from £9.5bn in 2012 – another year of virtually no growth.
The overall picture did, however, mask a welcome renaissance for first-time buyer lending as 216,200 became home owners last year. This was the first time there were more than 200,000 first-time buyers in one year since 2007. It was also part of a wider shift from an emphasis on remortgaging in 2011 to more home purchase activity in 2012. I expect this to continue this year, with increasing opportunities for first-time buyers to transact with smaller deposits and affordable mortgage rates.
In the past few weeks we have also had the end-of-year results from a series of building societies which had successful years. Overall gross mortgage lending by societies and other mutuals was £30.7bn, up by 30 per cent compared with 2011. This equated to a 22 per cent market share, from 17 per cent in the previous year. Last year was even better in net lending terms for the mutual sector at £6.5bn, out of the total of £7.4bn for the whole industry – a clear demonstration that mutuals punched above their weight last year, and I think this trend is set to continue in 2013.
Muted
New mortgage lending was muted at the beginning of the year. The weather in January put a dampener on activity so lending levels fell unexpectedly. I would expect to see this activity rebound in the coming months, as historically cheap fixed-rate mortgages will be attractive to those borrowers in a position to commit. Nevertheless the out-turn in 2012, and slow start this year, has cast some doubt on whether we will reach lending forecasts for 2013 by the Council of Mortgage Lenders, published in December, of £156bn gross lending and £12bn net lending.
Prospects for new house building also remain uncertain despite the stimulus of the NewBuy scheme in England, which will be extended across the UK this year.
The number of new homes started last year was 11 per cent less than 2011 and, at 98,280, the figure was less than half of the estimated need. Reservations under NewBuy continue to improve slowly but surely but it is still a scheme supported by a minority of lenders. More lenders will need to support it this year for the full potential of the scheme to be achieved.
On possessions, the CML confirmed that the full-year figures were below expectation and substantially below 2011 with 33,900 compared to 37,300. There was also better news on arrears trends. With interest rates unlikely to rise any time soon, and if they fall further, borrowers who have benefited from forbearance will have more time to get back on their feet.
There remains a group of borrowers who are financially stretched at current low rates with 28,900 in the highest arrears band at the end of 2012. However the worst-case scenario of worsening possessions in 2013 and 2014, as the CML forecasted, is abating and we may yet see a further modest drop in possessions in 2013.
We are not out of the woods on arrears and possessions trends but I do not expect 2013 to be the tipping point as some consumer bodies have forewarned.
Indeed I am still confident that the market will pick up overall as a considerable number of lenders have committed to supporting the Funding for Lending scheme and will be under pressure to meet their obligations. In the absence of an uptick in business borrowing, the cheap funding will help support the housing market instead – both home ownership and buy-to-let lending.
A few months ago I wrote about the outcome of the mortgage market review and my initial fear that the new rules might inadvertently lead to shrinkage in the market from today’s lending levels.
Recently I chaired a workshop on MMR for clients of Homeloan Management Limited and was able to get an update from firms on how the transition process was moving forward.
Many lenders were at an advance stage of planning, but some key decisions remained around implementing the advice rules, particularly for post-completion work, and lenders’ future distribution strategies and relationship with mortgage intermediaries.
We still have time to iron out the wrinkles to avoid unintended consequences. But it is an unhelpful coincidence of timing that the Funding for Lending scheme ends three months before new selling rules will be implemented. The funding tap is being turned off just when lenders will be focused on making sure all their products, processes and risk controls meets the heightened expectations of a new conduct regulator.
This is a recipe for a dip in mortgage lending in 2014 if lenders revert to a risk-averse attitude. CML expects that lending will fall in 2014 compared to 2013, and I am not sure how much weight it has given to the impact of the new mortgage rules in its recent forecasts.
Practice
Finally we have two trigger events that will shape how the mortgage market is perceived and works in practice. The spring Budget gave the chancellor another opportunity to support the growth agenda in the housing market, or to see the sector as a target for a tax raid, such as by a mansion tax or new stamp duty rates.
Second, the FSA thematic report on interest-only mortgages is eagerly anticipated and due soon. I still hope that the regulator will take a common-sense, pragmatic approach. There is more that lenders should do, but that is not the same as requiring a past business review, and lenders need to be focused on their primary aim of lending out money to new borrowers who can borrow responsibly.
I expect that spring will be even more interesting than usual in the mortgage market as, with so many conflicting pressures, it is difficult to call the direction of travel in 2013 with confidence.
Michael Coogan is ambassador and strategic adviser to Deloitte, chairman of Shaping Tomorrow and past director general of the Council of Mortgage Lenders
Key points
– Moody’s was the first credit rating agency to downgrade the UK’s AAA rating.
– We are not out of the woods on arrears and possessions trends, but 2013 is not expected to be the tipping point.
– The FSA thematic report on interest-only mortgages is eagerly anticipated and due soon.
