MortgagesApr 30 2019

The housing slump: Slowing market shakes up advisers' roles

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The housing slump: Slowing market shakes up advisers' roles

Brexit has been on the receiving end of many a pointed finger since 2016, with political uncertainty seeping into all parts of the UK economy in its wake. It’s no surprise, therefore, that the UK’s prolonged departure from the EU has borne the brunt of the blame for the housing market slump seen in recent years.

In its February UK residential market survey, the Royal Institution for Chartered Surveyors found British house prices were growing at their weakest pace since 2011. 

Speaking at the time, Simon Rubinsohn, chief economist at RICS, said: “Although activity in the housing market continues to be weighted down by the lack of available stock, changes in the tax regime affecting property, and affordability, feedback to the latest RICS survey makes it pretty clear that the ongoing uncertainty around how Brexit will play out is the critical factor influencing both buyers and sellers.”

One month later, the subsequent RICS survey saw demand from buyers remain in negative territory and a continuing decline in sales and new property coming on to the market. The “Brexit impasse” was again identified as the most prominent drag on activity.

The slowdown has already taken hold in London and the South East, as Chart 1 shows. Many analysts expect this trend to extend to other regions in the coming months. But mortgage advisers haven’t had as bad a time of things as this may suggest: several parts of the market are either flourishing or providing them with a window of opportunity to aid clients.

Later life

Chief among these are developments that relate to existing property owners, bolstered by the rapid price rises of previous years, seeking to make better use of their stores of capital. As one mortgage broker puts it: “Family-assisted borrowing has been a significant change, with rising property prices meaning more offspring relying on family members to help them on to the housing ladder. Outside of Help to Buy, an increasing number of lenders are trying to innovate in this area.”

It is equity release that is the most notable boom area. The rise of later-life lending has been gathering pace at a rapid clip in recent years. The Equity Release Council’s spring 2019 market report confirmed that demand for equity release has continued to grow across all UK regions, with lifetime mortgages in particular witnessing a rise of 25 per cent between 2017 and 2018. 

Lifetime mortgages are now estimated to account for a third of all mortgages taken out by homeowners from their mid-50s onward, compared with less than a fifth 10 years ago.  

Chart 2 shows the rate of growth over the past seven years.

The surge in demand is now being belatedly accompanied by the arrival of big name players. In April, building society Nationwide became the first major lender to offer equity release and interest-only retirement mortgages. The likes of Legal & General and Barclays are set to follow suit later this year and in 2020, respectively.

The risks associated with these products often necessitate the help of an adviser. Mark Harris, chief executive of SPF Private Clients, points to later-life lending as a growing area of opportunity in the market, noting that the associated tax, pension, debt and estate considerations also make it an area where advice is essential. 

Buy-to-let 

A different set of borrowers have also found that increasing complexity has created new challenges in recent years. Tax and regulatory changes have helped create something of a perfect storm for the buy-to-let market in particular. 

This sector grew rapidly following the financial crisis, but tax changes and the introduction of stricter affordability testing has since seen a steep fall in the number of mortgages being arranged.

The introduction of an additional 3 per cent stamp duty surcharge in April 2016 was closely followed by the abolition of mortgage interest tax relief for landlords, to be phased down to a 20 per cent flat rate in 2020, which tested the limits of landlord profitability. 

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules. These myriad extra costs saw some leave the market, especially those coined ‘accidental’ landlords who could no longer justify the added expense of owning additional properties. 

David Hollingworth, associate director of communications at London & Country Mortgages, says: “Landlords have been through substantial changes in a relatively short space of time. It’s therefore little surprise to see the activity in the buy-to-let purchase market soften, given these measures were designed to dampen what was a fast-growing market.”

However, he adds that while further acquisitions by amateur landlords have reduced, the change has not signalled the end of the buy-to-let market from advisers’ perspective. A shift to remortgaging has gathered pace as existing landlords come to terms with the impact of recent changes and seek to manage their costs more tightly.

As a result, the growing complexity of the buy-to-let environment has also created further opportunities for mortgage advisers, as those landlords who choose to remain in the market seek help navigating its demands. 

Shaun Church, a director at broker Private Finance, says: “The tougher buy-to-let environment is making it more demanding for us as brokers as it becomes an increasingly specialist area of the market. But the development of a highly specialist area is no bad thing; brokers exist to be specialists in our field. 

“Greater complexity is nothing for us to be put off by: it should be embraced. The more specialist it becomes, the more someone needs the help of an expert. It is an opportunity for brokers.”

Landlords have sought to change the structure of their portfolios as a means of navigating changes in the market, and so too have lenders. Responding to the reduction in mortgage interest tax relief, landlords are increasingly seeking to professionalise their portfolio and transfer properties to limited companies. 

Those landlords in a private limited company are able to treat interest payments as business expenses to be offset against profits.

Figures from lender Shawbrook Bank last year showed the proportion of buy-to-let mortgages completed by individual landlords had fallen from 68 per cent in the first half of 2015 to 34 per cent in the same period in 2018. The proportion being completed by limited companies doubled from 32 per cent to 64 per cent.

Mr Hollingworth notes specialist buy-to-let lenders have therefore been sure to offer products that can meet these growing demands, with plenty aimed at professional landlords. All this points to continued innovation and adaptation in this area of the market, despite the depressing headline figures. 

Mr Harris says: “The dynamics of the buy-to-let world have changed, so while the amateur end of the market has gone quiet, professional landlords are still very much active. They have been refinancing and, where possible, building a war chest. 

“While overall activity has not continued on its upward trajectory, the need for advice hasn’t waned. The evolving structure between lenders, products and criteria means that tax and mortgage advice is more beneficial now than ever.” 

Newcomers 

While the sun has not shone on buy-to-let landlords recently, first-time buyers have been making some hay – and with it further opportunities for mortgage brokers. 

According to UK Finance the number of FTBs hit a 12-year high in 2018, with 370,000 new mortgages completed in the year. That is only 1.9 per cent more than in 2017, but quite the recovery from the aftermath of the financial crash, when FTB numbers plunged by 47 per cent to 192,300 in 2008. Numbers did not surpass the 200,000 mark again until 2012. 

FTBs accounted for £62bn of new lending last year, making up half of the mortgage market, which Jackie Bennett, director of mortgages at UK Finance, attributed to a continued boost from competitive deals and government initiatives such as Help to Buy. 

Mr Church notes that his company has seen a significant increase in the number of clients who are new to the market, attributing the rise to the demographic no longer being priced out of the market by buy-to-let borrowers in all regions.

He says: “When one door closes another opens, and a decline in the buy-to-let sector has created other opportunities in the wider market. FTB mortgages are at a 12 to 13-year high. Where those clients were once priced out of the market by professional landlords buying up one-bed flats, they have now been able to make an entrance.”

Likewise, Mr Hollingworth agrees new buyers have seemingly not been put off in the purchase market, benefiting from less competition from landlords, the stamp duty relief granted to the demographic, and schemes designed to help them build a deposit.

Introduced in November 2017, the relevant stamp duty relief applies to purchases of residential property for £500,000 or less. It was then extended in last year’s Budget to FTBs buying through shared-ownership schemes. According to figures published by HM Revenue & Customs in November 2018, the relief has applied to 180,500 transactions since its introduction and saved borrowers joining the property ladder a total of £426m. 

Hotspots 

It is areas of continued activity such as these that are encouraging optimism among advisers, despite the glum headline statistics of stagnating purchase activity and prices across the wider housing market. 

Mr Harris says: “The challenging housing market and its knock-on effects means it is more important than ever for brokers to have a coherent client contact strategy so they are the first port of call for their client.

“While overall the market is more subdued, certain areas such as later-life lending and first-time buyers are busy. Brokers must therefore ensure they are skilled and up to date with lender and product developments so they can adapt to changes in market dynamics.” 

Mr Harris says he has also seen an uptick in more niche areas of the industry, witnessing a growing self-employed and contractor market. He adds: “Lenders have changed their attitude to such borrowers, becoming more flexible with their lending practices.”

Outside of traditional mortgage brokers, advisers in the wider financial services industry are also witnessing opportunities in the housing market, with a larger proportion of client contact concerning property transactions. Martin Bamford, managing director of Informed Choice, whose company does not deal directly with mortgages, points out that property wealth has become a bigger part of the client conversation in recent years.

He says: “We often factor a property purchase into the financial plans we construct for clients, for example buying a holiday home in retirement or helping the next generation on to the property ladder. 

“The other increased interest in property wealth comes from our later-life planning clients, where equity release might be a part of the conversation.”

Trends like these suggest the housing market slump has had the opposite effect on intermediaries, as the slowdown makes clients think more carefully about their financial decisions and the ultimate fate of their assets. 

Rachel Addison is senior reporter at FTAdviser.com