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  4. 2011: a flat year for the market, but a busy one for the CML

2011: a flat year for the market, but a busy one for the CML


Published: 18 January 2011 | Author: Bernard Clarke

Last month, we published forecasts for what we expect to be a flat housing market in 2011. If our prediction of 860,000 UK housing transactions this year proves to be correct, it will be the fourth successive year in which the number of property sales has hovered at around 900,000, or only about two-thirds of what we might expect to see in a more normally functioning market.

Given our prediction that home-buying activity will be static this year - and with few commentators, including us, expecting the re-emergence of a robust remortgaging market in 2011 (unless interest rates rise) - it should be no surprise that our forecast for gross lending this year is also flat, at £135 billion. The housing market in 2011 will continue to be shaped by a wider economy in which recovery is likely to be weak and patchy.

So, the picture this year could be characterised as one of stability at historically low levels of activity or stagnation, depending on your point of view. But while housing and mortgage markets may remain subdued in 2011, we are certainly not expecting a quiet year at the CML. On many of the key issues on which we work to represent lenders, there will be important developments in 2011.

Mortgage funding

Will 2011 be the year in which we begin to see a significant improvement in the functioning of wholesale mortgage funding markets, perceived by many as a crucial requirement for widening the availability of secured lending to consumers? 

Hopes were raised by encouraging signs last autumn of the emergence of a more active mortgage securitisation market. Unfortunately, there is a real risk this year that pressures on mortgage funding may intensify again as the deadlines draw nearer for firms to repay their commitments under official support schemes. 

By the end of November last year, outstanding funding advanced to firms under the special liquidity scheme (SLS) had declined by £75 billion from £185 billion, leaving a balance of £110 billion to be repaid. Meanwhile, there are commitments to repay a further £120 billion through the Treasury’s credit guarantee scheme (CGS). 

The SLS is scheduled to expire in January 2012, while commitments under the CGS are due to be repaid by 2014. Neither scheme will be extended, and this will focus the actions of banks and building societies to ensure a smooth repayment process. However, funds being repaid cannot also be used to promote lending to small businesses and home-owners.

As events unfold over the rest of this year and beyond in what is a unique business environment, we will continue to work on issues affecting the future availability of mortgage funding. Some of this work will focus on representing lenders’ views as the Bank introduces new rules on transparency for mortgage-backed securities and covered bonds, while firms also implement new requirements under Basel 3, Solvency 2 and the Financial Services Authority’s (FSA) new liquidity regime.

The impact of this raft of new regulatory requirements on wholesale mortgage funding markets will be a key issue in 2011 and beyond. It is essential that regulatory reforms do not impose unnecessarily onerous requirements that could hold back a market recovery in the longer term.

Mortgage regulation

On mortgage regulation, we expect “more of the same” in 2011, with the outcome of the mortgage market review (MMR) a key issue for lenders that will remain high on our agenda. 

We expect a raft of new FSA consultation this year on a wide range of issues affecting the industry, including responsible lending (again), interest-only loans, and rules on mortgage advice and distribution.   

Uncertainty about the MMR adds to the challenging environment for lenders as they plan for the future, and balance short- and long-term pressures and priorities. There are, however, some signs that the FSA may be re-assessing its approach in the light of the compelling new evidence we presented as part of our comprehensive submission to the regulator in November last year.

Following publication of the independent research that formed part of our submission, we stepped up our efforts to encourage politicians to take a greater interest in the FSA’s proposals for reform of mortgage regulation. 

At the end of last year, the housing minister, Grant Shapps, responded to the call for political participation in the debate by urging the FSA to introduce “proportionate” measures and avoid “unnecessary prescription on the mortgage industry.” He followed that up by holding a meeting with FSA chief executive Hector Sants.

The issue of mortgage regulation moved further up the political hierarchy this month when David Cameron aired his own concerns about its impact on the market. Responding to questions from voters he met while visiting a firm in Leicester, the prime minster said: 

“You need a housing market where people are able to sell, buy, move to different parts of the country, or go in search of that job or re-unite their family or whatever it is. The housing market has become very stuck and we have got to get it moving again and so a proper conversation with the banks and the building societies that stops the pendulum going too far the other way is important. What we want is a market that is moving, but not the unsustainable rise in prices.”

We agree – and have written to the prime minister to tell him so, and to remind him of the crucial role that the FSA is playing. We believe it would be helpful to have a dialogue with him and his colleagues to develop a shared agenda on how to address the complex range of issues affecting lenders and the wider market.  

Housing policy

We would also welcome a dialogue with ministers on another key issue for firms in 2011 – the development of the coalition government’s housing policy, more details of which will unfold as the year progresses. So far, the policy approach has been permissive, rather than prescriptive, with the replacement of top-down targets and controls by a Localism Bill and consultation on the delivery of homes in a way that meets the needs and aspirations of a decentralised system. 

What remains uncertain is whether this will be enough to persuade local communities of the desirability and benefits of new development. Housing supply continues to underperform the historical norm. But it is a crucial feature to get right if the housing market is to provide stability going forward.

As housing policy develops, we will continue to work on behalf of the industry for an environment in which lenders are able to contribute to the funding of homes for all tenures. We will consider carefully proposals on social housing reform, moves to introduce a new ‘intermediate’ rent of up to 80% of market value, and measures for the delivery of low-cost home-ownership. 

Earlier this week, for example, we responded to a consultation by the Department for Communities and Local Government, welcoming moves to give greater flexibility to providers of registered housing on the range of tenancies and rents. Our goal will be to continue to try to ensure that policy is implemented in a way that creates the right conditions for lenders to provide funding and to deliver choice of tenure for consumers.

Given the recent decline in home-ownership and the difficulties in reversing this trend in the short to medium term, the housing minister faces a significant challenge in delivering his plans for an age of aspiration. At this stage, the best prospects may be in the private rented sector, where strong demand is driving up rents and rental yields. In 2011, however, a key priority for us will be to work with the government on trying to ensure that its policy levers deliver the right balance of tenures.

Mortgage arrears and possessions

Our prediction that mortgage arrears and possessions will tick up again in 2011 will ensure that there is ongoing scrutiny of market behaviour. In our view, payment problems will be driven by a combination of job losses, reduced government support for borrowers in difficulty and an end to the mortgage rescue options for some households with worsening mortgage arrears. There are limits to forbearance as well, and this will come to the fore over the next few years.


Despite our forecast of a flat mortgage market in 2011, we anticipate a busy and challenging agenda for the CML. In fact, change will remain a constant in 2011 and beyond, and the winners will be those that anticipate and prepare for the challenges ahead.

We will continue to use our resources to represent lenders as effectively as possible. In what is sure to be a challenging year, we will use our market data and commentary to dispel myths and misunderstanding about the issues and challenges confronting lenders, and continue to provide a credible market view on developments.