Published: 24 April 2013 | Author: Bernard Clarke
- CML data shows building societies have seen strong growth in recent years – despite the challenges for retail-funded lenders.
- Since 2009, lending by mutually-owned lenders has grown strongly, in absolute terms and as a proportion of the market.
- For much of the last decade, building societies had a share of around 17% of the market. But that share grew to 22% by 2012.
- Growth has been across the market – in lending for house purchase by first-time buyers and movers, remortgaging, and buy-to-let.
- Choice and diversity serve consumers best. Building societies, large and small, are an important and distinctive component of a healthy mortgage market.
Many lenders, including some building societies, went through a difficult period in the financial crisis and its immediate aftermath. In recent years, however, the building society sector has seen strong growth and recovery, despite the particular challenges for retail-funded lenders created by a long-term low interest rate environment. This article draws on CML mortgage market data to explore some recent trends and developments in building society activity.
For two centuries, building societies dominated the mortgage market. But in the mid-1980s, the range of lending institutions began to diversify and, in recent years, some of the largest lenders have been banks. However, the Nationwide Building Society remains the third largest lender, accounting for 10.3% of the UK’s outstanding mortgage assets in 2011. Our list of the 20 lenders with the largest outstanding loan portfolios for that year also contained four other building societies – Yorkshire, Coventry, Skipton and Leeds – so societies have continued to account for a significant share of the market, despite the emergence of mortgage banks.
Within the CML, there are also many other small and medium-sized building societies. Many of these have a distinctive presence in the mortgage market. Some are mainstream lenders, while others target niche customers or have a strong presence in regional or local markets. Many have a strong and loyal customer base, and building societies make an important contribution to competition, diversity and choice in the UK mortgage market.
The market backdrop
Recent years have seen an expansion in activity by building societies, but the environment remains challenging for mutually-owned lenders. The Funding for Lending scheme (FLS), which opened last summer, has improved conditions and widened options in funding markets – and many building societies have signed up to it. Since the scheme was launched, borrowing costs have declined, with Bank of England data showing that, in the six months following the launch of the FLS last August, the average new mortgage rate declined by more than 30 basis points to 3.5%, one of the lowest rates in UK history. There has also been an increase in lending at higher loan-to-value (LTV) ratios since last summer.
However, the introduction of the FLS has coincided with a decline in savings rates. This has created uncertainty in the retail deposit market, which is a core component of the typical building society model. Falling rates have encouraged savers to switch in search of better returns, creating instability in retail markets.
In recent years, a range of government initiatives has been launched to try to encourage more widespread availability of mortgages, particularly at higher LTV ratios. The NewBuy and FirstBuy schemes have been augmented by Help to Buy, announced in the Budget in March. Despite this, conditions are challenging for borrowers. House prices remain high relative to squeezed incomes, and consumer confidence is fragile given the weakness of economic recovery.
Building society lending
Against this mixed backdrop, lending by building societies (including mutually-owned banks) has grown strongly in each of the last three years, not only in absolute terms, but as a proportion of the market overall, as Chart One shows. For most of the last decade, societies have maintained a broadly stable share of the market at around 17% of gross lending. But market share has picked up from a low point in 2009 to reach around 22% of UK gross lending in 2012.
Chart One: Gross lending by building societies/mutual lenders
The financial crisis led to a sharp reduction in activity by specialist, non deposit-taking lenders. But the increase in market share for building societies since 2009 is not a by-product of the disappearance from the market of many specialist lenders. That process was largely complete by the middle of 2008, when the mutually-owned sector was merely maintaining market share. The market share given up by specialist lenders was therefore taken up almost entirely by the banks.
The growth in market share by building societies has taken place since 2009, in a market in which wholesale funding has been constrained, retail funding markets have been disrupted and all lenders have been affected by requirements to hold more capital. Growth has also occurred in different market segments, including lending for residential purchases – both to first-time buyers and to movers – remortgaging, and buy-to-let.
In the aftermath of the financial crisis, the recovery of the share of the residential mortgage market held by building societies was initially slow. But there was a significant pick-up in tempo in 2012, when more than 27% of all house purchase loans were advanced by mutuals, up from 21% in the preceding year.
The first-time buyer market
Among first-time buyers, the growth in market share for building societies was even stronger. Across the whole market, the number of first-time buyers had been languishing at fewer than 200,000 a year since 2007. Last year, however, 218,000 people bought their first home. And the mutual sector accounted for more than its fair share of this growth, with almost 29% of first-time buyer borrowing last year, up from 21% in 2011.
Chart Two: Number of loans for house purchase advanced by mutuals, and % share of all house purchase loans
Chart Three: Number of loans to first-time buyers advanced by mutuals, and % share of first-time buyer lending
One development that has helped first-time buyers in particular has been the improvement in availability of higher LTV mortgages. Chart Four shows that, in the aftermath of the financial crisis, building societies were lending much more conservatively than banks, until last year.
At the beginning of 2011, less than 1% of mortgages advanced to first-time buyers by building societies were at more than 90% LTV, compared to a rate of between 3% and 4% for banks. Since then, however, building societies have significantly widened the availability of higher LTV mortgages to first-time buyers. By the end of last year, they were advancing a larger proportion of higher LTV mortgages to first-time buyers – with more than 4% of first-time buyer loans in this category, compared to around 3% for banks.
Chart Four: Proportion of loans advanced to first-time buyers at more than 90% LTV, %
Of course, increasing the availability of higher LTV mortgages is just one element of higher risk lending (albeit one that is in the spotlight now, as policymakers seek to improve access to the mortgage market). Lending at higher income multiples or increasing the length of the mortgage term also increases risk. In the past, the Financial Services Authority has voiced concerns over the proportion of loans advanced with a combination of higher LTV, higher income multiples and/or longer terms – a phenomenon it has referred to as “risk-layering.”
One area in which borrowers and lenders are exposed to less risk is in the sharp decline in new interest-only mortgages. Last year, just 1% of lending to first-time buyers by building societies was on an interest-only basis, down from 5% in 2011 and 20% at the peak in 2007. In 2007 and before, banks were more likely than building societies to advance interest-only mortgages to first-time buyers. But both banks and building societies have cut interest-only lending dramatically in recent years.
Looking at the proportion of loans in which there is a combination of risks, or risk-layering, our data shows only a very small increase in 2012, with these loans accounting for less than 1% of all those advanced to first-time buyers by building societies, and only fractionally more for banks. That compares to almost 7% of first-time buyer loans in this category in 2007. So, lenders are steadily making more higher LTV loans available – based on a careful assessments of affordability – with no evidence of any significant increase in risk-layering.
Remortgaging and buy-to-let lending
Building societies have expanded their market share for all types of lending, not just residential purchases. Across the market, remortgaging has declined significantly since 2008 but, more recently, building societies have taken a larger slice of this smaller pie. Last year, societies advanced 23% of remortgaging loans, up from 17% in 2011.
The market share of buy-to-let (BTL) lending advanced by building societies has also grown strongly in recent years. It more than doubled as a proportion from less than 20% of the BTL market in 2007 and 2008 to peak at almost 50% in 2011, before declining a little in 2012 – but remaining at over 40% for the year as a whole. Even the decline in market share in 2012 is explained not by a drop in activity by mutually-owned lenders, but by a strong return to the BTL market by the banks. As Chart Five shows, building societies began to build BTL market share through remortgaging at first, with house purchase lending recovering strongly in 2010.
Chart Five: Building society share of new buy-to-let lending by type of borrower, %
For more than 200 years, building societies dominated the mortgage market. In the 1980s, however, their market share declined dramatically with the emergence of the big mortgage banks.
Like other lenders, building societies suffered in the aftermath of the financial crisis. But commentators forecasting an irreversible decline in the sector have been proved emphatically wrong. Despite challenging conditions in both lending and savings markets, building societies have shown strong growth since 2009, and have been building their share of the market for all types of mortgage lending.
We favour a mortgage market characterised by choice and diversity, as we think such a market serves consumers best. In line with that aspiration, building societies large and small are an important and distinctive component of a healthy mortgage market.