Five things to look out for in 2015 - and three things we hope won't happen!
Published: 22 January 2015 | Author: Bernard Clarke
Last year proved to be an eventful and highly successful one for the industry. In the first full year of market recovery since the credit crunch, mortgage lending grew by more than 15%. Both the mortgage market review (MMR) and the Help to Buy mortgage guarantee were introduced successfully, with little market disruption. But early speculation about a housing market bubble proved wide of the mark – as we had predicted from the outset. So, what does 2015 have in store for lenders?
In December, we published updated market forecasts for this year and next. We expect gross lending to grow by 7% in 2015, to £222 billion. Net advances should grow even more strongly, by around 28% to £32 billion. Mortgage arrears are also expected to continue to fall this year. In this article, however, we look beyond the numbers and reflect on what else might happen in the mortgage market this year – and on three things that could occur but that we hope will not cause concern for lenders.
Preparing for higher interest rates
Despite the sharp decline in the Consumer Price Index earlier this month, 2015 could still be the year in which we see the first upward movement in interest rates since 2007. Many commentators now do not expect this before November at the earliest. But the Bank of England governor, Mark Carney, acknowledged earlier this month that, while a larger than expected dip in inflation meant that the prospects of a rise in rates had receded, they would be on an upward path in the period ahead.
We do have some evidence that people have strategies for coping with higher borrowing costs. Last October, we published research in conjunction with YouGov showing that 60% of those with a mortgage expect their finances to remain broadly the same (or even actually improve) when interest rates do rise. Even among those in financial difficulty, less than half say they are struggling with their mortgage payments.
The survey also found a strong awareness among households of the likelihood that rates will rise – with many having sensible plans in place to manage higher mortgage costs. Encouragingly, the Bank has signalled that once rates do begin to move upwards, the pace of increase is likely to be slow and measured. It also expects that, after a series of gradual increases, rates will settle at a lower level than before the financial crisis.
But, despite this, lenders are not being complacent and are continuing to urge their customers to be prepared. So, shortly we will be offering guidance to firms to help ensure that customers are anticipating higher borrowing costs.
A general election in which housing will be a key issue
Publication of the manifestos may be three months away, but it is already clear that for each of the main parties housing will be a key issue in the forthcoming general election. Meanwhile, some common themes are starting to emerge – especially around housing supply.
- As part of their solution for increasing the number of new homes, the Conservatives are keen to promote opportunities for custom- and self-building, and a new Right to Build scheme. They also advocate a range of measures to help people into home ownership, including an extension of Help to Buy, a starter home initiative and a Rent to Buy scheme.
- Labour has identified housing as one of its six goals. The party aims to build at least 200,000 homes a year by 2020, and double the number of first-time buyers. It plans to introduce a mansion tax, and has put forward a range of proposals to incentivise and remove barriers to housing construction by local authorities. For those in the private rented sector, Labour proposes the introduction of three-year tenancies, and an upper limit on rent increases.
- The Liberal Democrats want to build 300,000 homes a year, and aim to publish a long-term plan for housing in the first year of the next parliament. The party also wants to make more public land available for housing, and to “tackle land banking” through “use it or lose it” planning consent. It supports new “family friendly” tenancies, and measures to reduce the number of empty and second homes.
Meanwhile, there is a strong possibility that the forthcoming election will produce not only a second successive coalition, but one in which a range of smaller parties are supporting a future government. So, future housing policy may also be shaped by proposals from the Scottish Nationalist Party, Ulster Unionists, Plaid Cymru, the United Kingdom Independence Party and the Greens.
Whichever party or coalition of parties forms the next government, we expect to help shape a range of new housing proposals from the spring onwards, to seek to ensure that any new policy initiatives are workable for lenders.
Planning for the European mortgage directive
Last year, the regulatory agenda was dominated by implementation of the MMR. In 2015, however, the focus will switch to plans for introducing the European mortgage directive. Unlike the MMR – which was implemented with relatively little visible disruption to the market – there is unfortunately potential for the directive to cause considerable disruption for lenders and their customers. It will be one of our priorities this year to seek to minimise this.
The directive has to be implemented across Europe on 21 March 2016, and this is an immovable deadline. The frustration for UK lenders is that the directive provides little or no benefit to consumers in this country. Their interests are already well protected by national regulation. Nor will the directive make the UK market work any more efficiently. We believe that both the government and the regulator share these views.
In our opinion, therefore, the UK should seek to implement the directive in a way that minimises disruption of what is already an effective national regulatory regime.
As part of that process, we believe that lenders will need at least 12 months to implement the final rules. But before the Financial Conduct Authority (FCA) reaches the stage of finalising those rules, we have urged it to address four areas of concern:
- The absence of measures to manage the transition to the rules for the directive. Currently, there is no provision for “pipeline” cases, even though this was crucial to the successful implementation of the MMR. We believe a similar approach is needed for the directive.
- The risk that fundamental changes to the sales process will confuse consumers. In particular, the requirement for a reflection period following a “binding” offer does not need to introduce a new step in the conveyancing process, as the current implementation proposals could suggest. The formal offer should be treated as the binding offer, which would meet the requirements of the directive, while minimising confusion.
- It should be clear that the directive applies only to new lending. As currently drafted, the proposal is confusing and could be taken to apply to contract variations, even though this is not the intention. The FCA should make this explicit.
- There is an unhelpful definition of currency loans. The intention is that the directive should mitigate the risk of currency variation. But the current proposals apply too widely, and the scope should be more precisely defined.
A review of the MMR – and other reviews!
We are already contributing to a thematic review of the MMR being undertaken by the FCA and looking at mortgage advice and distribution. The regulator, which is also talking to individual firms as part of the process, intends to publish its review by the summer. Meanwhile, another review of the MMR, focusing on responsible lending, is expected in the second half of the year.
Overall, implementation of the MMR has been achieved with little disruption to the market. We therefore do not believe that there are many significant problems to resolve, although the ease with which contracts can be varied remains an issue. The regime also seems to be designed more around face-to-face contact than the internet channel. But this year we expect scrutiny of the industry on a range of issues:
- On interest-only, we expect the FCA to continue to look carefully at how lenders are dealing with customers at the end of their mortgage term, and how the industry can build on the success of last year’s 2020 campaign to alert borrowers to potential problems.
- We will also work with the Prudential Regulation Authority on mortgage-specific issues affecting lenders, especially where they rub up against business conduct regulation.
- Having set out for the Treasury the views of lenders on the potential for the Financial Policy Committee to intervene in the housing market, we will seek to ensure that the committee applies it suite of powers properly, clearly and transparently. We will also look to identify the unintended consequences of regulatory change.
- We will also set out the views of lenders on proposals for banking and capital reform, including the impact of proposed reforms on the cost and availability of mortgages.
The reform of pensions
In April, a major reform of pensions comes into effect, allowing many of those aged over 55 to take their pension pot as a cash lump sum. At this stage, is far from clear how many of those eligible will choose to take advantage of their widened range of choices. A far-reaching debate has already started about what people may do as an alternative to taking out an annuity; but there will surely be consequences for the housing market.
Areas where lenders may see effects of pension reform could include the buy-to-let sector and decisions made by older borrowers to pay off mortgages, including interest-only loans.
The cumulative size of pension funds affected is vast, with around £2.5 trillion invested in insurer-administered pension funds (although there will continue to be restrictions on access to some schemes). But there are significant differences in the size of individual pension funds. Many are small (and can already be taken as a lump sum), with the average size of a private pension fund standing at less than £30,000, according to the Pensions Policy Institute.
The effect of pension reform is likely to take some time to emerge, and the decisions people choose to make may also change as market conditions evolve over time. We will give an early assessment of the reforms as part of a conference we are holding in June, Pension Tension: New thinking on lending in retirement, which will look at the inter-relationship with equity release, retirement and regulation, and interest-only issues.
“Joining the dots” is going to be a theme for much of our work in 2015!
And three things we don’t want to see (but which may still happen)…
It is clear than 2015 will be a year of major opportunities and challenges for lenders. This article has sought to identify some of them, but there are other threats lurking for firms. Here, we look at some potential developments that firms hope will not disrupt mortgage markets.
Greater fragmentation of markets and government schemes
We have already said that we expect the forthcoming general election to be a springboard for a range of initiatives targeted at housing and mortgage markets. Given the drive towards greater devolution, there is also potential for an extended range of measures targeted at markets in different parts of the UK.
What generally works best for lenders is a narrower range of initiatives, applying broadly across the market and constructed in a way that maximises the potential for firms to support them. We urge policymakers to bear this in mind as they finalise their manifesto proposals, and seek to implement policy initiatives after the election.
Lenders do, of course, acknowledge that it is for voters and devolved administrations to determine housing policy, but urge that there is a concerted effort to avoid unnecessary barriers to their ability to participate.
Fresh problems in the eurozone – and a worsening global economy
Even in the first weeks of the year, we have seen fresh concerns about the stability of currency markets and risks of deflation in the eurozone.
The revival of the UK economy over the past two years has coincided with improved household confidence and stronger employment, which has done much to underpin the recovery in housing market activity. The short-term picture for the UK is resilient, but with risks from a deteriorating global economy and, in particular, the eurozone. This has the potential to reduce UK growth and affect consumer confidence, with consequences for housing and mortgage markets.
Stumbling progress towards a more coherent, joined-up housing policy
We support the broad aspirations of all the main parties to increase housing supply, but we would also like to see more progress towards the development of a co-ordinated, concerted approach to housing policy.
To deliver sustainable solutions to the UK’s long-running housing problems, this kind of policy approach needs to extend over a series of parliaments, and to be supported by a wider political consensus. We hope that the election can deliver a decisive step towards this kind of approach and away from the disjointed policy that has characterised the UK under successive government for much of the last three decades.
The lending industry is ready to contribute to the development of a long-term policy addressing supply-side constraints and affordability issues. We also need to avoid creating unnecessary barriers to the contribution lenders can make to the private rented sector and to address the long-term shortage of – and funding for – social housing.