A housing market to be proud of

A housing market to be proud of

Introduction This document looks at the mortgage market and its vital contribution to delivering a successful housing strategy. Mortgage lenders play a key role in all housing tenures. As well as funding owner occupation, lenders contribute to private rented accommodation, through buy-to-let mortgages, and they also provide funding for the social housing sector. After five years of flat housing markets, low transaction levels and concerns over the availability of mortgage finance, 2013 saw a marked recovery with over one million home purchases for the first time in five years. Total lending reached 176 billion, around 20% up on 2012 and this is expected to climb to around 210 billion in 2014. We have seen the return of 95% loan-to-value mortgages; lenders are offering products, both under Help to Buy and independently of the government scheme, to assist those who can afford a mortgage but only have small deposits. First-time buyers have returned to the market. The number increased by 23% in 2013 and looks set to grow further in 2014 to a six year high. So there are no longer worries over the availability of mortgage finance. But house price inflation, especially in London and the South East has become a greater concern. Recent interventions by the Financial Policy Committee of the Bank of England have been targeted at reducing some of these pressures; and we have also seen a new regulatory regime introduced by the Financial Conduct Authority designed to ensure that mortgages are only given to borrowers who can afford to service them. The long term objective should be a sustainable UK housing market which allows people across the country to realise their aspiration of home ownership (79% of British adults aspire to be home owners); but also gives choices for those for whom outright home ownership is not a realistic tenure and who will look either for rented accommodation or some form of shared ownership. www.cml.org.uk 2

We also need a housing strategy which acknowledges that the current housing market has fragmented into a series of disparate regional (even local) markets in which there are different conditions and challenges. A first requirement is more supply of new homes. Our house building programme needs to be ambitious, consistently delivering between 200,000 and 250,000 new homes each year for the next 10 to 15 years. But we also need to make best use of our existing housing stock; considerable wealth is already tied up in housing that could help people support themselves in older age; and ease the mismatch between supply and demand. Lender funding A housing strategy should command strong crossparty support and be sustainable beyond one parliament, with long term goals, offering clear and consistent policy direction and avoiding unintended consequences. We need regulation and other market interventions which are proportionate and appropriate, those which work centrally and impact locally. And regulatory measures need to dovetail with government policy and support the long-term health of the UK economy. Looking through the lens of the mortgage lending industry, we now consider what those challenges might be from the perspective of the young, the old, and the inbetweeners. We want the next government to: Link the disparate strands of a housing strategy into a coherent whole Acknowledge the need for better links and transitions between tenures Work with the industry on how to best use existing housing stock Refrain from microintervention overkill home-ownership 1.3 trillion private rented sector 178 billion social rented sector 60 billion www.cml.org.uk 3

The young A key driver of the housing market recovery has been the growth in lending to first-time buyers. Average first-time buyer loan to value Affordability pressures along, with a tightening of loan-to-value criteria, resulted in the number of mortgages taken out by first-time buyers falling from more than 530,000 to below 200,000 in 2009, with more and more resorting to the Bank of Mum and Dad and typical deposits rising from 10% of a purchase price to 25%. However, transactions by first-time buyers were among the first to show signs of recovery. The number increased by 23% in 2013 to 269,000 and looks set to grow further in 2014 to a six year high. There is increased availability and reduced pricing of higher loan-to-value mortgages. Currently the average first-time buyer deposit is around 18%, and around 8% of first-time buyers are now taking out mortgages with loan-to-values of 95%, whether that be with lenders who are signed up to the government s Help to Buy scheme or lenders who are working independently of the scheme. But even so first-time buyers are still languishing at only around half their long-term average of around half a million. Why? A key element is the sheer cost of housing; house prices have doubled in real terms since the mid-1990s, while real earnings have only risen by around 21%. The continuing shortage of housing supply is likely to buoy up prices and bear down on transaction numbers in the foreseeable future. Even high loan-to-value mortgages cannot alone solve the problem. The size of deposit (particularly in London and the South East) also remains a significant barrier to many would-be firsttime buyers, despite government schemes. 83% Average first-time buyer mortgage loan 122,000 www.cml.org.uk 4

Average first-time buyer deposit 25,000 Average age of first-time buyer 29 years old Low-cost home-ownership schemes have the potential to allow more young people realise their aspirations of becoming home owners. Part ownership schemes need to be made easier to understand which may mean that there are fewer varieties of them. It should be recognised that for some, part ownership may be a long-term, permanent tenure in its own right. The idea of shared ownership deserves further examination to remove some of the obstacles to its growth and to encourage lender participation. Policy makers need to take into account lenders concerns especially about the sale of shared ownership properties if we are to expand the market, increase lending volumes, and provide more long-term funding commitments. With the decline of owner occupation from 70% to 65% of all households, the private rented sector is playing an increasingly important role in today s housing market. Buy-to-let financing now accounts for 15% of total mortgage lending. We support a sensibly regulated private rented sector supported by a diverse range of providers capable of meeting the varied demands of tenants. Based on demographic trends, constraints on housing affordability and on the growing demand for flexible accommodation from a mobile workforce, this sector is likely to continue to grow. Government interventions must preserve the flexibility of this tenure; and be attractive to both institutional and private investors to encourage new supply. We want the next government to: Focus on measures that increase the supply of housing in all tenures, enabling more young people to gain a housing foothold Reform stamp duty to reduce its burdens, distorting effects, and unintended consequences Recognise that, for many, shared equity and shared ownership may not be a stepping stone to full home ownership but a permanent tenure in its own right www.cml.org.uk 5

Stamp duty The combination of a recovering housing market and the fiscal creep associated with stamp duty affects an increasing number of first-time buyers, and indeed other purchasers. Home buyers paid 4.9 billion of stamp duty in 2012/13 compared with the previous peak of 6.7 billion reached in 2007/08 even though there were only around 900,000 transactions compared to 1.6 million in 2007. However, the way in which stamp duty is levied has not been reviewed for a long time and its current impact is market-distorting, especially because of the slab method by which it is calculated. 8,000 6,000 4,000 2,000 Yield from residential stamp duty, m The impact of the tax in all parts of the UK should be reviewed. 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Lower band 250,001-500,000 Above 500,000 1-2m Above 2m Source: HMRC www.cml.org.uk 6

The old One of the consequences of the bulge in postwar baby boomers born in the years 1946-64 is that the UK now has an ageing population. There are 11.1 million people aged 65 or older, a number that has grown by 1.6 million over the last decade. By 2023, one-quarter of all adults will be aged 65 or older, and their profile will be inevitably shifting towards being very old. The number of new mortgages taken out by those aged 65 and over is modest and declining. However, the stock of mortgages held by borrowers in this age group is larger (around 4.5% and pushing higher). 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Number and proportion of mortgages extending age 65 and beyond 35% 30% 25% 20% 15% 10% 5% The number of people borrowing into retirement has grown in recent years, partly because some customers are taking out loans later in life. There has also been an increase in the number of those taking out mortgages for longer terms. The upward drift in state pension age, and the growing expectations that people will retire at a later age than before has had an effect. However, while lending into retirement is becoming more prevalent and increasingly necessary, the regulatory regime for the UK mortgage market does not help. Lenders are required to take into account the effect of foreseeable changes in circumstances, including likely retirement age when assessing affordability. 0 0% 06-Q1 07-Q1 08-Q1 09-Q1 10-Q1 11-Q1 12-Q1 13-Q1 14-Q1 % of total (RHS) number (12 month moving average) (LHS) Source: CML www.cml.org.uk 7

We want the next government to: But in offering loans to borrowers that may extend into retirement, lenders must balance all of the regulatory and legal requirements with the needs and aspirations of the borrower, as well as the overarching need to lend responsibly and treat customers fairly. Lenders are understandably cautious in interpreting the regulator s rules. This will inevitably impact on the extent to which the industry feels it is able to service this market. It is therefore important for regulators to revisit both the conduct and prudential rules around this type of lending so that our ageing population can obtain the right sort of product for its needs. This becomes even more necessary following the chancellor s Budget announcement of changes to pension rules which have led to speculation that one result could be an increase in housing market activity and borrowing by older customers. It is too early to predict how the market may be affected by the change in rules. But policy makers must ensure that pension and housing policies are in harmony. There is considerable wealth tied up in housing stock. 83% of over 60s in England own their own home and 64% own their home without a mortgage. This amounts to a massive 1.23 trillion in unmortgaged housing wealth. The potential for developing ways in which this wealth can be put to good use to support people in old age needs to be released. The equity release market and the residential mortgage market should work closely together to find ways of maximising that potential as this could help make better use of housing stock and housing assets. At present the two are separate entities with different regulatory regimes. There may well be an opportunity for a new market to be developed that serves the 55-70 age group in a different and better way. Policy makers should support and indeed encourage the development of a fully functioning large scale market in this area. 83% over 60s living in England own their own homes 1.23 trillion unmortgaged housing wealth 64% own without a mortgage Source: Demos Address the difficulties in lending into retirement resulting from the collision of new mortgage rules and the forthcoming pension reforms Promote better pathways between the mainstream mortgage market, lifetime mortgages, and downsizing Consider ways of encouraging older households to downsize, promoting more efficient use of the existing housing stock Ensure new housing supply adequately reflects the needs of an ageing population Ensure mortgage regulation works with, rather than against, such policy objectives www.cml.org.uk 8

And the in-betweeners How are existing home owners faring? Existing home owners who want to move are numerically more significant than other groups and important to understanding the wider housing market. Average home mover loan to value Average home mover deposit Transacting in the housing market is about fulfilling aspirations, so confidence is an important, if unquantifiable, factor. Within the general picture of a severe contraction in the number of transactions and the beginning of a recovery, the experience has been quite different for different types of buyers. The number of loans taken out by people moving home declined by almost half from over 560,000 in 2007 to 315,000 in 2009. However, unlike some other groups of buyers, the recovery in the number of home movers has been much slower. Last year movers took out only 337,000 mortgages, compared to an average of more than 700,000 a year in the decade preceding the market downturn. People who want to move in response to changing family and employment circumstances have been restricted by affordability constraints, restricted access to mortgages, transaction costs, economic conditions and a lack of confidence in taking on new borrowing commitments, as well as the cost of housing and the shortage of supply. Buyers in this group often rely on the growth of equity in their existing home to finance their next purchase. The combination of only modest earnings growth over the past few years and the erosion of housing equity have made it difficult for many in this group to bridge the gap on a scale sufficiently large enough for them to make the next step up in the property market. The problem of insufficient savings is also by no means limited to first-time buyers. Since the introduction of new mortgage rules in April, existing borrowers wishing to take out a new mortgage will see a noticeable difference in the length of time and level of detail now required by lenders in assessing mortgage applications. The increased level of affordability requirements may result in borrowers becoming mortgage prisoners and may prevent them switching to better deals to protect against rate rises. However, lenders can move these customers on to a mortgage that better suits their needs, as long as they do not increase their borrowing. 72% 58,700 Average home mover mortgage loan Average age of a home mover 151,000 39 years old www.cml.org.uk 9

With the prospect of higher interest rates on the horizon, borrowers will at some stage need to adjust to higher costs. Despite pressure on household finances, research shows that most borrowers prioritise their mortgage commitments and are willing to cut back on other spending where possible. This has helped mortgage arrears and repossessions to continue to decline despite a lengthy period of falling real incomes. At some stage a return to more normal interest rates will mean that an increasing number of home owners may experience mortgage repayment difficulties. Lenders will respond sympathetically and try to help their borrowers get back on track. Repossession will always be a last resort. But the government also needs to work with industry to develop an additional safety net, perhaps combining private insurance and state support in a more joined-up way than under current arrangements. 2005 50% Aged under 25 & 75% Aged 25-29 = BUY Buy without assistance We want the next government to: Reduce affordability barriers to transacting by reforming stamp duty Watch for any unintended consequences of regulation on creditworthy mortgage holders Work with the industry to develop a more effective safety net against the risks of changes in household circumstances Ensure that policies affecting all tenures are holistic and recognise private sector market realities 2011 8% Aged under 25 & 27% Aged 25-29 = BUY Buy without assistance www.cml.org.uk 10

Private and social rented sectors Given the challenges around access to home ownership, the private rented sector has become increasingly diverse as it has grown. Although traditionally associated with more mobile sectors of the population, it now caters to a range of households on a longer term basis. The typical terms and conditions of buy-to-let mortgages permit landlords to offer assured shorthold tenancies of between six and 12 months. However, this is beginning to change to cater for tenancies of up to three years. The lending industry acknowledges the aspirations for longer-term tenancies and will continue to work with landlords, tenants and policy makers in determining how they could be made more widely available. But it should not be assumed that these will instantly become the norm: for many groups of private tenants, the shorter and more flexible terms associated with existing six and twelve month tenancies are likely to remain the preferred option. The renaissance of the private rented sector over the past 15 years now means that households have much greater choice over the timing of house purchase decisions. Each year, there are significant numbers of household movements in both directions between home ownership and the private rented sector. Even when home owners need to move, for say job-related or family-related reasons, they may be able to defer a sale or switch to renting instead. So flexibility to move between tenures as people s circumstances change is critical to a well functioning housing market. We expect to see a growing interest from institutional investors in developing particular types of rented accommodation. In 2012-13 the private rented sector became the second largest tenure in England 18% private rented sector 17% social rented sector And we should not forget that the social housing sector plays an equally important role within the housing arena for those for whom home ownership or private renting is not an option. Mortgage lenders have lent 60 billion to housing associations for new build, repair and improvement to social housing. This has enabled significant improvements in the condition of existing homes and communities as well as delivering new affordable homes without increasing the use of public money. However, welfare reform has the potential to impact negatively on future investment. In particular, the payment of housing benefit direct to tenants creates uncertainty for landlords that they will receive their rent. Pilot schemes have shown a rise in arrears, and this will have a detrimental impact on lenders and investors appetite to fund the sector in the future. This is at a time when public funding has been cut and aspirations for new supply have been pinned on the availability of private finance going forward. Source: DCLG www.cml.org.uk 11

Final thoughts We want the next government to: Recognise that the UK housing market is really a whole set of local markets, but that most finance is provided by national lenders who need standard operating frameworks Ensure the practicalities of regulation are in line with government policy and support the longterm health of the economy Ensure that neither localism nor European regulation hinder rather than help the effective delivery of housing and housing finance Prioritise and promote the supply of the right types of housing in the right locations this is the long-term solution to housing affordability! www.cml.org.uk 12

About the CML We represent mortgage lenders and promote sustainable housing finance. The issues that we cover include: We represent lenders of all sizes and types who together undertake 95% of residential mortgage business in the UK. Our members include banks, building societies and other mortgage lenders, and firms that administer mortgages. CML membership 8 82 122 10 4 Full member Associate Third party administrator Group associate Parent member Affordable housing Arrears and repossessions Buy to let Conduct regulation Conveyancing Devolved administrations Environmental issues Equity release Europe Fraud and financial crime Housing market and supply Market analysis and data Mortgage lending practices New build Prudential regulation Political affairs/activity Source: CML www.cml.org.uk 13

Council of Mortgage Lenders North West Wing Bush House Aldwych London WC2B 4PJ Tel: 0845 373 6771 info@cml.org.uk www.cml.org.uk Follow us on twitter @cmlpressoffice and @cmlevents www.cml.org.uk