After last year’s political and economic upheavals, will anyone listen to the experts’ predictions for 2017 and can the market withstand any more stormy weather?
Predicting the trends that will shape the UK mortgage market tends to be more of an art than a science, particularly in the wake of 2016, a year that confounded all prophecies.
That said, learned opinion may suggest that some outcomes are more likely than others in 2017.
For example, mortgage experts believe that the biggest trends of this year will be a continued slowdown in house-price rises and a potential increase in mortgage rates, with issues around the wildcard of Brexit.
Mortgage Strategy has taken a closer look at the headwinds most likely to face the market this year, and where the opportunities may lie.
Gross lending
First, gross lending is unlikely to change much in 2017, according to industry professionals.
The Council of Mortgage Lenders predicts £248bn of gross lending this year – up by less than 1 per cent from the estimated £246bn for last year and down from its original forecast of £261bn, which was made before the start of 2016. On residential property transactions, it expects a reduction from 1.24 million last year to 1.17 million in 2017.
CML director general Paul Smee says: “The mortgage market remains resilient but is likely to plateau rather than grow much for the next couple of years.”
Private Finance managing director Simon Checkley says: “I don’t expect much change over the next 12 months. Indeed, we are likely to see inflation rise further in 2017, which will impact consumers, so lending may be flat at best.”
House prices
As with lending, the general forecast for house prices is of a slight rise only – Nationwide expects about 2 per cent growth in 2017.
The building society’s figures showed prices rose by 4.5 per cent last year, meaning the average price of a home is now £205,898, more than seven times average earnings.
It is no wonder the Local Government Association revealed last month that, while 46 per cent of 25-year-olds owned their home 20 years ago, only a fifth of the age group is on the housing ladder today.
Nationwide chief economist Robert Gardner says: “Like most forecasters, we expect the UK economy to slow modestly, which is likely to result in less robust labour market conditions and modestly slower house-price growth.
“But we continue to think a small gain – about 2 per cent – is more likely than a decline over 2017 because low interest rates are expected to help underpin demand, while a shortage of homes will provide support for house prices.”
Surveyor group Rics predicts 3 per cent growth in house prices this year, agreeing that the supply shortage will worsen the effect of the uncertain economic climate.
Meanwhile, Legal & General Housing Partnerships director Stephen Smith says “positive” forecasts such as these paint a different picture for many in the aftermath of the Brexit vote.
He says: “Despite speculation about the referendum result causing a fall in house prices, it is encouraging to see many surveyors challenge this by forecasting an increase in house prices.
“Although rampant house-price inflation pushes many first-time buyers out of the market, a fall can be equally destabilising for families and their finances. In an ideal housing market, prices would rise slowly, slightly below wage growth.”
The Government has made a number of recent announcements of its plans to boost housebuilding – such as the £7bn fund made available to housing providers – but construction levels are relatively low.
In fact, they are well short of the 250,000 new homes that many, such as housing charity Shelter, believe are needed each year to keep pace with demand. Government statistics for the 2015/16 financial year show construction began on just 172,080 homes.
Mortgage rates
While the forecasters predict not much movement in lending or house prices, most commentators believe there could be a significant change in mortgage rates – with rises likely.
Rates hit rock bottom in 2016, epitomised by HSBC’s record-low two-year fixed rate at 0.99 per cent, which was pulled in December. Longer-term fixes were also on the up as this year began.
It was when HSBC put up its rates that many took notice. It drew mass headlines and shone a spotlight on rising swap rates, which have a large bearing on borrower rates.
HSBC’s super-cheap deal was on the market for six months but no one expected it to last forever. When the lender pulled the deal it did not herald a sudden domino effect of rate hikes but there is a fear of gradual rises in 2017.
Meanwhile, “there is a growing sense among UK homeowners that the first base rate rise for a while could be close”, says Edinburgh Mortgage Advice director Mark Dyason.
“This has been compounded by the quarter point hike in the US in December. Most now accept that mortgage rates are unlikely to get better.”
London & Country associate director David Hollingworth echoes that sentiment. He says: “For the first time in a long time lenders have edged fixed rates up – a turnaround from the seemingly unstoppable cuts.
“As forecasts begin to consider a base rate increase in a higher-inflation environment, that could see more increases in the fixed-rate market, whether base rate shifts or not.”
Competition
This upward movement does not mean the market will be devoid of competitive rates in 2017, however. After all, historically any fix below 2 per cent has been very cheap, albeit we have got used to such lows.
“There are still competitive offerings out there, which will continue,” insists Coreco director Andrew Montlake.
Some experts believe that any tide of rising mortgage rates would bolster remortgage levels. LMS chief executive Andy Knee says: “If mortgage rates climb, we expect more homeowners to take advantage and fix by remortgaging.”
He adds that the LMS outlook for remortgaging is “optimistic”.
Of course, any house-price and rate growth would make things even harder for the army of wannabe FTBs.
April will bring the launch of the Lifetime Isa. This will work in a similar fashion to the Help to Buy Isa for those under 40; the state will add a 25 per cent bonus on up to £4,000 saved each year – making a maximum of £1,000 annually. The funds can be used as either a homebuying aid or a retirement pot.
While many commentators to whom Mortgage Strategy spoke say the Lifetime Isa will inevitably provide a boost, they do not think it will feed through en masse for years given that the maximum bonus for savers is £1,000 a year.
“Without the promised boost to supply it is difficult to see affordability easing and the ‘Bank of Mum and Dad’ will no doubt remain crucial to many FTB hopes,” says Hollingworth.
The industry’s general lack of optimism for FTBs highlights a lack of confidence in government action in this area. Many believe the Government’s measures last year to limit buy-to-let lending were designed to ease the process for FTBs by freeing up housing stock. However, the consensus is that this has been ineffective.
From April last year, anyone buying a second home had to pay an additional 3 percentage points in stamp duty; and from this April a revolution will begin whereby landlords will no longer receive higher-rate tax relief on mortgage interest by 2020.
Lending criteria
If that was not enough pain for prospective investors, lending criteria have got tougher this year under rules from the Prudential Regulation Authority. These include requiring lenders to assess borrowers’ ability to repay a 5.5 per cent rate, regardless of what they actually pay, when determining their mortgage suitability.
Perhaps unsurprisingly, CML data shows a fall in BTL lending last year, with just 100,000 homes purchased this way compared to 118,000 in 2015. The lender body expects the number to fall further, to 85,000 this year and 80,000 next year.
Building Societies Association mortgage policy adviser Robert Thickett says: “BTL will experience a further shake-up in 2017 with the taxation changes already introduced added to by regulatory change.
“The PRA’s requirements for underwriting will be another major change to adapt to. It could be a bumpy ride.”
Another factor for the mortgage market to consider this year is the Financial Conduct Authority’s review of competition.
An area of review welcomed by many is the investigation into the growing trend of execution-only product switching offered by lenders to clients approaching the end of an introductory period. Many brokers believe this encourages non-advised sales, which can lead consumers to make poor choices.
John Charcol senior technical director and Association of Mortgage Intermediaries board member Ray Boulger told Mortgage Strategy last month: “Lenders appear to be trying to get around the rules the MMR tried to implement.
“The worry at Ami is that lenders are pushing people into taking these deals on a non-advised basis where other factors will not be taken into account.”
The FCA aims to publish an interim report on its competition review this summer.
The summer will be doubly important for the mortgage market because, by then, we may know more about what Brexit looks like, which will have a huge impact on the UK’s economic wellbeing.
It seems that the market expects this year to be largely stable, with some uncertainty likely over Brexit developments.
Let us hope that these predictions prove correct, and that 2017 turns out less turbulent than last year.
Challenges lie ahead but no unpleasant shocks
Andy Knee, chief executive, LMS
Last year was a rollercoaster so how will 2017 compare?
In 2016 mortgage rates hit record lows but we do not expect these to stay the course through 2017.
Swap rates are rising and we are already experiencing surging, whereby the last lender to raise its rates in each round of increases receives huge application volumes as buyers desperately try to get the lowest rate.
Homeowners too are getting jumpy. We found 32 per cent of remortgagors expect rates to rise in 2017.
So our outlook for remortgaging is optimistic. LMS data reveals remortgaging activity grew in 2016, with over 4,600 more remortgages on average each month than in 2015. If rates start to climb, we expect more homeowners to take advantage of the situation and fix now by remortgaging.
Brexit negotiations will dominate the media, affecting confidence in property. But the market will not grind to a halt, merely slow down a little.
Fewer transactions and a lack of supply could reduce the amount of stock available. That will prevent prices falling, suggesting little respite for FTBs struggling to save for a deposit.
Overall, the UK mortgage market is resilient and confidence in property remains high, buoyed by foreign investment and the collapse of the pound. We wait to see how the chancellor responds to calls to revisit the changes made to stamp duty, widely held responsible for reducing deals at the higher end of the market. If he does, that will stimulate activity.
While there are challenges ahead for the industry, no unpleasant shocks – in property terms, at least – are expected in 2017.
