Gross mortgage lending in 2018 has been predicted to rise for the eighth year in a row to reach its highest level since 2007, with falling inflation to underpin sentiment despite Brexit uncertainty.
That’s the verdict of the Intermediary Mortgage Lenders Association’s (IMLA) fifth annual market review and forecast – ‘The New Normal: Prospects For 2018’.
It estimates that gross mortgage lending will reach £265 billion with net mortgage lending of £47 billion.
Yet, despite the best performance for a decade, the market continues to be challenged by a combination of a shortage of properties, very low levels of turnover and obstacles to both first-time buyers and “second-steppers”.
The report focuses on the ageing demographics, which will have profound ramifications for the mortgage market: a growing concentration of housing wealth among older home-owners with less (or no) reliance on mortgage finance but a desire to remain in their properties will lead to fewer transactions, with consequential knock-on effects for second steppers.
The forecast suggests remortgage activity will continue to be more buoyant than lending for house purchase, with total remortgaging reaching £94 billion, up 4.4% to reach 35.5% of total lending.
It also think that gross buy-to-let lending will recover in 2018 and 2019 despite the adverse tax changes for landlords. This not only reflects continued strong remortgage activity but an improvement in house purchase lending brought about by a higher level of churn in the market, IMLA said.
Meanwhile, lending via intermediaries is predicted to continue to increase its share of lending, rising to £158 billion this year and £164 billion in 2019, a share of 72.2% compared to 71.3% in 2017
IMLA’s analysis shows that the proportion of funding for new house purchases that came via mortgages fell from 52% in 2006 to 41% in 2016, with only a slight uptick to 41.5% in 2017. Moreover, the aggregate loan-to-value (LTV) ratio of the housing market has now fallen to below pre-financial crisis levels at 26%, as homeowners’ increasing equity reduces the role of mortgage debt in the overall housing market.
These trends have been influenced by the changing face of the UK homeowner in recent years, whose average age has increased from 52 in 1996 to 57 in 2016. This increase is far more rapid than the rate of ageing across the UK population as a whole. In 2016, 76% of all owner-occupiers were aged 45 or above, compared to 62% in 1996.
Furthermore, an increasing concentration of homeownership among older people – many of whom have paid off their mortgages – has translated into a historic low level of housing turnover. The average UK household now moves once every 19.2 years, compared to once every 7.4 years when housing transactions peaked back in 1988.
This increase in overall housing equity among older homeowners has reduced dependence on borrowing. New mortgages made up just 10.6% of the total stock of mortgages in 2017, less than half 2003’s peak of 24.2%.
The significant amount of cash (£261 billion) injected into the market between 2008 – 2017 is accounted for by a combination of regular and lump sum mortgage repayments and cash deposits. The number of first-time buyers has increased in recent years to reach 366,000 in 2017, buoyed by factors including cash inheritances, the ‘Bank of Mum and Dad’ helping to supplement deposits and government schemes such as Help to Buy, which have helped more aspiring homeowners make their first step onto the ladder.
However, homeowners looking to make subsequent moves are feeling the effects of an illiquid market. Despite 377,200 ‘steppers’ in 2017, this overall number is down 42% since 2007, as many struggle to meet stricter mortgage affordability criteria on larger homes, despite any price appreciation on their first home and equity gains as a result.
Kate Davies, executive director of IMLA, said: “While the mortgage market currently appears resilient, it is clear that a number of structural factors have been changing our perceptions of what “normal” looks like.
“We are witnessing a step-change in the market, as the shifting demographics of homeownership and the housing supply shortage create a structural break with what has been the norm. Despite the recovery of the housing market and the availability of mortgage finance since the last recession, stricter affordability rules are limiting activity by those who would otherwise be highly leveraged. Transactions levels have fallen and there is evidence of more cash being injected into home purchase. People are moving less often – whether by choice or constraint.
“Increased housing wealth can benefit older homeowners relying on a buoyant property market to help fund their retirements, along with first-time buyers who can access the Bank of Mum and Dad for help towards a deposit. But a chronic housing supply shortage is contributing to an increasingly illiquid market. Home movers, or ‘steppers’, in particular face a number of hurdles including high house prices relative to earnings, stricter mortgage affordability criteria and a lack of suitable homes – holding back housing turnover and transaction volumes.
“It’s important that government now recognises the demographic and socio-economic changes that have influenced the direction and makeup of the housing market. Whilst home ownership remains the ultimate goal for many, there will be significant numbers of people who will choose or need to rent at some point in their lives. The market needs to work for everyone and we all – government, lenders and housing industry – should work together to adopt new approaches that can increase the supply of homes suitable for all ages and tenures.”
