A new report from the Intermediary Mortgage Lenders Association (IMLA) has warned against discouraging investment in the private rented sector.
It believes such measures would, in the face of population growth and low housing supply, simply push up rents and harm tenants more than landlords.
The report – Segmenting the UK mortgage market – examines the key issues facing the main segments that make up today’s mortgage market, which IMLA says can be thought of as a series of interlinked but distinct markets for first time buyers, moving homeowners, buy-to-let investors, lifetime borrowers, remortgagers and further advances.
Assessing the possible impacts of July’s buy-to-let tax changes, IMLA argues a higher tax burden for landlords – which will push some into losses after tax and raise the effective tax rate on their buy-to-let above 100% – may slightly skew the market in favour of owner-occupied house hunters, by reducing the price that landlords are prepared to pay for any given property.
The risk, however, is that these changes and the threat of tighter buy-to-let mortgage regulation will constrain the supply of available rental properties at a time when the fundamentals of population growth and low housing supply are driving an increase in demand, and that institutional investment will fail to make up the gap.
The IMLA report shows total lending across the mortgage market this year was running below its 2014 level from January to May. Since then, there has been a sharp recovery and 2015 may be shaping up to be a mirror image of 2014.
Subdued lending in the first half of the year may have reflected uncertainty in the run-up to the general election but a clear cut election result has removed this level of doubt. The bedding down of the Mortgage Market Review (MMR), which disrupted some lending with its introduction in 2014, has also contributed to the recovery.
By far the most robust recovery has come in buy-to-let, but this must be placed in context of an 81% decline after the recession between 2007 and 2009. This compares with a 60% drop in remortgaging volumes, 56% among home movers and 53% among first time buyers over the same period. buy-to-let lending volumes remained 40% below their 2007 peak in 2014, and IMLA argues that it is responding to rather than driving growth in tenant demand in the private rental sector.
While buy-to-let has rebounded, the remortgage market has been slow to respond, but conditions are ripe for a resurgence. IMLA’s analysis shows Q2 2015 remortgage volumes were up 11% on the previous quarter to record the best performance since 2009.
At just under 3%, the price differential between standard variable rates (SVRs) and discounted variable rate deals is greater this year than ever before. Interest rates are also expected to rise, and for the first time in Q2 2015 UK, households’ aggregate housing equity surpassed the £5 trillion mark. Only 20% of gross UK housing wealth is now mortgaged, the lowest proportion since the early 1980s.
However, despite rising 12% on the previous quarter in Q2 2015 to £1.3 billion, the further advances segment remains the worst performing of recent years with this latest figure still less than half the quarterly average of 2008, when the financial crisis was raging.
Even when house prices are rising, consumers are not releasing equity and using their homes as collateral for broader consumption as many did in the early part of the century. Instead, they ploughed a record £13.7bn of equity into their homes in Q1 2015. IMLA suggests the Financial Policy Committee should pay more attention to this ‘unprecedented’ rate of mortgage deleveraging – equal to more than 4% of household’s post-tax income – when assessing the threat posed by the mortgage market to financial stability.
The IMLA report also notes the growing popularity of lifetime mortgages, with 2014 bringing a 21% increase in lifetime lending volumes to £1.5 billion after an 18% rise in 2013.
It suggests the pension freedoms introduced in April this year could help this process by encouraging new perceptions of the lifetime mortgage market. The changes brought pension pots into an individual’s inheritable estate alongside housing wealth and other assets. As the new rules become better understood, beneficiaries will come to see pension pots as part of an inheritable estate just as much as houses or savings accounts.
By comparison to an annuity, a lifetime mortgage offers valuable wealth preservation, with the gradual (c.6% a year) erosion of capital likely to be preferred to the instant erasing of capital that comes from an annuity.
Peter Williams, executive director for IMLA, said: “The mortgage market is having to navigate some difficult terrain, so it is encouraging to see signs that the lending recovery remains on track after a sharp slowdown this time last year.
“Comparing market segments, first time buyer volumes have actually held up best over the period from 2007-2014, while buy-to-let has been clawing its way back from a deep recession low as demand for private rental properties has grown. Until there is a broader policy push to tackle the chronic lack of supply, homeowners and renters in both private and social sectors will all remain vulnerable to the effects of the current lack of fully joined-up policy making.
“Current trends also highlight a change in homeowners’ attitudes to property since the recession. While conditions are ripe for greater remortgaging to occur, borrowers have become more cautious and have been choosing to grow the equity in their homes – like safe deposit boxes – rather than using the collateral for other consumption, through further advances. This approach presents the option of using housing wealth later in life, through lifetime mortgages and other mechanisms, as additional sources of retirement funding.”