In a sobering presentation at the Mortgage Conference, Tony Ward, director at due diligence consultancy Fortrum, explained the risks and structural challenges lenders now face in the UK mortgage market.
I was fortunate enough to be asked to speak at the Lending Summit last month about the mortgage market – where we are and where are we going. I had some hard home truths to deliver.
Amazingly, we have more mortgage lenders today than before the global financial crisis (GFC). But the top six lenders command more than 70 percent of all mortgage lending in the UK.
Looking a little deeper, we see that the top 15 account for around 90 percent and most focus on high-income customers. So, doing the maths you arrive at the conclusion that around 130 lenders compete for 10 percent of the market. About £26bn per annum. No wonder credit and price wars have started.
We also have an ageing population with increased outright home ownership. In 2016 people aged over 65 will be around 18 percent of the population and this is expected to grow to nearly 25 percent within 20 years.
There is now considerable housing wealth concentrated in older home owners, and these borrowers are paying off mortgages and staying in properties, which means the stock of mortgages is likely to contract.
With house price growth massively outstripping wages growth, and tighter conduct rules around affordability, this has meant the first-time buyer market has fallen off a cliff.
This very competitive situation where many lenders are fighting over a small slice of the market is having the usual effect: Pricing and risk are used to secure business and the big players have the balance sheet firepower to achieve this. It’s not a strategy for the faint hearted.
From a risk perspective, income multiples are now higher than pre-crisis levels and rising. The house price/earnings ratio is rising and is not too far from the record heights just before the GFC. Although arrears are low and falling – this is all to do with low interest rates and nothing to do with lenders’ skills.
Since the GFC, funding schemes have been available to banks and building societies which have allowed them to fund mortgages at close to zero marginal rates. This has stimulated the markets but has meant smaller non-bank players have had to concentrate on market differentiators to compete. With these funding schemes now in run-off, this will address the imbalance to an extent and allow smaller lenders to compete on a more level playing field.
Margin compression is, however, in evidence and the dual effects of tighter regulation and oversupply in the low risk sectors has been that the number of prime customers is falling.
Larger lenders have exacerbated this by industrialising their processes and simplifying products. This means that more can be done on an automated basis to cut costs and reduce regulatory conduct risk.
Coupled with ageing borrowers paying off their mortgage, the mortgage market may well have peaked and is now in long-term decline.
But all is not lost. Even though competition is tough, we are seeing a re-emergence of specialist lenders focussing on gaps in the market – including higher risk borrowers.
Ultimately, the market response to tighter regulation is that there are now under-served sectors such as first-time buyers and the self-employed.
Intermediary distribution has never been stronger (even though the number of intermediaries has halved in 10 years) and is in the region of 75 percent. So, in summary:
- The UK mortgage market is challenging and in long-term decline;
- First-time buyers are falling away, given tighter conduct and prudential rules, plus escalating house prices, and wage settlements not keeping pace with inflation;
- The ageing population now owns a substantial part of the UK housing wealth as they are paying off their mortgages, and this removes their loans from the system;
- We have much less product innovation than we did but the UK still ranks number one in the world for technology innovation in financial services;
- Securitisation is making a comeback, but with far fewer investors than there once was;
- The UK has headwinds with too many lenders and diminishing numbers of borrowers (at least for now with Brexit looming);
- There are opportunities, but it would be fatal to get caught up in price wars with mainstream lenders.