Predictions for the mortgage market in 2014

The past year saw the mortgage and housing market take centre stage in national news coverage as Funding for Lending (FLS), inadequate housing supply and Help to Buy were among the topics to make the headlines and the pace is not expected to slow in 2014. Rebekah Commane asked industry experts for their predictions for the year ahead

Ray Boulger, senior technical manager at John Charcol

House prices will end 2013 up by 9 per cent, based on the Nationwide and Halifax indices. Until spring 2013 increases were primarily London centric, with prices in most other areas outside the South East either static or falling.

However, price differentials between London and elsewhere have widened so much that I expect prices in most regions to increase broadly in line with London in 2014, with some probably outperforming London. The Autumn Statement announcement that foreigners will be subject to capitals gain tax from April 2015 when selling residential property is likely to result in some deciding to sell before then but the impact will be negligible outside London.

The factors pushing up house prices will continue in 2014, with Help to Buy (HTB) being a bigger influence. After three years with little change in gross mortgage lending, the 2013 figure will be about £174 billion, 22 per cent higher than 2013. Lending will increase further in 2014, probably by a slightly smaller percentage, taking the total to £200 billion.

Lenders have plenty of funds, partly because of the Funding for Lending Scheme (FLS), whereby the Bank of England offers very cheap funds for a four-year term. Although this scheme will now finish a year earlier than planned, i.e. on 31 January 2014, lenders can draw down funds to which they are already entitled and many will draw considerable amounts in the run up to the scheme ending, giving them a substantial war chest for 2014 lending.

Following ‘guidance’ from the Bank of England it is highly unlikely that Bank Rate will change in 2014. Despite the fall in unemployment now accelerating on the back of a stronger than expected pick up in the economy, comments from the Bank suggest it will be in no hurry to increase Bank Rate, even when unemployment falls to its initial target rate of 7 per cent.

The availability of 95 per cent LTV mortgages has increased substantially as a result of HTB and will increase further early in 2014. Despite HTB being the catalyst for this increase most lenders offering mortgages with only a 5 per cent deposit are not using the scheme to do so.

The increased competition in 2014 for borrowers with only a 5 per cent deposit will result in lower rates. However, criteria will remain tight and prospective borrowers will continue to need a good credit status.
The most visible impact for most consumers of the Mortgage Market Review is that from then it will generally be mandatory for borrowers to get advice before they can take out a mortgage. Consumers used to using a mortgage broker will not notice much difference but it will be a culture shock for some consumers.

Paul Winter, chief executive, Ipswich Building Society

Looking forward to the year ahead, housing policy will remain top of the agenda with prominence upon the impact of Help to Buy on house price inflation and the desperate need for affordable housing. In addition, the Mortgage Market Review comes into force in late April and will impact on the length and stringency of the mortgage approval process.

Regulation will continue with force with an increased focus on governance following the unravelling of Co-op Bank.
Broadly speaking I believe that house prices will continue to rise in 2014, possibly by around 5 per cent, but it’s unlikely that this will translate to rising sales and will be fuelled where demand significantly outstrips supply. The ‘housing bubble’ will play out in certain areas, with rocketing prices remaining confined to London and the South East. In the East of England where Ipswich Building Society has the majority of our mortgage book I anticipate a steady but not dramatic increase in house prices.

My greatest concern is the government’s Help to Buy scheme and the lack of a clear exit strategy. Looking at Canada, where a similar scheme has been in place for over 20 years, I am uncertain that there can now even be an exit strategy without causing detriment to house prices. There is an urgent need to balance schemes designed to fuel house purchase demand (and hence house price inflation) with increased housing supply. Whilst much has been done to drive demand and build some feel good factor in consumers, housing supply has had less intervention and whilst new build numbers are picking up they remain far behind demand.

Mortgage Market Review (MMR) is another significant change in the mortgage market in 2014. It comes into effect on 26 April and is likely to have a substantial impact on some consumers. MMR places emphasis on the lender to ensure it is lending responsibly and completing individual assessments of affordability.
My concern for consumers is that these new regulations will make it more difficult for borrowers who are self-employed or work on flexible contracts and have perfectly good credit histories to get a mortgage.

The early withdrawal of the Funding for Lending Scheme (FLS) is also significant. Recent research from the Building Societies Association demonstrates that since the summer of 2012, building societies and other mutual lenders have drawn down just £6.9 billion of FLS money. Conversely banks have drawn down £16 billion of FLS. The impact of this, alongside increasing capital requirements could see banks increasing mortgage rates in the lower LTV spaces and a reduction in the availability of higher LTV mortgages (despite Help to Buy) in 2014.

Paul Broadhead, head of mortgage policy, The Building Societies Association

Withdrawal of the FLS alone should not have too much impact on the supply of mortgages to borrowers with smaller deposits. There is little evidence that this scheme increased this type of lending by much across the market.
The Help to Buy mortgage guarantee scheme is targeted directly at increasing the supply of high LTV mortgages from those lenders that have been absent from this market. The direct impact of the scheme will likely see an increase in the number of high LTVmortgages but it is important to recognise that there is no discernible difference to consumers whether a particular mortgage is within or outside of this scheme.

A number of people will find the right mortgage for them from lenders not signed up to the Help to Buy scheme so it is important to look beyond it. Building societies have consistently offered low deposit mortgages throughout the financial crisis and many have launched new 95 per cent LTV products recently.
Help to Buy is likely to have an impact on consumer sentiment and confidence that the mortgage market is open for business. This may be more significant than the direct impact of the scheme. With the size and market share of the firms participating, the number of mortgages flowing through the scheme will be substantial, although it will be difficult to say how many of these purchases were directly attributable to HTB.

A managed and carefully communicated exit strategy will help avoid disruption, and the terms could be tweaked following recommendations by the Bank of England’s Financial Policy Committee if there are any signs of a housing bubble forming. The new responsible lending rules will also mitigate against a bubble.
House building is increasing but with a long lead-in time it is going to be a while before supply begins to catch up with demand. We still have an acute shortage of housing and this is unlikely to be rectified in 2014. It’s difficult to generalise house prices across the country but we’re likely to see some growth across the board, but that will be strongest in London and the South East where supply most outstrips demand.

It is likely that levels of arrears and possessions will remain fairly low in 2014 as the economy recovers and incomes begin to grow. The general sentiment seems to point to the Bank of England being unlikely to raise interest rates until 2015. It is important to note that there is likely to be continued pressure on household finances as we continue on a cautious economic recovery.

The mortgage application process will likely become lengthier for consumers following the new regime of mortgage regulation.

Brian Murphy, head of lending, Mortgage Advice Bureau

With regards to Help to Buy, we do not believe that it will lead to a housing bubble. The schemes are specifically targeted to enable those potential borrowers who can sustainably afford a mortgage to buy a property with as little as a 5 per cent deposit.
Ninety five per cent mortgages have always been part of a normally functioning market and the lack of low deposit mortgages has been the primary reason for the low level of transactional activity. The Bank of England now has the power to intervene in markets and its focus is very much on ensuring that the housing and mortgage markets are growing sustainably.

They have demonstrated that they are prepared to step in and take action to remove support mechanisms – such as the removal of FLS one year ahead of the proposed end date – once evidence exists that markets are operating on a more normal basis.

The shared equity HTB product, aimed at new build customers, has proved extremely successful with more than 18,000 reservations since inception in April and the mortgage guarantee product is gaining momentum and more lenders have announced their intention to participate.

What is really encouraging is that some lenders have launched 95 per cent LTV mortgages without recourse to the HTB guarantee. This demonstrates that conditions are returning to more normal levels and lenders are prepared to again embrace this important sector of the market. As conditions improve further we expect more lenders to re-enter this sector of the market, which should mean an orderly exit from H2B once it ceases.

House Builders have seen activity jump since the introduction of the schemes, with several large national firms reporting that they have sold virtually everything they have built and are looking to ramp up the number of new starts in 2014 and beyond. Planning consents are up considerably year on year.
Developers are building sites more quickly and looking to invest in new sites and develop more quickly.
We think that house prices are likely to see rises of approximately 5 per cent.

With the wider UK economy continuing to improve, more people than ever are in employment and as the unemployment rate falls further we think that wages will start to increase at a rate closer to or near inflation, which should mean that those in arrears and under financial pressure have a greater opportunity to get back onto an even keel, thus improving the numbers further.

We don’t believe that MMR will make the mortgage application process more drawn out but that lenders will increasingly only want cases submitted that are fully complete at the point of application.
Brokers should hold off from submitting a case until they are in possession of all supporting documents as lenders will only want to assess the case once.