UK Mortgage Outlook 2008-9: A Turbulent Year

Table of Contents

OVERVIEW

• Catalyst
• Summary

EXECUTIVE SUMMARY

• The UK mortgage market experienced unprecedented turmoil in 2008
  • The onset of a severe recession hit demand for mortgages
  • Providers in the UK were not immune to the financial instability
  • These problems conspired to hamper the free flow of credit in the UK markets
  • Reductions in both demand and supply combined to squeeze gross lending in 2008
• 2009 to date has been marked by the impact of the severest recession in decades
  • Datamonitor forecasts total gross lending of £145 billion in 2009
  • The supply of credit was further restricted in the first quarter but increased in the second
• Falls in house prices have revived negative equity and aggravated the constriction of credit
  • House prices have fallen a long way from their peak in 2007
  • Negative equity makes an unwelcome return
  • House price falls are affecting credit supply
  • Nationwide is tentatively predicting a year-on-year rise in prices by the end of 2009
• First time buyers have faced particular difficulties
  • Lenders are unwilling to offer high LTV mortgages
• Arrears and repossessions are on the rise
  • The incidence of mortgages falling into arrears showed a sharp increase in 2008
  • Repossessions also rose, but by less than expected
  • Datamonitor expects the incidence of arrears and repossessions to peak in 2010
• Historically low base rates have had a major impact on consumer and lender behavior
  • The type of mortgage chosen by borrowers has been driven by future rate expectations
  • The relationship between the base rate and mortgage rates has broken down
  • Low standard variable rates have reduced the incentive for homeowners to remortgage
• Datamonitor expects gross lending to pick up gradually over the next few years

A REVIEW OF THE UK MORTGAGE MARKET IN 2008 AND 2009

• 2008 saw unprecedented turmoil in the UK mortgage market
  • The year started with predictions of a ' soft landing' for the economy and housing market
  • The onset of a severe recession further hit demand for mortgages
  • The Bank of England was slow to react to the deterioration in the economic climate
• The supply of mortgage finance was affected by a dramatic worsening of credit conditions
  • Providers in the UK were not immune to the financial instability
  • These problems conspired to hamper the free flow of credit in the UK markets
  • Reductions in both demand and supply combined to squeeze gross lending in 2008
  • Lending for house purchases declined massively in 2008, reflecting the collapse in property sales
  • Lending fell sharply in terms of both the number and the value of approvals
• To date, 2009 has been marked by the worst recession in decades
  • The Bank of England took drastic measures to stimulate the economy
  • Datamonitor forecasts total gross lending of £140 billion in 2009
  • Fears of a slow recovery for the economy as a whole
  • The supply of credit was further restricted in the first quarter, but increased in the second

KEY TRENDS AND FACTORS AFFECTING THE MARKET

• Falls in house prices have revived negative equity and aggravated the constriction of credit
  • House prices have fallen a long way from their peak in 2007
  • Negative equity makes an unwelcome return
  • House price falls are affecting credit supply
• Sentiment on house prices has become more optimistic in the third quarter of 2009
  • Nationwide is tentatively predicting a year-on-year rise in prices by the end of 2009
  • Halifax data confirm upwards trend in prices
  • The Royal Institution of Chartered Surveyors becomes more upbeat
  • Other parties strike a more cautious note on prices
  • Consumers remain pessimistic about the state of the housing market
• First time buyers have faced particular difficulties
  • Lenders are unwilling to offer high LTV mortgages
  • A third of consumers who want to buy a house in the next year will have to borrow from friends or family
  • The government and the industry have taken steps to help first time buyers
  • Providers have launched new products specifically for this market
• The government raised the stamp duty threshold to help stimulate the market
  • Providers have launched new products specifically for this market
  • The government raised the stamp duty threshold to help stimulate the market
  • The FTB market continued to decline throughout 2008, but started to recover in 2009
• Arrears and repossessions are on the rise
  • The incidence of mortgages falling into arrears increased sharply in 2008
  • Repossessions also rose, but by less than expected
  • Datamonitor expects the incidence of arrears and repossessions to peak in 2010
  • The industry and other parties have taken steps to limit repossessions
  • The government has introduced its Mortgage Rescue Scheme but with limited success to date
  • Other government measures have sought to minimize the incidence of repossession
  • Consumers' confidence in their ability to meet repayments has been unaffected

FORECASTS AND FIGURES

• Historically low base rates have had a major impact on consumer and lender behavior
  • The type of mortgage chosen by borrowers has been driven by future rate expectations
  • The relationship between the base rate and mortgage rates has broken down
  • Low standard variable rates have reduced the incentive for homeowners to remortgage
• Datamonitor expects gross lending to pick up gradually over the next few years
• In the light of current volatility, Datamonitor has produced two alternative scenarios
  • The pessimistic scenario assumes a steep rise in unemployment and a continuing lack of credit
  • The optimistic scenario assumes a quicker economic recovery and a more rapid expansion of credit

APPENDIX

• Supplementary data
• Definitions
  • Balances outstanding
  • Bank of England base rate
  • Buy-to-let mortgage
  • CAGR
  • Fixed rate mortgage
  • Gross advances
  • LIBOR
  • Remortgaging
  • Sub-prime
• Methodology
• Forecasting methodology
• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

TABLES

• Table: Forecast gross advances under the Datamonitor view, 2009 - 2013
• Table: Forecast arrears and repossessions under the Datamonitor view, 2009 - 2013
• Table: Forecast gross advances under the Datamonitor view, 2009 - 2013
• Table: Forecast gross advances under the pessimistic view, 2009 - 2013
• Table: Forecast gross advances under the optimistic view, 2009 - 2013
• Table: Quarterly changes in UK GDP (% change compared to previous quarter)
• Table: Number of approvals for house purchase
• Table: Bank of England base rate (%)
• Table: Quarterly changes in credit availability and scoring criteria
• Table: Annual gross lending (£m)
• Table: Annual gross lending by product line (£m)
• Table: Number and value of all mortgage approvals, by month
• Table: Monthly gross lending (£m)
• Table: Factors affecting availability of secured credit
• Table: Nationwide and Halifax prices indices, monthly and annual changes
• Table: Impact of house price expectations on availability of credit
• Table: Consumer confidence in strength of housing market compared to a year ago
• Table: Consumer expectations of strength of housing market over next 12 months
• Table: Net balance of lenders reporting increase in availability of high LTV mortgages
• Table: Average rates for two year fixed-rate mortgages of 75% and 90%/95% LTV
• Table: Consumer attitudes on perceived difficulties in raising mortgage finance
• Table: First time buyer loans
• Table: Annual arrears and repossessions
• Table: Level of consumer concern about ability to meet repayments
• Table: Type of mortgage
• Table: Base rates, LIBOR, swap rates, average mortgage rates from 2007 to 2009
• Table: Net balance of lender reporting increase in spreads for different categories of mortgage
• Table: Monthly mortgage approvals

FIGURES

• Figure: Severe tightening of mortgage credit availability and lending criteria throughout 2008
• Figure: The Datamonitor view is that gross lending will recover gradually to a level of £220 billion in 2013
• Figure: UK GDP started to decline in the second quarter of 2008
• Figure: Approvals for house purchase fell sharply from mid-2007 to the end of 2008
• Figure: The Bank of England base rate remained at relatively high levels until the final quarter of 2008
• Figure: Severe tightening of mortgage credit availability and lending criteria throughout 2008
• Figure: After strong growth in 2006 - 07, gross lending fell sharply in 2008
• Figure: Lending for house purchases has been worst affected by the downturn
• Figure: Mortgage approvals are on a downward trend, in terms of both value and time
• Figure: Gross lending remains very subdued in first half of 2009
• Figure: Factors affecting availability of secured credit started to recover in the second quarter of 2009
• Figure: House price indices show negative annual growth from early 2008 onwards
• Figure: Expectations of house price falls have contributed to a reduction in secured credit availability
• Figure: Consumer confidence in housing market has been badly affected
• Figure: Consumer expectations for housing market over the next 12 months are conservative
• Figure: The number of 75%+ LTV mortgages fell massively in the wake of the credit crunch
• Figure: High-LTV mortgages have become relatively more costly than low-LTV mortgages
• Figure: A sizeable proportion of prospective buyers have experienced, or anticipate experiencing, difficulties in obtaining mortgages
• Figure: The number and value of FTB loans have been on a downward trend
• Figure: There was a marked increase in mortgage arrears in 2008
• Figure: Arrears and repossessions will peak in 2010 before falling back
• Figure: The credit crunch has not affected consumers' confidence in ability to repay their mortgages
• Figure: Tracker mortgages rose in popularity in 2008 and 2009
• Figure: Steep rise in differential between mortgage rates and LIBOR, swap rates
• Figure: Secured lending spreads have increased across all categories of loan
• Figure: Approvals for remortgaging fell sharply in the wake of base rate cuts in late 2008
• Figure: The Datamonitor view is that gross lending will recover gradually to a level of £220 billion in 2013
• Figure: The pessimistic forecast sees gross lending rising to only £185 billion by 2013
• Figure: In the optimistic scenario, gross lending rises to £245 billion in 2013, just a short way off the 2008 total