The UK Mortgage Market in 2007 and Future Outlook

The advent of the credit crunch has dealt a big blow to the UK mortgage market. Indeed, the current market is one of high uncertainty, with falling house prices and significantly lower transaction volumes. How much will the UK mortgage market account for by the end of 2008 and beyond?

Report Highlights
September 2007 was the turning point for the UK mortgage market, when the credit crunch cumulated into the collapse of the third biggest UK mortgage lender, Northern Rock. Nonetheless, it was not until November 2007, that the effects of the liquidity squeeze started to feed through gross lending.

Due to the continuous lack of liquidity, lenders continue to rationalize lending, focusing on good quality business. With lesser appetite for riskier lending, lenders have significantly raised the level of deposit required from mortgage customers.

Lower availability of credit, squeezing consumer spending power and rising mortgage interest rates have all combined to significantly affect mortgage loan approvals. However, it is loans for house purchase and 'other' which are struggling rather than remortgaging.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Increased awareness of environment change has boosted demand for green products 2
Governments across the world are under pressure to reduce their countries' impact on the global environment 2
The UK has proposed one of the most ambitious targets to combat climate change 2
Energy efficient housing is one of the key measures that the UK government is hoping will achieve a reduction in emissions 2
Mandatory energy performance certificates are now required for every residential property in the UK, as part of the requirements of a Home Information Pack 3
The UK banking market offers a range of green-friendly products 3
Consumers adopted more ethical banking products from 2006 to 2007, growing the business by 11% 4
Ethical investments are still the largest and most popular green financial instrument 4
While there is a standard definition of a green mortgage, the product takes many different forms 4
Mortgage lenders offer various types of green mortgage 4
The market for green mortgages is still small, despite a slight increase in popularity 5
Most green mortgage providers are small lenders 5
Typically, a lender's green mortgage product will be more expensive than their best mortgage offer, although in some cases discounts are offered 7
While category 1 lenders have enjoyed some growth, category 2 lenders' green mortgage books remain steady 7
Green mortgages remain niche internationally 7
Financial services companies abroad are more creative in their approach to offering green mortgage incentives. 8
Green mortgages are likely to remain a niche product 8
The UK mortgage market is driven by price 8
History demonstrates that higher-priced, non-standard mortgage offers do not perform well in the UK market 9
The green proposition is likely to provide a competitive advantage to lenders if a customer has to choose between two similarly priced products 9
There is limited demand for green mortgages 9
The green mortgage product appeals only to a limited segment of the market 10
Green mortgages do not appeal to first-time buyers 11
In the current market, second and third homebuyers are opting for the lowest priced mortgage products 11
Very few lenders offer the product, thus limiting supply and product choices 11
Market uncertainty is shrinking non-standard product portfolios 11
Few mortgage brokers are aware of green mortgages 11
Widespread uptake will require government and institutional commitment 12
Some incentives have been put in place but the market view is that they are not enough 12
Proposed government initiatives to encourage greener living will drive demand for green mortgages 12
Sustained co-operation between lenders and the government is needed to grow the green mortgage market 13
Some European countries have successfully implemented incentive schemes to boost green housing 13
The UK needs to stimulate greater awareness of green building among the general public 13
Consumer education is key 14
APPENDIX 15
Definitions 15
Green mortgage 15
Methodology 15
Further reading 15
Ask the analyst 15
Datamonitor consulting 15
Disclaimer 15
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Table 1: Gross lending by product line for H1 2007 and H2 2007 5
Table 2: A sample of independent house price forecasts for the UK residential property market 9
Table 3: Forecasted gross advances in the UK residential market by product lines under Datamonitor's view, 2007-12f 13
Table 4: Forecasted gross advances in the UK residential market by product lines under a pessimistic view, 2007-12f 15
Table 5: Forecasted gross advances in the UK residential market by product lines under an optimistic view, 2007-12f 16
Table 6: UK monthly gross mortgage advances, 2006-07, January-June, (£m) 17
Table 7: UK monthly gross mortgage advances, 2006-07, July-December, (£m) 17
Table 8: Gross mortgage lending by product line, 2003-07 18
Table 9: Nationwide's and Halifax's house price indices, May 2007-May 2008 18
Table 10: Household debt to income ratio, 1998-2007 19
Table 11: Arrears and repossession data, 2003-07 19
Table 12: Value of all secured loans approved in the UK by product line, April 2006-April 2008 (£m) 20
Figure 1: UK gross mortgage lending in the first six months of 2007 outperformed 2006 levels 3
Figure 2: Gross lending in November and December 2007 failed to reach 2006 levels 4
Figure 3: Gross lending for 'other' was the fastest growing product line over the last five years 6
Figure 4: House prices have been falling in recent months 8
Figure 5: Household debt to income ratio has increased steadily over the last 10 years 10
Figure 6: The number of properties taken into possession increased further in 2007 11
Figure 7: Loan approvals for house purchase have dropped considerably 12
Figure 8: Under Datamonitor's view, gross lending will drop by 19.3% in 2008 to reach £293.5 billion 13
Figure 9: Under a pessimistic view, the UK mortgage market will contract significantly over 2008-10f 14
Figure 10: Under an optimistic view, gross lending in the UK mortgage market will decline by 9% in 2008 16
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