UK Mortgage Market Outlook: Q3 2007 (Market Focus)

The past few months have been hectic, to say the least, for the UK financial services sector. The credit crunch has led to a number of lenders facing liquidity issues as banks continue to refuse to lend money to each other. Given the current difficult environment lenders are operating in, what are the prospects for the UK mortgage market in the future?



Report Highlights
Mortgage lenders advanced a total of £98.7 billion in gross lending in Q3 2007, representing an increase of 6.2% over 2006 levels (the previous highest Q3 lending). House prices fell in the last few months. Based on the Nationwide House Price Index, house prices fell by 0.8% in November 2007, which brought down annual house price growth to 6.9%. The quarter of a million mortgage borrowers coming off their two- or three-year short-term fixed rate product over the next few months will face a ‘rate shock’. With lenders currently charging higher interest rates in current market conditions, there is concern that arrears level and repossessions will rise significantly.


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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Despite difficult times, gross mortgage lending in Q3 2007 was the highest on record 2
The UK mortgage market reached a record £98.7 billion in gross lending in Q3 2007 2
All product lines performed strongly in Q3 2007 3
Monthly analysis highlights that gross mortgage lending is slowing 4
Lower volume and value of secured loans approved in the last few months will ensure that the market continues to slow in Q4 2007 5
Gross mortgage lending will reach a new peak in 2007 but there are troubles ahead for 2008 6
A number of issues will adversely impact on gross lending in 2008 6
Falling house price trends are causing uncertainties 7
Funding issues continue to restrain lending 8
Consumer debt remains high 8
Under the Datamonitor View, the UK mortgage market will contract to £335.7 billion in 2008 9
Given the unpredictability of the UK mortgage market, Datamonitor has analyzed two additional alternative scenarios 10
The pessimistic scenario assumes a house price crash 10
The optimistic scenario adopts a bright view of the economy 11
A number of developments took place in the UK mortgage market in recent months 13
Some changes occurred in the number of lenders operating in the UK mortgage market 13
The FSA is to investigate mortgage lenders' handling of arrears and repossessions 13
APPENDIX 15
Supplementary data 15
Definitions 19
Bank of England base rate 19
CAGR 19
Gross advances 19
LIBOR 19
Loan-to-value (LTV) 19
Second charge loan 19
Sub-prime 19
Methodology 19
Forecasting methodology 20
Further reading 20
Ask the analyst 20
Datamonitor consulting 20
Disclaimer 21

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Table 1: Forecasted gross advances in the UK residential market under the Datamonitor View, 2006-11f (£m) 9
Table 2: Forecasted gross advances in the UK residential market under a pessimistic view, 2006-11f (£m) 11
Table 3: Forecasted gross advances in the UK residential market under an optimistic view, 2006-11f (£m) 12
Table 4: UK gross mortgage lending in the third quarter, 2003-07 (£m) 15
Table 5: Value and volume of all secured loans approved in the UK 16
Table 6: UK gross mortgage lending by product line, Q1 2006-Q3 2007 (£m) 16
Table 7: Monthly house price change in the UK, Jan 06-Nov 07 17
Table 8: UK monthly gross mortgage lending by product line, Jan-Sep 2007 (£m) 17
Table 9: Forecast macroeconomic variables used in the Datamonitor View scenario, 2006-11 18
Table 10: Forecast macroeconomic variables used in the pessimistic scenario, 2006-11 18
Table 11: Forecast macroeconomic variables used in the optimistic scenario, 2006-11 18


Figure 1: Gross mortgage lending in Q3 2007 was the highest on record 3
Figure 2: Gross lending under all three product lines rose further in Q3 2007 4
Figure 3: Monthly gross mortgage lending is slowing 5
Figure 4: Both the value and volume of secured loans approved have been falling in the last few months in the UK 6
Figure 5: UK house prices fell in the last couple of months 7
Figure 6: Under the Datamonitor View, gross lending in the UK mortgage market will fall to £335.7 billion in 2008 9
Figure 7: Under a pessimistic scenario, gross advances in 2008 will fall by 13% 10
Figure 8: Under the optimistic scenario, gross lending in the UK mortgage market will reach £427.8 billion in 2011 12


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