UK Mortgage Outlook 2008-9: A Turbulent Year

Introduction

The UK Mortgage Market saw unprecedented change in 2008 and early 2009, from collapsed wholesale funding markets, to the nationalization of some of the country's biggest lenders. With many homeowners now struggling to keep up repayments, house prices at record lows and lending criteria still very strict, the market is set to tread a long and winding path before it returns to normal.

Scope

*Provides an overview of macroeconomic and other events affecting the mortgage market in 2008 and 2009

*Analyzes in detail the impact of factors such as low base rates, falling house prices, and rising numbers of arrears and repossessions

*Sets out Datamonitor's forecasts for gross lending covering the period 2010-2013

Highlights

2008 saw the onset of a severe recession and the culmination of the credit crunch. This led to a severe and sustained fall in the availability of credit for secured lending throughout the year. Together with a fall in demand prompted by fears of rising unemployment, this caused gross lending to fall by nearly 30% to about £260 billion.

First time buyers have been hard hit by the massive reduction in high LTV mortgages in 2008 and early 2009, the supply of which has been badly affected by the credit crunch. The few deals that are still available at the 90%+ LTV level are being priced at much more costly rates than deals at lower LTVs.

The low base rate environment has had a major impact on both consumers’ and providers’ behavior. Tracker mortgages rose markedly in popularity in late 2008 and early 2009, as borrowers sought to take advantage of a falling base rate.

Reasons to Purchase

*Understand the key issues facing the mortgage market that lenders need to address

*View details of Datamonitor's forecasts to help plan your future strategies

*Access relevant findings from Datamonitor’s Global FS Consumer Insight and Retail Banking surveys

Report Highlights
Highlights

2008 saw the onset of a severe recession and the culmination of the credit crunch. This led to a severe and sustained fall in the availability of credit for secured lending throughout the year. Together with a fall in demand prompted by fears of rising unemployment, this caused gross lending to fall by nearly 30% to about £260 billion.

First time buyers have been hard hit by the massive reduction in high LTV mortgages in 2008 and early 2009, the supply of which has been badly affected by the credit crunch. The few deals that are still available at the 90%+ LTV level are being priced at much more costly rates than deals at lower LTVs.

The low base rate environment has had a major impact on both consumers’ and providers’ behavior. Tracker mortgages rose markedly in popularity in late 2008 and early 2009, as borrowers sought to take advantage of a falling base rate.
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Table of Contents 10
Table of tables 11
Table of figures 12
A Review of the UK Mortgage Market in 2008 and 2009 13
2008 saw unprecedented turmoil in the UK mortgage market 13
The year started with predictions of a 'soft landing' for the economy and housing market 13
The onset of a severe recession further hit demand for mortgages 13
The Bank of England was slow to react to the deterioration in the economic climate 15
The supply of mortgage finance was affected by a dramatic worsening of credit conditions 16
Providers in the UK were not immune to the financial instability 17
These problems conspired to hamper the free flow of credit in the UK markets 17
2008 quarter 1: an increased degree of risk aversion led to a reduced supply of credit 18
2008 quarter 2: credit scoring criteria were tightened 18
2008 quarter 3: there was a continued fall in the availability of high LTV loans 19
2008 quarter 4: spreads on loans rose in response to the financial crisis in September 2008 19
Reductions in both demand and supply combined to squeeze gross lending in 2008 19
Lending for house purchases declined massively in 2008, reflecting the collapse in property sales 20
Lending fell sharply in terms of both the number and the value of approvals 21
To date, 2009 has been marked by the worst recession in decades 23
The Bank of England took drastic measures to stimulate the economy 23
Datamonitor forecasts total gross lending of £140 billion in 2009 24
Fears of a slow recovery for the economy as a whole 24
The supply of credit was further restricted in the first quarter, but increased in the second 25
Quarter 1: a further constriction of credit and lending criteria continued the trend of 2008 25
Quarter 2: an increase in the supply of secured credit could signify the first signs of recovery 25
Key trends and factors affecting the market 27
Falls in house prices have revived negative equity and aggravated the constriction of credit 27
House prices have fallen a long way from their peak in 2007 27
Negative equity makes an unwelcome return 28
House price falls are affecting credit supply 29
Sentiment on house prices has become more optimistic in the third quarter of 2009 30
Nationwide is tentatively predicting a year-on-year rise in prices by the end of 2009 30
Halifax data confirm upwards trend in prices 30
The Royal Institution of Chartered Surveyors becomes more upbeat 30
Other parties strike a more cautious note on prices 31
Consumers remain pessimistic about the state of the housing market 31
First time buyers have faced particular difficulties 33
Lenders are unwilling to offer high LTV mortgages 33
A third of consumers who want to buy a house in the next year will have to borrow from friends or family 35
The government and the industry have taken steps to help first time buyers 36
Providers have launched new products specifically for this market 36
The Bank of China expands its presence in the UK market 37
The government raised the stamp duty threshold to help stimulate the market 37
The FTB market continued to decline throughout 2008, but started to recover in 2009 37
Arrears and repossessions are on the rise 38
The incidence of mortgages falling into arrears increased sharply in 2008 38
Repossessions also rose, but by less than expected 39
Datamonitor expects the incidence of arrears and repossessions to peak in 2010 39
The industry and other parties have taken steps to limit repossessions 41
The government has introduced its Mortgage Rescue Scheme but with limited success to date 41
Other government measures have sought to minimize the incidence of repossession 41
Consumers' confidence in their ability to meet repayments has been unaffected 41
Forecasts and figures 43
Historically low base rates have had a major impact on consumer and lender behavior 43
The type of mortgage chosen by borrowers has been driven by future rate expectations 43
The relationship between the base rate and mortgage rates has broken down 44
Low standard variable rates have reduced the incentive for homeowners to remortgage 46
Datamonitor expects gross lending to pick up gradually over the next few years 48
In the light of current volatility, Datamonitor has produced two alternative scenarios 49
The pessimistic scenario assumes a steep rise in unemployment and a continuing lack of credit 49
The optimistic scenario assumes a quicker economic recovery and a more rapid expansion of credit 51
APPENDIX 53
Supplementary data 53
Definitions 69
Balances outstanding 69
Bank of England base rate 70
Buy-to-let mortgage 70
CAGR 70
Fixed rate mortgage 70
Gross advances 70
LIBOR 70
Remortgaging 70
Sub-prime 70
Methodology 70
Forecasting methodology 71
Further reading 71
Ask the analyst 72
Datamonitor consulting 72
Disclaimer 72
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List of Tables
Table 1: Forecast gross advances under the Datamonitor view, 2009-2013 8
Table 2: Forecast arrears and repossessions under the Datamonitor view, 2009-2013 40
Table 3: Forecast gross advances under the Datamonitor view, 2009-2013 49
Table 4: Forecast gross advances under the pessimistic view, 2009-2013 51
Table 5: Forecast gross advances under the optimistic view, 2009-2013 52
Table 6: Quarterly changes in UK GDP (% change compared to previous quarter) 53
Table 7: Number of approvals for house purchase 54
Table 8: Bank of England base rate (%) 55
Table 9: Quarterly changes in credit availability and scoring criteria 57
Table 10: Annual gross lending (£m) 57
Table 11: Annual gross lending by product line (£m) 57
Table 12: Number and value of all mortgage approvals, by month 58
Table 13: Monthly gross lending (£m) 59
Table 14: Factors affecting availability of secured credit 59
Table 15: Nationwide and Halifax prices indices, monthly and annual changes 60
Table 16: Impact of house price expectations on availability of credit 61
Table 17: Consumer confidence in strength of housing market compared to a year ago 61
Table 18: Consumer expectations of strength of housing market over next 12 months 61
Table 19: Net balance of lenders reporting increase in availability of high LTV mortgages 62
Table 20: Average rates for two year fixed-rate mortgages of 75% and 90%/95% LTV 63
Table 21: Consumer attitudes on perceived difficulties in raising mortgage finance 64
Table 22: First time buyer loans 65
Table 23: Annual arrears and repossessions 66
Table 24: Level of consumer concern about ability to meet repayments 66
Table 25: Type of mortgage 66
Table 26: Base rates, LIBOR, swap rates, average mortgage rates from 2007 to 2009 67
Table 27: Net balance of lender reporting increase in spreads for different categories of mortgage 68
Table 28: Monthly mortgage approvals 69
List of Figures
Figure 1: Severe tightening of mortgage credit availability and lending criteria throughout 2008 3
Figure 2: The Datamonitor view is that gross lending will recover gradually to a level of £220 billion in 2013 8
Figure 3: UK GDP started to decline in the second quarter of 2008 14
Figure 4: Approvals for house purchase fell sharply from mid-2007 to the end of 2008 15
Figure 5: The Bank of England base rate remained at relatively high levels until the final quarter of 2008 16
Figure 6: Severe tightening of mortgage credit availability and lending criteria throughout 2008 18
Figure 7: After strong growth in 2006-07, gross lending fell sharply in 2008 20
Figure 8: Lending for house purchases has been worst affected by the downturn 21
Figure 9: Mortgage approvals are on a downward trend, in terms of both value and time 22
Figure 10: Gross lending remains very subdued in first half of 2009 24
Figure 11: Factors affecting availability of secured credit started to recover in the second quarter of 2009 26
Figure12: House price indices show negative annual growth from early 2008 onwards 28
Figure 13: Expectations of house price falls have contributed to a reduction in secured credit availability 29
Figure 14: Consumer confidence in housing market has been badly affected 32
Figure 15: Consumer expectations for housing market over the next 12 months are conservative 33
Figure 16: The number of 75%+ LTV mortgages fell massively in the wake of the credit crunch 34
Figure 17: High-LTV mortgages have become relatively more costly than low-LTV mortgages 35
Figure 18: A sizeable proportion of prospective buyers have experienced, or anticipate experiencing, difficulties in obtaining mortgages 36
Figure 19: The number and value of FTB loans have been on a downward trend 38
Figure 20: There was a marked increase in mortgage arrears in 2008 39
Figure 21: Arrears and repossessions will peak in 2010 before falling back 40
Figure 22: The credit crunch has not affected consumers' confidence in ability to repay their mortgages 42
Figure 23: Tracker mortgages rose in popularity in 2008 and 2009 43
Figure 24: Steep rise in differential between mortgage rates and LIBOR, swap rates 44
Figure 25: Secured lending spreads have increased across all categories of loan 46
Figure 26: Approvals for remortgaging fell sharply in the wake of base rate cuts in late 2008 47
Figure 27: The Datamonitor view is that gross lending will recover gradually to a level of £220 billion in 2013 48
Figure 28: The pessimistic forecast sees gross lending rising to only £185 billion by 2013 50
Figure 29: In the optimistic scenario, gross lending rises to £245 billion in 2013, just a short way off the 2008 total 52
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