Market review

The news is good

Craig Calder

director of mortgages, Barclays

The summer of 2022 is well and truly here, and the mortgage market continues to defy expectations in terms of both the volume of activity and the strength of demand, especially amongst homemovers. Having said that, the purchase market is expected to slow in the coming weeks as mounting living costs, inflation reaching a 40-year high, affordability concerns, and rising interest rates are likely to generate increased consumer caution.

RESIDENTIAL MORTGAGE APPROVALS

Earlier indications of this emerged in the latest Bank of England Money and Credit statistics, which showed that residential mortgage approvals decreased to 63,700 in June from 65,700 in May. This figure is also below the 12-month pre-pandemic average up to February 2020 of 66,700.

In addition, net borrowing of mortgage debt by individuals decreased to £5.3 billion from £8.0 billion in May, although this remains above the pre-pandemic average of £4.3 billion. Gross lending decreased to £25.4 billion in June from £28.1 billion in May, and gross repayments decreased slightly to £20.3 billion from £21.2 billion. The data also showed that the average interest rate paid on newly drawn mortgages increased by 20 basis points to 2.15 per cent in June.

GROWING REMORTGAGE PIPELINES

Let’s just clarify that there are no huge surprises here, especially in light of the aforementioned factors – and it’s prudent to point out that we continue to see sustained interest from firsttime buyers and existing homeowners looking to take their next step onto the property ladder. Remortgage pipelines are also growing, providing a wealth of opportunities for intermediaries. This was highlighted in data from LMS, also for June, which saw pipeline cases increase by 10 per cent month-onmonth – the biggest increase since the start of 2022 – as more consumers turn to remortgaging to offset their cost-ofliving struggles.

Breaking down the reasoning behind this, 52 per cent of remortgage borrowers increased their loan size in June, and 67 per cent took out a five-year fixed rate. Thirty per cent said their main aim when remortgaging was to lower their monthly payments, the most popular response. The data also suggested that instructions are expected to pick up further over the summer months.

THE SUPPORT OF INTERGENERATIONAL LENDING

Turning our attention back to the purchase market, data from Legal & General’s SmartrCriteria tool for June suggested that family members continue to play a key role in helping first-time buyers onto the property ladder. ‘Firsttime buyer/first-time landlord/nonowner occupier’ was the third-mostused criteria point, while ‘joint borrower sole proprietor’ took the fifth spot.

Despite wider economic pressure, the number of searches for guarantor/family assist mortgages and gifted equity/ concessionary purchase mortgages both remained comparable to May (dropping by one per cent and rising by 0.4 per cent respectively).

As a lender who has been a prominent figure in the intergenerational lending space for many years, I think it’s good to see the spotlight being shone on this area, as an ever-growing number of borrowers are seeking financial support from family members to help with a variety of property purchases. And with many variations of this product type on offer, it’s important for advisers to be aware of the full intergenerational lending spectrum so they can help even more borrowers to benefit from this financial backing and achieve their homeownership aspirations.

BUSINESS CONFIDENCE

Even though this has been far from negative so far, I always like to finish on a particularly positive note, and there’s nothing more positive for the housing and mortgage market than confidence. With that in mind, let’s close with the stat that over two-thirds of property professionals (64 per cent) were reported to be somewhat or very confident about their business prospects over the next 12 months. This figure emerged from a Countrywide Surveying Services poll of lenders, brokers, surveyors, and other property professionals.

When it came to the biggest drivers influencing the market, half of respondents (50 per cent) indicated that the cost of living would be the biggest driver. Higher interest rates captured over a third of the votes (36 per cent), general economic uncertainty accounted for 15 per cent, consumer confidence 14 per cent, increased taxation six per cent, and all of the above came in at 34 per cent.

I can’t argue with any of these percentages, and they serve nicely to remind us of the challenges ahead. These challenges, however, continue to be tempered by the sustained levels of positivity and confidence on show throughout the industry thanks to a highly robust housing market and a competitive lending marketplace. M I

Green credentials, EPCs, and the importance of positive change

Grant Hendry

director of sales, Foundation Home Loans

The topic of properties’ green credentials is now at the forefront of a host of property-related discussions, and a major component of these conversations is the Energy Performance Certificate (EPC).

Believe it or not, 1 August 2022 marked the fifteenth anniversary of the EPC in England and Wales. These were first introduced back in 2007 as a result of EU directives around the energy performance of buildings, and played a key role in the integration of the Home Information Pack (HIP), a pack that was initially provided by those selling properties with four bedrooms or more.

A requirement to have an EPC was then gradually extended to all buildings, both commercial and domestic. Later down the line, in May 2010, the government changed the legal requirement for a HIP, but EPCs remained an integral and compulsory element in the renting or sale of a property, and this remains the case.

EPCs play a critical role in identifying good and bad green credentials within individual properties and in allowing buyers to make an informed decision about what to do with this data.

Lenders and advisers also have a major role to play in the energy efficiency conversation. Here at Foundation Home Loans, we are always looking to play an active role in the education process and in raising awareness around green mortgages. We do this by taking a proactive approach to this type of lending in both the residential and buy-to-let sectors, and by delivering a range of green solutions for purchase and remortgage purposes. For landlords, and for intermediary partners servicing the needs of such clients, a vital role within this is maintaining a strong grasp of efficiency requirements and awareness of new legislation.

On the topic of awareness, it was highly encouraging to see that over nine in 10 landlords are aware of the new EPC ‘C’ legislation, according to Q2 2022 BVA BDRC Landlord Panel research. From a purchase perspective, it’s clear that EPC ratings are having an impact for landlords looking to increase their portfolios. The BDRC research found that, of the landlords intending to buy this year, the majority (63 per cent) are specifically aiming for A-to-C-rated properties, while 24 per cent are looking to purchase D-to-E-rated properties. Only two per cent were reported to be specifically looking to purchase a property with an EPC rating of F or G. In the residential market, buyers are reported to be more likely to try to negotiate asking-price discounts to factor in the cost of making green improvements in the next ten years. This is according to a new report from Rightmove, which also outlined that four in ten homeowners (41 per cent) have already made changes to improve their homes; for the remaining 59 per cent, the biggest reasons for not doing so were that they don’t feel they need to make improvements (40 per cent), or that the improvements are too expensive to make (33 per cent). The overwhelmingly biggest motivator for improvements was to reduce energy bills. Sellers who have already made changes that have improved the EPC rating of their homes are pocketing as much as 16 per cent more, on average, when selling. The study analysed over 200,000 homes listed on Rightmove that had sold twice, with an improved EPC rating the second time. Those who had upgraded their rating from an F to a C added an average of 16 per cent to the price achieved by their home. Moving from an E rating to a C rating banked sellers an extra eight per cent on average, and moving from a D to a C resulted in an average of four per cent more. These represent some enlightening figures and certainly help demonstrate just how prominently energy efficiency sits in the thought process of homeowners, landlords, and tenants. This is in sharp contrast to times gone by and represents a trend that will become even more apparent as energy prices escalate further and when it comes to shifting attitudes toward the UK’s drive to hit Net Zero. The mortgage market will continue to play a central role in this progression, and lenders who are active and innovative in this space will lead the way in driving positive change in the mindset of intermediaries and borrowers – positive change that will benefit all generations. M I

Our economy is changing fast, and lenders must adapt

Stuart Miller

chief customer officer, Newcastle Building Society

Every 10 years, the UK government carries out a census to take a snapshot of the population – a record of demographic trends across the country that is used to help government comprehend and develop social policy.

The most recent was conducted on 21 March 2021,1 and its first datasets were published at the end of June this year, with Scotland and Northern Ireland’s data separate from England and Wales.

The initial analyses undertaken by the Office for National Statistics (ONS) reveal how British society has changed over the past decade –and, indeed, how it continues to change. The 2021 census figures show the size of the usual resident population was 56,489,800 in England and 3,107,500 in Wales – the largest population in this jurisdiction on record, with over 3.5 million more people living in England and Wales than there were in 2011. Meanwhile, ONS figures published separately show the number of new homes completed over the same timeframe was just 1.5 million, taking the total number of households in England and Wales to just shy of 24 million.2 While the detailed figures recording the average number of people living within a household won’t be published until the autumn, even this first round of high-level data is informative, particularly for our sector.

We all know the UK population is ageing, and with modern medicine improving life expectancies, it’s no surprise that the 2021 census showed there were more people than ever in the older age groups. According to the data, the proportion of the population aged 65 years and over last March was 18.6 per cent, up from 16.4 per cent in 2011.

July’s Labour Force Survey estimates for March to May 20223 are interesting to consider alongside this backdrop. Overall UK employment rose to 75.9 per cent, but is still below pre-pandemic levels.

The number of part-time employees increased during the latest three-month period, continuing to show a recovery from the large falls in the early stages of the coronavirus pandemic. And though the number of self-employed workers fell during the pandemic and has remained low, that number is now starting to pick back up, driven by more people becoming part-time self-employed.

In the mortgage market, we have the privilege of a granular insight into the context of these aggregated data trends. Assessing affordability, helping clients to present their income and creditworthiness in the best light possible, and having to deliver the news no hopeful borrower wants to hear – mortgage declined – give brokers and lenders a very real and immediate sense of how people across the country are faring. Inflation running over nine per cent at a time when interest rates are rising – with the Bank of England being all but explicit about its intention to continue along that path – has begun to affect family finances visibly now. Even with the government’s cost-of-living payments for those struggling the most, people are getting poorer.

We are facing a toxic cocktail – more people over 65, more people struggling to make ends meet – and all the while, house prices and rents continue to soar.

It’s my view that the July labour statistics indicate something’s got to give – the rise in the number of part-time self-employed earners in the UK chimes with what we see. Many cannot take on extra work to pay for higher energy bills and more expensive food and clothes; they are relying on universal credit due to age, infirmity, disability, or because, increasingly, they have no option but to be full-time carers.

But there are also many people who, seeing their standard of living sliding, are reviewing their current working patterns. This may be parents taking time off work to care for children, it may be children needing time off work to care for parents. It may be those already in retirement, whose rather meagre rise in state pension in April has prompted them to take on some paid employment.

Economic change on the scale we are seeing today changes people – their priorities and their behaviour.

This leaves lenders with a choice. Do we keep applying the old rules? Or do we choose to recognise that today’s world is not the world of 10 years ago? As lenders, we can empower our underwriters to be flexible and make common-sense decisions when computers might otherwise say no.

I know what all those who work so diligently to support our customers at Newcastle Building Society choose, and what I choose myself: to help people make the best financial decisions they can by taking the time to understand who they are. M I

1 https://www.gov.uk/government/publications/census-2021-first-results-england-andwales/population-and-household-estimates-england-and-wales-census-2021 2 https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/ populationestimates/bulletins/populationandhouseholdestimatesenglandandwales/ census2021 3 https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/ july2022

With change comes opportunity

Steve Goodall

MD, e.surv

Landlords in the buy-to-let sector at the moment might agree with the title of this article in theory, but given just how much change they’ve been subjected to over the past seven years, I’d understand the statement being met with some cynicism. Tax relief withdrawal, fire and health and safety regulation, additional stamp duty, tougher affordability rules imposed on banks by the Bank of England – it has been relentless as the government has pursued its objective of improving the private rented sector and helping more renters to become homeowners.

In its latest statement on the sector, Michael Gove, secretary of state for the Department of Levelling Up, Housing and Communities, unveiled a policy paper entitled A fairer private rented sector in June. It proposed a 12-point plan to tighten up regulation, which it believes will improve standards for both tenants and landlords.

It comes as private landlords are already facing several years of major change driven by the government’s net-zero targets. Where new tenancies commence from 2025, properties rented privately – either to local authorities or to individuals – must have an energy performance certificate (EPC) efficiency rating of band C or above. It’s just beginning to hit home how seismic a change this is going to be for the private rented sector.

Research published in July by Shawbrook Bank found that 30 per cent of landlords they surveyed have not yet made any energy-efficiency improvements to their properties. Two in five landlords (42 per cent) claimed their tenants would need to vacate their properties for improvements to be made, at a cost of £5,000 in lost rent, while 10 per cent of landlords won’t be starting work for up to four years, cutting it close to the proposed 2025 deadline.

Shawbrook calculates that landlords could lose up to £9,500 a year if they are unable to make changes to the energy efficiency of their properties ahead of the EPC regulation changes. It’s a significant proportion who need to. Close to a quarter (23 per cent) of landlords said their properties are currently rated D or below for energy efficiency, so they may be unable to begin a new tenancy from 2025 unless improvements are made. A further 27 per cent of landlords surveyed admitted to not knowing the energy efficiency rating of their properties. In some cases, landlords said they knew the EPC rating for only some, not all, of their rental properties.

In addition to the lost rental income, the survey suggested that most landlords expect the improvements to cost on average £5,900, but just a third currently have the necessary funds available to pay for the proposed changes. The prospect of such significant change, increased regulatory responsibility and scrutiny, and the sizeable investment costs has already pushed some landlords out of the market altogether.

The number of properties available to rent through letting agents in March has halved in three years, according to figures collated by Propertymark. Its survey of 443 agents representing 4,000 UK lettings branches found that 94 per cent of landlords who removed their properties from the rental market did so to sell them. More than half of the rental properties sold in March this year alone did not return to the private rented market.

Large corporate and institutional investor landlords have been buying into the private rented sector for some years now, with companies such as John Lewis, Lloyds Banking Group, and Legal & General all becoming landlords. By far the most popular tenancy group focused on to date by these investors has been high-quality student accommodation and, to a lesser extent, housing for young professionals or adults living in care. The market is expecting this shift to continue – more small-time landlords to sell up and more institutional money to fund purpose-built rental stock. What happens to the homes sold out of the market, then? At the white paper’s launch Mr Gove said, “Most people want to buy their own home one day and we are firmly committed to helping Generation Rent become Generation Buy. We must reduce financial insecurities that prevent renters progressing on the path to home ownership and, in the meantime, renters should have a positive housing experience.”

The English Housing Survey 2020 to 2021 shows that currently, 21 per cent of homes in the private rented sector are non-decent.

The sector has the highest prevalence of Category 1 hazards – those that present the highest risk of serious harm or death. In 2020, 12 per cent of private rented properties had such hazards, compared to 10 per cent in the owner-occupied sector and five per cent in the social rented sector.

A housing market that provides homes that work for those living in them is clearly what we should be aiming for, and it feels reasonably likely that we are slowly moving down that path. It presents an opportunity – perhaps for first-time buyers, but also for developers – to improve the quality of that older, unwanted stock. Not only would it improve the quality of security on lenders’ balance sheets, but it would also increase supply at a time when it is really needed. Of course, we will need to scrutinise and ensure those changes and upgrades are affordable and made – that’s what we are here for – and this drive to improve the quality of our rented stock could represent a significant boost to the available housing stock if we can find a way to enable the opportunity. M I

Knowledge is critical to getting right balance on duty of care to customers and environment

Mark Blackwell

COO, CoreLogic

For more than two decades, the evolution of financial services has been shaped by regulation. M-Day, the Consumer Credit Act, Mortgage Market Review, Mortgage Credit Directive, Basel regimes, Solvency II, Retail Distribution Review, and, most recently, the Financial Conduct Authority’s consumer duty legislation.

Firms have a year to adopt processes that allow checks and balances to be put in place to ensure customers are at the heart of everything for regulated firms. More on this later.

First, let’s talk about the next wave of regulation coming our way. For once, it’s not about protecting customers or consumers, and it’s not coming from our friends in Stratford. The green agenda has been top priority for successive governments since Theresa May signed the UK’s net-zero agreement, committing the country to cutting carbon emissions dramatically by 2050.

Boris Johnson’s government oversaw the Glasgow-hosted COP26 climate change conference in November last year, and with energy and fuel prices the number one anxiety for the vast majority of British households, whoever wins the Conservative party leadership contest will find themselves facing the unenviable choice of whether to pursue net-zero targets aggressively or bow to the public’s need for financial respite.

Even if the green levy on household energy bills is suspended, as many are calling for, the country is nevertheless bent on cutting carbon. After the hottest day on record this summer, and whole streets destroyed in wildfires and flash flooding, Britain will find it hard to ignore the threat climate change poses to everyday life.

Late last year the government published updated rules for the residential property sector in England (devolved governments have separate proposals), confirming that CO2 emissions from new-build homes must be around 30 per cent lower than current standards and emissions from other new buildings, including offices and shops, must be reduced by 27 per cent by June 2022.

The Future Homes and Buildings Standard, set for implementation in 2025, will bring emissions targets down further for new homes, while in the private rented sector, minimum energy performance band ratings will become mandatory on all properties where a new tenancy begins after that date.

Heating and powering buildings currently make up 40 per cent of the UK’s total energy use, and the latest government figures show 54 per cent of homes in England are still rated D or below for energy efficiency.

Installing low-carbon technology and using materials in a more energyefficient way to keep in heat will help cut emissions, while the new rules also include legislation for all new residential buildings, which will be designed to reduce overheating.

All these new standards spell considerable change for lenders, who will have a legal duty to withhold finance on properties not complying with the rules. When net-zero targets start to hit existing homeowners’ housing stock, refinancing responsibly will become harder still.

When you add this requirement to the soup, getting the green compliance transition as accurate as possible will be vital for lenders not wishing to fall foul of regulators.

The obvious question is how one does this. Ultimately the answer to this must start with data. Knowledge about both the property and borrower is the only way to bake green compliance and consumer-duty rules into lending policy and practice. Access to this data is also going to be necessary to compile financial results and performance assessments, making funding availability contingent on evidence of compliance.

The problem facing the majority of mortgage lenders, both residential and buy-to-let, is that legacy IT systems, coupled with historical cobbling together of different approaches to data records and storage, make this critical knowledge virtually impossible to get at in a meaningful way.

For the best part of the two decades of regulation this market has lived through, I do not think nearly enough investment has been made in creating IT knowledge bases fit for the present, let alone the future. Opting for yet another hack-and-fix job at this stage in the net-zero journey will not just rapidly become an obvious false economy; it also risks accusations of board negligence. Given the pace of new legislation implementation across our market, investing in technology that can cope is now mission-critical.

It’s time to make systems work for us all – and data relating to your duty of care to your customers, as well as to the built environment and planet, needs to be in the right format and in the right hands to achieve that if we are to get the balance right. M I