The UK housing and mortgage market
For the majority of 2019, the housing market continued to experience slowing transaction levels from lacklustre buyer demand as recent trends continued. Political uncertainty surrounding Brexit continued and caused a market drag, with prospective buyers delaying decisions until the outlook became clearer. The combination of affordability challenges and low housing supply also contributed to slowing levels of transaction activity. House price growth fell with price reductions again seen in some parts of London and the South East.
However, the year ended on a more buoyant note for the housing market following the results of the UK General Election in December 2019. There was a boost in market activity in the final weeks of 2019 which has continued into 2020, matched by strong house price growth in the first month of the year. Reports of both new instructions and new buyer enquiries are at their highest level since before the Brexit referendum in 2016. As uncertainty reduces, pent-up demand is being released into the marketplace. This demand is supported by low mortgage interest rates as competition persists.
According to the Bank of England, gross mortgage lending reached £267.6bn1 in 2019, broadly flat compared with £269.3bn in 2018, with refinancing driving lending activity.
The UK savings market
TThe UK savings market continued to grow in 2019 with c.£71bn added in the year to reach a total of £1,731bn2 (2018: £1,660bn).
Despite new competition entering the savings market (6% more providers than a year ago2), rates showed a gradual decrease during 2019 as a result of economic uncertainty caused in part by concerns around Brexit. Average one-year fixed rate bonds were paying 1.23% in December 2019, down from an average of 1.45% a year ago, with similar falls seen in the longer-term bond market (34bps) and ISA fixed bond markets (17bps for one-year ISA and 25bps for longer-term ISAs).2
Average rates also fell on no-notice accounts, down from 0.63% to 0.60% at the end of 2019, with ‘top of the market’ rates falling by c. 15bps.2 Although the Bank of England base rate has remained at 0.75% since August 2018, the percentage of accounts paying over base rate has now fallen to 68.7%, the lowest percentage since September 2018.2
Despite the falling interest rates, variable rate products continued to be popular with growth of £25bn2 in the year, 35% of total growth, as customers sought flexibility and accessibility of their funds over higher returns, potentially reflecting the macroeconomic uncertainty during the year.
Aside from the rates offered, other trends in the savings market included:
- the growth of platforms in the UK, which offer a marketplace for savings products and a ‘one-stop shop’ for consumers to maximise their Financial Services Compensation Scheme coverage while benefiting from competitive deposit rates, and
- a resurgence in ISA accounts has been seen for the first time since the introduction of the personal savings allowance in 2016.
The Group’s lending segments
Positive dynamics for the specialist Buy‑to‑Let sector
Government and regulatory intervention in the Buy-to-Let segment of the mortgage market slowed in 2019, following a period of sustained regulatory change. The only notable changes during the year were the penultimate installment of the phased tax relief restrictions in April (which will be fully implemented from 6 April 2020) and the implementation of the Tenant Fees Act on 1 June 2019.
Whilst these changes have the potential to disrupt the Buy-to-Let sector, the impact is likely to be relatively small against the context of much larger regulatory changes in recent years. The culmination of these changes to the regulatory and tax landscape has deterred amateur landlords from entering the segment, while professional landlords have had to adjust their approach by diversifying their portfolios – benefiting the more specialist aspects of the market such as limited company Buy-to-Let and high-yielding property types.
The private rented sector, however, grew in 2019, showing its sustained importance to the UK housing market, and new lending in the Buy-to-Let segment increased 1% to £41.0bn from £40.5bn in 2018.3 Despite a softening of house price inflation in 2019, house prices remain high, and affordability measures remain stretched, as such, the market for rental property is expected to remain strong. Landlord confidence did, however, fall in 2019, weighed down by political and economic uncertainty, and perhaps exacerbated by the introduction of the Tenant Fees Act in June. This could ultimately put upwards pressure on rents as landlords pass on increased costs via rent hikes or sell properties, leading to reduced supply. However, 2020 has started on a positive note with reduced uncertainty fuelling a rise in sales expectations, consumer confidence and housing market indicators.
The trend in amateur landlords withdrawing from the market looks set to stay, leaving professional landlords, whose primary income is obtained from their property portfolio, to pick up the demand. The professional segment, whilst not immune to the changes, has persisted because of the strong fundamentals which underpin it: sustained demand from tenants, and the potential for long-term capital gains.
Borrowing through limited company structures also continues to be a feature of the market, with professional landlords continuing to mitigate the impact of income tax changes via this route. The Group is a respected lender within the specialist Buy-to-Let sector, through its Kent Reliance, InterBay Commercial and Precise brands, with a strong reputation for limited company lending which has been beneficial to date and is expected to continue to be so.
Resilience in UK yields
Investment in UK commercial property reduced to £48.4bn4 in 2019, a fall of c.£11.0bn compared with 2018, although that figure remains above the ten-year average.
Since the UK General Election, anecdotal evidence suggests increased investor activity, and there is optimism that greater political certainty could lead to positive investment returns across the sector in 2020 and during the next five years.
The UK remains attractively priced, relative to other European markets, largely due to perceived Brexit risk. Overseas investors continued to dominate the segment in 2019, increasing market share to 49%,4 with a significant rise in North American investors.
The office segment performed well in 2019, with rents increasing in central London and other key UK cities, while demand for industrial and logistics space is supported by continued growth in e-commerce.
Once again, the retail property segment is expected to be challenging during 2020, with values in high-yielding high streets and shopping centres likely to be the hardest hit, and where excess space may need to be redeveloped and repositioned for alternative uses.
The lending segment is dominated by the high street banks. Opportunity exists for specialist lenders, whose manual underwriting approach, and willingness to engage in a dialogue to ensure robust understanding of customer requirements, can provide a service differential.
The UK has experienced a long-term upward trend in real house prices, creating affordability problems, as demand for housing outstripped both supply and real wage growth. Turnover in the second-hand housing market has fallen, resulting in reduced liquidity within this segment.
The new-build segment has also been adversely affected, especially in London, with some regions structurally reliant on the Government’s Help to Buy product, which will be restricted to first-time buyers and be subject to regional caps from April 2021. The support required by the small and medium-sized developers, which form our core audience for development finance, will continue to increase as high street lenders appear to be pulling away from development finance.
Specialist residential lending
In spite of support from the Help to Buy scheme, political uncertainty and lower remortgage activity impacted the market-wide residential sector, which was largely flat in 2019 compared with 2018.
The Help to Buy scheme remains popular and has supported strong first-time buyer activity in recent years and UK Finance suggests that Government support for the scheme has had a material impact on the supply of new homes. The Help to Buy scheme was originally due to end in 2021; however, it has been extended until April 2023 but will be restricted to first-time buyers only and regional price caps will be applied.
Market analysis by Savills estimates that 36%5 of current Help to Buy sales across England could be lost once the new regional house price caps are introduced if developers fail to adapt the size of homes they deliver.
Residential remortgage activity decreased by 1.8% in 2019 to £80.2bn6 compared with £81.6bn in 2018. Remortgages have been fuelled by low rates and uncertainty in recent years as borrowers looked to lock in their repayments for the medium term. The remortgage market slowed throughout 2019 due to the market shift towards five-year fixed rate products and the concurrent growth in product transfers.
The Group targets complex prime borrowers including those with non-standard asset and income structures, the self-employed, Help to Buy, Right to Buy, new-build and near-prime borrowers as well as those seeking shared ownership mortgages. They are ill-served by the commoditised and inflexible decision-making processes of mainstream lenders.
Second charge lending
The second charge sector grew strongly in 2019, with approximately £1.25bn7 of gross new lending (2018: £1.07bn). Growth has been supported by increased house prices over the past few years, which has reduced outstanding loan to values, increasing the capital available for release via a second charge. Homeowners are also moving less frequently, partly due to market uncertainty, and are instead choosing to remain in their current property and make home improvements which may be financed by a second charge loan. There is also the potential for the growing volume of borrowers on five-year fixed rate mortgages to use a second charge mortgage rather than remortgage, to avoid the cost of early repayment charges.
There are a number of successful non-bank or alternative providers of finance to retail and SME customers in the UK. These businesses are funded through a variety of means, including wholesale finance provided by banks and securitisation/bond markets, high net worth investors and market-based/peer-to-peer platforms.
OSB is an active provider of secured funding lines to these specialty finance providers, to date focusing on short-term real estate finance, leasing and development finance. Through these activities OSB has achieved senior secured exposure at attractive returns to asset classes that it knows well. This financing activity covers a broad range of business sectors and its overall size is thus difficult to quantify. OSB sees a regular flow of opportunities, adopts a very selective approach and has a strong pipeline of new business.
1. UK Finance, New mortgage lending by purpose of loan, 3 Feb 2020.
2. Moneyfacts, UK Savings Trends Treasury Report, Dec 2019.
3. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020.
4. Savills, UK Commercial outlook, January 2020.
5. Savills, Market in Minutes: New Homes and Help to Buy, December 2019.
6. UK Finance, UK residential originations, 18 February 2020.
7. FLA, Second charge mortgage market reports volumes up by 19% in 2019, Feb 2020.