Market review

The UK housing and mortgage market

In 2018, the housing market saw a continuation of trends seen in the previous year. Whilst political uncertainty surrounding Brexit has undoubtedly had some impact, the combination of affordability challenges and low housing supply also contributed to slowing levels of activity in some parts of the country. Price growth declined and even reversed in some parts of London and the South East, whilst in other parts of the country, house prices continued to grow, including in many of the UK’s major cities. The record low mortgage rates in mainstream markets, as high street banks competed for market share, continued to support the market with low loan servicing costs but deposits required were still a barrier to entry for many. This drove the extension of the government’s Help to Buy equity loan scheme.

Government policy and the intention to support home ownership and increase the supply of social housing has been positive, including lifting the borrowing cap for councils and the move to abolish stamp duty land tax for first-time buyers on properties worth up to £300,000. However, this activity was somewhat overshadowed by political uncertainty and noise surrounding Brexit. It is reasonable to expect increased support for building new homes and the housing market in general once clarity around the political landscape returns.

According to UK Finance, gross mortgage lending reached £269.3bn in 2018, up 3% compared to £260.4bn in 20171 with remortgage activity driving lending growth.

1. UK Finance, New mortgage lending by purpose of loan, 30 Jan 2019.

The UK savings market

The UK savings market continued to grow in 2018 with c. £64bn added in the year to reach a total of £1,671bn (2017: £1,607bn).2

The year also saw new competition entering the market offering attractive rates to savers, with existing banks taking note. Savings rates showed a gradual increase during 2018 with average one-year fixed rate bonds paying 1.45% in December 2018, up from an average of 1.16% at the start of the year. Average rates on no-notice accounts increased from 0.45% to 0.63% at the end of 2018, demonstrating that the Bank of England base rate rise to 0.75% in August 2018 had some effect on the wider savings market.3

Aside from the rate offered, two clear trends are emerging in the savings market:

  • there are signs that customers are becoming more technologically aware and are choosing their savings providers based on service and convenience over their return, and some new entrants to the market are exploiting this opportunity. We expect this trend to continue, however;
  • it has also been observed that traditional ways of interacting with savings customers, via branches, are regaining popularity.

Variable rate easy access products proved to be popular accounts for the industry in 2018, as customers sought flexibility and accessibility of their funds over higher returns, potentially reflecting the current macroeconomic uncertainty.

2. Bank of England, Monthly amounts outstanding of monetary financial institutions’ sterling retail deposits from private sector (in sterling millions) seasonally adjusted, LPMB3SF, 20 Feb 2019.

3. Moneyfacts, UK Savings Trends Treasury Report, Dec 2018.

OneSavings Bank’s lending markets

UK Buy-to-Let/specialist SME market

PRS broadly stable

The Private Rented Sector (‘PRS’) remained at approximately 4.5 million households in 2017–18, broadly stable for the last five years.4

As has been well documented, the lack of growth is attributable to the political and regulatory interventions announced under the previous Conservative administration. These delivered the desired reduction in Buy-to-Let market growth. In the year, new Buy-to-Let lending of £37.1bn was up 4% on 2017 (£35.8bn), a figure that should be measured against the context of 2016’s £40.6bn.5 However, despite a softening of house price inflation, house prices are still generally up, and affordability measures have not eased, hence, the changes to Buy-to-Let taxation have arguably done little to achieve their primary political aim, of increasing levels of home ownership. Given this continuing context of a shortage of housing supply that keeps house prices relatively high and mortgage regulation and mortgage finance beyond the reach of many, the market for rental property is expected to remain strong.

This demand is, however, being met by a reducing number of landlords. The ‘dinner party landlords’ who flocked to the market in the period from approximately 2012–2015, have diminished, put off by, in particular, changes to personal taxation. This has left professional landlords, those whose primary income is obtained from their property portfolio, to pick up demand. The professional market, 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.

This long-term perspective drove a change in buying behaviour from professional landlords, in the form of significant growth in the market for long-term fixed mortgage rates. In a time of economic turmoil, these provide a degree of certainty as well as enable greater leverage under the PRA rules.

Borrowing through limited company structures also continues to be a feature of this market, with professional landlords continuing to mitigate the impact of income tax changes via this route. OSB is a respected lender within the specialist Buy-to-Let sector, with a strong reputation for limited company lending which has been beneficial to date and is expected to continue to be so.

4. English Housing Survey, Headline Report 2017–18, 31 Jan 2019.

5. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb 2019.

Commercial Residential development

Resilience in UK yields

OneSavings Bank’s manual underwriting and individual case assessment model provides a strong platform for specialist residential lending. Customers with non-standard asset and income structures, or complex credit histories as well as those seeking shared ownership mortgages, are ill-served by the commoditised and inflexible decision-making processes of mainstream lenders.

OneSavings Bank implemented a number of tactical product initiatives in this market in 2018. We are seeing encouraging results which we will build on in 2019.

The UK commercial property market saw investment reduce in 2018 compared to 2017, although the total exceeded £55bn for the fifth consecutive year.6 The uncertainty surrounding the UK’s withdrawal from the EU continues to have an effect, with indications that some investment decisions are being delayed until a clear way forward has been agreed.

However, the UK remains an attractive investment proposition. Yields are high compared to much of Europe and Asia, while sterling is weak and interest rates are relatively low. As a result, overseas investments accounted for more than half of investments in 2018, an established trend that is expected to continue.7

Furthermore, high demand for offices in and around London, partly due to a lack of development opportunities, suggests that London may be more resilient to Brexit than initially thought.8

Research from Savills highlights increasing demand for industrial and warehouse properties which provide logistical support, usually for e-commerce. Also featured is the potential for commercial property growth in regions outside London and the South East, aided by stronger house prices and consumer confidence, together with a relative lack of supply.8

As in previous years, yields weakened across the retail property sector (except in prime central London), reflecting the rise of technology, changing consumer habits and a resulting lack of demand. This trend is not expected to change, but it may create opportunities for investors looking to repurpose vacant shops, creating a greater mix of uses and services.8

The lending market 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 a robust understanding of customer requirements, can provide a service differential.

6. Colliers International, UK Property Snapshot, Jan 2019.

7. CBRE Research, UK Real Estate Market Outlook 2019.

8. Savills, UK cross sector outlook, 8 Jan 2019.

Residential development

Continued under-supply

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 market.

The new-build market 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 who form our core audience for development finance will continue to increase.

Specialist residential lending

New initiatives gaining traction

OneSavings Bank’s manual underwriting and individual case assessment model provides a strong platform for specialist residential lending. Customers with non-standard asset and income structures, or complex credit histories as well as those seeking shared ownership mortgages, are ill-served by the commoditised and inflexible decision-making processes of mainstream lenders increase.

OneSavings Bank implemented a number of tactical product initiatives in this market in 2018. We are seeing encouraging results which we will build on in 2019.

Second charge lending

Controlled high standards

The second charge market saw approximately £1.07bn of gross new lending in 2018 (2017: £1.02bn).9 This market continues to adjust to the changes in regulation that came into effect in March 2016 and the short-term outlook remains neutral; any significant increase in market size is considered unlikely.

2018 saw the first regulatory reviews of lending practice in the sector, leading to some lenders revising their risk appetite and lending practices. We expect further regulatory involvement in the broker market in the short term. This is expected to maintain the subdued outlook for this market. As a regulated lender in other markets, OSB has always maintained high standards of conduct and prudential regulation so we do not see this having any material impact on our lending.

9. FLA, Second charge mortgage market reports volumes up by 13% in December, 8 Feb 2019.

Funding lines

Strong pipeline

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 the Bank 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.

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