Blimey – you go on holiday for a couple of weeks, come back and mayhem appears to have broken out in the mortgage market.
The global capital markets have gone into meltdown; non-conforming lenders are either re-pricing or pulling products like they’re going out of fashion; the Conservatives are calling for the abolition of mortgage regulation, and economic analysts – who promised us that we still had a few more rate increases to endure – are now saying we may well be at the top of the rate cycle. Is there anything else to come? Wayne Rooney appointed as CEO of Halifax perhaps?
It’s strange the way in which a bad dose of market jitters gets people contemplating all sorts of possibilities which, only a couple of weeks ago, would have had them condemned to a psychiatric unit for testing. It seems to me that what is needed now is a good dose of common sense, rather than further conjecture about whether the mortgage market is about to go into total meltdown.
Consider the facts
It’s worth considering the facts. They may be boring and less sensational than some of the headlines of late, but they do help get the current situation back into perspective. The UK mortgage market is very different to its US counterpart. We have an undersupply rather than an oversupply of housing, lenders are tightly regulated and have not been making irresponsible loans to so called ‘ninjas’ (no income, no jobs and assets) and interest rates are now thought to have peaked or are very close to the top of the rate cycle.
Most importantly, the underlying economy is robust. Trading figures are strong, company profits are holding up well and the outlook for the future is positive. What’s more, consumers still believe in the merits of home ownership. Owning a home remains a key priority and, ironically, the recent stock market slump has reinforced many people’s belief that bricks and mortar is a far safer haven for their retirement funds than an equity based pension scheme.
There is no reason, therefore, to believe we are on the edge of an economic precipice and about to follow our US cousins on a rollercoaster ride into oblivion. I’m no economic expert, but my view is that what we are experiencing is a market correction which may result in a gentle slowdown in the mortgage market, but it should not result in a crash.
Being positive, the shaky state of the money markets combined with an unexpected fall in the headline rate of inflation from 2.4 per cent to 1.9 per cent, will hopefully encourage the Bank of England Monetary Policy Committee to put rates on hold for the time being. That has to be good news for all home owners, but especially first-time buyers. It may also help keep arrears, which have been showing an upward trend in recent months, under control.
A degree of ‘adjustment’
But what of non-conforming lending – even if the mainstream market is let off the hook, will the non-conforming sector be hit hardest? There is no denying that the market is undergoing a degree of ‘adjustment’ at the moment. However, this also needs to be kept in perspective. Although some pricing has increased and some products have been pulled, there are still a reasonable number of non-conforming players active in every sector of the market. What’s more, I’ll lay a wager with anyone that we’ll see more traditional mainstream lenders moving down the credit curve into non-conforming during 2007/2008. We will not be short of providers.
Agreed, most of the competition will be in the near-prime and light adverse sectors, but medium and heavy products will continue to be available, albeit with tighter lending criteria. The underlying demand for non-conforming mortgages continues to exist; I don’t see the market suddenly drying up over night.
A retrograde step
Out of all the shock headlines of recent weeks, perhaps the most bizarre was the announcement by a Conservative party policy group that it recommended scrapping mortgage regulation in a bid to reduce red tape by £14 billion a year. On the face of it, the thought of ditching mortgage regulation may seem like Christmas coming early. However, I think it would be a retrograde step which is in the interests of no one. In my mind, it would be like abolishing speed limits on the roads; it may be liberating to start with, but scary as the accident and death tolls start to rise.
The reality is that regulation has benefited the mortgage market and intermediaries in particular. Brokers’ share of new mortgage business has risen from approximately 50 per cent to about 70 per cent since regulation was introduced and brokers have never been so important. Regulation has also helped bolster consumer confidence and rid the industry of its ‘cowboys’. The majority of brokers are committed to maintaining high professional standards and are in the market for the long-term.
My outlook for the next 12 months is not sensational, but hopefully more realistic than some of the recent prophecies of doom. I think the housing and mortgage markets will continue to grow, but at a slower rate, consumers will continue to believe in the merits of home ownership – and in the merits of getting help from professional advisers, and that the non-conforming sector will continue to be an important part of the UK market. I also expect us all to be working in a regulated market in five years time.
If I’m right, remember that you heard it here first.
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Views from the industry
