Flying blind? COVID-19 and the UK mortgage market
In the latest instalment of our COVID-19 series, Prof Peter Williams (Departmental Fellow, Land Economy, University of Cambridge) discusses how the coronavirus pandemic is affecting the UK mortgage market.
Effectively the mortgage market was put on hold by the UK government announcements in late March regarding movement restrictions and the buying and selling of homes during the subsequent lockdown. Although it was acceptable in some limited cases to continue with sales, for the most part, activity was suspended (the charts below from the May 2020 MPC Report highlight the market shifts). Physical valuations ended and although some lenders have increased the LTV at which they will accept a modelled price (an AVM) and mortgage offers have been given an extended life, the housing market has largely closed and along with it large parts of the mortgage market.
Unsurprisingly, transactions have plummeted as have the number of new mortgage loans. Lenders moved quickly to cease higher LTV loans reflecting both perceptions about risk and the need to preserve liquidity in an uncertain market. With 3-month mortgage payment holidays put in place, lenders were faced with reducing income streams while at the same time still paying out to service their own borrowings whether via savings or funds drawn from money markets. Mortgage offers were closely scrutinised to ensure they were still viable – in essence, the market had undergone a material change of circumstances.
For most banks and building societies, there was access to the new £100 billion Term Funding scheme (on deposit of eligible collateral) aimed at supporting lending and of course, a lower Bank Base Rate (BBR) to 0.10% was imposed which will feed through to lower rates on loans to households (but not all, eg, those on fixed rates and as rates are so low anyway there are limits to which lenders can follow the BBR down). In addition, the Bank of England suspended the requirement to hold a countercyclical capital buffer for at least the next 12 months. However, non-banks, ie those firms without a full banking licence and who do not take deposits, remain outside of the scheme and they are key lenders to more marginal mortgage borrowers.
After the initial moves, some lenders did move back up the LTV curve but it is clear that high LTV loans will be harder to come by and any putative recovery in that market has been closed off at least for the short to medium term. For lenders, the economic outlook of rising unemployment and reduced incomes poses real challenges for lending and argues for caution. This is because although downturns have been experienced before, the COVID-19 pandemic has threatened the incomes of a widespread of borrowing households rather than simply those on the lowest incomes. With over 6 million employees on furlough, the question is how many will be able to return to work at the end of the period? At the moment the underlying unemployment rate is probably being suppressed by the scheme.
The Monetary Policy Report and the Interim Financial Stability report issued by the Bank of England on 7 May provide an illustrative scenario based on a number of assumptions including the speed with which the lockdown is scaled back. With respect to the housing market, the scenario suggests a 16% fall in house prices and a rise in mortgage impairment but only a limited degree of negative equity (6%). Clearly there will be important regional and local variations but the Bank indicates that the payment holiday will be effective and suggests that the return to work should mean most mortgage payments resume post furlough.
The reality for lenders and borrowers and indeed the whole of the housing and mortgage market is that nobody can fully predict where this is going. Certainly, there will be a recovery but we can debate endlessly the shape and duration of that recovery and the final outcome. While it is tempting to say everything will get back to normal, in truth the pandemic has forced all to look again at how and where we work and live. It is very likely some jobs will not return and that the scale of home working will increase along with better use of technology.
This then poses the question of whether there will be a selective market recovery with favoured locations doing much better than others and within that some complete re-thinking as to what a favoured location might be. The mortgage market will adapt around this and it might suggest that lender appetites could become more selective?
The government has restated its commitment to helping first-time buyers onto the housing ladder by “cutting the cost of new homes through the new First Homes scheme”, encouraging a market for long-term fixed-rate mortgages and bringing in a new national shared ownership model though in reality whether these can be delivered in the current context must remain a question. Rumours abound of extensions to the current Help to Buy scheme and of stamp duty cuts as possible stimulus measures when the time comes.
The simple truth at this stage is we are largely “flying blind”. The ONS has suspended its house price index as have others (both Nationwide and Halifax have published their index based on their own data – the former up 0.7%, the latter down 0.6%l). There is limited market data available and most of it is still pre-crisis. Our understanding will improve over the next 3 to 6 months but we probably have to anticipate some big shifts in behaviour and preferences. If so, it certainly suggests the past may be no complete guide to the future!
Prof Peter Williams is a Departmental Fellow, Department of Land Economy, University of Cambridge.
Views expressed by authors may not represent the views of CaCHE.
Date: May 7, 2020 4:00 pm
Author(s): Peter Williams
Categorised in: Economy