If only we had a crystal ball

What will the UK mortgage market look like for lenders, brokers, buyers and sellers when the housing market starts moving again? Iress Principal Mortgage Consultant, Steve Carruthers takes an in-depth look at what the future holds.

It cannot be overstated how much of an effect COVID-19 has had on our world. Each of us has been affected in some way, and thousands of people are putting their lives at risk every day. Aside from the obvious impact on global health and health services, the world’s economies could be facing a deep recession, and in the UK the barometer for economic health is the housing market.

The Bank of England in mid-March effectively put the brakes on the UK mortgage market overnight, although the practicalities of the house buying process means this would have happened sooner or later. This has left the UK mortgage industry with an uncertain future. In this article we’ll explore what a world post-COVID-19 might look like.

At some point lockdowns will be eased, the economy will start moving again as will the housing market. At that point, what will the mortgage market look like? Not just from a lender or broker position but for buyers and sellers, for without those there is no market.

Lower house prices?

It stands to reason that suppressed demand drives prices down. We could see a reduction in asking prices across the board in the short term and this may well be most pronounced in the first time buyer market, where LTVs are typically higher. However, what happens next could go one of two ways.

At the first time buyer end of the market, where buyers have scrimped and saved for a deposit, we may see a reduced number of people who are able to buy. Jobs may have been lost, deposits destined for a first house have been repurposed for living expenses, and those who are financially stable are able to “buy up” due to falling prices. The paucity of buyers could have a knock-on effect for the rest of the market, reducing prices across the board.

Conversely, falling house prices could open the market up to those who were previously unable to afford to get onto the housing ladder. Indeed, wealthier individuals not originally intending to buy may see low prices as an opportunity to invest savings. House prices rise and the market bounces back.

Clearly, it’s not as simple as that. We’re assuming that lenders’ access to funding remains the same, that lending conditions and risk appetites are unchanged and that the competitive landscape remains as it was.

The new norm will be just that - normal. People will still want to buy homes, need advice and lenders will want to help people achieve their dreams.

Lenders

The combination of the semi-enforced slowdown in the market and the inability to meet face-to-face has had significant consequences. Lenders are unable to conduct physical valuations, product ranges have been withdrawn, and businesses have had to focus on remortgages and rate switches whilst fielding increased calls around mortgage payment holidays. While retail deposits do provide a source for funding for the high street lenders, the lack of liquidity in the wholesale markets has meant that it is not as reliable as it once was for the ‘non-bank’ specialist lenders.

A lack of funding, constricted product lines and (with social distancing set to continue for some time hence) an inability to physically value properties requiring higher LTVs could point to a tightening of lending criteria and reduced appetite for higher risk mortgages.

High-street lenders’ aversion to high risk mortgages may push buyers towards smaller, specialist lenders that place more emphasis on complex cases. However, reduced interest rates and lower house prices may make less risky mortgages more affordable for more people. While first time buyers may (again) be unable to afford to buy, wealthier buyers may be enticed back into the market, propping up prices.

Brokers

Brokers are intrinsically dependent on the supply of mortgage products and the demand of buyers. However, we are currently seeing brokers widening their service offering to include protection, insurance and ASU cover to offset decreased mortgage demand. Equally, clients are seeking advice and support around payment breaks, product transfers and remortgages. Reduction in staff combined with the increased need for advice means brokers will need to automate services to maintain efficiency. Searching the market for the right product, for example, was simply a tedious process, but now (given the challenges of working from home) it’s a serious impediment to efficiency. Technology, used to automate these repetitive tasks, can help make brokers more efficient now and free up time when normalcy returns.

This could create a more advice-led business model with people focused on value added services, while technology automates the more process-driven tasks. Indeed, social distancing will force brokers to use new means of engaging with their customers - we’re already seeing the use of Skype and Zoom and valuations via desktop and AVM tools.

A new normal?

The new norm will be just that - normal. People will still want to buy homes, need advice and lenders will want to help people achieve their dreams. Sadly there are people who have faced tragedy, hardship and worry but we have also seen humanity at its best, selflessly helping support those in need.

We have all gained a new appreciation of the important things in life and have applauded health and care workers on a Thursday evening, along with showing gratitude to everyone else who has stepped forward to ensure our lives can continue as best possible.

In our industry it is reassuring to see how adaptable and resilient brokers and lenders have become. Age old attitudes to home working have changed so that people can still support customers in need while technologies such as AVM and Desktop valuations allow the mortgage processes to continue as best as possible. Out of all of this we have learnt that adapting to change, whilst painful and difficult for some, when borne out of necessity can be done and can be done effectively. So whatever the new norm is, those that adapt and apply technology to ease the human burden, allowing more resources to deal with the people-issues that technology cannot address, can survive and potentially thrive in tomorrow’s normal.

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