By Paul Broadhead, Head of Mortgage and Housing Policy at the BSA.

This article was first published in Mortgage Finance Gazette.

To understand and comment on the housing market, it’s important to consider the wider context which is influencing behaviour.

The latest economic data shows that rising inflation, caused by increasing food and energy prices, is driving down real incomes, affecting every household in the UK.  In the 12 months to June 2022, consumer prices grew by 9.4% and are expected to rise further, into double digits, later this year when household energy prices will be subject to another price cap review. 

In the labour market, unemployment rates remain low at 3.8% (between March and May 2022). Both Brexit and the coronavirus pandemic have impacted employment, resulting in a smaller workforce. This reduction in the supply of workers, combined with a sharp pickup in demand following the end of Covid related restrictions, has contributed towards a sharp rise in job vacancies, reaching record highs of 1.3 million in Q2 2022.

Approvals for house purchases in the first six months of this year is around 20% lower than the same period last year and broadly compares to the levels we saw pre-Covid. However, re-mortgaging is up 36%, so total loans are only down by 3% The share of loans for house purchases reduced from 65% last year to 53% this year. House prices continue to grow in double digits with a 10.7% annual growth in June 2022 according to Nationwide, but this is down from 11.2% in the previous month.

Whilst the stamp duty holiday clearly impacted house price growth and therefore comparisons for the last year, it's not surprising that, as the increased cost of living starts to bite, the number of new buyer enquiries has started to fall, and mortgage lending has eased somewhat[^1]. 

This small downturn in house hunters is not, however, enough to address the imbalance between housing supply and demand [that I spoke about last month]. Even though the outgoing prime minister made housing a party priority, the ambition to create 300,000 new homes hasn’t been achieved since 1977[^2].  It’s therefore extremely concerning that neither of the two candidates in the leadership race have a commitment to increase the stock of housing in their ‘manifestos’ – and one reported to have referred to such things as “Stalinist”. With more buyers than sellers in the market, house prices will continue to rise, even if at a slower pace than recently, making the dream of home ownership ever-more difficult to achieve.

Back in June, the Bank of England Financial Policy Committee announced its decision to scrap its mortgage affordability stress test, this came into force on 1 August.  It may help some more people get the size of mortgage that they need, however lenders will still need to assess affordability carefully and in line with market expectations on rates – which remain on the rise.  Responsible lending will prevail and there will be no free for all.  

Whilst looking at the wider landscape in which the mortgage market operates, it’s also worth mentioning the FCA’s new Consumer Duty, with the final guidance, rules and implementation timetable published on 27 July.

This is a major regulatory change, and whilst building societies have always worked hard to provide products and services which deliver good outcomes for their savers and borrowers, the Duty may now require them to deliver the same outcomes through different processes, with additional evidence to demonstrate how those outcomes are being met.

For mortgages, the new Duty follows the position in the Mortgage Conduct of Business Sourcebook (MCOB), and therefor applies to all regulated mortgage contracts but not, for example, unregulated buy-to-let contracts or commercial lending. As mortgage intermediaries are a very important part of the mortgage distribution mix for building societies, certain responsibilities will be placed on both parties. For example, lenders must be able to demonstrate that their product and the overall charges, including any that are levied by the intermediary, provide fair value to the customer. Whilst brokers will be required to obtain confirmation from the lender that the total benefits are proportionate to the total costs, as well as ensuring their own fees and charges are fair value.

The BSA has always supported the FCA’s focus on good consumer outcomes, however the work on operations and processes that will be needed to implement the Duty, whilst not yet fully determined, should not be underestimated. We are pleased that our representations on the implementation dates were heeded, with the deadline for new and existing products extended by three months, to 31 July 2023, and closed books to July 2024.   One date for our diaries on this topic -  by 30 April 2023 lenders must have completed all reviews needed to meet the four outcomes under the new Duty and have shared with mortgage intermediaries the information needed for them to meet their obligations under it.

^[1] https://www.rics.org/globalassets/rics-website/media/knowledge/research/market-surveys/uk-residential-market-surveys/june-2022-rics-uk-residential-market-survey.pdf

^[2] Office for National Statistics: House building, UK: permanent dwellings started and completed https://www.ons.gov.uk/file?uri=/peoplepopulationandcommunity/housing/datasets/ukhousebuildingperman entdwellingsstartedandcompleted/current/ukhousebuilding.xlsx