Record mortgage affordability is keeping the housing market afloat, but current housing policy needs to be revised to meet home ownership targets according to a new report by the Intermediary Mortgage Lenders Association (IMLA).
Overall, it forecasts a continuing recovery in mortgage lending during 2016 and 2017, with a particular pickup in lending for house purchases by owner occupiers from an estimated £142 billion in 2015 to £155 billion in 2016 and £169 billion in 2017.
However, reviewing 2015 activity, the report finds that even though mortgage affordability has hit its highest level ever, with buyers spending a record low 8.6% of their income on interest by the third quarter of 2015 and even first time buyers spending only 9.7% by November.
It adds that first time buyer numbers have fallen marginally year on year, suggesting the government may need to revisit housing policy to successfully increase owner occupation levels.
IMLA’s research shows that as a result of this increased affordability, first time buyer mortgage repayments are lower than average rents in every region of Britain, although this is not yet being translated into the desired increase in home ownership with factors including deposit affordability issues and tighter lending criteria also having an effect.
The rise in affordability over the past year has been supported by cheap mortgage deals, alongside rising incomes. Mortgage rates are at record lows. February 2015 saw the average two year fixed rate at 75% LTV fall below 2% for the first time and by October the average two year fixed rate at 90% LTV slipped below 3% for the first time.
In a trend particularly benefitting first time buyers, the last year has seen high LTV loans become substantially more affordable, with those borrowers opting for higher LTV options facing a smaller marginal cost for borrowing between 75% to 90% and between 75% to 95%.
IMLA’s analysis finds the implied marginal cost of borrowing between 75% and 90% LTV, which was as high as 21.3% in the middle of 2010, had fallen to 12.9% by the end of 2014 and was only 7.8% by December 2015.
However, improving affordability of higher LTV loans in 2015 did not spark a rise in aggregate high LTV lending or the number of first time buyers, which fell back slightly in the year to November 2015 compared to the same period of 2014.
Deposit affordability issues and tighter lending criteria mean that not all buyers can access the deals available, even though high LTV loan repayments are now more affordable than ever, the report points out.
The IMLA is concerned that the government’s decision to terminate the Help to Buy mortgage guarantee scheme at the end of the year could make it harder for first time buyers, as it may reverse the recent improvements in high LTV loan pricing.
‘Overall lending is steadily improving but there is still a disconnect in the housing market that needs to be fixed if we are to notably improve home ownership levels. Mortgage repayments are more affordable than ever, but the number of people moving into owner occupation has remained fairly flat even though paying down a mortgage is now cheaper than paying rent in every region of the UK,’ said Peter Williams, IMLA executive director.
‘This points to a problem that is not being adequately addressed even though there are now many more high LTV deals on offer, saving even a 5% deposit can be a struggle as house prices have risen relative to incomes. This, combined with tighter lending criteria, is preventing any real recovery in homeownership levels,’ he explained.
‘The winding up of the Help to Buy mortgage guarantee scheme at the end of this year could remove the buoyancy aid that is record affordability. Great strides were made in 2015 to drastically reduce the price of high LTV loans, but without a form of guarantee in place, lender appetite could sink,’ he pointed out.
He added that the latest BCBS proposals calling for tighter capital requirements could also dampen competition between lenders and both may limit first time buyer activity, a part of the market that needs supporting.
The IMLA’s report also looks at the implications of the government’s changes to the buy to let sector, and the effects these are likely to have on buy to let lending and owner occupation trends over the next few years.
It says that in a tacit admission that its policy of stimulating new supply has failed to deliver on sufficient scale, government policy is now focused on sustaining levels of owner occupation through managing demand among buy to let landlords and second home owners, with a number of tax changes underway.
However, the IMLA argues that promoting home ownership without sufficient new supply can only succeed at the cost of a diminished social rented sector and a squeezed private rental sector with higher rents for tenants.
The paper suggests the private rented sector will remain the pressure valve that accommodates most of the increase in population expected over the next few years as landlords continue to respond to rising tenant demand.
The report forecasts a slower pace of growth for buy to let lending in 2016 than in 2015. The IMLA anticipates that remortgaging rather than house purchases will continue to drive growth in buy to let lending. By November 2015 buy to let remortgage lending reached 60% of total buy to let lending and 33% of all remortgaging.
‘Ultimately, a rising population demands more homes regardless of their tenure. No matter how quickly the government can designate land for development, it will still take time to realise these plans and build new homes,’ said Williams.