In this week's blog, we look at the bull case for the mortgage market to answer the following questions: Is liquidity returning to the market, and what indicators should we look at to make that assessment? The health of the mortgage market indicates the health of the market our borrower clients transact with, so although investor sentiment is optimistic given their focus on the macroeconomic outlook, buoyed by easing monetary policies and declining global inflationary pressures - the practical necessity on the sell side is that there must be a healthy mortgage market to support UK real estate.
The good news is that the surface-level data is positive regardless of deeper interpretation. Approvals have risen to their highest point since the summer of 2022, and the latest Bank of England data set shows net mortgage approvals rose in October, with net borrowing increasing by 0.9bn to £3.4bn month on month. The more profound thought process may suggest that applicants raced to get transactions through ahead of the budget, and there is an unspoken understanding that this process will have put a degree of polish on the figures; we don't yet know the impact that rising swaps rates post the budget will have had on tempering the inflow of applications, but what we do know, is that swaps are incredibly volatile, and perhaps overly relied on in the news cycle as an indicator. Maybe it's simpler to focus on product launches, and with Barclays cutting their fixed rates, Halifax introducing innovative fixed-term products, and the increase in tracker products on offer across the market, there is corroborating evidence to suggest that the products are there to support an assumption of increased imminent volume.
So, what indicators do we expect to see in the coming months to firm up these expectations? Recent data may indicate an uptick in completed house sales, signalling increased buyer activity. However, once the Land Registry and other real estate analytics platforms show rising transaction volumes month-over-month, we will be more confident of greater liquidity. Regional hotspots, particularly in metropolitan areas, may see a disproportionate growth share, indicating renewed confidence and mobility in the market.
The big move we expect to see in 2025 is improved mortgage credit accessibility compared to what we have seen in the post-pandemic era. Traditionally, financial institutions easing their lending criteria or introducing more favourable mortgage products for individuals with a less-than-perfect credit history is the starting pistol being fired on improved liquidity, so higher LTVs in the mortgage market, more aggressive debt-to-income ratios, and bolder borrower profile plays, are all characteristics of what you would historically see. It's what we will be expecting to see. This trend would suggest greater inclusivity in the property market and enhance overall transaction activity - and only really represents an unhealthy situation if it becomes a disproportionate volume of overall applications, as we saw in the financial crisis.
This shift will also be driven by the rise in consumer private credit defaults, a rate that hit the highest level in the second quarter of 2024 since the furlough scheme pandemic peak. This isn't necessarily unexpected, given the inflationary rollercoaster we have been on, so rather than seeing this as a barrier to entry, the market will see this as a demographic of customers that needs to be serviced and adapt products accordingly. Ultimately, lenders want to lend, and if you are a big bank or small bank, you must build products people can use, or you quickly become yesterday's bank.
It would be disingenuous not to also touch on the bear case and show some awareness that political choices post-budget may slow down the transactional volume in the market, increasing landlord stamp duty, a reversal back to previous stamp duty thresholds for first-time buyers, and no help-to-buy replacement on the horizon, it may suggest that artificially stimulating the buy-side through governmental policy seems to have stalled slightly for now. However, there is also some hidden bullish sentiment here to highlight. The crux of the concern with the buy-side stimulus was the inability of the supply side to meet demand in terms of new starts, forcing up prices and inadvertently making the situation worse on the buy-side, so there are positive arguments to be made for reducing these sorts of schemes, relying on the private sector to price accurately for demand, and to shift the focus back onto building more homes.
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