PHIL SPENCER: Hello and welcome to Mortgage Insider from Barclays, the podcast series for mortgage brokers. I'm Phil Spencer. You may know me from a certain TV property programme; what you might not know is that I trained as a surveyor and launched and ran one of the UK's first-ever property search companies.
In this series, I'll be using my experience to get to the heart of the biggest issues in mortgage broking. You'll hear from industry leaders, brokers, as well as Barclays own in-house experts. We’ll share insight and expertise to help you navigate the challenges that changes and the opportunities that lie ahead for intermediaries in 2023.
The housing market in 2023, well there are a lot of moving parts aren't there? Inflation, interest rates, falling house prices, and a lot of households whose fixed rate deals are due to end this year, putting an average £250 onto their monthly mortgage bills, but I'm told that despite all that it's not all bad news.
And in this episode, we hear from someone who lives and breathes this stuff. I spoke to Lucian Cook, Head of UK Residential Research at Savills, about the UK purchase Market. Lucian great to see you. You genuinely are my go-to man when I need to really hear about what is happening on the ground so I'm ever so grateful about you coming on the podcast.
There's a lot of variables out there on that. We've got interest rates, we've got costs of living, we've got inflating and just it feels an unsettled environment. Can you for the benefit of our listeners just lay it out, tell us how it is, give us an overview if you would be so kind about what's happening in the UK sales market at the moment?
LUCIAN COOK: Yeah. Well, I think a lot of the factors that you've talked about, there’s very little doubt that they are weighing down on the housing market, but we shouldn't forget that comes after a burst of pretty extraordinary activity that we had in the pandemic. I would say the height of the uncertainty was the back end of the autumn last year and then we saw a lot of disruption for example in the bond markets which fed through very quickly through to the mortgage markets.
I would say some of that has settled. We've got a better handle on where the cost of debt is and is likely to be going forward. But still with an environment where it looks like we're going to have a recession, shallow though it might be, and given that when people are coming to refinance or they're going to buy their home, they're facing much higher mortgage costs, we've inevitably seen some house price falls and I think there's probably more of that to come.
Equally I suspect we're going to be in a relatively low transaction market by historical standards and that's probably going to be one that's weighted towards people who've got more access to equity. So, cash buyers are going to still I think be reasonably active in this market and the lower the loan-to-value you’re operating at, the more choice of mortgage you get, the more competitive terms you could get for that mortgage finance
PS: But what would be a typical transaction volume, a million, 1.1 million?
LC: Yes, so if you went back to pre-credit crunch, it was like 1.6 million, and then post-credit crunch everything changed, 1.2 million became the new norm. We had that real burst in activity driven by the race for space, the ability to lock into mortgage debt, the temporary insanity that the buyers locked onto when they could get a stamp duty advantage.
PS: Don't get me onto that one!
LC: Well, people paying £30,000 more to save £15,000 in stamp duty, that was what was going on. And then transaction volume went back up to 1.5.
PS: Did they really? Mortgage brokers and agents had a good time then, and didn't they?
LC: Everyone was having a ball at that point. But I think when you started to see from the beginning of last year inflation really start to become embedded the Bank of England becoming much firmer in terms of rising interest rates to combat that threat of inflation, that's when we started to see the market change. I think at that point though, there was a real lack of stock available, so the market ran on for a bit and that continued to mean transaction levels were pretty decent. But I think the 1.2 million that we saw or that we would say is normal, our forecasts are out there saying it'll be 870,000 this year, we may have been a little bit bearish on that possibly, but I still think we're going to be below normal market conditions.
PS: It's strange to think is it looking back through the horribleness of the pandemic, our housing market survives on sentiment and there we were in a global recession, a global pandemic, and people were still moving left right and centre and falling over themselves to pay what even at the time felt like inflated prices. Here we are now and actually we've got a cost-of- living crisis and inflation and all the different things that's really making people think. But actually, what you're saying is: there still is a market out there.
LC: There's definitely still a market out there. I think what's different between the period post-pandemic was that we had some behavioural change and that was really the result of lockdown. So, in essence, the experience of living and working from home, and if you were really unlucky having to school from home, pretty much meant, however big your house was, you were two bedrooms short, or you felt you were two bedrooms short. And that acted as a massive catalyst for people.
PS: I'm not heard it said like that, but you're absolutely right because the home was the school and the office and the gym and everything else. You didn't have any dinner parties, but we all asked a lot more of our homes. So, yes, a couple of rooms short, everyone.
LC: And of course, what you could also do at that point was lock into very low cost of debt. So, it wasn't just the interest rates were low, but it was also your two-year fix, your five-year fix was incredibly cheap. So, you could upgrade. You knew how much of additional mortgage you're going to spend. It wasn't that much that was really what propelled the housing market to the extent that it did. This time around it's a bit different and I think that really reflects the cost of debt. And in essence what happens you go to get your mortgage, you will look at your mortgage payments, it probably makes you a bit more cautious about how much you're prepared to spend, and you've got to meet the banks’ requirements under that higher interest rating environment. And I think that just limits the amount of debt you're prepared or able to take on and that's the thing that is already affecting the market and I think will be that drag on house prices over the course of 2023.
PS: Got it. It makes a lot of sense. I read something recently in actual fact of course it may very well have been written by your good self, that the cost of a house isn't actually the price that you pay. It's the costs of the debt that you pay over the course of the long term. That's the real cost of the house.
LC: Yes. Generally. I think there are two aspects of housing affordability for anyone with a mortgage. The first one is the cost of servicing the mortgage debt and that's slightly complicated by having to meet bank stress tests to reflect slightly more uncertain times; but the other element which is really relevant to first-time buyers is the cost of the deposit. It's that cost of the deposit hurdle that really shapes the market at the lower end. So, if you're getting on the market, heavily reliant on the bank of mum and dad, clearly no longer have the availability of help to buy, and for those reasons, I think first-time buyers are going to find really quite difficult market conditions this time around. And if you're trading up the housing ladder, you've got to accumulate a chunk of equity to allow you to get that competitive mortgage finance to allow you to make the next step. So, I think there are two elements in there.
PS: Can we talk about people coming off their fixed rates because there's been a lot of stuff written in the past about that? The end of the world is coming because everyone's coming off their fixed rates and it's going to cost; I'm told an average of £250 a household per month more. It is it a concern?
LC: Yes, it's it is a concern but it's not perhaps the concern that we would have had when you look at previous downturns that we tend to judge ourselves by, so whether that's the early 1990s or 2006/2007 and that's because more people are on a fixed rate mortgage. So, you gradually see a pool of people with a mortgage coming to an end. It doesn't hit you all at once. I think that's the first point. The second point is that the Bank of England mortgage regulation was pretty strict and draconian up until August and that means that those people have taken on a mortgage have already had their finances stress-tested to a degree. But it means that for many households, there's already baked-in a degree of tolerance to stomach that increase in mortgage costs. And then I'd say finally the big difference that we've got now is that the Bank of England have provided lenders with some of the tools to make sure that people aren't fully exposed to that increase mortgage costs. So, it might be an ability go on to an interest-only mortgage for a short-term or extend the mortgage term. So, I think there's broadly those three things that make it different.
PS: Sure, but will that stress test have taken into account cost of living?
LC: No, it won't have done and that will mean that some people might have to dip into their savings for a period to help meet their mortgage requirements. Some of them might have to ask the bank of mum and dad for a little bit of help month to month.
PS: Good old bank of mum and dad. Aren't they about the 10th biggest lender?
LC: Yes, and that's just in terms of raising the deposit and this is where you might see a bit of a change. I think it will be difficult for some people but because of the stress tests it shouldn't be unmanageable and that combined with the banks having learned their lessons for example from the early 1990s means I don't think you're going see a lot of for-sale stock and that's why I don't think you're going to see the same degree of price falls that you saw in the two downturns that we judge everything by which is those 06/07 and early 90s.
PS: Thank you. You are putting my mind at rest. You always do, you're very good at that, Lucian. What about regional variations? Housing market in this country is known to be polarised and it's not just different areas behave differently; even different price brackets behave differently. Are you seeing much of that at Savills at the moment?
LC: Well, I think different parts of the market doing different things. I'm not sure it's regional as such to be perfectly honest. I think it's more different segments of the market. So basically, those markets where people have got more equity and less reliance on mortgage debt approving to be more robust. So more difficult times for example for first-time buyers and particularly buy-to-let investors compared to say downsizers who are in a very different space.
And of course, as you go up the value chain, people normally have more equity to rely on and they’re less debt reliant. So that means there's a bit of a difference between the bottom end of the housing market and the top end of the market. Where I think the regions are going to come into play really is after 2023 because we're in the moment, aren't we where we're seeing pretty low mortgage approvals.
The main house price indices month on month are coming out with falls, relatively modest price falls, but still price falls and we sort of forget that around the corner once the beast of inflation is tamed, then gradually, we'll see interest rates ease back and that's partly priced into the cost of say, five-year fixed rate mortgages. And so, it's as you start to see those rates come off the other side that brings more people back into the markets and it provides the capacity for a housing market recovery.
So, I think 2024, back end of 2024, you will have seen the market bottom out and then it will progressively gather pace through 2025-26-27.
PS: Can I just take you back. You said the “market falls”. Is that a fall in the rate of growth or was it an actual fall you're talking here?
LC: So, at the moment we're seeing falls in house prices. And that's no surprise, is it? We talked about those factors that drove the house price growth post pandemic. We would say it became a bit of a cappuccino market, there's a bit of froth on the top and clearly some of that had to come off and then you've got the affordability issue.
So, I don't think it's a great surprise, but I still think for a lot of buyers, you shouldn't forget that people generally hold their home even in the early stages of home ownership for seven years. And then they get to a certain point and it's 20 years plus. And over that seven-year period even if price is full by say 10% over a five year period they're still going to be in positive territory and a lot of this is about buyers taking a medium term view rather than just the short term view.
PS: It's all related, isn't it, which is what makes it fascinating to discuss and that's why you do what you do and indeed why I do what I do. Let's just touch for a minute about house building. How does that fit into the picture, how are the house builders faring at the moment?
LC: So, the house builders I would say they benefited really strongly from that strong burst of transactional activity, partly because the second-hand market was short of stock, it put them in a great position for them to be able to provide it. They also had the benefit of help-to-buy and that means that when they've come into this disruption in the market, they've been in a pretty good place financially.
However, I think as we stand now, no help-to-buy, weaker market conditions, a lot of the stock that they've built has been targeted at, for example, first-time buyers and younger households, who are probably going to get be hit a bit harder by the circumstances that we see at the moment. So, I think what you'll see short-term is a fall in house building. And of course, what that means is that long-term inherent shortfall in the amount of stock that we have is going to become a bit more acute over the period of the next two years.
PS: That's the last thing we need!
LC: I think it's the last thing from a societal perspective, no doubt about it. But it may also just put that floor in prices.
PS: Okay, just a short word if we can about buy-to-let and the future of buy-to-let. Things have changed a lot over the last few years and again there's a lot of stuff in the press about people selling up and there’s too much regulation and tax etcetera which of course is bad news for tenants, it's bad news, I believe, for society, because the rents are rising and if rents rise, it's harder to save for a deposit, first-time buyers can’t get on the housing ladder. What are your thoughts?
LC: Yes, I think it's become a much more difficult climate for buy-to-let investors. And in many ways if they're buying in their personal name, the effect of the interest rate rises is twofold because not only if they got higher interest rates, but they're not getting full tax relief on that. So, it becomes a bit of a double whammy. We also know that there's more regulation around the corner. There's a renter's reform bill and equally we know that a lot of them will have to invest in their homes to get them up to the next environmental energy efficiency level and we don't quite know when that will be, but we know that it's around the corner.
PS: We don't know the detail of that, do we?
LC: And I think that's just made some of those buy-to-let investors much more cautious about buying more stock and let's not forget buy-to-let really took off in what from about 1999-2000. A lot of the people who bought at that time are now hitting retirement age. And they are hitting that retirement age when actually running that property is a bit harder because of the regulation. So, we are going to see some of that buy-to-let stock, I think, come back to the market, where people have got a mortgage. I still think if you're a cash investor, there are very good reasons to be in that market and my God, we need the private rental stock. Otherwise, that generational divide in housing that we talk about that's going to get wider.
PS: I'm very worried about it.
LC: But I think it will be the become more and more the domain of the cash investor. And where it is backed by mortgage debt, it's going to be about bigger landlords with portfolios that they can diversify across and they'll just look to what long, medium-term is sustainable levels of debt that they can take on.
PS: Lucian, great to talk to you. Let's end on a high note because it's not all bad news, is it? There are reasons to be optimistic. Would you agree with that?
LC: Yes, I think so. Let's not forget this is not the early 1990s and 2006/2007. We're going to have a period of elevated interest rates, that'll put pressure on transactions and on prices, But the expectation is that those rates will gradually fall, it will bring people back into the market. It'll allow a return to house price growth and the Bank of England regulation when we go into that period is going to be a bit less draconian. So actually, it allows that recovery to come back a bit more quickly than would have been the case if they hadn't taken the action that they took back in August.
PS: Words of the wise, you heard it here first. Lucian, thank you so much. Great to see you, much appreciated. That was Lucian Cook, Head of UK Residential Research at Savills.
The views expressed by external guests in this podcast are their opinions only and do not necessarily reflect the views of Barclays. Thanks for listening to Mortgage Insider. I'm Phil Spencer and this has been a Fresh Air Production for Barclays. Please rate, review, and follow the podcast on Apple, Spotify, or wherever you get your podcasts. See you next time.