Good afternoon, everyone on this sunny Friday afternoon,
welcome to the Barclays Mortgage Intermediaries Economic Outlook
on the Housing Market Webinar.
I'm Sian McIntyre. I'm the Head of Acquisition Engagement
for the Barclays UK and Life Moments division.
And in that role I have an absolute privilege
of leading our Intermediary team.
I'm joined today by two fantastic guests
who are going to help us unpack what's going on
as we try and navigate what I hope to be a much rosier 2024.
But just before I introduce both of them
and we jump into it, I do have a disclaimer.
The views expressed in this webinar by our guests
are not necessarily the views of Barclays,
but what I can say is they're definitely the views
I'm very interested in hearing more about.
So, a very warm welcome. Let me first go to Alex.
We've got Alex Maddox
who leads the Barclays Funding and Securitisation team.
Prior to that, Alex was responsible for Capital Markets and Execution
and the digital strategy for Kensington.
Having spent time at Deutsche Bank
and over 15 years in investment banking.
A warm welcome, Alex.
We also have today Rob Thomas.
So, the Principal Researcher from IMLA,
previously served as an economist at the Bank of England,
so very well placed to help us navigate what's going on.
And Rob also spent time at UBS
and was also Senior Policy Advisor to the Council of Mortgage Lenders,
amongst many other things.
I'm an eternal optimistic person.
I've definitely come into 2024
thinking I'm going to manifest positive moment
and it's great to see some of the lead indicators.
But some of the shifts we've seen even in the last few weeks,
whether it was the inflation print or lenders taking rates up,
are certainly stark reminder that we remain in a transitional period.
So, it's Friday.
We're here to hear from our experts.
I'm in sunny Cardiff. It's blue sky.
Absolutely beautiful down here.
A complete contrast to the weather earlier this week,
and perhaps a mirror of what,
of how we are feeling about what's going on.
So, there is, despite my optimism, Alex,
there is definitely data and science behind what is happening.
One month in and lots of shifting and sometimes conflicting indicators.
We've got hundreds of brokers on the line today.
We're all trying to run our businesses.
We're definitely all hoping for a much better year than 2023.
I'm going to hand over to you for the next 20 minutes or so.
If you could just give us your perspective
on how we interpret what's going on, so we can start informing
and making some good business decisions for the year ahead.
Over to you, Alex.
Yeah. Thank you Sian. Thanks for the introduction.
And thank you everyone for joining. Yeah, I think it's you know,
it's one of the most difficult things, isn't it?
We all get asked by friends as well as, I guess if you're an intermediary
by your customers, should I be locking in rates now?
Should I do a two-year? Should I do a five-year?
You know, everyone asks that question
and we ask it often for ourselves as well with our own mortgage.
And it's one of the most difficult things to to answer, I think.
And, we, I'll try to put a few,
a few ideas out there about what might happen,
sort of going forward and why.
The one thing, I actually haven't got a slide covering this in the deck,
but I did once before,
there was a massive increase
in the amount of five-year fixed back in sort of 2022/2023.
And I think that's a great job done by the intermediary market out there
and extending customers' fixed rate terms when rates were nice and low.
So, I think you probably did a better job
at predicting where rates were going than the markets did,
because an awful lot of the markets
thought the rates were going to stay low for longer.
Maybe you kind of, you know more than I do, anyway.
But we'll see here what's going on.
Actually, it's a bit of a switch recently to floating rates products.
So again, maybe the intermediary market
is a leading indicator of what's really going to happen
rather than the markets.
But in the meantime, I'll give you the market overview,
and we'll take it from there.
And feel free to call me in two years' time
and tell me that I was wrong.
Because actually, I won't say things about economists with Rob after me,
but, you know, being an economist and trying to predict the market
is famously difficult.
So on this slide,
I think it's always useful to give some context.
I know from my team, very young team,
I had, you know, people saying, oh my God,
can rates ever go to 4 or 5?
Can they stay there? And if you look at this blue line here,
which is the the Bank of England rate here,
you know, it was really, really high.
A lot of people may know family members or friends
or even ourselves who had mortgages during the 80s and early 90s
and that brutal time of inflation and unaffordable mortgages.
And then, of course, we have this benign environment,
which was almost the exact opposite, sort of post-GFC.
And for a long time, I think, you know, all credit to the central bank
and perhaps, Rob's input to being an economist there during this period.
But CPI inflation was kept under control for so long
and then suddenly you can see that red line spike, we've all felt it.
And I guess the question really from here is what happens,
what happens next, is this going to continue?
The good news is it's come down.
Rob can probably explain more about what's happening recently,
but we have seen that a slight sort of stabilisation,
shall we say, in the last month or so in the inflation rate.
And also, I guess, Bank of England rates do seem to have peaked at this point.
But when you look back over that longer timeline,
the level of the blue line of base rates is not actually that high.
And hopefully we'll come down a little bit,
but I think we just have to get used to a return to normal
rather than a new normal.
This is what it was really since mid-90s.
If we just move through to the next slide.
I think this one is quite interesting.
I think, when you read the press,
you think this is all about us or all about Truss.
May be an even better sort of definition.
And this was all caused by, you know,
actions of Liz Truss in her, however few days it was.
But actually, this story is a global story.
It's not just caused by the UK. We have our own version of it.
And certainly what happened then didn't help.
But, you know, the path of interest rates.
You can see the blue line is Bank of England,
the green line is the US Fed funds rate. their equivalent,
and the ECB rate for Europe is there, what they call their main rate,
have all been very, very similar.
Over the years I've generally seen that the US tends to move first.
And I think if you look at that 2016 point,
you can see how the US started sort of putting up interest rates
before we got to... really before we got to Covid,
and got rates up to about 2% really, while the UK was increasing a little bit.
And the Europeans in my experience are usually the last to move.
And you can see that they didn't actually do anything during that period.
And the US had to sort of change path and drop rates back down again,
as Covid hit and took them pretty much down to zero,
where the UK had headed down to
and the European Central Bank was still there, as I said.
But all three central banks have been increasing rates.
And yeah, that's because inflation is a global problem.
You know, the issues we've seen from Ukraine,
have impacted everybody.
Food prices, petrol prices, it's a massive deal.
I don't say... In the US, we have, I think it was,
the type of mortgage market is also important
for the intermediary and for customers
and spare a thought for your US equivalent because over there they have
a 30-year fixed rate mortgages is the norm.
And there are a few of us in the UK market that offer that product.
Kingston has a product which we developed recently.
And in the US it's the norm.
And an awful lot of customers have locked in mortgages at 3% for 30 years.
And so as you might imagine,
the amount of mortgage refinancing going through is almost nothing.
And so, yeah, much worse to be an intermediary over there than in the UK.
And as a result of that, actually, very few people have moved house
and people are generally spending money
improving their houses rather than moving houses.
And you've seen that's driven up house prices.
It has normalised a little bit recently, but a massive increase
because there's a shortage of building, again similar to the UK,
and no one willing to sell
because over there, if you sell then you have to give up your mortgage
and move out of a 3% for life to a 7% for life.
And that's a very, very expensive decision,
which you'll only take if some kind of life situation
means that you have to do that.
The European market tends to have more floating rate mortgages,
more like the UK.
Probably with the exception of the Netherlands and Germany,
where again, there is a lot of longer-term fixed.
But I think we've seen a lot of talk about the pros and cons
of having a floating rate mortgage market
versus a long-term fixed rate mortgage market.
And I think there's sort of, in some ways it's good
because you get the transition mechanism,
as the central bank wants to put up rates,
the affordability starts to kick in quicker
in floating rate markets like the UK.
I know we've all had our issues trying to get affordable mortgages out there
and, you know, getting customers to pass affordability.
But that ultimately has been somewhat the goal of the central bank
in the US market. But they don't have that ability
because customers just don't reset their mortgages.
So, that transmission mechanism is not nearly so powerful.
Maybe we just move onto the next slide, please.
We talk a lot about swaps.
And hopefully, all of you have heard... many of you who have listened to me before
will have hear me bang on and on about swaps and swaps are important,
and we'll talk about them a bit more.
But, I'd like to talk about a slightly different type of swap.
We normally talk about interest rate swaps,
and this is an inflation swap here.
And what this is, it's a product in the market where the market makers,
trade instruments linked to where inflation is expected to be going forward.
And so you can look at this, if you look at the green line,
which is the one-year inflation swap,
that's the market's best estimate of inflation
on average over the next year.
And the blue line is the five-year inflation swap.
So that's where the market thinks inflation would be
on average over the next five years.
And you can see there that it's trending, both of those lines
are have been trending for quite a while now
well above the 2% target rate of inflation from the Bank of England.
And you can see that massive spike in 2022 and 2023 where,
you know, the market was expecting inflation to peak up to 10%.
And I guess it did.
And it's come down during that period or during the sort of subsequent period.
But I think what's quite interesting here is that this,
this market is still predicting that inflation will stay high at around 3.5%.
So well above the central bank target rate,
which in some ways we would expect as a result of that,
that rates will stay higher for longer
in order to try to push those inflation expectations down.
And I'm sure Rob will talk more about this kind of thing going forward.
When you look at views from different economists
across the the market,
generally, people saw, a lot of people think inflation
could drop to 2% during the summer,
which would be a welcome change from what this forecast is saying.
And obviously, if inflation does drop down to that 2%,
then hopefully we can see that reduction in base rates to do that.
So maybe an argument there for floating if you believe that story,
you know, floating rate product could be pretty attractive
if you believe that inflation is going to stay longer,
stay higher for longer and rates higher for longer,
then probably, you know, a tougher call
in what to recommend to your customers.
And maybe if we go through to the next slide, please.
Yeah, I think... So, what I've tried to do here is,
include... look at where rates may go,
because I think that's probably the most frequent question that I get is,
you know, are our mortgage rates going to be higher or lower in six months' time?
And I can't tell you because I don't have a crystal ball,
but I can tell you at least what the market thinks.
And so this brings me back to that point about interest rate swaps.
So, the interest rate swap is, I like to think of it,
it's like the average of the market's expectation
of the average base rate over the period.
So a two-year swap is what the market thinks
the average base rate is going to be over that two years.
So right now as of this morning two-year swaps are about 4.3%.
So, that's the market expectation for average base rate,
base rate is currently five and a quarter.
So, somehow the market thinks they're going to start at 5.25
and I guess end at 3.25 in two years' time.
So that they average about 4.2 over that two-year period.
Rightly or wrongly, that's what the market thinks.
Swaps are fundamental to pricing of almost all mortgage businesses.
So I can't really think of any business
which won't be looking at the swap market
when they're working out where to set mortgage rates.
And the reason for that is the most mortgage lenders
hedge out their interest rate risk using swaps.
Certainly the case for the wholesale and most of the retail lenders
and therefore I would recommend, you know, keep an eye on swap rates.
You can go onto Google and look up two-year swap rate,
which will give you a good feel for the two-year mortgage rate.
And then, you know, five-year swap rate for the five-year mortgage rate.
And what I recommend is you kind of watch those
because if you see those swap rates ticking up on Google,
you're probably, it's a good sign that mortgage rates are about to pick up a bit.
Like Sian said, recently, you know,
swap rates have picked up from around 4% to 4.3%.
And some of those wonderful rate cuts that we've been seeing got curtailed
and even started to increase a little bit.
If you see swap rates dropping down rapidly,
then probably says that, you know, cheaper mortgages are on their way.
There's usually a lag of a week or two
between swap rates moving and mortgage rates moving.
So, always a good thing to keep an eye on.
But what I've done here is,
generally if we look at, on average, the two-year swap rate,
which is that dark blue line,
the fixed rate is the Bank of England time series,
is roughly 50 basis points over the swap rate.
And so what I've done is, for sort of from Jan 24 onwards,
I've put in there where the swap market is expected to be,
and you can see that swaps are expected to drop down
to about three and a half within a year.
So by Jan 25, swaps are expected to be at 3.25.
And so, you know, we might expect mortgages
to be in that sort of 3.75 to sort of 4% range.
I've shown them around 4% there.
Also, we see that SVR tends to track the Bank of England base rate
rather than the swap rates because it's a floating rate index.
And that, you know, based on where base rate expectations are,
we'd expect SVRs to drop down to about 6% by 2026.
And still a big difference between two-year mortgage rates and SVRs,
probably telling you that there's going to be a great,
a great market for product switches or remortgaging
for customers to go on to reversion rates for quite a while.
And that difference has been there.
There were periods where SVRs and fixed rates were similar,
like back in 2009, but it's pretty rare.
And we would expect, let's say a lot of,
a lot of remortgaging and product switches to happen over time.
Generally, SVRs are about 3% over base
is what we've seen on average in the past.
And then maybe just a final slide from me,
you know, to put my cards on the table
about where at least the market would imply our mortgage rates to go.
One other thing that we've heard a lot of talk about
over the last 6 to 12 months is,
lenders pulling products very quickly,
the frequency and number of mortgage rate changes has been baffling.
It's been really tough, I think, both for lenders
and especially for intermediaries and ultimately for your customers,
to deal with the rate of change of mortgage rates.
And I think some of that we probably need to all take away as an industry
and think about how we can do that better.
Clear disclosure of when rates are going to be pulled is obviously one thing,
but, you know, is the market quick enough and efficient enough
and how we do this, I think is a question we should all be asking ourselves.
And maybe there's a digital solution for improving that over time.
Clearly the sourcing systems are improving a lot
and are a lot quicker to change than they used to be.
But if you look on the left-hand side there,
mortgage rates definitely moved up quicker,
which is that bright yellow line at the top.
And you can see there in late 2022,
Liz Truss time, mortgage rates ramped up but fixed rate bonds,
so this is savings products, also picked up quite quickly.
Instant access savings have been slower and have finally reached about 2%.
But you can see there that fixed rate bonds and mortgages
have ended up at pretty much the same level there, at around,
I think this was sort of as of the end of October 23rd,
have stabilised at around the same level.
And if you look on the right-hand side there,
you can see the difference between the two.
And this is almost a measure of sort of bank profitability.
And really, to answer the question,
are banks making loads of money out of mortgages?
And the answer is, well, not as much as you might think,
because if we look at, for instance,
the green line on the right-hand side here,
this is a difference between the two-year mortgage rate
and the two-year savings rate.
And you can see that that's actually as low as it's ever been.
And that difference between where banks or lenders borrow money
and where they lend it out is a sort of a measure
of their profitability before expenses and tax.
And so whether they're borrowing in two-year savings or two-year cash ISAs,
they're paying a rate that's not far off their mortgages,
maybe slightly better if you've got a big book of instant access
or current accounts
like a lot of the high street lenders do,
but they are still seeing the margin is not as wide as it was,
but it is coming down rapidly as well.
So, I think the ability for mortgage lenders generally
to cut margins from this point or to cut rates is only likely to happen
if we also see a drop in savings rates.
So maybe another area to keep an eye on is if you see savings rates dropping,
it's probably a sign that there's some room for the lenders
to drop their mortgage rates a bit
and perhaps push them down closer to the swap rate.
I've covered quite a lot there, Sian.
So, hopefully I've given us a little bit of an indication
of what might happen, which I think is positive for you.
Yeah.
But there's certainly some risk on the horizon,
certainly the Middle East, I didn't touch on that,
but that certainly could provide some pressure on inflation.
-So, fingers crossed. -Yeah.
Brilliant. Thank you. Alex. Absolutely fabulous as ever.
I'll probably describe this really poorly,
but it is a lot more stable or stabler than it was last year.
And, understanding in particular swaps
and the correlation between swaps rates and lenders rates
and what we might be predicting in particular in relation
to the Bank of England rate, is incredibly useful,
as we all try and navigate the year ahead and beyond.
And your reference also to the global stage and environment
in which we're operating, is really well made.
I think it's a sign of the level of volatility and how there are things,
as much as you would love your crystal ball,
there are sadly things that can come left field,
but we can definitely navigate with what we know and make decisions
because I'm going to remain optimistic,
and predict that we'll have a more positive and a stabler market in 2024.
I'm going to come to Rob now, if I may.
-Hi, Rob. Very warm welcome again. -Hi.
You're the author behind the IMLA report
that was published only at the back end of last year,
suitably entitled "The New Normal: Prospects for 2024 and 2025".
Alex talking there about maybe it's a return to normal.
It does feel to me more like a new normal.
I can't imagine the dizzy heights of the low interest rates
that feel like a long, long memory
and a long time ago.
But even since the report was published,
I'm conscious that things have moved again.
Another signal that it's really, really tough to predict.
So, we'd love to get your perspective on what's going on
and what's your outlook for the rest of the year.
Thanks, Rob.
Thanks. Thanks, Sian. That's a great introduction.
And thanks, Alex, for a really, really interesting exposition
of what's happening with mortgage rates and other interest rates.
Yes, I write the IMLA research
and at the end of every year I put out a much anticipated forecast.
The only people who really forecast the mortgage market
are ourselves and UK Finance.
So it was always interesting to see how the two forecasts compare.
Anyway, the background is I mean,
I agree we've had, things have settled down.
And if we look at the first slide, you can see that we've settled down
from a very turbulent period.
I can't remember probably in my adult life, quite as many shocks
coming quite as quickly as the ones we've seen recently.
We had Covid, followed by the massive supply disruption
that came out when the economies of the world opened up again from Covid,
which you can see on this graph,
is what sent global commodity prices spiking very significantly.
You know, as the global economy got back to work.
Then we saw the Russian invasion of Ukraine.
And then in the UK, we also, of course, had the now rather infamous
2022 autumn mini budget.
All of these shocks have hit the UK economy
and of course, the housing and mortgage markets.
But I have to say, if you went back a couple of years
and you... 2 or 3 years, and you told someone
that the economy was going to be hit by all these shocks,
I think they would have expected the economy
and the housing market to be in far worse shape than it is, frankly.
So, the optimistic point of view
is we've come through this in pretty good shape,
considering how much the economy has been buffeted
by really important global shocks.
And as you can see, the impact on the UK economy
has been particularly through the import prices in food and energy.
And if we move on to the next slide, we can see that impact
and how the authorities - not just the authorities,
but every pretty much every forecaster really,
bar a few, failed really to understand the impact
that that would have on the economy or particularly on inflation.
So this is another chart taken from the New Normal Report.
This is the government's official forecast
done by the Office of Budget Responsibility.
And if you look at the blue line that was their forecast
for inflation, CPI inflation, back in October 2021.
As you can see, they were not expecting inflation to get very high.
They were expecting it to glide back to,
comfortably back to 2% by early 2024 where we are now.
Then if you look at the purple line, that's the the out-turn.
You see this huge spike in inflation
that we, of course, had following those shocks.
If you then look at the red line, that was the OBR's November 2022 forecast.
They had inflation falling really quickly
and actually turning negative by this year surprisingly,
if you look at their latest forecasts from last autumn,
which is the green line, you can see they're now much more careful
about how quickly inflation is going to come down.
So, the government didn't anticipate how quickly inflation
or how much inflation would rise.
And then they also didn't anticipate how sticky inflation has been.
And I think that's an important theme that I would pick up, that we believe,
in the IMLA forecast, that inflation is quite sticky
and inflation has moved from those import price effects,
through energy and food increasingly into services.
But I'll come back to that later.
Moving onto the next slide.
What about the impact of all of this
on the housing market and the mortgage market?
Well, this is the impact on the housing market.
Of course, we had that incredible post-Covid boom,
sparked partly by the so-called
"race for space" as people re-evaluated where they wanted to live.
But I think far more importantly, by the huge fiscal and monetary relaxation
that took place, government essentially pumped very large sums of money,
some £300 billion into the economy
to keep it afloat in the Covid lockdown period.
And a lot of that money seeped into the housing market
and it pushed house price inflation up to double-digit levels.
Then, of course, interest rates started to rise,
perhaps arguably somewhat belatedly, from late 2021,
the Bank of England realised that interest rates were too low,
that monetary conditions were too soft, too relaxed,
and interest rates started to rise and forecasters
pretty quickly started to talk about some quite serious falls in house prices.
Many, many forecasters, including the OBR,
had quite significant falls in house prices.
I was a bit sceptical about the idea that they'd fall rapidly,
but even our forecast had house prices falling.
House prices, of course, did soften last year.
But what's interesting is when you look at the latest numbers from last autumn,
heading up to the end of last year,
is that they actually really began to stabilise.
And I mean, this is the 12-month increase.
But if you look at the more contemporaneous measures
like 3 months on 3 months, some measures are actually now up.
So, house prices probably,
you could describe now as being either stable or maybe slightly up.
Now, when you consider where base rate is, 5.25%,
compared to where it has been, as Alex was saying,
for that extended period when it was ultra low,
again, I think most people would be surprised.
Certainly, most economists would be surprised
that the housing market has been this robust
in the face of interest rates at this level.
And I think part of the reason if we're saying,
well, what is the reason for that is,
well, partly we still have some of an overhang of,
of cash from the Covid injection from government.
It hasn't all been unwound by any means.
Although personal saving levels have started to fall.
But also we have this structural factor in the UK,
which is not unique to UK. You see many other countries where we,
we have not built enough housing to cater for growing population,
and the UK population has been going up quite significantly
and you will have seen a lot of stuff in the press
about net immigration at record levels.
So, we have record... and everybody has to have a place to live.
So, a record demand for housing, either rented or owner occupied.
And this is keeping house prices relatively buoyant.
Now, if we look at the next slide, we can see housing turnover in a slump.
Housing turnover is usually the first thing thing to fall.
You know, people who are looking to sell their houses
often have an idea of what they're worth and don't want to take a big cut.
What we see from this graph is, obviously there was
the very abnormal reduction during the Covid period, during lockdown,
but then a very big boom afterwards because of government incentivised
housing transactions with stamp duty holidays.
And then in 2022, the market continued to be buoyant.
But as soon as you got to the period of the mini budget in autumn 2022,
as we all know, and I'm sure that you're watching more even than I
being at the sharp end.
We saw a huge increase in fixed rate mortgages
and the mortgage market taking a real battering.
And yes, it impacted transactions quite significantly.
But again, if you look at where we got to by the end of 2023,
housing transactions are rising again.
They're actually above the level they were in the early part of 2019
before the Covid pandemic.
So, even housing transaction levels actually are in reasonably good shape,
I would say, going into 2024.
So I mean, all of that sounds fairly rosy.
If we press on to the next slide,
let's look at how that impacts on the mortgage market itself.
So, this is gross mortgage lending
looking at for house purchase and remortgage.
And what you see is that again, you see the very clear impact
from that mini budget in autumn 2021 impacted the...
Autumn 2022 impacted the market and sent mortgage lending down
really, really sharply in the early part of last year.
But again, a recovery started to happen in the latter part of last year.
We still don't have the full Q4 numbers.
But I'd anticipate they would be,
we think there would be roughly in line with Q3.
So, what that again suggests is that the market,
despite all these shocks through recent years,
and particularly despite high interest rates,
which is always a key factor for the housing market,
it is an interest rate sensitive sector of the economy,
the housing market and the mortgage market.
You would expect higher interest rates to reduce house prices
and to reduce mortgage activity.
Despite all that, the market has recovered from these shocks.
And let's not forget, of course, bank rate at 5.25% hasn't come down at all.
Fixed rate mortgage pricing, of course, has come down
quite significantly in recent months, and that's great news for borrowers.
But bank rate is still at these relatively high levels by recent history.
And yet the mortgage market again also seems to have stabilised
rather like the housing market.
Obviously not at high levels
compared to where we have been in recent years,
but looks like there's a recovery going on.
So, all that looks fairly optimistic.
So, if you then look at the next slide, you might be,
wondering what is the impact of all of this on affordability,
mortgage affordability.
And these are numbers from UK Finance
who look at the mortgage interest payments for new borrowers,
both first time buyers and home movers, as a proportion of their income.
And you can see the, I think as Alex mentioned back in the late 80s,
early 90s, that huge spike that coincided with base rate reaching 15%,
you know, real pain in the mortgage market.
And it led to many, many customers falling into arrears.
We've obviously had this much more benign period since then,
and particularly since the global financial crisis,
we've actually had, ironically, record levels of affordability.
Which seems odd given that everyone talks about how unaffordable housing is.
The level of house prices relative to income
has been at record levels, but because mortgage rates have been so low
that when you translate that into the amount people
are actually paying on their mortgage as a percentage of their income,
it's been at a record low.
Of course, all that's begun to change now with higher interest rates.
But what you do see, looking at this chart,
which goes up to last year,
as much of the data from last year as we have available,
you'll see that actually the red line, which is home movers,
people who are moving home. i.e. non-first time buyers,
their affordability is actually better than the average of this whole period.
It's still more affordable than it has been generally in the past,
although not as good obviously as the history of the last ten years or so.
If you look at first home buyers, actually it is a little bit more difficult.
They are now above the long-term average in terms of how much
they're spending on their mortgage as a proportion of their income,
and I think that does show that a lot of first time buyers
are struggling in this higher interest rate environment to make the numbers work.
And obviously, brokers will know how much that's the case
that many first time buyers are indeed finding it difficult.
So, that's the sort of background in the market.
What about our forecast? Moving on to what we see happening?
Given that you will have thought that what I've said is relatively optimistic,
you might be surprised to see that for the forecast period
we're actually not that optimistic about where gross lending will be this year,
a little bit more so in 2025.
You'll notice that the blue line gross lending does come down.
The red line is net lending.
So that's effectively the increase in the amount of mortgage debt out there.
And that actually really fell very sharply in 2023.
And probably it was the most surprising number.
It doesn't really matter much if your mortgage broker in a way directly
because you're involved with the gross lending end of the market.
But net lending,
which is telling you how much in aggregate mortgage lending is growing,
was in 2023, on our estimate, one of the lowest numbers ever recorded.
So, and we expect that to continue to be an issue in 2024
and I'll come back to that shortly.
But why are we fairly cautious or pessimistic about this year?
And it comes back to this issue about inflation,
which, as I was saying earlier,
and Alex mentioned it as well, inflation has been relatively sticky.
And if you look at the December inflation CPI number,
what you saw was having had a very good number in November,
inflation went up slightly in December to 4% headline rate,
sounds high. But has come down a lot.
But it's when you scratch under the skin a bit
and you look at for example, core inflation in the UK
that is stripping out the more volatile elements of inflation, it's 5.1%.
And services inflation went from 6.3 to 6.4%.
So what we've seen is inflation which was an imported phenomenon,
you know, as gas prices and fuel prices rose,
food prices rose, has become more embedded in the domestic economy.
And you can see this if you look at where wages have been going up,
they've been going up very, very steep rates, 7-8%.
That's now come down to a level which is below seven,
but we're still above 6% wage inflation.
The government has announced a 10% increase in the minimum wage,
which will take effect in April.
So many businesses will find that they're having to pay staff more,
and they are having to pass those costs on
because there's almost no productivity growth in the UK economy.
This is a long-term problem we've had, and it's not unique to the UK,
but basically productivity growth has been roughly zero.
So, if you have to pay your workers 6% more,
you really have to pass that on to customers
because you can't find it in productivity improvements
because they're very hard to find.
And so, we're cautious that the Bank of England
will not want to cut bank rate quickly.
We'll actually wait and want to see what's happening to core inflation,
want to see services inflation coming down.
However, as Alex mentioned, there is a school of thought out there now,
a group of economists who believe that headline CPI inflation
could come down to 2%,
by the summer or maybe even earlier because of falling energy prices.
And if that does happen, actually we could be wrong.
And the bank rate or base rate will fall this year,
maybe even in the first half of this year.
And if that is true, actually, you know,
our forecast would be significantly more optimistic.
I would say we'd be forecasting house prices
will continue to rise this year if bank rate falls
and that, this blue line here for 2024 would probably be up on 2023, not down.
So, where inflation is heading this year is really a critical issue
in terms of where the housing and mortgage markets are going to go,
we've been cautious.
But who knows what way it'll go.
I mean, the biggest issue,
I guess, is that there are some geopolitical concerns out there
that could flare up and send a lot of those commodity prices back up.
But our concern is more about how quickly inflation in the domestic economy
will recede, given that unemployment is still very low
and employers are still finding it difficult to hire staff.
It seems to me that it won't be very quick to see,
we won't be quick to see wage prices coming back down
to the sorts of levels we got used to in the past.
So wage rises are 5-6%. If they become embedded,
are simply not consistent with 2% inflation,
and therefore the Bank of England will have to wait
and keep interest rates high.
So, those are the sort of structural, cyclical factors we see.
But if you go on to the next slide,
I did want to just finish with a couple of...
A couple of slides about a sort of structural background that's taking place.
I think it's important for everyone in the mortgage market
to think about and understand.
This slide shows the number of mortgage properties,
the change in the number of mortgage properties since 2009.
And what you'll see is that for a long period of time,
the number of mortgages held by owner occupiers has been declining,
and it's been declining quite sharply, in fact, quite a lot.
Whereas a number of buy-to-let mortgages has been going up.
What was interesting and maybe unique about last year
was that we think for the first time,
both the number of owner occupied and buy-to-let mortgages actually fell.
Now, the reason why the number of owner occupied mortgages
has been falling is really essentially about demographics
and the difficulties first time buyers have getting on the housing ladder.
So owner occupation is quite concentrated
amongst older age groups, people in their 50s and 60s,
the baby boomers, and many of them are now coming to the age
where they're paying their mortgage off.
They're reaching their final mortgage payment,
becoming mortgage free.
And that's what's driving that decrease in the number
of owner-occupied mortgages.
At the same the floods of new owner occupiers,
you see coming in first time buyers that we used to see, isn't happening.
The numbers have been much lower than in the past.
As we all know, many younger people struggling to get into the housing market.
And that, of course, has driven the increase
in the number of buy-to-let mortgages.
But even that market has been hit recently
as buy-to-let borrowers have had their own issues
and concerns about affordability,
and found it difficult often to remortgage properties
because mortgage rates are so much higher,
exacerbated by tax changes which hit higher rate.
Buy-to-let borrowers who are buying in their own name.
And this is actually causing some buy-to-let investors
to get out of the market.
Which of course is exacerbating problems for potential first time buyers
because their rents are going up quite sharply
if they're in the private rented sector.
And if we look at the final slide I wanted to show today,
something people don't normally look at.
So something a bit different, which is interesting, is if you work out
the value or estimate of the value of total housing transactions,
you'll see 2021 was a record year, we'd never had
such a large amount of housing turnover, more than 350 billion.
But what's interesting about this slide
is not that it's fallen back since then.
That's predictable as housing transactions have reduced.
It's comparing the blue and the red bars.
So the blue element is the amount of money paid in cash for those transactions.
The red was the amount financed for mortgage debt.
Now, if you compare 2006
and look at the relative size of the blue and the red
compared to 2023,
what you see is this really significant increase in the amount of cash
being used in these transactions,
and a really significant decrease in the amount of mortgage debt.
And I think this mirrors the,
this effect of more and more homeowners paying off their mortgage.
More and more of the housing stock is owned by people of an older age
who no longer need a mortgage.
And therefore, when they come to transact,
more and more of those people are transacting in cash,
obviously typically with down-sizers.
But even people who are just moving due to moving jobs,
if they're in the older age bracket,
they will have accumulated a lot of equity.
The positive message we can take from this, I think,
and a really important message, is there is this huge reserve now,
an unprecedented reserve of equity in the housing market.
I estimate that the average LTV of the UK housing market is now about 23%,
and it's never been lower in modern history.
So there's this huge reserve of equity in the housing market
which mortgage lenders and hopefully brokers can tap,
particularly in the later life lending market.
People are sitting on this large amount of equity,
and I think many of them really could benefit themselves,
benefit their lives from releasing some of that equity.
So I think that will be an increasing focus of mortgage lenders into the future.
Fantastic. Thank you. Rob. A masterclass.
I've been scribbling away in the background here.
I'm going to try and summarise it. I'm really conscious of time.
We were going to explore...
One of my questions I was going to put to you was,
why is the housing market so resilient?
And you covered that wonderfully. And that's sort of supply side effect,
particularly given sort of population demographics was incredibly interesting.
Also found really interesting the affordability point, but also
quite how is that disproportionately impacting first time buyers
who are so critical to the whole market moving with great context,
I think I'm going to summarise now, if that's all right.
I'm conscious it's Friday afternoon.
You both kindly and generously giving your time
and all of you listening in, I'm sure have got something out of this,
but I'm going to end with... I've gone from giddy optimism
to probably realistic, cautious optimism.
It definitely feels like things are stabilising,
but they're not going to return to the dizzy heights
that we saw before 2023.
I think I'm taking away from this some key indicators
that we all will hopefully keep an eye on
whether that's the swaps markets that you were talking about, Alex,
and how they are predicting the outlook for 2024 and beyond.
I think you described... You talked about inflation, Rob.
So, how it's embedded in the domestic economy.
So yes, we need to keep an eye on that inflationary print.
But it's really the underlying detail in that data
that is interesting to us in terms of how it will impact.
And it's definitely the problem child that the Bank of England
and the rest of us have been wrestling with.
But it is on a downward trajectory.
So I'm going to hang on to that.
We're still predicting that will come down
and correspondingly, base rate will.
You talked about productivity and how that's really tough,
particularly if the inflation problem is more domestic than imported.
I'm looking to AI. AI has been described as a Fourth Industrial Revolution.
I think these sorts of times make all of us in the ecosystem
take stock and think about innovation,
whether that's lending products to different demographics
or whether that's how we do business.
So, AI I'm sure will increase productivity more broadly,
but definitely help our sector.
And I'm still holding on to falling energy prices.
And some of those economists who are predicting a return to 2% this year.
But today is a fantastic illustration of nobody has a crystal ball.
We can look on past events.
We can't predict the shocks that lie ahead.
But with experts like you, we can at least feel better informed.
And we can certainly have more confidence
in making some decisions to take advantage of the opportunities
that remain despite the volatility.
So, I hope you've all enjoyed it today.
Enjoy the rest of your Friday afternoon.
For those of you who drink, I'm looking forward to a gin and tonic
at the end of the day,
this is recorded, so there's a lot of information,
if you would like to listen back,
we will be sharing this over the next week or so.
Thank you very much again for joining us in the webinar.
Thank you, Rob, and thank you, Alex.
Have a great weekend. Bye, bye.