London Update
Issue 36
Feature Article: The Evolving Mortgage Market
Economic and Market Roundup
Regeneration News
Latest Young Group News
Mortgage Market Update
Young Index Q4 2008 Survey Results
About Young Group
Feature Article: The Evolving Mortgage Market
Paula Hawkins
Since the summer of 2007, the UK mortgage market has changed beyond all recognition, leading to a dramatic shift in relationships between the key players: borrowers and brokers, lenders and networks. And while a cursory glance at the state of the market gives cause for pessimism – the choice of loans available has fallen dramatically over the past 18 months – there are signs that the shake-up of the market could be a good thing, and that the players and systems which emerge from the havoc wrought by the credit crunch could be stronger, safer and more transparent than those which existed before.
From a consumer's point of view, there are two ways of getting a mortgage: either they can approach a lender directly, or they can go to a mortgage broker to scour the market for the right deal for them. As the mortgage market has become increasingly complex, dealing with a broker has become a popular option: indeed, until 2007 brokers were frequently able to secure exclusive rates which were not available direct from the lender and which could save a borrower thousands of pounds over the term of their loan.
“A broker should have access to all mortgage lenders, exceptional market knowledge and not charge for their advice”
There are two sorts of broker, too: those who charge fees for their services as well as taking a commission from the lenders and those who provide advice for free, relying solely on commission for their income. Brokers can also be part of a network, made up of sole traders or small to medium sized firms, who gain more weight with lenders through business volume and closer relationships. In fact, in the past, networks have been able to offer lenders' exclusives of their own, thanks to the volume of business that they have generated for the lender.
Membership of a network has become increasingly popular over the past few years, driven in large part by regulatory changes in the mortgage market. When the Financial Services Authority (FSA) took over regulation of the mortgage market in 2004 it introduced more stringent and comprehensive compliance requirements than had existed under the previous Mortgage Code Compliance Board (MCCB) regime. For small firms, considering regulatory issues at every stage of the mortgage process was extremely onerous: the obvious solution was to join a network with a single compliance department in order to reduce the bureaucratic burden.
Networks vary in size and quality. The range of products they are able to offer varies too as lenders can choose which networks they would like to deal with in order to get the best distribution for their products. From a broker's perspective, choosing a network to join has in the past been determined by a range of factors: the price of the offering, the service provided, the range of products available from the network, the margins the network is able to deliver on applications and the overall volume of business which the network writes.
However, dramatic changes in the mortgage market over the past 18 months have radically changed the relationship between lenders, brokers and networks, and this has meant that for both lenders and brokers, the key criteria to consider when choosing a network have changed.
The background to the change is of course the credit crunch: the virtual closure of the wholesale credit market following the collapse of Northern Rock meant that banks were no longer prepared to lend to each other, nor were they keen to gain a greater share of the mortgage market: they no longer wanted to lend at all. One of the ways in which they chose to restrict lending was either to refuse to lend through mortgage intermediaries altogether, or to introduce a system of dual pricing, where consumers were able to get the best deals by going direct to the lender rather than to a broker. This situation has now changed again: most lenders (HSBC being a notable exception) will now deal with brokers and in most cases dual pricing has all but disappeared.
However there is no doubt that lenders are becoming increasingly picky about which networks they will choose to deal with, and not simply because they wish to restrict lending. A further consequence of the events of the past couple of years is that the FSA now scrutinises the practices of lenders and mortgage intermediaries far more closely than it had done in previous years: getting one's regulatory responsibilities right is more important than ever.
As mentioned above, brokers have traditionally considered price and service, among other things, when choosing a network. In the current, challenging market, price remains an important factor, but access to the right range of products is also vital. At a time at which mortgage brokers' incomes are under severe pressure – the Association of Mortgage Intermediaries (AMI) estimates that they fell by 40 per cent in 2008 and are likely to remain flat this year – attracting business from borrowers will be dependent on the ability to offer a wide and competitive range of products.
What is increasingly clear is that a broker or network's standards of compliance will become more and more important in the current market since they will in large part determine which intermediaries lenders are prepared to deal with, and as a result the range of products which that broker or network is able to offer. According to Lesley Titcomb, director of small firms at the Financial Services Authority: “Lenders will favour intermediaries who have good processes and paperwork, with the highest standards of compliance.”
There is evidence that brokers are wising up to this fact: Pink Home Loans, one of the larger networks, reported in December that it received 39 applications from brokers, the second-highest monthly figure in 2008. This switching trend is expected to continue as brokers gravitate towards those networks with the strongest reputations and the most attractive offerings. “Clearly intermediaries are looking to networks to help them through the current market conditions,” says Neil Hoare, sales and marketing director at Pink Home Loans.
While many brokers are choosing to diversify into other income streams in order to compete, others will survive by choosing quality networks with the ability to provide a decent service and to negotiate the regulatory hurdles on their behalf. The result, it is hoped, is that the eventual end-user – the borrower – will be offered a wide choice of mortgage products, but will also be able to get quality advice and efficient service as well. This should go hand in hand with the welcome demise of those brokers who have lent recklessly, to the detriment of the housing market as well as the UK economy.
Paula Hawkins
Paula writes on the residential property market for a number of national newspapers including The Times, Independent, The Sunday Telegraph and the Evening Standard. Paula is also the author of a guide to personal finance, published by Penguin Books.
Good News for Borrowers
Within the last few days, Abbey, HSBC and C&G have all reduced rates on new mortgage products to below 4.0% and we understand that Halifax and Nationwide are due to follow suit in the coming days. In addition, the government has announced a second set of measures to shore up the banks and get them lending again:
- The £250 billion credit guarantee scheme announced with the last group of measures in October will be extended.
- There is also a new facility to guarantee loans and mortgages issued by the banks to encourage them to lend again. Effectively an insurance scheme for the banks' bad debt.
- There is a new scheme to provide banks with access to Government bonds in return for other assets or payment, which replaces an existing scheme that's due to end this month.
- The Bank of England will set up a special fund to buy high quality loans and other assets direct from the banks, to be funded by the Treasury, with an initial £50 billion set aside.
- Northern Rock has been given extra time to repay its government loans.
Banks “Hoarding” Effects of Base Rate Cut
The UK's 4 million borrowers with tracker mortgages will see repayments fall again following this month's reduction in Bank rate, but lenders are still making an estimated £120m a month because of the large margins on new mortgages. January's 0.5% base rate cut to 1.5% shaves £48 a month off the cost of a £200,000 tracker (from £905 to £857 a month) and some lucky Cheltenham & Gloucester (C&G) borrowers who took out a tracker home loan at 1.01% below Bank rate will pay as little as 0.49% in interest. However, lenders are still profiteering at the expense of new borrowers. The average two-year tracker stood at 4.51% in early January, according to data firm Moneyfacts, even though Libor, the rate at which banks fund mortgages in the money markets, had dropped to 2.5%.
Neil Young, CEO of Young Group, pointed out that cuts in interest rates are no longer the effective economic tool that they once were and that the Treasury and lenders must adopt a different approach to free the mortgage market (see here for more).
ARLA Keeps Faith with Property and Waits for the Bounce
The Association of Residential Letting Agents (ARLA) has pointed out that property has always been a safe investment; “People do require a roof over their heads and prices will recover. It is even possible that the bounce off the bottom will be unexpected, sudden and very steep because of pent up demand. But this will depend on the availability of mortgages.” This follows ARLA research which mirrors Young Group's Young Index findings that landlords plan to hold their investments for the long term. ARLA found that that 88 per cent of landlords do not expect to sell in the next year, compared to the 77 per cent who expressed the same view in the last study. The survey of 488 letting agents and 328 landlords found that one in five buy-to-let investors intend to hold on to their current properties for more than 20 years. Commenting on the study's findings, ARLA's Head of Operations Ian Potter said: “Buy-to-let landlords are helping to guarantee the growth of the private rented sector and these are the people who provide the housing solutions for those hit by the current recession.”
The Time is Right to Net a Property Bargain
According to the Financial Times, the more entrepreneurial corporate buyers “willing to roll up their sleeves” are finding a “perfect market to fish for bargains”. It said the £750m Trillium acquisition shows public companies are prepared to swallow a bitter pill on pricing to generate necessary cash to secure their finances. Meanwhile, Morgan Stanley believes half of the large quoted property companies will have to take action to avoid breaching debt gearing covenants.
House Buyers Make a Tentative Return to the Market
Three pieces of data lurking within the Royal Institution of Chartered Surveyors' (RICS) housing survey give ground for cautious optimism. The RICS headline index for December rose slightly to its highest level since February 2008. This measure asks RICS members “did house prices go up or down last month?” They produce their headline index by looking at the difference between the percentages who said 'down' and 'up'. There was also a rise in the number of new buyer enquiries, the second such monthly rise in a row - and the fastest pace of improvement since August 2006. The final piece of good news shows that the stock of property for sale has fallen over the last few months. The stock of property for sale is just 1.1 per cent up on this time last year.
Rightmove Sees Surge in Property Seekers
The new year has seen a surge in 'window shoppers' for new homes, with the number of inquiries from those seeking to view properties more than doubling even as actual sales stay near record lows. Rightmove, the online portal, has reported a surge in activity, with inquiries rising to 429,560 in four weeks to January 10 from 199,762 in the same period last year. The level of interest in home buying came in spite of more evidence of a sustained fall in prices into 2009, with an average asking price drop of 1.9% in the month to January 10. Supply remains constrained, according to Rightmove, as potential sellers are discouraged by the market.
House Building Set to Drop to New Low
The Construction Products Association believes the building industry is poised for its most marked decline in almost 30 years during 2009. It forecasts that the number of homes starting to be built will drop to the lowest level seen since 1924, excluding the period of the Second World War.
Heathrow Set for Third Runway and Terminal 6
The biggest UK airport expansion for 60 years has been approved as the Government gave the go-ahead to a £9bn third runway and sixth terminal at Heathrow. Ministers will attempt to appease environmental groups by pledging that the extra runway capacity will be linked to tough new emissions standards for aircraft. Only airlines that buy the most fuel-efficient aircraft will be granted additional slots when it opens in 2019 or 2020. The expansion will create an additional 600 flights a day at a time when the new Crossrail link route through to Canary Wharf will be fully operational.
Nomura Signs Deal for Canary Wharf Office Space
Nomura has signed a new tenancy agreement which means it will remain at the 35,000 sq ft former Lehman Brothers' European headquarters at 25 Bank Street in Canary Wharf, for at least another two years.
£180 Million DLR Extension to Woolwich Arsenal Opened
Boris Johnson cut the ribbon this month at the new Woolwich Arsenal station, which sits to the south of the River Thames to King George V station to the north. The extension will provide a vital new transport crossing for local communities and businesses as well as visitors to the 2012 Games.
Mr Johnson said: “I'm absolutely delighted that this extension with its cracking new station is up and running and puts Woolwich Arsenal firmly on the Tube map. Woolwich has long lacked the transport links that encourage the creation of new jobs, homes and shops and this is the sort of project that will help kick the credit crunch where it hurts.” The new DLR link opened seven weeks ahead of schedule, and will connect Woolwich to City Airport in six minutes, Canary Wharf in 20 minutes and Stratford in just 23 minutes. It will join the main Olympic site with the Royal Artillery Barracks in Woolwich.
Olympic University Plans Afoot
Plans to bring a University to the site of the London Olympics will take a step forward next month with the launch of a viability study backed by Boris Johnson. It is hoped that a top British university will agree to establish a campus in the Olympic Park as a flagship legacy scheme. Olympic chiefs have asked the Higher Education Funding Council for England to draw up plans for a college to make the commitment to the East End. Talks have already been held with the Russell Group, which represents universities that receive two-thirds of research funding in the UK. Universities thought to be interested in a move include Imperial College, King's College, and UCL.
New Neighbours Planned for London Bridge Shard
Sellar Property has announced plans to build three more skyscrapers close to its 'Shard of Glass' development at London Bridge Station. The new 'Project 3 Houses' is a proposed mixed use development as the second phase of the group's masterplan for London Bridge. Sellar has said phase one of its plans is “already well underway and is due for completion in 2012”. The three new towers are understood to reach respective heights of 100m, 200m and 250m, close to the height of the 310m Shard, which is set to be Europe's tallest tower. The overall development comprises 380 apartments, along with a hotel and shops and a cinema complex, a public Lido and the regeneration of a local school.
O2 'Worlds Most Popular Venue' Set to Grow by 30%
Anschutz Entertainment Group is to develop an additional 260,000 sq ft at the O2 in Greenwich, SE10, increasing the size of the scheme to 880,000 sq ft. Approval for the expansion, granted last month, will add further entertainment facilities to the venue, which recently officially became the world's most popular venue. The O2 sold almost 2 million tickets in 2008, over half a million more than nearest rival, Madison Square Gardens, and more than the Manchester Evening News Arena, Wembley Arena and the National Indoor Arena in Birmingham combined.
Young London: Going from Strength to Strength
At a time when a number of high profile estate agencies are struggling to survive, we're pleased to be able to report that Young Group's own estate agency, Young London, is expanding and actively seeking new instructions in the local London SE1 market.
This follows the success that the Young London team has achieved in letting all initial instructions at myBASE1 (SE1), The Water Gardens (SE16), The Interchange (E8), The Retreat (SW18) and Kings Quarter (N1). Young London now manages more than 250 properties on behalf of landlords.
As we go to press, Young London is kicking off its marketing campaign for Young Group's investors' apartments at Ability Place in Canary Wharf, which will complete shortly. Young London can be contacted on +44 (0)845 356 1010.
Following January's 0.5% drop in base rate to an all time low of 1.5%, Neil Young, CEO - Young Group, pointed out; “This first MPC decision of 2009 is akin to the Bank of England giving its opening team talk of the season. Base rate is unable to fall much further, lenders know what's expected of them and the onus is now on them to go out there and perform.”
In the current climate, base rate setting is no longer the economic tool that it once was and is becoming less effective the lower rates fall. Building societies are facing increasing difficulties; balancing being able to offer competitive rates to retain their savers with offering mortgage lending to their borrowers; yet another reason why rates are not being passed on to borrowers. It's become clear that base rate cuts alone are not the solution.
Borrowers are increasingly savvy regarding the impact of base rate cuts and their focus is now on the availability of lending rather than base rate. The is reflected in the latest Young Index poll which identified that only 12% of investors expressed a desire for a lower base rate, compared to 28% who cited the need for wider mortgage choice as top of their wish list.
Call Young Finance on +44 (0)845 356 1000 for free, impartial mortgage news and advice
Young Index: Summary Results, Q4 2008
• 96% of investors intend to hold their residential property investments for the next 12 months. 37% intend to hold their assets for at least 10 years and more than 20% of buy-to-let investors aim to keep their property investments for the next 15 years or more.
• 33% intend to buy additional residential property investments within London within the next 12 months, whereas just 8% of investors intend to buy UK residential property outside of the capital.
• The outlook for London property prices is 3 times stronger than for the rest of the UK. 36% of investors believe that London prices will be at current levels or higher by this time next year, whereas just 10% expect the same to be true of UK property outside London.
• Investors are focusing on mortgage finance; 50% now review their mortgage every 3-6 months and almost 1 in 4 are reviewing their finance options more frequently.
• 69% of respondents expect the Bank of England base rate to be at or below 2.0% at the end of 2009, and most predict it to stand at just 1.0%.
Many thanks to all those who took the time to participate in the final Young Index of 2008. The number of responses that we received was superb and enabled us to paint an interesting picture of current investor sentiment within the property sector. Many of you may already have noted the headline results from subsequent press articles, but a full summary of findings from our Q4 2008 Young Index is included here. Meanwhile, congratulations go to Ryan Harris, who was the winner of the Young Index prize draw. Ryan received £100 of John Lewis vouchers, which he described as “a very nice start to the new year!”
STOP PRESS: Estate Agent of the Year 2009 Nomination
We're delighted that Young London has been nominated for the Estate Agenct of the Year Awards, only 3 months after opening our first high street office. Voting questionnaires are currently being distributed to a selection of our investor landlords by the awards organisers. Final judging is weighted by response rate as well as votes and comments, so if you do receive a questionnaire we'd be grateful if you could return it to the organisers or visit www.estateagentoftheyear.com.
Many thanks in advance for your feedback and support.
London Update: Get involved, tell us what you think |
If you have any comments, would like to respond to any of the issues raised in this issue of our London Update, or suggest a topic for a forthcoming issue, we'd very much like to hear from you. Email moakes@younggroup.co.uk. |
Young Group specialises in providing Property Portfolio Management services to private investors; offering the best off-plan direct investment opportunities in London, as well as access to indirect, development fund investment opportunities through its development arm, Young Property. Young Group manages the entire investment process. For direct investments this spans from sourcing the opportunities through to financing, furnishing and letting.
Young Group owns all the property that it sells, and also retains a number of units in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion and has transacted in excess of 1,700 apartments, with a retail value of £700 million. The Group’s lettings division, Young Lettings, has successfully let the majority of investors’ apartments shortly after completion.
Young Group supports NORWOOD and CHILDREN with LEUKAEMIA, two charities particularly close to our heart, donating £50 per property exchange.
t: +44 (0)845 356 1000 e: info@younggroup.co.uk
