Listen to our podcast – recorded 1st December 2020
Update on credit trends in the mortgage market and what changes to expect in the new year – Dave Kerry, Head of Data Insight
In the mortgage market, we saw growth into October after a strong September, only to fall back slightly in November as we moved into the seasonal period. With September’s record-high application volumes only just tailing off in mid-October and early November, we are currently seeing 85% of September levels. This is significantly higher than pre-Covid and 2019 levels. As we move into the seasonal period we typically see a a 20-30% reduction, only to pick up in January when there is an increase in demand.
Overall, we expect the applications in 2020 to be greater in volume than those in 2019. We expect December to show a complete recovery in terms of the applications that were lost during the initial lockdown period. These applications are not only greater in volume than 2019, but according to our Delphi score, they are higher in quality too. Loan values have also continued to increase, sitting at 10% higher now than see in the Pre Covid period (Q1 -2020).
We have also seen subtle changes occurring in the market in terms of products being offered. Due to the uncertain times triggered by the pandemic, there were less products available during lockdown, which made it difficult for the first-time buyer market. However, the first- time buyer market has more to look forward to with regulatory changes coming into force in the near future.
The restrictions on the use of deposits from the bank of mum and dad have been removed by some lenders , as have the rules surrounding the need to evidence 6-month job stability prior to being eligible to apply for a mortgage, which shows confidence is growing. When we take into account the additional measures that are set to come into place for first time buyers, such as help-to-buy in April, and other measures, it indicates an optimistic start to the New Year.
Looking at the most recent lockdown, consumers and lenders seemed better prepared for this second wave with workforces at home, and products and strategies more aligned to the changeable environment we are in. The impact on the mortgage market may be slightly lagged in comparison to other markets but current performance continues to be strong, perhaps an indication of consumer confidence and attitude to the new norm in addition to lender ability to deal with the lockdown.
Mortgage arrears are quite low and remain cushioned as a result of Emergency Payment Holidays (EPH). There are ongoing concerns given that arrears are likely to spike as arrears in the EPH population are three times that than in your typical stock population. We will only see their final impact when they end in early to mid-next year. They are also representing around a third of the one and two down missed payments, which is a high proportion of overall collection stocks for lenders.
When we take a broader view, there are other factors to still consider as we look to Q1 of 2021. For example, uncertainty is a huge factor in itself, with unemployment to consider, as well as the unwinding of government support. These all lead to us questioning whether conventional measures of risk will hold up given the invisible risk of EPH and the unknown risk of unemployment, and this is without ignoring that Brexit is to come.
Current housing price trends and their impact on the forecast for 2021 – Sadia Sheikh, Head of B2B Economics
In terms of prices and activity, we saw a strong summer. Data suggests this continued well into autumn with the more stable measure of year-on-year growth suggesting that prices increased by 6.5% in November, which is nearly a six-year high. The Halifax house price index showed annual growth of 7.6% in November, confirming robust numbers on price trends.
When we look at HMRC transactions, Bank of England lending, or the RICs balances on sales, we see the strong trends from summer have lingered on into the autumn. At a first look, it appears the summer boom has continued; however, if we take a step back from those headline numbers, we can see a few reasons for caution.
First, when taking a month-on-month view of price growth with the Nationwide house price index, we see strong growth in July to August. But this momentum has decreased with September, October and November all registering growth under 1%, suggesting the underlying momentum is slowing.
A second reason to be wary is that though we have seen strong growth, it has been underpinned by government support rather than robust economic fundamentals. As those support schemes unwind, it is likely the momentum will falter.
With Furlough and EPH schemes that were initially set to end on the 31st of October, our outlook for Q4 was weak with no house price crash but largely flat house price growth. With the extension of the EPH and Furlough scheme into next year, our outlook for Q4 has been upgraded, which has had a positive impact on our view of house price growth for 2020.
The measure we use when considering positive house price growth is crucial. At Experian, we use the ONS measure as it has wider coverage. According to ONS, we are looking to end on 3-4% growth, which is a very good outcome given that we are in an unprecedented economic crisis point.
2021 will be interesting to analyse given income support schemes have been extended through to the end of Q1, which will encourage housing activity and house price growth as people take advantage of these schemes before they unwind.
As the end of Q1 approaches, though, we do expect a cliff edge when the government support schemes end, which will be a stress point for the housing market in terms of demand as incomes and jobs come under pressure. Following the end of Furlough, we are expecting unemployment to peak during Q2 at 7.5%, which sits well with OBR’s own forecast. All of this will be happening in the backdrop of Brexit, another approaching stress point.
Regarding Brexit, whether we have a deal or no deal will now only have minor differences, with either outcome associated with a downward impact on GDP. With an elevated environment of uncertainty and knowing the Chancellor intends to claw back the generous spending we have seen, overall growth in the economy will be lower.
The logical conclusion when ruling out austerity as the Chancellor has done, is to expect significant tax rises ahead. This will hit buyers on the margin, and with pressure on house prices clearly downward, most are forecasting a decline in house prices in 2021.
The industry average ranges from -1% to -8% decline in overall house prices for next year, with our own modelling indicating a -3% fall. However, it is advisable not to look at any one forecast point in isolation as each forecast depends on the forecaster’s view of the economic recovery which is based on several unknowns – the vaccine being one of them, as well as how effective it will be. There is some danger in viewing point forecasts too narrowly, and the more helpful approach is to look at overall trends.
Our current view is built on the basis of announced government policies so far, which suggest all support will end at the end of Q1, which means we are expecting a fairly challenging 2021. If the Chancellor steps in at the end of March 2021 and extends support further, then we will see an uplift in the housing market, activity and prices but at this point, no such announcement has been made.
Critical Factors to consider for the market as we move into 2021 – Derek Garriock, Design & Innovation Director
There were a lot of challenges faced by the mortgage market in 2020. A major challenge surrounded the operationalising of remote working teams who support the mortgage customer journey from end to end. The journey was not fully deployed via the UK but involves an off-shore aspect, which made it difficult to ensure mortgage operations were working efficiently. When combined with the volumes of applications, this led to a bottleneck as lenders tried to tackle the high volumes in the summer right into the autumn. This bottleneck in processing now sits with lawyers and conveyancers as the volumes of completion work through the system.
Moving into 2021 from a lender point of view, the focus is on cost reduction. Mortgages are a very costly process to onboard customers, due to the degree of complexity that sits within the Mortgage lending assessment, and there are multiple parties to take on the required transformation journey, e.g. aggregators, brokers, and lenders who have to collaborate to deliver a great customer journey. 2020 has served as a catalyst to drive the digitisation of the mortgage market, which in turn will drive more efficiency into a suboptimal process, benefitting future customers.
We have found we can cut out up to 75% of costs in the mortgage originations process through better use of data. That can start with customers boosting their credit scores at the start of the process, or better understanding of their eligibility for a mortgage before they start the origination processes, alongside brokers and lenders using open banking capabilities to inform affordability and underwriting decisioning having accelerated people through the onerous fact find / application process by using open data pre-population capabilities. This approach starts to address the blind spots created by EPH and lack of information around who is and isn’t impacted by Furlough and other schemes impacting lending decisions and pricing.
We have also seen significant interest in lenders’ needing to focus on the retention of customers and how they can drive stronger engagement with existing mortgage customers earlier in the product switch process, to improve the probability of retaining these existing borrowers.
2021 will champion the year of digital transformation within the market. The majority of organisations understand if they want to survive and prosper beyond these challenges, they need to knuckle down now and drive their digital transformation agenda. There are lots of opportunities for organisations to drive significant efficiencies through 2021, reducing costs and delivering significant improvements across the mortgage lifecycle to meet their customers’ needs and ever advancing expectations.
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