Memorandum by the Council of Mortgage
Lenders (CML) (AH 37)
1. The Council of Mortgage Lenders (CML)
welcomes this opportunity to submit evidence to the Select Committee.
Affordability and the supply of new homes are matters of great
importance to the industry, households and indeed the country
as a whole.
2. The CML is the representative trade body
for the mortgage lending industry in the UK. We have 147 members
who together lend around 98% of the residential mortgages outstanding.
The industry provides funding to support home-ownership, the private
rented sector (including buy-to-let) and the social rented sector.
3. The CML devotes considerable resources
to tracking and analysing the UK's housing and mortgage markets
and works with lenders and others to develop products and procedures
that can reduce the risks homeowners face. Every six months the
CML publishes housing market forecasts, a repossession risk review
and detailed arrears and possessions figures. The CML also commissions
research on specific topics such as first-time buyers and regularly
publishes articles through Housing Finance Online. Since 1999,
the CML has been working with the Government on the Sustainable
Home Ownership initiative through which work has been undertaken
to improve both the public and private safety nets for homebuyers
in difficulty. More recently, the CML has been working with the
Government on equity loans and how more use might be made of these
to help low income home-owners.
4. Work with the Government is important
but it is vital that this should be seen in perspective. The UK
mortgage lending industry makes mortgage loans totalling around
£100 billion net every year (ie, total loans made minus loans
repaid). The UK industry offers a wide variety of products covering
a range of sub-markets and is judged by independent reviewers
to be not only the largest but also the most competitive and innovative
mortgage market in Europe (Mercer Oliver Wyman, 2003).
5. We have structured our response around
the issues set out in your Press Notice. Our assessment of these
suggested they might be clustered into three areas, home-ownership,
affordability and house prices and housing supply. The response
follows this logic.
6. The main points raised in this submission
are as follows:
Lenders have been actively working
to assist the access to and the sustainability of home ownership.
An innovative and flexible range of mortgage products designed
to achieve this are on offer, where this can be done on a prudent
and sustainable basis.
The housing market remains strong,
but potential first-time buyers face significant affordability
hurdlessome of these pressures are cyclical (and an important
part of orderly transition of housing market to a soft landing),
but there is also evidence of problems becoming structural.
A key problem and the focus of Barker
Review is the UK's chronic under-investment in house-building.
Potential exists for all tenures
to grow in absolute terms, although social housing is likely to
diminish in relative importance. Emergence of intermediate tenure
is important for overall efficiency of housing market and broader
sharing of welfare benefits that come from asset ownership.
The sustainability of home-ownership
is a more important issue than any specific target level. There
is an unmet demand for home-ownership and around 80% of households
will probably be home-owners at some point in the life cycle.
There are no simple solutions to
tackling affordability and housing supplyand clear limits
to what government can deliver. There are some useful Government
initiatives, eg, low cost home ownership (LCHO), but also less
helpful interventions, eg, Stamp Duty. There is also the possibility
of some unintended outcomes if the Barker Review process succeeds,
eg, lower risk appetite from lenders and less ability to tailor
products aimed at LCHO.
7. The mortgage lending industry has been
a strong supporter of home-ownership. The industry has long argued
that the benefits of owner-occupation are many and varied including
the degree of control and security it offers households over their
homes and the financial advantages of acquiring a property (ceasing
to pay rent and building a financial asset). This is evident in
surveys of tenure preferences. Although it has fluctuated over
time there is still an unfulfilled demand in relation to home-ownership
(see Chart 1). This is despite the reductions in tax benefits,
eg, the withdrawal of mortgage interest tax relief in 2000 and
it is now the case that the tax take from home-ownership via stamp
duty and other taxes now exceeds capital gains tax relief (Wilcox,
2004 ). As has been evident from the Government's own reviews
(HMT and ODPM, 2005), home-ownership is perceived to act as a
significant stimulus to the economy (though see paragraph 27)
both through spending on home improvements and furnishings, the
feel good factor and the wealth effects of house price inflation.
8. Although the advantages of home-ownership
are many and considerable it is not without its critics (eg, Malpass,
2005). There are concerns about the over-promotion of the tenure,
the difficulties households may have in moving between areas and
the effects of any house price depression on both households,
regions and indeed the economy as a whole. Certainly one cannot
ignore the difficulties posed by the last major housing downturn
(1991-93), for example the 200,000 households who lost their homes
through repossession during this period, but the reality was that
the vast majority of households continued to service their mortgage
debts and the home-ownership market withstood a major test of
its underlying strength. Although there have been suggestions
the UK is on the verge of another major house price depression
(Capital Economics, 2004) the consensus view now seems to be we
are seeing a slow downward adjustment and should arrive at the
so called, "soft landing" with prices adjusting to the
underlying capacity of households to buy.
9. Like many others, the CML is concerned
about the sustained decline in the number and proportion of first-time
buyers. However, lenders do not feel this should be dealt with
simply by lending households more money. Indeed, it is evident
both they and borrowers have been acting prudently in terms of
borrowing. The number of 95% plus loans is substantially less
than in the late 1980s (see Chart 2). As we discuss later, lenders
have sought to help potential buyers with new products and alongside
this they have introduced efficiencies related to the conveyancing
process by agreeing a standardised set of solicitors instructions
(the lenders handbook), dealt with the incidence of defective
new homes (through lenders agreeing not to release the mortgage
until property was certified as properly completed) and increasingly
no longer levying the higher lending charge fee (for loans above
85% where a mortgage indemnity policy must be bought). In addition,
reflecting the highly competitive market, lenders commonly offer
free valuations and legal work.
10. The CML is of the view that it will
be possible to expand home-ownership further albeit this growth
will be slow and possibly limited in terms of the UK total. The
UK is 13th in the EU home-ownership league table. With low interest
rates and rising wages modest growth should be possible. Demographically
driven growth will take place anyway as older generations of tenants
are replaced by younger home owning households. We do not have
a view as to how big the home-ownership sector should be as this
is largely a product of market circumstances, government support
and household preferences
11. The CML's recent work on equity loans
demonstrates lenders' interest in broadening the ways in which
households can acquire, hold and dispose of housing equity. The
recent report by Wilcox (2005) illustrates that there is potential
for developing an intermediate housing tenure, although being
based on secondary analysis it does not actually take into account
household preferences. As our first-time buyer research indicated
(CML, 2005a), many young households are happy to rent privately
until they are ready to settle down in their early-to-mid 30s.
The key factor affecting the scale and future role for intermediate
housing solutions is likely to be the proportion of such households
that have ultimately aspirations to achieve full home-ownership
in the future. At the same time, as was evident from the Government's
Home Ownership Task Force (HOTF, 2003), there was some real concern
that the intermediate home-ownership sector was not being supported
or managed appropriately and that change was needed to help it
meet its full potential.
12. Although numerical growth is possible
in all tenures, given the growth in households and people, it
is clear that if home-ownership is to grow in proportionate terms
then one of the other tenures must be reduced. Given the recent
and welcome growth in the private rented sector, it is our view
that the social rented sector will ultimately shrink further.
This will be reflect increased wealth and prosperity across society
in the UK.
13. Our recent research (CML, 2005) suggested
that, using one measure, we might see between 1.8 and 2.2 million
new first-time buyers over the 2006-10 period. Although this is
likely to include a substantial proportion of households (around
20%) who are returning to home-ownership, it does indicate that
further growth of the tenure is possible, in both absolute terms
and relative to other tenures. Moreover, the lower numbers of
first-time buyers seen since 2003 coupled with the demographic
profile suggests that there is a growing pool of potential first-time
buyers who may be delaying purchase for lifestyle reasons or concerns
14. The future course of home-ownership
will be heavily influenced by its affordability. Pressure on affordability
increased through much of 2004. In summary;
House prices rose nationally to hit
new peaks; the average UK house price is now more than £186,000.
The ratios of house prices to earnings
and other measures of income are at record high levels
Mortgage payments as a percentage
of income for first-time buyers have risen sharply over the past
year or so and are now close to the problematic levels of the
15. Affordability is now improving modestly
as house price growth has fallen below income growth and variable
and fixed-term interest rates are lower than at the beginning
of the year. However, affordability has deteriorated in all UK
regions in recent years. The least affordable regions are the
south west, Greater London and the south east and the most affordable
regions are the three north of England regions plus Scotland and
16. As noted earlier affordability pressures
have become a serious problem for first-time buyers with increasing
numbers currently unable to access home-ownership. The number
of first-time buyers has shrunk to around 330,000 a year (30%
of total) from around 550,000 (45% of total) at the turn of the
decade. The gap between what lenders are willing to lend based
on ability to repay assessments and the price of property has
17. To access the market, increasing numbers
of first-time buyers are having to provide large deposits. For
a typical first-time buyer this is now around £17,000, equivalent
to over 50% of gross annual household income. This compares with
a little over 25% of annual income five years ago. In the least
affordable regions, the typical deposit is now equivalent to 65%
of annual household income. First-time buyers are increasingly
seeking assistance to raise deposits. The Financial Times
(FT, 2005) recently reported on a survey which indicated that
up to 50% currently receive assistance from parents compared with
30% three years ago. ODPM figures show that nearly a quarter of
first-time buyers rely on gifts and family loans to afford a deposit
compared with 4% 25 years ago.
18. There is a limit to how much assistance
can be given. The figures only record those who actually become
home-owners. Those without assistance may be forced to defer or
reconsider home ownership as an option. Wilcox's recently developed
measure of affordability (Wilcox, 2005)the number of households
aged under-40 in Great Britain, whose income would be too high
to qualify for housing benefit if they were living in social rented
accommodation, but too low to afford a mortgage on the cheapest
10% of two- or three-bedroom homes for sale in their areaprobably
overstates (by a large margin) the actual demand-based figure.
A more appropriate measure might be the number of households who
currently want to become home-owners and would meet all other
underwriting criteria for a mortgage, but who, because of prevailing
house prices, interest rates and income levels, fail lenders'
ability to repay assessments.
19. In terms of the market as a whole the
increasing choice of fixed, variable and capped rate products
allows borrowers to choose the risks they want to bear. Some products
allow higher income multiples against longer-term fixed rate products
which protect younger (first-time) borrowers from interest rate
re-pricing risk for the duration of the loan. Increasing optionality
built into products such as payment holidays, additional borrowing
facilities and offset mortgages. These products provide greater
flexibility (at a cost), and may support short-term sustainability
rather than immediate affordability.
20. Competitive pressures within the mortgage
lending industry have resulted in a structural narrowing in lending
margins relative to base rates over many years. This benefits
all borrowers. With respect to first-time buyers, examples of
products designed specifically to help them into home-ownership
Low equity/high LTV loans typically
allowing up to 95% to be borrowed. Some lenders offer more than
100% through a combined mortgage and unsecured loan.
Guarantor mortgages, where the guarantor
assumes responsibility for repaying the loan in the event of default
by the borrower.
Joint loans between parents and children.
Mortgages based on the incomes of
more than two applicants.
Family offset products where interest
earned on the savings or current accounts of family members can
be used to offset the mortgage payments of the borrower.
21. Alongside such product innovation we
must also note the rise of the market for re-mortgaging in recent
years allowing borrowers to take advantage of more favourable
market interest rates, reducing (or limiting rises in) mortgage
service costs. This allows for rapid adjustments once a household
has entered the tenure.
22. The lower and more stable level of interest
rates than in the past means that borrowers can borrow more relative
to income for a given level of monthly debt service. Reflecting
this (and the spur given by Mortgage Conduct of Business MCOB
responsible lending requirements), lender underwriting processes
are increasingly based on a close individual assessment of ability
to repay rather than crude income multiples. This is an area of
active development and debate. Increasingly sophisticated ability
to repay models take account of:
Income prospects as well as current
Disposable income rather than gross
Differences in family size and composition.
Lifestyle and spending patterns.
Other financial commitments.
Ability to repay if interest rates
23. It has been possible for lenders to
extend high income multiple loans on a tailored and prudent basis,
helping aspiring home-owners to enter the market. In addition,
in recent years, lenders have also been offering mortgage finance
to previously "underserved" parts of the market including
the self-employed, those on contract employment and with unconventional
or irregular income streams (the self certification market) and
those with an adverse credit history (the sub-prime, near-prime
24. Although costs have been driven down
in a variety of ways and access improved, we cannot ignore the
fact that home-ownership is made less affordable by stamp duty
and other Government activities. Average first-timer buyer house
prices now comfortably exceed the lower stamp duty threshold (charged
at one per cent on purchase prices in the range £120,000-£250,000)
in the three least affordable regions and are somewhat above that
in East Anglia, the Midlands and Wales. Stamp duty raises the
up-front cost of becoming a home-owner in the least affordable
regions by around £2,000 per transaction.
25. The CML recently set out the range of
regulatory costs that are now impacting upon lenders (CML, 2005b)
and a copy is attached. Such costs ultimately feed through to
customers including first-time buyers. The mortgage regulation
regime recently introduced by Government (October 2004) is one
such cost. Going forward, the introduction of home information
packs is planned for 2007. Although it should ensure better information
for buyers some of the costs are likely to be built into house
prices and borne by buyers.
26. Low rates of house-building have profound
and wide-ranging economic and social effects for the UK. The housing
market is cyclical in nature, reflecting changes in the underlying
economic environment. Formal estimates indicate that the responsiveness
of UK housing supply to house prices is low, both in absolute
terms and relative to most other countries, and has declined over
time. This means that changes in the macro-economy, for example,
in the job market or interest rates, potentially have a major
impact on house prices.
27. There is some uncertainty about the
precise transmission mechanism between house prices and the wider
economy. The Government's Economic and Monetary Union assessment
(HMT, 2003) suggested that the largely variable rate nature of
UK housing finance and the relationship between house prices and
consumption undermined macroeconomic stability. But more recently,
the Bank of England (Attanasio et al, 2005) has queried
the importance of house price effects, suggesting instead that
common factors are likely to lie behind house price movements
and consumption growth. The housing market, together with its
influence on household spending, has nevertheless been an important
consideration in the Monetary Policy Committee's decisions about
28. The focus of the Barker Review is firmly
on longer-term developments rather than the short-term volatility
of house prices. This is sensible, given that cyclical affordability
pressures are an important mechanism that ensures housing supply
and demand remain in broad balance. Barker seeks to separate out
and respond to structural factors, such as the UK's long-standing
under-investment in house-building and demographic pressures arising
from the ageing population, relationship breakdown and inward
29. New rates of house building account
for less than one per cent of the existing housing stock. By itself,
this would mean that large increases in housing supply would be
necessary to influence house price developments. But we believe
that much of the impact of any new build is likely to be dissipated
anyway. This is because it will spur existing home-owners to use
more housing serviceslarger homes, second homes etcand
attract households to the area where new build is taking place.
The overall implication is that substantial volumes of new build
sustained over a number of years would be necessary to have a
material impact on affordability.
30. As the Barker Review recognises, there
are complex issues about the geographic, property-type and tenure
distribution of additional new build. We will have to wait until
the Government announces the details of its national affordability
goal later in 2005 to judge whether it has found an effective
framework within which it can deliver positive results. But this
is a particularly tall order to get right.
31. If the Barker proposals are successful
in delivering slower real house price gains over the longer-term,
it is important to recognise that this may have profound market
and policy implications (CML, 2003). Other things being equal,
the credit risk associated with a given LTV advance will be higher
than previously, and this will be reflected in lenders' underwriting
criteria. In essence, lenders may become less willing to offer
high LTV loans or seek to charge more for such loans, or some
combination of the two. This may give rise to further differentiation
across borrowers and, ironically, lessen lenders' appetite to
tailor products aimed at low cost home ownership. Equity withdrawal
may be restricted, with potentially profound consequences for
remortgaging activity and lifetime mortgage products while lower
price appreciation may reduce the appetite for buy-to-let loans.
SECTION 106 AGREEMENTS
32. A neglected aspect of housing supply
is the difficulties lenders have been facing with restrictive
covenants imposed by some local planning authorities through planning
obligations (ie, s106 agreements) for affordable housing. Local
planning authorities (LPAs) are adopting different approaches
to affordable housing in s106 agreements and lenders find it very
difficult to deal with the variety of restrictions being imposed.
The current restrictions on rural exception sites under PPG3 where
lenders would never be allowed to sell the property on the open
market, even if an affordable need could not be identified, is
overly restrictive. There is a danger that lenders will withdraw
support for these schemes entirely.
33. The Government has stated that it sees
the adoption of MMC as providing a major opportunity to produce
a "step change" in housing supply. A number of high
profile MMC projects have received government support and the
Housing Corporation has made the availability of grant conditional
on the increased use of MMC in new-build projects initiated by
housing associations. Lenders are supportive of moves to create
conditions in which innovation can thrive but are conscious that
past generations of innovative housing construction have not always
produced happy results. Much pre and post war prefabricated housing
has been characterised by long-term defects and there appears
to be some connection between the use of such techniques and low
demand. Lenders have a long-term interest in property that has
to stand as security for a mortgage of up to 35 years term. In
order to help ensure that the new generation of MMC properties
maintain proper standards in relation to durability, whole life
costs, repairability and adaptability the CML has been working
closely with the Building Research Establishment (BRE) and with
the Association of British Insurers (ABI) to develop a certification
standardLPS 2020, which will provide real assurance to
key stakeholders about the design, manufacture and on-site erection
34. Moreover, new properties need to be
built sustainably. Britain's climate is changing and houses built
now need to be designed for the long term and the conditions of
the future. For example, much of the Thames Gateway growth area
is situated in the flood plain. The Government needs to work with
the Environment Agency and DEFRA to ensure that these issues are
addressed otherwise properties will be difficult to insure and
therefore to mortgage.
35. Home-ownership is one of a number of
competing tenures. There is no unique or unchanging "equilibrium"
between the tenures. Changes in the conditions of demand and supply
between and within the tenures will change the "equilibria"
between and within the tenures. Although house prices are high,
this does not necessarily mean they are fundamentally overvalued
or in danger of collapse.
36. As Professor Nickell of the MPC has
pointed out (Nickell, 2005), there are a number of reasons why
the equilibrium level of house prices might have risen, as follows:
The rate at which new dwellings are
being built is at an historically low level whereas the population
of working age and the net rate of formation of new households
is relatively high;
Debt-service costs in the early years
of a loan are less in a low inflation and low interest rate environment;
The substantial and sustained fall
in long-term real interest rates has lowered the real cost of
37. Why long-term real interest rates have
declined to unusually low levels and what may cause that to change
and when are important issues. David Miles' view is that current
interest rate structures will probably not prove sustainable and
the implication of this is that house prices will adjust downwards
relative to incomes as real interest rates return towards more
38.A survey conducted for the FSA in late 2003
(FSA, 2004) showed that, at that time when base rates were 3.5%
and average mortgage rates were less than 4%, a one percentage
point increase in mortgage rates was expected to have little impact
on households' ability to cope with their financial commitments.
Broadly speaking, this is what we have observed this year. The
same survey found that, if interest rates rose by 2.5%that
is mortgage rates climbed to a little below 6.5%an additional
4% of households thought they would fall behind, and an additional
15% would struggle, with at least one form of borrowing. Assuming
that the responses would be broadly consistent today, this research
suggests that a rise in mortgage rates towards 6% would begin
to squeeze some household budgets, but that the vast majority
of households would manage.
39. A wide range of factors, including the
distribution of unsecured credit and the type of mortgage held,
would determine which households are most likely to have problems.
But it seems probable that this would include some recent first-time
buyers, given the highly-leveraged nature of their borrowing.
A one percentage point rise in the mortgage rate to around 6%
would raise the total payment of a repayment mortgage for a recent
typical first-time buyer by 10%. This would be equivalent to £70
a month, or 3% of household income.
40. The arrears and possessions data also
support the view that current levels of house prices and mortgage
service are generally affordable. Although both arrears and possessions
have picked up over the past year, this is from historically very
low levels and has not been unexpected. It may, at least to some
extent, be the natural consequence of the relatively rapid growth
in self-certification and sub-prime lending in recent years, and
simply reflect the maturing of these portfolios.
41. The sharp rise in mortgage possession
court actions and orders made recently may be thought to point
to a sharp rise in possessions ahead. However, such a scenario
does not fit well with current and projected arrears figures.
Rather, it suggests that lenders are responding more quickly to
defaults partly as a consequence of the new MCOB regime.
42. This is not to say that the current
level of house prices and affordability facing would-be home-buyers
is desirable or politically acceptable. But the decisions on an
acceptable level of affordability and the desired mix of tenure
are ultimately matters for politicians responding to household
preferences and economics rather than the mortgage lenders, who
satisfy the needs of home-buyers, buy-to-let landlords and housing
associations and their clients.
43. The Select Committee is examining an
area where simple solutions are difficult. From a lender perspective,
maintaining a sensible balance between demand and supply is a
pre-requisite for a stable and sustainable market and where entry
level house prices will be aligned with potential first time buyers.
44. Both lenders and government have been
seeking to overcome the evident difficulties that exist in the
current market. There are clear limits to what they can do. Any
demand side assistance through subsidies or product pricing, if
not matched by commensurate increases in supply, runs the risk
of pushing up house prices. The Government is quite right to take
forward the Barker agenda but it is ambitious and poses some risks.
45. Equally, the work government is doing
around low-cost home-ownership (LCHO) is sensible and long overdue.
The priority given to LCHO has been too low and too little has
been done to improve the efficiency and effectiveness of LCHO
schemes and providers. Both ODPM and the HC bear some responsibility
here and we are still awaiting the full implementation of the
Home Ownership Task Force recommendations. The CML welcomes the
Select Committee's decision to conduct an Inquiry into LCHO.
46. We have raised the issue of stamp duty
and other regulatory costs which bear down on potential buyers
and on lenders costs and charges. The Government needs to respond
to these concerns and not least to move forward on reforms to
47. It should not be forgotten that lenders
have lent over £35 billion UK wide for new-build, repair
and improvement to social housing. Such investment represents
a successful partnerships between the public, not for profit and
private sectors. Lenders have also been instrumental in promoting
higher standards and expansion in the private rented sector through
the availability of competitively priced buy-to-let loans now
totalling over £63 billion. It is important that Government
shows a real awareness of the potential contribution of the lending
industry to the provision of quality affordable housing in all
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