Mortgage market activity in UK set to be flat in 2018 and 2019

The outlook for the mortgage market in the UK is more optimistic than a year ago but overall activity is expected to be flat in 2018 and next year due to continued economic uncertainty, according to a new report.

But the outlook varies depending on different lending sectors with buy to let activity in particular not expected to recover this year or even in 2019. The report from UK Finance says buy to let has been weaker than expected.

It explains that several different factors are weighing on buy to let activity. Lenders tightened affordability criteria ahead of the Prudential Regulation Authority’s stress tests, which came into effect at the beginning of 2017, and the tax relief changes began to take effect from April, the first stage of a four year transition. These two changes, along with the change in stamp duty for additional homes means buy to let house activity has been flat since June 2016.

It points out that there is still uncertainty in how landlords will react to the income tax changes. ‘We have not seen any sudden contraction in lending as a result, but expect landlords to become more cautious and will likely limit their ability to re-leverage their portfolios,’ the report adds.

It also points out that the housing market is in a similar position to the economy, slightly subdued, with some components holding up better than expected. ‘As most housing transactions are discretionary, it is often the case that activity levels tend to be bear the brunt of any uncertainty, as buyers and sellers wait to get a clearer picture of where the economy might be headed. For this reason, we expect overall activity to be fairly flat over the next two years, in part a result of the economic uncertainty,’ the report adds.

UK Finance does not expect house prices to fall as a lack of supply continues to prop up values. But it does forecast that house price growth will slow over the next two years and then grow in line with earnings. ‘We expect to see regulated house purchase activity to grow modestly in 2018, driven wholly by first time buyers, as home mover numbers remain flat. This is expected to continue into 2019,’ it says.

The forecast says that first time buyer numbers performed better than expected over the course of 2017, helped by Government schemes, good credit availability, and competitive mortgage rates. ‘We expect to see a continued recovery in first time buyer numbers, though at a slower rate than seen over the last few years,’ the report says, but it adds that first time buyers continue to face affordability issues.

Home mover activity also performed a little better than expected, but is still only likely to match levels over the past three year and activity if forecast to remain at this level over the next two years. However, remortgage activity has been stronger than expected.

Prospects for the UK economy are likely to remain more uncertain than usual for the next few years as a consequence of Brexit. Data for the first nine months of 2017 shows that the economy has been growing at a slower pace than over the last few years, the report points out.

And it explains that while it’s still not clear how Brexit will pan out, it is worth bearing in mind that the housing market is relatively well insulated than many other parts of the economy, as most activity is driven domestically. London may be an exception, but even there the impact is likely to be limited to prime areas.

It suggests that should Brexit negotiations adversely affect the UK economy, policymakers in Government may well see the housing market as a way to stabilise the economy, as has been the case in the past, and are likely to take policy action accordingly. Overall, the majority of borrowers are expected to cope with a more challenging economic climate, resulting in forecast figures which still look very favourable compared to the recent past.

Mohammad Jamei, senior economist at UK Finance, said:

‘We are slightly more optimistic about the next two years than we were a year ago. We expect more first time buyers over the next two years, helped in part by competitive mortgage rates and Government housing schemes.

‘Home mover numbers have recovered a little in 2017, but look set to remain flat over 2018 and 2019, as they have benefitted less from government support and have been largely left to fend for themselves. The number of home owners re-mortgaging with a new lender has grown strongly in 2017, and our expectation is for this to continue over the medium term.

‘Regulatory and tax changes are amongst several factors that are reducing confidence in the buy to let market. This has led to subdued house purchase activity by landlords since the middle of 2016 and we expect more of the same over the next two years.

‘Housing market activity on the whole has recovered somewhat over the last 12 months helped by first time buyers, but this recovery only brings activity levels back to where they have been since 2014. Looking ahead, we expect activity to continue flat over the next two years, in part a result of economic uncertainty.’


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