The financial services industry has seen the most dramatic fallout so far from the US sub-prime mortgage crisis, with events at Northern Rock leading to the first 'run on a bank' in the UK in over 100 years. However, despite these recent events, the UK mortgage market is still expecting to see record lending for the year, while a slowdown has been forecasted for 2008.
In January 2007, Datamonitor predicted that the UK mortgage market would reach a new peak in 2007, with a forecasted GBP357.2 billion in gross lending for the full year. The market is still on track to hit this forecast, with mortgage advances reaching GBP211.7 billion in the first seven months of the year, a rise of more than 11% over the previous period.
As the full year forecast already factors in a slowdown in the housing market in the latter half of the year, it is not expected to change, despite events at Northern Rock. Indeed, the market had already started to slow down before recent events as higher interest rates, increasing consumer debt, lenders' less risky approach to lending and lesser funding available all took their toll.
However, in 2008, we can expect a much tougher market for both consumers and lenders. On the consumer side, borrowers will face higher borrowing costs. A number of lenders have already put up their prices in a bid to brace themselves against future pitfalls and as a result of costlier funding. This is particularly reflected in the UK sub-prime mortgage sector, where many lenders have already implemented a review of their prices, which has resulted in an increase in the cost of borrowing. Among these institutions are GMAC-RFC and Kensington.
Moreover, availability of credit will become more difficult for certain customer segments, among which are the credit-impaired, first time buyers and those with a small amount of or no deposits at all. Indeed, the current market volatility means that UK mortgage lenders are adopting a more stringent lending policy, reducing their exposure to high loan-to-value (LTV) loans and sub-prime lending. As an example, Kensington, which is primarily a sub-prime lender, recently announced its decision to refocus on its prime mortgage business and cap its adverse mortgage range at 75% LTV. Furthermore, first time buyers will continue to be the casualty of the UK housing market - not only will they continue to be priced out, but they will also have fewer choices of lenders to borrow money from.
Consequently, on the lender side, after years of witnessing intense competition, certain niche mortgage sectors, particularly those viewed as risky - such as sub-prime and second charge lending, will face reduced competition due to a lack of appetite from lenders. On the other hand, in the mainstream mortgage market, the fight for customers with a good credit record will be as fierce as ever. In such an environment, we can expect house price growth to slow significantly and mortgage lending levels to fall in 2008.