Read summaries from the panels at the FCA Mortgage Conference.
- Affordable housing
- Challenges of an ageing population
- The future of the mortgage market
Speaker: Campbell Robb – CEO, Shelter
- Nida Broughton – Chief Economist, Social Market Foundation
- David King – Priced Out
- John Stewart – Director of Economic Affairs, Home Builders Federation
Many experts point to a lack of housing supply as the single most important factor behind high real house prices, and as a key influence on house price growth. Figures differ but estimates by the late Cambridge academic Alan Holmans (for the Town and Country Planning Association) in 2013, suggested that around 240 to 245,000 homes need to be built in England every year.
In 2014 117,720 dwellings were completed in England. Since 2004 an average of 135,230 dwellings have been completed each year in England, falling to an average of 119,501 since 2008. The last year in which in excess of 240,000 homes were built in England was 1978.
Since the mid-1990s the first-time buyer house price to earnings ratio rose consistently until the recession. According to Nationwide this now stands at 5.1 for the whole of the UK, compared to a pre-crisis peak of 5.4. Affordability differs by location. In London this ratio now stands at a record 9.4. Its previous peak, in 2007, was 7.2. In Northern Ireland this measure has been more volatile. This measure peaked at 8.1 in 2007, falling to 3 in 2012 and now sits at 4.2. Almost all regions now have a higher house price to earnings ratio than the end of the 1980s housing boom. The long-run average, since 1983 until now, is 3.5.
Key themes emerging from panel discussion:
- what does affordable housing mean? Views ranged from housing being affordable at four times income or where a third of a person's income is spent on housing. Affordability was also identified as a problem that went wider than London. Affordable rent was also discussed, where in the private rental sector more than one third of income is typically spent on rent. John Stewart, Director of Economic Affairs at the Home Builders Federation, made the point that in the last 15 years the number of people under 35 has not changed and yet the number living with their parents has increased by 1 million – home ownership in the under 35s has reduced by 25% over this period
- multiple, long-term causes of undersupply The panel considered a variety of causes and long-standing problems which led to an undersupply of housing: planning systems, shortage of building skills and the availability of land. The panel also identified other problems undersupply was creating, such as backlog of pent-up demand, the delayed or reduced formation of households and underoccupation within the housing market
- options for older homeowners Support for older people who wanted to move to smaller homes was discussed and the panel suggested that more could be done to create improved options for older buyers to move than exist in the current market. The panel also suggested that reform of the tax system and inheritance could create more options for older borrowers to move home
- the distribution and mix of different homes The target market of newly built dwellings, their location and price needs to be evaluated to ensure it can meet the various needs of different households, at different stages of their lives and with differing financial resources
- the future of the housing market Demographic changes, as a result of social and economic change, will continue to challenge the UK housing market. The panel believed that if there is no appetite to build social housing and with affordable housing likely to shrink, the private rental sector would be important in meeting UK housing needs. The panel considered that a holistic approach, bringing together all of the interested parties in supporting UK housing provision was required and that privately funded solutions were possible if problems in the planning system and availability of land could be solved
Speaker: Moray McDonald – Managing Director, Products Personal and Business Banking, Royal Bank of Scotland; Chairman, Council of Mortgage Lenders
- Edward Oxley – Manager, Mortgage Policy, Financial Conduct Authority
- David Sinclair – Director, International Longevity Centre UK
- Jane Vass – Head of Policy, Age UK
- Nigel Waterson – Chairman, Equity Release Council
The mortgage-related challenges facing an ageing population have been the focus of much recent discussion. Some of the issues tie in closely with other sessions at this conference – particularly affordable housing and indebtedness.
In the past the primary purpose of a mortgage was to buy a property, and the vast majority of consumers expected to clear their mortgage well before retirement. However, there have been several economic and demographic trends that are changing this expectation. For example:
- life expectancy has increased and working lives are getting longer
- more wealth is tied up in property as property values have increased
- consumers may seek alternative sources of retirement funding in response to pension reforms
- mortgage affordability pressures have increased as property prices outpace wage rises
- intra-generation inequality may increase expectations that older consumers will provide more financial assistance to younger generations
As a result there are more reasons for older consumers to take out debt secured against their homes. This is only likely to increase in the future. For example:
- to release property wealth – to supplement retirement income or to help family members access the property market
- to deal with existing debt burdens eg to repay outstanding interest-only mortgages or to consolidate other debts
- to provide asset based welfare eg to fund care costs or to repay secured state benefit debt eg support for mortgage interest (SMI) as announced in the last Budget.
- a need for longer mortgage terms in response to affordability pressures
Key themes emerging from panel discussion:
- there is a growing demand from older borrowers for mortgages and products that allow them to access housing wealth This demand is likely to grow in the long term as social, economic and demographic changes play out
- the needs and attitudes of older consumers are diverse They are not one homogenous group. This diversity should be recognised in financial and housing solutions. Many older people are financially savvy and are economically active long beyond state pension age, but a proportion will be vulnerable or have lower levels of financial capability. Consumer segmentation is a useful tool for better understanding the differing needs of consumers within a particular sector (eg when considering appropriate solutions for borrowers with interest-only mortgages who have a shortfall on maturity)
- equity release products will play an important part in providing solutions for older consumers. But they will not suitable for all. Awareness of equity release products would increase if they were considered in every retirement planning discussion. More thought needs to be given on how to reach consumers who might benefit from equity release but who might not be engaged in such discussions (eg consumers who have a low income but relatively high housing wealth)
- but the mainstream mortgage market also has a significant role to play, to provide the capacity needed to meet the requirements of a growing older population
- there has been some product innovation, particularly in the equity release market, but further product innovation is needed. For mainstream mortgages this could include increased reliance on housing equity as the eventual method of repayment rather than sole reliance on a standard affordability assessment. Flexibility is important, such as the ability for the product to change as the borrower’s life changes. The use of blanket age limits should be questioned and thought given to alternative, better ways of assessing risk. Where products allow flexibility, lenders need to ensure their staff are trained to recognise this. The mortgage sector has been somewhat preoccupied with other issues since the financial crisis, but is now better placed to consider innovation and is looking ahead
- regulation must be able to adapt to changing needs of consumers. The FCA is focusing on innovation and assisting markets to work well, and is keen to engage with stakeholders. There is a wider question about the attitude of society to risk, and how to balance the need for consumer protection with flexibility. For example, balancing the benefits a product may bring to the majority of consumers, compared with the detriment that may arise for a minority (eg a more flexible approach to affordability, which may result in some consumers losing their homes). Is society willing to accept this?
- the housing market must work for participants of all ages. There is a housing shortage, and problems in one area of the market have a knock-on effect on other areas. An important element of building strategy will be to provide attractive housing for older consumers in locations where they want to live. Builders and planners must give more thought to this. Although many older consumers wish to remain in their current homes, others want to move but barriers stand in their way, such as the availability of property, financial implications (eg costs or impact on tax position), and the inconvenience of moving. Further consideration should be given to reducing these barriers
- all stakeholders need to work together to consider how best to meet the needs of older consumers. An ongoing dialogue is required
Speaker: Professor Elaine Kempson – Director, Personal Finance Research Centre, University of Bristol
- Mick McAteer – Non-Executive Director, Financial Conduct Authority
- Chris Pond – Chair, The Money Charity
- Matthew Whittaker – Chief Economist, Resolution Foundation
- over-indebtedness is a cross-cutting issue and creates distinct challenges for certain consumer groups. There are concerns about the sustainability of current debt levels and the path dependence debt accumulation creates in a low wage growth and low interest rate environment
- household debt-to-income has fallen to less than 145% from a peak of 169% but remains high. The Office for Budget Responsibility (OBR) expects household debt as a proportion of income to increase steadily, reaching 167% by 2020
- FCA analysis suggests that the majority of mortgage borrowers who face affordability pressures are those who have experienced payment difficulties in the past. Arrears and repossessions are also concentrated in consumers in the lower income groups who also rely heavily on other forms of credit (secured and unsecured)
- during the early 2000s the relaxation of lending standards in the market resulted in home ownership being extended to those who had previously found it difficult to secure a mortgage. This has created financial problems for a significant minority of consumers – many have either lost their homes, are currently in arrears or are now trapped not simply because of tighter affordability rules but also because of changes in lenders' risk appetites
Key themes emerging from panel discussion:
- regulation can only do so much. Debt to income ratios are rising again but regulation alone cannot control household borrowing. The panel believed consumer education was a necessary component of the solution, alongside a change in firms' approaches to lending and affordability through higher standards.
- we have an economy built on spending. The panel agreed that while there are financial capability issues related to credit use for consumer spending, borrowing is often necessary to fill a long-running income to expenditure gap or where consumer circumstances change and there are no savings to fall back on
- impact of low interest rates and forbearance providing breathing space. Forbearance and low interest rates have provided some breathing space for stretched consumers. However, this will come to an end, and some consumers’ financial positions could change very quickly. How consumers and lenders prepare and subsequently react to rises in the interest rate will be of concern to many market participants
- home ownership is not the right solution for everyone. The panel debated whether home ownership was right for everyone. While property as an asset can be important for future financial provisioning, it can also become a burden for certain consumers who begin to struggle to afford their mortgage, enter negative equity, or cannot sell their home easily. However, given the propensity of home ownership and home ownership aspiration housing is, for many, the only form of long-term savings some consumers have
Speaker: Nigel Wilson – Chief Executive, Legal and General Group
- Lynda Blackwell – Manager, Mortgage Sector, Financial Conduct Authority
- Olivier Defaux – Head of European Mortgage Strategies, BlackRock
- Robin Fieth – Chief Executive, Building Societies Association
- Robert Sinclair – Chief Executive, Association of Mortgage Intermediaries
How will the market move forward given all the structural challenges discussed in the earlier sessions, combined with the demands put on it in terms of contributing to overall UK GDP and meeting wider growth ambitions?
Key themes emerging from panel discussion:
- there is a role for alternative sources of funding. The mortgage market has the potential to grow if funding beyond that provided by deposit takers can be successfully placed. Funding is likely to come into the mortgage market from a range of investors, who see mortgages (including equity release and buy to let) as a potentially attractive source of return. There is a question about how well the interest of investors searching for yield is aligned with the interest of consumers, and there has been some past bad experience, but ultimately it is in the interests of investors for mortgages to perform
- new sources of funding such as crowd funding and peer-to-peer may also play a part, although there is a question around whether there will be enough investors to provide significant amounts of mortgage funding, and there are also debates to be had about appropriate regulation of this type of funding
- building societies will continue to serve their members, providing mortgage funding to their members, without short term shareholder pressure
- regulation must evolve as the needs of consumers evolve, for example to accommodate the needs of older consumers. Consumers may also benefit from a more holistic approach to advice, so that advice better addresses their wider circumstances. Intermediaries will continue to play an important role as they help under-served segments of consumers access a diverse range of products available in the market
- the FCA welcomes diversity. Outliers may get scrutiny, but this can be a positive thing and can help foster innovation
- there should be more of a focus on supply-side issues, to ensure a property market that works well for all types of consumers, of all ages and tenures, with the aim of providing vibrant integrated communities. This requires the coordination of efforts of all stakeholders, including the mortgage sector
- there is potentially a bigger role for institutional investors in the property market, building appropriate properties on an industrial scale
- most of the UK hasn’t seen the adjustment in property prices seen elsewhere, so assuming that they are a one-way bet is risky