The future of the UK mortgage market

Speech by Christopher Woolard, Director of Strategy & Competition, FCA, delivered at the FCA mortgage conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

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It’s a great pleasure and privilege to welcome everyone this morning to Westminster albeit with some small sense of irony  - we are in officially the least affordable property area in England and Wales.

Let me begin by thanking everyone here in advance, including our panellists, for their contributions to today’s discussions.

As you’ll see from the programme, a key aim for the day is to encourage debate on the most important topics, both regulatory as well as non-regulatory, that are currently facing the UK’s mortgage market.

To support that, we have four panel sessions ahead. Two before lunch on affordable housing and on an ageing population. Two after: on over-indebtedness; and on the future of the mortgage market.  

By way of introduction, I want to look, in turn, at core questions those four panels will cover.

But I’d like to start with a few general observations about the context for our debates today.

It scarcely needs saying that few issues in the UK matter more to the general public than homeownership.

As a nation, we consume huge amounts of information about property. We are borrowing more. And we’re spending increasing amounts of disposable income on homes.

For mortgage leaders today of course – in business and regulation, as well as in politics – those trends create a number of important questions. Some are questions rooted in the origins of the financial crisis.

Others very micro and personal. So on the one hand you have homeowners willing their property values up. On the other, first time buyers willing them down.

Yet within this context, a very clear challenge for all of us is everyone seems to be in agreement that something not only needs to be done, but that our response must incorporate lessons from the past.

Mortgage Market Review

Now, in terms of the latter challenge, responding to the past, it’s clear much has been accomplished.

So while it’s right to guard against complacency, especially given the tendency of financial history to repeat itself, there’s no doubt there are key differences between 2015 and the unsustainable lending levels of 2007.

The first big difference here is what appears to be a shift in the risk appetite of industry.

The second comes in the form of regulation, with stricter international and domestic capital and conduct requirements. Including the introduction in the UK last year of the FCA’s Mortgage Market Review (MMR), as well as work by the Bank of England and the Financial Policy Committee.

That some questioned whether the impact of those interventions might lead to a drying-up of the market is a matter of public record. The MMR alone was predicted to affect mortgage approvals by anything up to 20 per cent.

Looking back now, it’s difficult to square those forecasts with actual market activity. Particularly when you assess the number of mortgage approvals post-MMR versus pre (43pc against 41pc).

But there is clearly a question here as to what the ideal level of activity is and how you achieve it.

No-one, frankly, wants to return to the unaffordable lending practices of the past, where almost every application was approved. And this is likely to mean (among other things) that assessments of mortgage applicants’ circumstances will continue to require more care than they did pre-crisis.

We do, however, have to remain sensitive to the impact of these reforms over the long run. And we certainly need to keep focussed on outcomes  and whether the market is working well. Even if we believe our rules are proportionate, we need to remain alert to how firms are interpreting them and the effect on consumers.

That is one reason why we are will be undertaking a review of barriers to competition in the mortgage sector, with a view to launching a market study in early 2016. This work will include a review of key aspects of how MMR has impacted the market. I will say more in the context of our fourth topic.

But first, I want to turn to this morning’s session on affordable housing because it includes questions that affect almost every other debate we’re having today.

Affordable housing panel

The most significant of those questions being: how do you manage the long run challenge of house prices rising faster than wages?

For close to a 100 years, the answer to that question has been remarkably consistent. Loosen lending standards.

Post-crisis, no-one is seriously arguing for more of the same medicine. Nor is there a sensible economic case for doing so, especially in the current context.  Slackening lending standards when supply is constrained, as it is now, implies a pretty simple equation.

Stimulating demand will lead to rising prices. This is economics 101.

A core affordability question for today then is can we – in industry as well as regulation – find solutions here that make sense in the real world.

The answer, in all likelihood, will not be easy, certain or singular. It will come from a combination of factors, including: ongoing assessment of regulatory impact; market growth and innovation; and central government-led policy.

Now, as a model for future success, this does not have the glossy PR ‘pizzazz’ of an effortless solution to the challenges we’re contemplating today.

But it has the virtue of being both sensible, as well as an approach we can apply to multiple issues across the mortgage market, including core challenges like the UK’s ageing population. The second of today’s discussion topics.

Ageing population

That this is one of our most pressing societal issues is not in question. The UK has one of the fastest ageing populations in Europe, which itself is relatively old compared to other continents. Globally, the forecast is for a 244 per cent increase in the number of over 85s in the next 35 years.

Moreover, few are seriously predicting this trend will slow. In fact, the smart money is on a rapid acceleration in longevity. Many scientists are already confidently predicting that the advent of ‘gero-protector’ drugs will have a profound impact on the ageing process.

Now, unless you’re seriously disillusioned by actuarial calculations, this will represent progress. 

But couple it with wider issues in the mortgage market, including affordability, and we quickly run into a number of important issues. For example, an older population that is increasingly asset-rich, but cash-poor.

How do you address that challenge?

One tried and tested possibility is to unlock the value of your home.

The average pension pot is £30,000, yet a significant number own property assets of around seven times that number or more. The ability to access some of that asset, as a restricted lump sum or as a gradual income could make a significant difference to people’s lives.

Yet, in the not too distant past, equity release became a dirty word. Whilst we have seen a combination of regulation and industry-led initiatives to help clean up the market, some will argue that the costs of equity release, both up front and compounded over time, are relatively high for the individual, and that the previous image has stuck.

Others can point to potential benefits here, especially for those who want to remain in homes they’ve worked and paid for over their lifetime. 

Either way, it’s clear that the UK and EU equity release markets are relative minnows. Indeed, by EU calculations, only 13 member states have a market. Accounting for just 0.1pc of total EU mortgage lending. Significantly smaller in scale than the US. 

Now, this does invite the question as to whether the reputation of the market has reduced the number of firms and consumers willing to engage in it.

That this is a concern for a financial sector already beleaguered by poor headlines is understandable.

However it does make assessment of market functionality more difficult. From a regulator’s perspective – are there barriers to competition or even missing markets?

We believe there is a debate to be had about what products and markets could exist and whether more entrants and innovation here might benefit consumers with greater choice and improved products.

We believe there is a debate to be had about what products and markets could exist and whether more entrants and innovation here might benefit consumers with greater choice and improved products.

Certainly, you cannot avoid the need to engage on what is a fundamental question: what impact will the ageing population have on the UK’s mortgage markets as we move forward?

That’s why we want to use today as a first step in a conversation with industry and consumer bodies about what options could exist in the future. And that is a conversation we want to continue over the autumn.

For example, what do we think the effects could be on the housing market as a whole? Does regulation need to adjust to foster more of a market in areas like equity release, whilst still protecting consumers?

Moreover, what scope is there to apply other more creative solutions and products to other key mortgage challenges, including areas like indebtedness? That leads me to our third topic.

Indebtedness panel

We know, for example, that the financial crisis created low-income growth around much of the world and that this, in turn, led to a corresponding growth in secured debt. A trend accelerated more recently by the paper wealth of rising house prices.

Now, the fact that people look to borrow against home equity is not a surprise. Nor is it necessarily a problem when house prices are rising, or if the intention is to extend or enhance the value of the property.

But there are other imponderables to factor in. Relative wage growth is one. Monetary policy another. At least 1.85 million UK homeowners have never experienced an interest rate rise. 

What this might mean going forward, is clearly a core question to unpick in today’s discussions on indebtedness.

So, for example, to what extent are we worried about the risks to homeowners here of overleverage? And what might the impact be on numbers falling into difficulties and arrears?

The FCA has already stressed the importance to lenders of making sure they assess the impact of rate rises on their mortgage books, particularly to vulnerable customers.

But we know credit conditions in mainstay markets remain comparatively tight. And this means less affluent groups are looking, in increasing numbers, to sources of non-mortgage debt for borrowings.

Future of the mortgage market

Now, unpacking that challenge is clearly of enormous consequence. It involves near-term changes that we can see reasonably well, including changes in areas like regulation.

But it also includes challenges that need to be viewed through a longer-lens. Including fundamental questions around areas like competition. Eighty per cent of the mortgage market sits in the hands of six main players.

That competition can play a key role in ensuring the mortgage market works well is in little doubt. If competition is functioning effectively, it should lead to lower prices, better consumer service and more innovation in the form of products that better address consumer needs.

Inversely, if competition does not work well, we know you quickly run into a host of potential issues.

So, for instance, consumers not buying mortgage products or services that are appropriate for their individual needs or circumstances. We might find customers paying too much for the products or services they receive or opaque pricing split between headline rates and fees. Or faced with a lack of real choice even though a number of firms may offer similar products.

Market features need to facilitate competition. Regulation is not the be all and end all, but can have an important impact on how well competition works – in fact, many aspects of the regulatory regime are designed to affect the ability of firms to enter or be present in a market and the type of products they offer.

But, we need to ensure that , in doing so, they do not put an unnecessary constraint on competition. Although much of the market is based around the idea of the 25 year mortgage with some kind of fixed or capped element, we have to ask ourselves whether that will always be the case.

The relevance of all these issues is at the origin of the commitment in our Business Plan to undertake  a market study starting early in 2016 on those aspects of the mortgage sector that may not be working well.


So, this has just been a quick assessment of where we stand today and the significant issues going forward, including on affordable housing; ageing society, indebtedness and the future of the mortgage market itself. 

The roots of many of the issues in those areas are both long and deep. But no less topical or important for it. Let me end with a final thank you to everyone here today for your attendance and input. The conversations we are going to have today will touch on issues that matter to millions of families around the country. Thank you.