It is unprecedented how many times the word ‘unprecedented’ has been used in recent weeks. Yet it’s true and evidence can be seen clearly in the functioning of the UK’s residential property market.
We have long been accused as a nation of an unhealthy obsession with home ownership and house prices. Despite the rise of the rental market in recent years, nearly two-thirds of UK households are owner occupiers and 35% of household wealth is tied up in property. In previous downturns, early policy interventions have focused on trying to ignite the property market through liquidity schemes for mortgage providers, increases to stamp duty thresholds, and the Help to Buy scheme to encourage purchases. Government actions this time, because it’s a healthcare crisis first and forefront, have pretty much frozen the property market. It therefore is fair to say we are facing an unprecedented situation and there are significant implications for the lending market.
What has happened?
- The Government has effectively told home buyers and sellers to delay transactions in line with social distancing measures
- Mortgage providers have been inundated with requests for payment holidays following Government guidelines that lenders must honour a three-month time frame
- Lenders have withdrawn products from the mortgage, development and bridging markets as they focus on managing existing customers and assess uncertainty over valuations
- Multiple process complications have arisen – inability to conduct on-site valuations, temporary closure of the Scottish Land Registry and filing challenges with the English Land Registry, and difficulties accessing removal services
- Projects involving renovation or refurbishment could be hit by delays as construction sites close down or staff shortages build
The combination of these factors will largely stop the purchase market for a period of time, particularly once the existing pipeline of mortgage lenders is worked through. Under social distancing rules, there will be no in-person viewings of occupied properties and drive-by / desktop valuations will become the only option. The impact is already being felt with Zoopla reporting a 40% fall in demand from buyers and forecasting an overall drop of 60% for the second quarter.
The flow-through to house prices and valuations is uncertain as transaction volumes will fall to an extent that makes comparisons limited in significance, particularly when assessing a move away from normal market conditions. The introduction of a material uncertainty clause by some valuers will compound this and make it harder for lenders to place reliance on given valuations. This is evident in the removal of high Loan-to-Value (LTV) loans by both high street lenders and non-bank lenders which will temporarily close the market to first-time buyers. The lasting impact on valuations will depend on the demand suppression that lingers which will be a function of the state of the economy once normality returns. Determining factors will include the extent to which we are left with higher unemployment rates, reduced availability and higher cost of credit, and the volume of forced sellers.
How are we responding?
As a specialist bridging lender, we have to assess the state of the market as a whole in making our risk decisions and therefore transaction volumes and mortgage / development finance availability are key considerations. We recognise that the freeze in the property market will have a significant short-term impact on the ability for our existing clients to successfully exit their facilities, through a sale or refinance, in line with contractual repayment dates, and we are working with each of them on a case by case basis.
Whilst other lenders have temporarily withdrawn from the bridging market as they assess the impact on their existing portfolio, we are determined to retain our presence in the market and keep lending but in a prudent manner given the current climate. As such, for the time being we are focusing on residential transactions up to £2.5m with a small reduction in our maximum LTV and a minimum 12-month term and detailed analysis of the possible impact on successful completion of projects and exits. We will maintain the underwriting flexibility and speed that underpins our approach but recognise some of the process challenges will lengthen the timing of completions. We are working with our external partners to stay attuned to emerging best practices and will be accommodative of desktop valuations being used in most cases depending on the risk profile of the deal.
Our technology infrastructure fully supports a remote-based workforce and allows us to conduct electronic identity verification to reduce process barriers that others will be facing. Our current pipeline of opportunities is as strong as ever and we will continue to support our introducers and their clients in providing tailored capital at a time when funding sources will be more limited in the market.