As we head into the second half of 2023, the housing market remains in uncertain territory.
With the prospect of weaker market conditions looming over the next six months, here are the top five questions lenders are asking right now.
What are the real risks in mortgage lending today?
The biggest risk to lenders is thinking they can carry on lending in the same way as they have for the last five years. We’re going to see much lower levels of house price growth over the next five years so lenders can no longer rely on house price inflation to grow their lending books.
The future is about using data to make better business decisions and enhancing customer service. Product types such as new-build, flats and high LTVs have always been treated more cautiously. This remains true in a general sense, but we believe data and insight can help unlock new opportunities for safe and profitable lending by identifying risks early and accurately. There has been a lack of product innovation around the credit risk of the asset but improvements in data availability, valuation quality and understanding local market performance can drive change.
Should we dial back the use of automated valuation models due to the current climate?
We’re not recommending lenders make any significant changes but increased scrutiny over performance and direction of the market is key. We’ve enhanced the frequency, granularity and transparency of our model performance monitoring to ensure the lending community is fully equipped to make informed decisions.
We have yet to see widespread, rapid falls in house prices. Even if we did, our model calibration process is designed to capture changes in the liquidity and uncertainty of the market and reflect that in the AVM confidence levels. This ensures lenders remain within their valuation risk appetite.
During the global financial crisis, Covid and in the current market, our AVM confidence levels are proven to be reliable and accurate.
Where are the opportunities in buy-to-let?
Landlords are facing multiple challenges. High interest rates are forcing many to exit the market.
Those who remain have to contend with two main headwinds; new regulations from the Renters Reform Bill aimed at improving the standard of private rented accommodation and the upcoming Energy Performance Certificate (EPC) minimum requirements, now expected in 2028.
To meet the minimum EPC C requirements, for example, many landlords will need to invest in their portfolios. Or, they may decide to sell the properties in need of the most work back into the owner occupier market and reinvest that cash into higher-rated homes to rent back out.
To uncover such lending opportunities and support their plans, lenders and brokers must have conversations with landlords. First to find if they plan to stay in the market and then the borrowing options available to them to boost or refurbish their properties.
Should we be more conservative with lending on new-builds?
New-build lending represents net lending growth for lenders so they should have a market share of this borrowing. Lenders should not focus too much on the historic performance of the new-build market because a lot has changed since the 2000s.
The quality of new homes has improved a great deal and we can see from the data Hometrack produces that more recent vintages of new-builds, particularly flats, are holding their value much better.
The energy efficiency of newly built homes is also a major selling point for buyers. From our research last year, we found that 76% of consumers said they preferred to buy a new build because of its energy credentials.
How much do EPC ratings really affect property prices right now?
It’s a complex and difficult call to make. There are few homes that have been improved purely to boost energy efficiency. Even fewer have also had valuation evidence captured immediately before or after through a survey or a sales event. Instead, they are extended or renovated and at the same time, energy efficiency improvements are made. The uplift in value is more down to the extension works.
Until there are much more universal impacts caused by low EPC ratings, such as the ability to get a mortgage, questions around affordability or other tax penalties, we don’t see property prices being that affected.
Theo Brewer is director of analytics and consulting at Hometrack
