Better use of data will increase margins this year

Article originally published in The Intermediary April 2024 – page 91

Housing is always a key election battleground, and it looks set to be again when Britain finally heads to the polls some time before January 2025.

All the parties will espouse more ambitions for the sector. The Conservative Party says it aims to build 300,000 homes a year. Labour says they’ll build 1.5 million affordable first homes over five years and reform stamp duty. The Liberal Democrats want to build 150,000 social and council homes a year. All sensible aims and yet, delivering on these promises is a different story.

The Spring Budget should have been an opportunity for the government to outline much more detailed plans to support the housing market, but it was conspicuously absent from the Chancellor Jeremy Hunt’s speech.

The uncomfortable truth is that the country’s housing crisis is deepening and even if government could push developers to up the number of new home starts, it has missed its opportunity to do so. To increase the supply of new homes, which are desperately needed, there must be a commercial incentive for developers.

In terms of supporting buyers, lenders must fill the gap and that means understanding all the nuances of what is today, a very complex market when you consider the niches and margin decisions lenders must make. What you know and can demonstrate affects your capital position as well as any market driven decision to be in a particular market.

Lenders must be willing to lend to support purchasers because, whichever party wins the next election, even if it does commit to meaningful policies that will encourage developers to deliver at sufficient scale, it will take years to add to housing supply.

That leaves the housing industry to cope with the status quo today, and there are several challenges facing lenders in the current market. Savills is forecasting a 3 per cent fall in house prices over this year, before recovering and rising 3.5 per cent next year. They see housing transactions at just over 1 million this year, rising slowly over the next five years. Rents will rise by an eye-watering 18.1 per cent by 2028. These numbers, although estimates, reflect the financial situation faced by households across the UK. Homeowners are squeezed, with budgets having to cover much higher remortgage costs. Inflation over the past two years has pushed up fuel bills, the cost of the weekly food shop, broadband, home insurance, car insurance, mobile bills – all have risen considerably.

Rent rises are perhaps the biggest dampener on residential transactions. Higher mortgage costs for private landlords are eating into renters’ ability to save for a deposit. The supply of rented homes is shrinking, putting more upward pressure on rents.

With such a significant squeeze on homeowner and first-time buyer affordability over the past two and a half years, developers are cautious. Real estate specialist JLL forecasts 150,000 construction starts in 2024, the same number of as there were in 2023.

Mortgage lending forecasts are also modest. UK Finance expects gross lending to fall 5 per cent over the coming year to £215 billion and lending for house purchase to fall 8 per cent to £120 billion. Arrears are expected to rise to 128,800 cases by the end of the year, meaning banks and building societies will have to set more aside to cover rising default costs.

The good news is that the affordability shock is set to peak this year. Inflation is expected to fall back to target and the Bank of England has dropped its outlook from the possibility of further monetary tightening to sticking to the current position. January and February trading this year has been buoyant. Spring trading data will be crucial.

With the picture as it is, lenders are faced with the reality that protecting their own balance sheets and profitability is down to them and them alone. A smaller pool of borrowers means competition is rife, allowing little leeway to raise mortgage rates. Maintaining sufficient margins therefore comes down to operational efficiencies and the pressure is on to achieve those quickly.

Gaining efficiencies and competitive head start by investing in the right data services can help to speed up the correct assessment of risk, mitigating balance sheet exposure to falling property values, rising loan-to-values and therefore affordability pressure. Streamlining workflow processes using better technology saves time and resource. With better data, lenders can make better decisions that protect margins in what is set to be a challenging market for some time yet.