Mortgage Constraints: Implications for UK Housing Markets

17th Annual ERES ConferenceMilano

June 2010

Martin HaranMichael McCordDavid McIlhatton

University of Ulster

Introduction Residential Mortgages -Epicentre of GFC

Financial De-regulation

Enhanced Accessibility to Mortgage Finance

Expansion in Mortgage Product

An Expanded Mortgage Market

• Enhanced Efficiency through Competiveness

• Growth in UK Sub-prime Lending

• Financial Stimulus to Overheated Market

• Stability of UK Mortgage Market Post-GFC

Content Analysis of Literature

Statistical Evaluation

Key Stakeholder Interviews

Analytical Modelling of

Outcomes

Findings Dissemination

Methodological ApplicationMethodological Application

Q1 1990

Q3 1990

Q1 1991

Q3 1991

Q1 1992

Q3 1992

Q1 1993

Q3 1993

Q1 1994

Q3 1994

Q1 1995

Q3 1995

Q1 1996

Q3 1996

Q1 1997

Q3 1997

Q1 1998

Q3 1998

Q1 1999

Q3 1999

Q1 2000

Q3 2000

Q1 2001

Q3 2001

Q1 2002

Q3 2002

Q1 2003

Q3 2003

Q1 2004

Q3 2004

Q1 2005

Q3 2005

Q1 2006

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q3 2008

Q1 2009

Q3 2009 -

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

No. Of Loans (UK) UK HP

Number of Loans & House Prices (UK)

Q1 1990

Q3 1990

Q1 1991

Q3 1991

Q1 1992

Q3 1992

Q1 1993

Q3 1993

Q1 1994

Q3 1994

Q1 1995

Q3 1995

Q1 1996

Q3 1996

Q1 1997

Q3 1997

Q1 1998

Q3 1998

Q1 1999

Q3 1999

Q1 2000

Q3 2000

Q1 2001

Q3 2001

Q1 2002

Q3 2002

Q1 2003

Q3 2003

Q1 2004

Q3 2004

Q1 2005

Q3 2005

Q1 2006

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q3 2008

Q1 2009

Q3 20090

50000

100000

150000

200000

250000

300000

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

NI HP No. Of Loans (NI)

Number of Loans & House Prices (NI)

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20090

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000House Price Income

Separation of House Price to Income

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

2009 -

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Median FTB Advance Median Advance MoversMedian FTB Income Median Mover Income

Detachment of Lending and Income ratio

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20090

0.5

1

1.5

2

2.5

3

3.5

4Advance per income FTB Advance per income Movers

Relaxation in Lending Standards

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

200950

55

60

65

70

75

80

85

90

95

100

Loan-to-Value (FTB) Loan-to-Value (Mover)

Loan-to-Value

Jan 1999

Jun 1999

Nov 1999

Apr 2000

Sep 2000

Feb 2001

Jul 2001

Dec 2001

May 2002

Oct 2002

Mar 2003

Aug 2003

Jan 2004

Jun 2004

Nov 2004

Apr 2005

Sep 2005

Feb 2006

Jul 2006

Dec 2006

May 2007

Oct 2007

Mar 2008

Aug 2008

Jan 2009

Jun 2009

Nov 2009

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2 year fixed rate 95% LTV Tracker rateBoE Official Bank Rate, end month 3 month sterling LIBOR10 yr nominal par yield on Govt Securities

LTV & The Cost of Borrowing

2005 2006 2007 2008 20090%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Under 125k 125-175k 175-250k 250-500k Over 500k

PROPERTY AQUISITION BY VALUATION (FIRST-TIME BUYERS)

2005 2006 2007 2008 20090%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Under 125k 125-175k 175-250k 250-500k Over 500k

PROPERTY AQUISITION BY VALUATION (HOME MOVERS)

Preliminary Analysis

Analytical Modelling

Where: K is equal to capital (Value of Loans)Y is equal to incomeD represents the level of debt income multipleLTV is the loan-to-value at time tHP represents house priceC is the capacity to service interest payments

Model Analysis

ANOVA (89.70, p <.005)

MAVAIL = 12712.82β0 +11.05β1 - 0.168β2 – 75.15β3 – 0.027β4

Conclusions

• Contraction in risk appetite• Current inflexibility in lending decisions• Wholesale removal of 100% LTV Products• Turbulent period of realignment (Lag),

economic (macro & micro) balance • The panacea of financial and economic

uncertainty will create ongoing discord.