Mortages – Chris Mallin Macro Perspectives

The key chart

**Resilient mortgage demand masks tough times for UK mortgage providers (% YoY)** (Source: Bank of England; CMMP analysis)

The key message

The relative stability/resilience of mortgage markets in the UK (and in the euro area) has been a consistent theme in the “messages from the money sector” during the COVID-19 pandemic.

UK mortgages grew 2.9% YoY in August, unchanged from July, and monthly flows have been steadily increasing from their April 2020 lows. This recovery has also been the main driver in the rebound in overall household borrowing, with mortgages accounting for £3.1bn in August’s £3.4bn increase in total lending to individuals. Looking forward, the number of mortgage approvals for house purchases also increased sharply in August to 84,700, the highest number since October 2007.

So far, so good – but there is always a “but”…

Current mortgage demand is very subdued in relation to past cycles despite the low cost of borrowing. One factor here is that, despite the deleveraging seen since 1Q10, the UK household debt-to-HDP ratio remains at 85%, the threshold level above with the BIS believes that debt becomes a drag on future growth. Unsurprisingly, the CAGR in HH debt (primarily mortgages) has trended between only +/- 1% nominal GDP growth since early 2016 – not much of a “growth story” here.

More concerning for mortgage providers, the effective rates on new and outstanding mortgages have fallen 28bp and 32bp respectively over the past 12 months to new lows of 2.14% and 1.72% respectively. The gap between the rate on outstanding and new mortgages was 38bp in August, indicating further downward pressure on net interest margins and income.

With subdued growth and further NIM compression ahead, mortgage providers will need to embrace digitalisation to deliver effective market segmentation/client knowledge, alternative revenue sources, further efficiency gains and more effective liquidity and risk management.

Seven charts that matter

The relative stability/resilience of mortgage markets in the UK (and euro area) has been a consistent theme in the “messages from the money sector” during the Covid-19 pandemic. Outstanding mortgage balances grew 2.9% YoY in August, unchanged from July but slightly below the 3.1% growth recorded in June. In contrast, the growth in consumer credit hit a historic low (-3.9% YoY) while corporate lending grew 9.7% YoY (see key chart above).

**Monthly flows have recovered steadily since their April 2020 lows** (Source: Bank of England; CMMP analysis)

The recovery in monthly HH borrowing flows since April’s lows (see chart above) has been the key driver in the recovery in overall household lending (see chart below). In August, for example, mortgages accounted for £3.1bn out of a total £3.4bn monthly flow.

**Mortgages are driving the recovery in household lending** (Source: Bank of England; CMMP analysis)

**Approvals suggest positive momentum** (Source: Bank of England; CMMP analysis)

Looking forward, the number of mortgage approvals for house purchases also increased sharply in August to 84,700, the highest number since October 2007. This partially offsets the March-June weakness – there have been 418,000 approvals YTD, compared with 524,000 in the same period in 2019.

So far, so good – but there is always a “but”…

**Current demand is very subdued in relation to past cycles in nominal and real terms** (Source: Bank of England; CMMP analysis)

Current mortgage demand is very subdued in relation to past cycles (see chart above), despite the low cost of borrowing. One factor here is that, despite the deleveraging seen since 1Q10, the UK household debt-to-HDP ratio remains at 85%, the threshold level above with the BIS believes that debt becomes a drag on future growth (see chart below).

**HH debt ratios remain elevated at the BIS threshold level** (Source: BIS; CMMP analysis)

Unsurprisingly, the CAGR in HH debt (primarily mortgages) has trended +/- 1% nominal GDP growth since early 2016. The chart below comes from CMMP Relative Growth Factor (RGF) analysis, which considers the rate of growth in debt in relation to GDP on a three-year compound growth basis with the level of debt expressed as a percentage of GDP. This graph illustrates the UK HH RGF on a rolling basis. There is little to get excited about in this chart.

**An unexciting “relative growth” story – rolling 3-year CAGR in HH debt versus rolling 3-year CAGR in nominal GDP** (Source: BIS; CMMP analysis)

More concerning for mortgage providers, the effective rates on new and outstanding mortgages have fallen 28bp and 32bp respectively over the past 12 months to new low of 2.14% and 1.72% respectively. The gap between the rate on outstanding and new mortgages was 38bp in August, indicating further downward pressure on net interest margins and income.

**The challenge of delivering top-line growth** (Source: Bank of England; CMMP analysis)

Conclusion

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

LT challenges – the key chart

**UK households save too little and borrow too much**
Source: ONS; ECB; CMMP analysis

The key message

The digitalisation of UK mortgage and savings is accelerating but structural and cyclical dynamics are challenging the strategies and profitability levels of building societies and compromising their ability to respond to the associated opportunities and challenges.

Summary of segmentation analysis

Building societies play an important role in UK financial services, helping their 25mn members to finance the purchase/building of their homes and to save.

The 43 societies currently account for 23% of outstanding UK mortgages (£337bn) and 18% of total HH savings (£297bn). The five largest account for c.90% of assets, members and industry profits. The balance sheet, members and annual profits of Nationwide, the UK’s largest building society, exceed the equivalent numbers for the rest of the industry combined.

CMMP analysis segments the industry by balance sheet, membership, infrastructure, P&L and geographic location and identifies four distinct tiers of building society.

It highlights how “the value” of members and branches and profitability drivers vary significantly across, and within, the four tiers and identifies those societies who enjoy neither the economies of scale of the Tier 1 societies nor the superior profitability (and income generation) of the smaller Tier 4 societies.

The Chairman of one society suggested recently, that many peers would be tempted to simply “trade through” the current crisis (supported by adequate capital) but that “they shouldn’t”. CMMP analysis not only supports this view but also provides a foundation for formulating the necessary strategic responses.

Please note that the summary comments above and the charts below are extracts from more detailed analysis that is available separately.