When any set of rules or regulations are imposed, there are often unintended consequences that unfold as a result. These aren’t always negative, but just aren’t particularly expected when the new rules are first worked out.
Take something as simple as the smoking ban. Whether you are a smoker who views it as an inconvenience or a non-smoker who has rejoiced in the cleaner air and health benefits, you probably wouldn’t have predicted the popularity that electronic cigarettes have now enjoyed. Enterprising tobacco giants probably had plans in the pipeline as soon as a ban was first mooted, but to the wider public the devices seemed to appear overnight.
The main intention of the Mortgage Market Review was to reform the mortgage market to ensure it works better for consumers. More specifically, there was an urge to prevent borrowers – not to mention lenders – overstretching themselves as the gap between earnings and property prices continues to widen. The regulators were determined that the mortgage market learned from the mistakes it made before the global financial crisis. By introducing MMR, it intends to avoid a repeat. The days of so-called free and easy credit – not to mention loan-to-value ratios of 100% and beyond – are something the powers that be are determined to consign to the history books.
While it may be too early to tell for sure whether the Mortgage Market Review is having the desired effect, it isn’t too soon to see some side effects of the new rules. The tabloids may be focussing on the nature of the new affordability questioning (particularly on some of the more bizarre questions now being asked of prospective borrowers) but the more measured commentators are talking about gradually increasing interest rates and a slight cooling in the rate of mainstream lending growth. The Council of Mortgage Lenders itself described the impact of the MMR as “subtle rather than dramatic”. But this influence could soon become more sharply felt.
Over the last couple of months, while the mainstream mortgage market has adapted to the requirements of the MMR, the bridging sector has enjoyed a new growth spurt. A year-on-year improvement of 24% has brought annual gross bridging lending to £2.17bn according to the latest West One Bridging Index. While bridging loans were included within the MMR, the sensible approach of the regulator means that the affordability assessments aren’t applicable in most scenarios.
However, post-MMR delays experienced by many lenders in the mainstream market have leaked into their buy-to-let and commercial operations. So to avoid delays, property investors are increasingly looking to avoid the usual suspects from the start and seek alternative methods of finance.
Of course while the MMR may or may not prevent further outbreaks of rash mortgage lending, it somewhat ignores the bigger issue plaguing the UK housing and mortgage market – namely the supply shortage.
New housing starts may be gradually increasing according to the latest ONS data, but it’s worth remembering that they are rising from the deepest of dips. In order to build more sustainable growth this time around, we need to avoid making the same mistakes that were made pre-crash, and involve more imagination in our housing strategies. It’s open to discussion whether this is done through converting space previously used for commercial purposes to residential use, or through concentrating funds on projects that increase supply rather than just make obtaining mortgage finance easier. But there is certainly room for more innovation than was displayed previously. As mainstream lenders focus their attention on simpler, residential cases, there is an enormous appetite for alternative finance specialists such as bridging lenders, who are establishing themselves as the go-to solution for developers.
For the MMR to be considered a success, we need to witness not only sustainable growth in the mortgage market, but a sustainable fall in the number of borrowers and lenders getting themselves into a tight spot. And until the supply shortage is fully addressed, the UK will continue to find itself running into the same problems. So here’s hoping the Government heed the need for more imaginative thinking on the issue.
Going back to unintended consequences, the fact the bridging market has gone from strength to strength in tricky economic conditions, and now continues to prosper, while the MMR has only slightly impacted mainstream lenders, could all be seen as a situation most didn’t predict.
However, it is certainly an outcome that has proved beneficial to borrowers, investors, and the whole UK property market alike.
Once the bedding-in process is complete, let’s hope the MMR can continue to have other positive side effects. For now, it’s clear that borrowers are spluttering less, the lending industry is breathing more easily, and the property market as a whole is looking much rosier.
