Over recent years the FCA has given mortgage lenders more flexibility in the way they apply stress tests, but amidst global economic uncertainty we are continuing to see mortgage affordability tighten. But this is only part of the story of why our housing market remains subdued, with the need to modernise the home buying and selling process representing a critical challenge, and one that is perhaps more within our control.
Geopolitical and macroeconomic factors outside of lenders’ and consumers’ control will always have the potential to both knock confidence, and push up the cost of finance. That much is abundantly clear from the ongoing crisis in the Middle East, and its impact on mortgage rates. Recent research from Moneyfacts, for instance, highlights that the average two-year fixed rate has risen 91 percentage points since the start of the conflict at the end of February.
Meanwhile, sluggish wage inflation since the Credit Crunch, linked to the UK’s wider challenges around economic growth and productivity, means that these unpredictable events have a disproportionate impact on borrowers’ finances and ability to borrow sufficient capital.
The extent of this affordability issue was laid bare in the recent Lending Where We Live report by UK Finance. It showed that mortgage affordability has reached its tightest level since 2008, with homebuyers spending on average just over a fifth (21.3 per cent) of their gross income on mortgages. And given the variation in house prices and incomes regionally, it is even more acute in areas like North Norfolk, where 25.7% of income is taken up by mortgage payments.
The cost of inefficiency
However, the issues facing borrowers and remortgagors are compounded through our inability to fully address the uncertainty and inefficiency in our transaction process – something that is firmly within our control. In the housing landscape, given the mortgage rate volatility we have seen in recent years, speed and certainty in the transaction process have become increasingly important. Borrowers need to be able to move at speed to capitalise on rates before they expire, while buyers and sellers need the confidence that transactions can progress before circumstances change. But given the long-standing inefficiencies in our property market, this isn’t yet possible at national scale. And it’s not just the customer that suffers. Inefficiency in the system increases costs for all market participants, from lenders to brokers to conveyancers. Manual processes, duplicated work, a lack of upfront information, repeated AML and ID verification checks across a fragmented system mean more than nine million hours is lost annually. Paper-based processes are not just inadequate, they limit speed, consistency and security at critical stages. It’s no surprise that the average time to exchange on a property is now 4.4 months. All of this contributes towards unnecessarily high fall-through rates on transactions, with Santander estimating more than half a million sales a year do not complete. The lack of certainty and efficiency creates risk and raises costs for lenders, which in turn feeds through into pricing and product criteria – underpinning the affordability issues borrowers face. Improving the infrastructure through greater digitisation will reduce delays, provide greater security and certainty within the transaction, helping make the UK’s mortgage market more resilient and supporting greater liquidity.
Closing the gap
The good news is that there is a groundswell of support for change from industry, and work is underway to address these deficiencies across the industry, and from Government. HM Land Registry’s digital strategy and developments in Smart Data and digital identity point to progress, while we wait for the conclusions on the Government’s consultation into the Home Buying and Selling process, which should accelerate positive reform. In an incredibly fragmented ecosystem, collaboration across industry professionals, regulators and the government will be key to driving innovation and long-term progress. Initiatives like the Property Data Trust Framework from the Open Property Data Association (OPDA) highlights how shared digital property data, greater interoperability and more connected processes across all stakeholders has the potential to transform the industry, decreasing lengthy process times and fall-through rates. While better data quality and consistency is a must, the industry is also starting to realise the potential of technological change. For instance, our partnership with NatWest, enabled by the PEXA platform and PEXA Pay, has already started to deliver remortgages in just two working days.
Recognition to reform
Housing demand remains strong but it continues to be constrained by affordability pressures and slow, fragmented housing market processes. Whilst meaningful progress has been made across the property market, greater attention must now turn to the last mile of the transaction. Reducing friction, delays and security risk at the point of completion, where money is exchanged for home ownership, will be key to delivering a more seamless and secure home buying process.
As financial challenges weigh on home buyers and sellers, greater adoption of digitisation among industry leaders will play a pivotal role in improving customer experience and modernising the transaction process. It will not solve the UK’s affordability challenge alone, but it can help reduce the avoidable costs, risks and delays that make it harder for borrowers to move with confidence. Unlike the impact of geopolitical events, it is entirely within our control.
