Economist Rupert Seggins takes a look at some of the consequences of the new mortgage market rules and changes in lending standards. The purpose of these changes has been to make borrowers (and by extension lenders) less likely to get into trouble during a crash. But these changes have had consequences. Tightening standards means that progressively higher income households are the only ones able to afford to buy a house. This blog argues that we may be moving to a new normal: higher-income buyers, lower risk in the market, 30% fewer first time buyers with a mortgage each year than before 2008. The focus of this blog is on the home buyer market and not the market for buy-to-let.

2. In short…
• The rules of the UK mortgage market have changed
considerably since the crisis.
• The purpose has been to make borrowers (and by extension
lenders) less likely to get into trouble during a crash.
• These changes have had consequences. Tightening standards
means that progressively higher income households are the
only ones able to afford to buy a house.
• The new normal: higher-income buyers, lower risk in the
market, 30% fewer first time buyers with a mortgage each year
than before 2008.
2

3. The UK housing market – cause & effect
3
UK planning
restrictions
Tougher policy
stance on risk
Continued
population
growth
Expectations
that prices
will continue
to grow
Tighter
lending
criteria than
before 2007
Richer, lower risk home
buyers; fewer
mortgages; lower home
ownership rate
Globalisation &
technology
creating
inequality

4. The focus in this pack is on these factors
4
Tougher policy
stance on risk
Tighter
lending
criteria than
before 2007
Richer, lower risk home
buyers; fewer
mortgages; lower home
ownership rate

5. Fewer mortgages – the new normal
5
• Since 2007, mortgages have
become cheaper. But it takes
considerably longer to save for
a deposit.
• The biggest driver of the first
time buyer mortgage market is
the ability to raise a deposit.
• We estimate that a “new
normal” in the first time buyer
market with an average 15%
deposit requirement is
328,000 transactions per year.
This is 29% below the pre-
crisis average of 416,000.

6. Changes in risk – when do borrowers default?
6
• By and large, falling
house prices by
themselves are not
enough to cause a big
surge in mortgage
problems.
• You need a combination
of falling house prices
alongside either
increased unemployment
(2007) or a spike in
borrowing costs (1990).
• Or all three…

7. Lower rates, longer terms – easier debt servicing
7
• Since 2010, average mortgage
interest rates have fallen from
3.8% to 2.7%.
• During the same period,
average mortgage terms have
risen from 21 years to 24 years.
• This has led to a £1,800 fall in
annual repayments on an
equivalent sized mortgage.
• First time buyers have mainly
benefitted from lower rates,
while home movers have
benefitted from longer terms

8. Increasing resilience to any future rate rises
8
• Since the early 1990s,
lower rates have enabled
households to take out
larger loans relative to
incomes.
• But owing to more
affluent borrowers, rates
would have to rise
considerably from where
they are now for interest
payments relative to
incomes to get back to
where they were in 2007.

9. The Mortgage Market Review – joint borrowers & more brokers
9
• The Mortgage Market
Review, which took effect in
April 2014, introduced
tougher criteria for
households to meet before
being granted a mortgage.
• This prompted two
reactions from mortgage
borrowers: 1) more joint
borrowers in response to
the stiffer income tests; 2)
greater use of mortgage
brokers in response to the
extra complexity

10. The importance of the Financial Policy Committee
10
• The Bank of England has been
using its new powers to try to
make the mortgage market
more resilient.
• The “ideal” is the case of Hong
Kong. In 1997, house prices fell
by 66%, but very few
mortgages fell into arrears.
• Thus far, the Bank of England
has used one trick. A cap on
the proportion of mortgages
being issued with a loan size
relative to incomes larger then
4.5 time. It worked.

11. Higher income borrowers a consequence of lower risk
11
• The average house buyer is
looking less and less like the
average household.
• Average house buyers’ incomes
have largely kept up with price
rises since 2007. High prices
may be more sustainable than
commonly thought.
• On current trends, one third of
the mortgage market would be
made up of “wealthy
achievers”. An increase from
one fifth in 2010.

12. Summary – lower risk, higher incomes, higher prices
12
• The mortgage market has
changed a lot since 2007.
• Policymakers and lenders have
worked to make the market
more resilient to spikes in
interest rates & unemployment.
• This has lowered the risk of
borrowers getting into trouble.
But it also means fewer
mortgages, fewer middle to
lower income borrowers and
has helped embed the trend of
falling home ownership.

13. A word from our lawyers
This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as
providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be
taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in
any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently
verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or
completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any
use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of
the RBS Economics Department, as of this date and are subject to change without notice. The classification of this document is
PUBLIC. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh
EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority. © Copyright 2015 The Royal Bank of Scotland Group plc. All rights
reserved