In the wake of the Brexit vote all eyes are on market data that can provide some sense of direction for what the impact on the housing and mortgage markets will be.

The latest estimates from the Council of Mortgage lenders shows gross lending down 10% in the second quarter compared to the first quarter, after the rush to beat the stamp duty deadline boosted lending in quarter 1. However, gross lending is still 8% up on the level recorded a year ago showing that even in the run up to the vote lending was holding up.

Home purchase lending linked to transactions
The greatest concern for lenders over the Brexit result was the potential impact on housing transactions which have a close correlation to lending volumes. However, the lending figures from the CML suggest housing market activity has been holding up in the run up to the vote on 23 June.
This is consistent with Hometrack’s latest cities house price index which reveals that housing market activity in cities outside London has held up well, with sales keeping pace with new supply. In Manchester, for example, market conditions are in the strongest position they have been for several years and house price growth is running at 9% per annum.

While the strength of London’s housing market has attracted much attention in recent years, the reality is that regional housing markets have significant scope for house price growth. This is alongside increased sales volumes as households start to gain in confidence over the outlook for the economy,supported by record low mortgage rates. Indeed, with half the country voting for BREXIT there is a large cohort of households whose confidence will have been boosted by the result.

While there are upsides in regional housing markets, the London housing market was facing headwinds ahead of EU vote. Brexit has compounded the near term challenge in the capital of high prices, low yields, unaffordability, tax changes for investors and a lack of value for money for overseas buyers. The latest data shows supply rising faster than sales for the first time in the last three years pointing to a slowdown in house price inflation in the months ahead.

Hometrack analysis reveals that over the last 20 years events such as the dotcom bubble bursting in 2000 and the Iraq war in 2003 impacted far more heavily on housing turnover in London than the rest of the UK. This trend is likely to continue in 2016 with transactions volumes expected to fall by as much as 10% in central areas of London if past trends are repeated.

The impetus for home purchase lending is set to come from regional housing markets so long as the economic outlook remains supportive of buyer confidence. First time buyer demand has certainly picked up and this could be a key area for focus in 2016 and into 2017.

Buy-to-let consolidation
The buy to let (BTL) sector has been a strong area of net lending growth as demand for investment property has grown in recent years. Lenders have been prepared for a period of consolidation in the BTL market following recent stamp duty and tax relief change changes, this has been reflected in lending volumes over recent months which are down by 50% on a year ago according to the CML.

This is in part down to the rush to beat the stamp duty deadline but it is the outcome of the current consultation into tougher affordability tests on new BTL lending that could further impact demand.

A number of lenders have already taken pre-emptive measures by raising stress tests from 125% to 145%, which will force investors to increase equity commitment to fund purchases by up to 10% or more in a significant number of higher value markets. This is likely to encourage those landlords still looking to invest to move into lower value markets that offer the potential for greater returns.

In turn this presents a risk for lenders, as borrowers chase greater returns in lower value markets where demand for housing is less certain over time. . A potential move by borrowers up the collateral risk curve needs to be carefully monitored. The case for buying residential property as a long term investment is far from over but the fundamentals for making investment decisions have shifted.

We expect the stock of BTL loans to register a small consolidation in the months ahead as investors adjust their portfolios to meet the new market dynamics.

Short term boost for re-mortgaging
Re-mortgaging volumes continue to grow on ever lower mortgage rates, and, with speculation of another cut in interest rates in the near future to 0.25%, re-mortgaging could be further encouraged.

The crucial question is whether lenders will push rates down further in line with the cost of funding or hold off on lending rate reductions, seeking to support margins amid greater uncertainty for the outlook of the housing market.

More innovation in first time buyer segment?
It is worth remembering that despite all of the speculation around the impact of Brexit the fundamentals of the housing market have not changed.
We have record low mortgage rates and a wide imbalance between supply and demand. Demand for housing has not suddenly disappeared following the vote but the big question is whether buyers are happy to continue with new home purchases. The greatest potential for lenders is set to come from rising demand in lower value markets outside of London and the South East where transaction volumes appear to be holding up. More innovation in the first time buyer segment may be required to help fill the emerging gap in the BTL sector.

This article first appeared in Mortgage Solutions