Executive Summary

The prospects for UK mortgage lending currently look brighter than for many years. Buoyant sales, from the second quarter of 1996 onwards, look set to make the year's final total for gross lending close to £71.19bn, an increase of 24.6% against the 1995 figure.

Key Note forecasts that, at current prices, gross advances will grow strongly throughout 1997 and 1998. Thereafter, growth will slow, but even so, gross advances for the year 2000 are predicted to exceed £98bn, nearly 38% higher than in 1996. In real terms, gross mortgage lending is forecast to grow by an average 8.4% per annum over the period, but most of this will be achieved in 1997 and 1998.

In 1995, 59% of gross mortgage advances came from building societies, with banks accounting for 37.2%. Other lenders accounted for the balance of 3.8%. By the end of 1997, however, over £200m of the industry's assets will have moved from the building societies sector, into that of the banks. This is caused by the conversion of some of the largest building societies into public limited companies. The effects of this dramatic change in the structure of the market is yet to be fully realised.

By the year 2006, there will be 21.9 million households in the UK, 1.7 million more than in 1996. However, the average household size is reducing, an increase of 40.5% being forecast in the number of households occupied by single persons. The market is not helped by a shortage of building land which, together with tight planning restrictions, is preventing builders from responding fully to increased demand.

The key first-time buyer group is set to fall to 7.1 million in the year 2009, 24.6% below 1995. Analysts, however, believe that this decline will slow when the pent-up demand of cautious first-time buyers, who have held back as a result of the recession, is released onto the market.

Flexibility of mortgages and direct marketing seem certain to accelerate. Increases in interest rates, anticipated after the forthcoming General Election, are focusing attention onto fixed rate products. `Buying-for-let' mortgages, fuelled by tax changes in the Budget and an injection of funds from institutional investors, are highlighted as a growth area. Mortgages backed by house price bonds, which treat housing as a financial asset are also set to grow. They are appearing on the market in packages which offer homeowners a reduced or zero rate of interest, in return for a share in any capital appreciation when the property is sold.

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