Consolidation to fragmentation

The lending market has undergone a significant amount of consolidation over the last couple of years. HBOS was swallowed up by what has now become the Lloyds Banking Group. Alliance & Leicester and Bradford & Bingley were taken over by Spanish giant Santander, who got its foothold in the UK back in 2004 with the acquisition of Abbey. We’ve also seen a number of building societies being rescued by fellow societies, Nationwide being one of the most active. Numerous lenders left the market altogether.

All this activity has left the market in short supply of lenders, with only a handful of any real significance remaining. According to the Council of Mortgage Lenders, the five largest lenders accounted for 82% of all lending activity last year compared to 2007 when the top five accounted for 64% of lending. While the CML has warned that further marketing consolidation may ensure this pattern persists in the long term, all is not lost.

For those of you who can remember the marketplace in the early 1980's, you will have seen a similar picture. But the most interesting part was what happened after that flurry of deals, and I think that we’re seeing a repeat of that performance now.

We are slowly but surely starting to see the lending market fragment again. We have already seen new entrants come into the marketplace over the past year or so, such as Metro Bank, Aldermore and Precise – and there are more waiting in the wings for FSA approval, Tesco being the most noteworthy. Both Royal Bank of Scotland and the Lloyds Banking Group are selling off parts of their businesses. Tentative steps are being taken into the UK market by some foreign investors, Bank of China being a good example. I have also heard that some building societies are looking to expand their lending to the intermediary sector.

OK, so none of these lenders are going to make a material difference to the market on their own. But together they may lend a combined billion pounds or so, and at least that’s a start.

The rationale for these new players is not rocket science. Quite simply they believe that the UK is at the bottom of the economic cycle and whilst there is undoubtedly still some pain to come for the economy, the housing market is seeing levels of returns that it hasn’t experienced for a long time in areas of lending that are lower risk. Lenders are backed by investors, whether they be retail or wholesale investors and what any investor wants is good return on the money they put into a business. With the traditional safe havens of gold and oil at peak levels and normal savings rates languishing at an all-time low, the mortgage market is starting to become an attractive proposition again with a healthy return on investment and the downside risks somewhat behind us.

In the words of Warren Buffet, one of the most successful investors in today’s world, “Whether we are talking socks or stocks, I like buying quality merchandise when it is marked down." Most would agree that the UK housing market is a quality investment and over the last two years it has been marked down, so all you investors with a few billion to spare, come and fill your boots with our housing market. We’ll welcome you with open arms if it helps really get things moving!