20 February 2013
Higher and more persistent inflationary pressures represent a greater headwind, but we still expect the funding for lending scheme to lift activity over coming months.
House purchase activity was robust into the start of 2013, on the back of better mortgage availability and pricing, and we share the Bank’s confidence that this will continue over the coming months.
With the exception of some positivity in the labour market, economic news in the last month has been neutral to disappointing.
The UK economy shrank by 0.3% in the last quarter of 2012 leaving growth flat for the year as a whole.
The IMF edged down its 2013 forecast for the UK economy (now expecting growth of 1% down from 1.1% previously), and reinforced its message that the UK’s anaemic economic performance might necessitate an easing back on the Government’s planned fiscal tightening.
Inflation was 2.7% in January for the fourth month in a row and the main development from February’s Inflation Report from the Bank of England was a worsening in the outlook for inflation since the Bank last reported in November. Inflation is now expected to increase further and may breach 3% by the summer and could remain above the target rate of 2% for the next two years or more.
Against this backdrop the Governor painted a picture of a further period of protracted pressure on living standards and a slow economic recovery. With this in mind, the MPC kept monetary policy on hold to support the recovery; even though inflation remains persistently above target, this is still viewed as a temporary, albeit protracted phenomenon.
The Bank’s view is that FLS, together with more general improvement in funding conditions, has started to have an impact on the availability of finance to households and businesses and will have a more material impact on lending activity in the first half of 2013. In the short-term, this improved credit availability has an offsetting effect on the impact of higher inflation on household finances.
The next set of FLS metrics (due out on 4 March) will allow a more detailed look at the progress and success of the FLS.
Housing and mortgage markets
Sentiment in the housing market continues to be positive. The recent RICS survey reports higher sales in January for the fourth month in a row. There has been a dip in the pipeline of new business since the start of the year – with a fall in both the number of new enquiries from buyers and the number of properties newly put up for sale – but surveyors suggested that the poor weather may have contributed to this.
The latest Bank of England figures (Tables A5.3 and 5.4) confirm that 2012 ended on a slightly lacklustre note. Gross lending, at £11.4 billion in December, was 11% lower than November and 7% lower than a year ago. The outturn for 2012 as a whole was better than for 2011 - £142.6 billion, up from £140.8 billion. Although the underlying position has improved modestly since the summer, gross lending in the second half did not match the relatively buoyant levels of a year earlier.
Our forward estimate is for gross lending of £10.4 billion in January, down 9% on December and 3% lower than January last year, again this dip could be associated with the bad weather in January.
Looking at the components of gross lending, figures from the Regulated Mortgage Survey show that there has been a shift towards house purchase and away from remortgage. House purchase and remortgage lending were largely the mirror image of the 2011 picture – the story of 2012 has been of resilient house purchase activity but soft remortgage activity, while the opposite was true in 2011.
Chart 1: Number of house purchase loans and remortgages, % change year on year
Source: CML Regulated Mortgage Survey
This shift towards house purchase lending, along with the increase in gross mortgage lending in 2012 as a whole, seems at odds with the drop in net lending.
Net lending in 2012 was £7.4 billion last year, down from £9.5 billion in 2011. A significant fall in lending to housing associations, who have moved towards capital market funding, may be part of the explanation.
The latest Bank of England mortgage approval figures point to the continuation of this underlying trend for house purchase lending to make up an increasing proportion of gross lending.
When adjusted for seasonal factors, house purchase approvals increased again in December (for the fifth consecutive month) and - at nearly 56,000 – were the strongest since the start of 2012 (when lending was buoyed by the looming end to the stamp duty concession for first-time buyers).
On the other hand, remortgage approvals (seasonally adjusted) dipped a little for the second month in a row but activity appears to have shown signs of stabilising.
In the Inflation Report the Bank signalled that it expects mortgage approvals to increase further in coming months - underpinned by expectations of lower bank funding costs and incentives provided by the FLS.
One change that could be indicative of increased risk appetites already being exhibited by lenders has been the pick-up in the number of first-time buyers - with 2012 seeing the largest number of borrowers buying their first home for five years. A modest pick-up in the proportion of lending to borrowers at higher LTVs (above 90%) and a fall in mortgage rates at higher LTVs appear to be playing a part.
The Governor noted a few weeks ago that mortgage rates, especially for high LTV mortgages, have fallen, and separately the minutes of January MPC meeting highlighted that rates on new fixed-rates mortgages had continued to fall in December, with rates on 2-year deals at 90% LTV falling by over 30 bps.
Similarly, figures from our Regulated Mortgage Survey show that pricing has eased since last summer across all LTVs (see chart 2), and are broadly comparable with a year ago for LTVs at or below 80%.
Chart 2: Pricing of 2-year fixed rate mortgages by LTV, %
Source: Regulated Mortgage Survey
The key finding is that FLS along with improvements in wider funding conditions appear to be delivering better pricing and volumes (at least in first-time buyer space).
In addition to mainstream house purchase lending, buy-to-let lending continues to show resilience. In total £16.4 billion was advanced for BTL mortgages, up from £13.7 billion in 2011. Around half of this is to borrowers refinancing their existing loans, leaving a total of 73,600 loans to borrowers newly purchasing a BTL property. BTL house purchase accounted for 12% of all mortgaged house purchases in 2012 – recovering somewhat from a low of 9% in 2010 but still some way off the peak in 2008 when BTL accounted for 17% of these transactions.
Even though above target inflation continues to put pressure on household finances, our latest arrears figures suggest that many households have continued to manage these pressures. The number of borrowers experiencing mortgage arrears continued to trend downwards through the last quarter of 2012.
The persistent inflationary pressures and the protracted economic recovery imply that pressure on household finances may lift more slowly than seemed likely a few months ago. But as a result it is likely that rates will stay lower for longer which will continue to support borrowers experiencing, or on the verge of experiencing, mortgage payment problems.
However the implication is a stronger headwind against which the FLS will need to work to boost activity levels through 2013.
- Name: Caroline Purdey