From 1st July the Council of Mortgage Lenders is integrated into a new trade association, UK Finance. For the time being, all UKF mortgage information will continue to be published on this website, and UKF member-only mortgage information will only be available here.

UK Finance represents around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation takes on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Please go to www.ukfinance.org.uk for wider content and updates from UK Finance.

Analysis

Published: 20 March 2012 | Author: Bob Pannell

  • From a low base, house purchases have strengthened in recent months. This does not simply reflect greater first-time buyer numbers ahead of the stamp duty concession ending on 24 March.
  • Despite UK bank rate remaining at ½% for three years and the recent benefit from European Central Bank liquidity measures, several UK mortgage lenders succumbed to cumulative funding pressures by raising their standard variable rates. Though unwelcome news for those directly affected, the aggregate impacts in the mortgage market and wider economy are likely to be modest.
  • The launch of the NewBuy scheme marks a useful addition to the toolkit that participating lenders have to address the spectrum of financial circumstances that would be borrowers face. While NewBuy will enable households to buy a new property, its overall market impact will depend on the scale and composition of eventual take-up.

Economy

There have been few major economic surprises in recent weeks. The latest unemployment figures showed a headline increase of 28,000 in the three months to January, continuing the less negative picture of a month earlier.

Survey data for the services and manufacturing sectors has been positive, although the figures for construction activity continue to be erratic and there is a danger of these “tripping” the UK back into recession when first quarter GDP figures are published in April.

The underlying picture, however, remains one of subdued near-term growth, with the prospect of a strengthening economic recovery as the year goes on.

An important factor influencing the strength of recovery will be how quickly the pressure on real incomes abates in line with slowing inflation. Although inflationary pressures have fallen sharply in recent months, from last September’s peak rate of 5.2%, the resurgence in oil prices this year provides a useful reminder that the future downwards trajectory may not be as rapid or smooth.

Recent fiscal numbers have been better than projected, but Chancellor George Osborne has strongly hinted that his 21 March Budget will be fiscally neutral (so continuing the approach followed in the autumn Pre-Budget).

With most of the tax measures featuring in his deficit reduction plans already implemented or announced, a growing focus in this and subsequent budgets will be driving through deep public spending cuts. Osborne may choose to nuance how the pain is distributed, but there is little prospect of this being a “feel good” Budget.

Housing and mortgage markets

Property sales remain fundamentally weak, but have shown strong year-on-year increases since the closing months of 2011. Allowing for the seasonal factors that depress activity over the winter months, the underlying picture for house purchase activity continues to show some buoyancy.

HMRC figures are only available up to January, but Bank of England approvals figures have been perky. Seasonally adjusted approvals totalled nearly 59,000 in January, the highest monthly figure since the short-lived bounce in late 2009 (associated with a previous stamp duty concession coming to an end).

We believe that lending for house purchase remained brisk through February. Our forward estimate is that gross mortgage lending totalled £10.7 billion in February. This would be the seventh month in a row of higher year-on-year lending. 

Chart 1: Monthly house purchases, 000s, seasonally adjusted

HP transactions 

Source: HMRC and Bank of England

Although numerous commentators, including the CML, have referred to first-time buyers looking to beat the end of the stamp duty concession on 24 March, it is worth noting that it is not just first-time buyers driving firmer property sales activity. Our Regulated Mortgage Survey figures up to and including January show only minor changes in first-time buyers as a share of house purchase lending.

The pick-up in activity appears to mark a generalised improvement, with the latest RICS survey also reporting that its members were no longer predicting further house price falls. This may reflect household sentiment stabilising in anticipation of a recovery in real incomes, but wider economic uncertainties make it difficult to judge how well the upturn will persist.

Low interest rates have been an important factor mitigating the housing market downturn, both in the UK and across much of the rest of Europe, according to the latest European Housing Review.

In early March the Bank of England, as widely expected, voted to keep its bank rate at ½% and asset purchase (quantitative easing) programme at £325 billion. This marked the third anniversary of unchanged and historically low official UK interest rates. Most commentators see interest rates remaining very low for the foreseeable future. When February’s Inflation Report was drafted, financial markets anticipated bank rate remaining at or below 1% three years ahead and the first rise not occurring until late 2013 at the earliest.

A few days before the Bank’s interest rate decision, several lenders began announcing higher standard variable rates (SVRs).

The rationale for such actions is clear, as the Bank of England, amongst others, has been signalling for months that UK banks were experiencing challenging funding conditions as a result of Eurozone uncertainties, and that this could feed through into the availability and pricing of mortgages.

But, as we commented last month, the European Central Bank’s move in December, followed up a few weeks ago, to provide Eurozone banks with more than €1 trillion of cheap three-year funding has helped funding market conditions to improve since the turn of the year.

Despite this recent respite, funding conditions are more challenging than a year ago, however. And as BBC business editor, Robert Peston, noted, albeit in the context of reporting on Lloyds’ annual results, UK banks are also experiencing higher funding costs from repaying government loans under the Special Liquidity and Credit Guarantee Schemes.

Higher mortgage rates are never welcome news for borrowers, of course, but most households should have a range of coping strategies that they can deploy. Where household finances are especially tight, there is some potential for an increase in arrears, but our sense is that the aggregate impact will be very modest. And, to the extent that this batch of SVR increases prompts borrowers who are not directly affected to plan for their own mortgage costs eventually rising, and, where possible, to start building some wriggle room within their own budgets, there may be a mitigating effect on the evolution of arrears over the next few years.

The SVR increases may prompt a modest pick-up in remortgage activity over the coming months. Remortgage approvals were marginally higher in January, but the seasonally adjusted figure – a little under 32,000 – continues the softer pattern of the past few months.

More generally, the overall economic impact from higher SVRs is likely to be rather modest, especially as they will not show through in the headline CPI inflation figures (as these exclude mortgage interest payments).

Recent weeks have also been busy on the housing policy front, with the launch of a reinvigorated Right to Buy (RTB) and the NewBuy scheme, announced in last November’s housing strategy. The latter is a mortgage indemnity scheme that will assist potential buyers of new build properties that have no more than a 10% deposit. A Scottish variant of NewBuy has also been announced and should become operational shortly.

There has been quite a lot of media criticism of the NewBuy scheme, much of which reflects a poor understanding of its design. The scheme aims to help a particular group of households – those with good credit characteristics but who are for whatever reason deposit-constrained. There is no question of participating lenders diluting their normal credit standards, and this is one of the key reasons why no specific targets have been set for take-up under NewBuy.

While first-time buyers, and especially those without access to the bank of mum and dad, may be attracted to it, NewBuy is not an exclusively first-time buyer scheme. The CML and some of our member firms have highlighted the deposit constraints facing ”second steppers” (the first-time buyers of a few years ago). It is by no means inconceivable that these existing home-owners with a proven track record of mortgage repayments find favour with NewBuy lenders.

In short, both the scale of take-up under NewBuy, and the borrower mix, are unknown at this stage, and this makes it difficult to accurately gauge what the initiative will deliver. It is not intended, nor is it likely, to transform the housing market. Nevertheless, the CML welcomes NewBuy as an important addition to lenders’ toolkit in addressing the various needs of would be borrowers.

It will likely take a couple of years to accurately gauge how beneficial its impact has been. More immediately, although it will take time for the RTB and NewBuy schemes to build, they have the potential to offset the dip in first-time buyer activity that the end of the stamp duty concession on 24 March seems likely to produce (see our budget submission).