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: 21 June 2012 | Author: Bob Pannell

  • Mortgage lending and housing transactions have see-sawed in recent months, but the underlying position appears to be broadly flat.
  • The government has responded to ongoing Eurozone concerns by heralding a “funding for lending“ initiative that is likely to feature housing. Details are expected shortly.
  • Meanwhile, the Bank of England has signalled that it will provide UK banks with unlimited liquidity if a full-blown Eurozone crisis hits.

Housing

Despite the various headwinds facing the UK economy – and not least the ongoing pressure on household incomes - the housing market has performed reasonably strongly since late last year.  Seasonally adjusted property transactions have been above year-earlier levels since November.

The pattern of housing transactions has been distorted by the ending of the stamp duty concession in late March. Property sales fell back by more than a quarter in April, following a surge in March. According to our Regulated Mortgage Survey, the drop off in activity was much greater for first-time buyers - barely half the level of March.

The see-saw pattern of lending appears to have continued in May, with our forward estimate being that gross lending totalled £12.2 billion, reflecting stronger house purchase and remortgage activity.

Mortgage approvals in April were a little higher than March on a seasonally adjusted basis. This is consistent with our view that activity levels are broadly flat.

Unfortunately, a number of one-off factors, such as the dreadful weather, the Diamond Jubilee weekend and the London Olympics, are set to distort a range of market indicators over the coming months, and it may be the autumn before we can more accurately gauge market trends.

Economy

Meanwhile, the Eurozone crisis rages on, adding materially to the uncertainties surrounding short-term economic prospects.

The recently announced €100 billion bail out of Spanish banks and Greek election results have provided the briefest of reprieves. Spanish and Italian bond yields have moved higher, dangerously so in the case of Spain.

This latest bout of turbulence has triggered a significant change in the mood music from the UK authorities, and most notably from the Bank of England. This appears to be motivated by two factors. First, an awareness that the continuing state of heightened Eurozone uncertainty is itself entrenching greater caution on the part of banks, businesses and households, and so damaging short-term growth prospects. But also an understanding that matters in the Eurozone might be coming to a head, with an associated risk of material adverse impacts for the UK.

Both elements feature in the “large black cloud of uncertainty” referred to by Bank of England Governor, Mervyn King, in his recent Mansion House speech.

The Chancellor of the Exchequer, George Osborne, speaking at the same event, heralded measures aimed at countering the negative impact on UK growth prospects. They are similar to those recommended a few weeks earlier in the IMF's assessment of the UK economy, but do not include any recalibration of the fiscal strategy.

A key pre-emptive measure is activation of the Extended Collateral Term Repo (ECTR) facility. The first auction took place successfully on 20 June, with banks taking up the full £5 billion of cash that was on offer.

The terms on offer are considerably more relaxed - cheaper funds for longer - than when ECTR was originally announced last December. This is a rare and significant departure of Bank policy, and tells us that alarm bells are ringing in Threadneedle Street.

This is prudent contingency planning.

The message from our central bank is clear and unambiguous. It will provide UK banks with whatever liquidity they need as circumstances unfold, buying the government time to address the wider repercussions should the Eurozone be at risk of collapsing.

Another measure announced during the Mansion House speeches is the “funding for lending” initiative.

The initiative appears to contain some elements of the Special Liquidity Scheme and Project Merlin, but few details are currently available.

The aim, however, is clear - to counter the adverse impacts on loan pricing and availability arising from the funding pressures on UK banks. This reflects a concern on the part of the authorities, as expressed in the minutes of the latest MPC meeting, that such pressures may be undermining monetary measures – notably QE – to keep credit flowing through the economy.

Recent months have seen higher bank funding costs feed through into more expensive mortgages and loans to SMEs.

Chart 1: Annual average rate charged, new mortgages, %
new mortgages 

Source: Bank of England

 

So what do we currently know about “funding for lending”?

It is a joint initiative between the Bank of England and HM Treasury.

It is intended to be a temporary initiative, made necessary by current exceptional circumstances.

The scheme seeks to exploit the high credit standing of the UK government to channel funds with a maturity of several years at rates below current market rates to banks that sustain or expand their lending to businesses and households.

Although recent comments by MPC member Adam Posen suggest that the critical need is to boost lending to businesses, the Chancellor did refer specifically in his Mansion House speech to aspiring home-owners.

And, speaking to the Centre Forum think tank a few days after the Mansion House banquet, Business Secretary, Vince Cable, signalled that housing is very high up on the government’s radar, and that the government may also be looking to underwrite loans tied to construction of affordable homes.

As further details about the “funding for lending” initiative emerge over the coming weeks, we should get a better handle on whether the main intended impact is to bear down on pricing or to boost the wider availability of mortgage credit.

There has been one other important shift in policy over recent weeks.

A few days prior to the Mansion House speeches, Bank of England Deputy Governor, Paul Tucker, cautioned that, in the current challenging environment, prudential regulation risks forcing banks to be unnecessarily risk averse.

While Mr Tucker’s concerns were specifically with regard to liquidity, the Chancellor expanded on the theme in a less well reported part of his Mansion House speech, when he said that there was “an important role here for the new Financial Policy Committee in ensuring that capital and liquidity regimes balance the need for strong banks with the need to avoid a pro-cyclical tightening of financial conditions”. He then followed this up by announcing that the Government will amend the Financial Services Bill to give the FPC a secondary objective to support economic growth as well as stability.

We welcome this official recognition that regulatory pressures have a material cumulative impact on lenders’ behaviour.