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Published: 20 November 2012 | Author: Bob Pannell

  • House purchase and remortgage activity both appear to have picked up recently, and this should be supported by an improvement in the availability and pricing of mortgages.
  • The Funding for Lending Scheme is likely to have made an early positive impact, helping to counter some of the negative pressures associated with a protracted and weak economic recovery.

Housing and mortgage markets

There are signs that the market weakness of recent months may be coming to an end.

Our forward estimate is that total gross lending recovered to £12.9 billion in October. This would reverse the sharp dip reported for September, and imply that lending was 4% higher than the year earlier.

Chart 1: House purchase and remortgage lending, £ million

Market commentary November 2012 activity final

Source: CML estimates

House purchase and remortgage activity are both likely to have picked up in October, in keeping with the underlying improvement in Bank of England approvals data over recent months.

Special factors have distorted the monthly pattern of house purchase activity, but the underlying picture appears to have settled into a pattern of modest year-on-year growth.

By contrast, remortgage activity had been very subdued through 2012, with low back book rates limiting incentives to refinance onto new deals. However, over recent months the cumulative effect of increases in SVRs by some mortgage firms and more competitive mortgage deals – on the back of better funding conditions – appears to have re-kindled some remortgaging appetite.

While this is from a low base - the Bank of England reported 28,000 remortgage approvals in September - it does suggest that remortgage activity may act as less of a drag on overall lending going forwards.

An important development for the market is that the upward pressure on new mortgage rates - evident during the first half - has shown signs of abating in recent months.

Chart 2: Average quoted mortgage rates, new lending, %

Market commentary November 2012 rates

Source: Bank of England

As the Bank of England notes in its recent Inflation Report, average rates on fixed rate mortgage products - which represent about two thirds of new mortgage lending - have eased back lately.  This reflects improvements in European funding conditions more generally and Funding for Lending Scheme effects. While much of the initial impact has focused around lower LTVs, there has been greater competition at higher LTVs and also some firms newly offering high LTV products.

But it is early days for the FLS, and the Bank rightly continues to urge caution regarding the likely scale and timing of FLS effects. The first FLS metrics – relating to drawdowns under the scheme and net lending flows for the third quarter – will be published on 3 December, but may not be particularly revealing.

An important factor relevant to the longer-term impact of FLS will be the extent to which household demand - still constrained by the wider pressure on household finances - picks up in response. While a dramatic improvement seems unlikely, the latest RICS survey, reporting the strongest reading for house buyer interest in nearly three years, has been interpreted as an encouraging sign by some commentators.


The economic backdrop for the housing and mortgage markets remains challenging, but not dramatically different from recent months..

Notwithstanding better than expected third quarter GDP growth – up 1% - the latest assessment of economic prospects by the Bank of England is for relatively sluggish economic growth. Some of this echoes the weaker prospects for the eurozone, but it also reflects a temporary spike in inflationary pressures – CPI rose to 2.7% in October, up from 2.2% the month before – on the back of higher food and fuel prices, which in turn defers a recovery in real incomes until the second half of 2013.

As expected, the MPC chose not to embark on any fresh quantitative easing for the time being. In part, this reflects an understandable desire on the part of the authorities to carefully assess the impact of the FLS over the coming months.

We did see what amounts to a modest easing of monetary policy, however, as the Treasury announced that the Bank would be transferring to it £35 billion of accumulated interest payments on its gilt purchases. The indications are that the Office for Budget Responsibility may count this as a short-term positive for its fiscal projections. If so, the combined effect of this and earlier downward revisions to estimates of public sector net borrowing this year may allow a more comfortable fiscal backdrop to the Chancellor’s autumn statement in early December than seemed likely just a few weeks ago.