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Published: 21 January 2013 | Author: Bob Pannell


We start 2013 on a more positive note than a year ago, even though the UK economy has barely grown.

This may seem counter-intuitive, at a time when the euro area is experiencing its own double-dip recession and when the Bank of England and other commentators are cautioning that UK GDP might contract in the fourth quarter (the first official estimate of Q4 performance will be published on 25 January).

But there are a number of reasons for optimism.

Although the global backdrop remains challenging, the risks associated with the eurozone crisis appear less critical than at the start of 2012, thanks to the actions of the European Central Bank and European policy-makers more generally.

A greater confidence that eurozone difficulties can be resolved over time has meant better funding market conditions since last summer. UK banks have benefitted even more, following the introduction of the funding for lending scheme (FLS) in August.

While it is still early days for the FLS, and so uncertainties around its effectiveness are understandable, the scheme clearly adds another monetary weapon to the Bank of England’s armoury. Recent MPC decisions to refrain from further quantitative easing (the previous increase to £375 billion was completed before November’s MPC meeting) in part reflect an expectation among policy-makers that the FLS will stimulate lending over the coming months.

We look at the ramifications of FLS for the mortgage market in the next section.

Recent labour market conditions also represent a significant positive. The adult unemployment rate currently stands at 7.8%, down half a percentage point on a year earlier. And, as we highlighted in our recent market forecast paper, employment – at 29.6 million - is up half a million over the same period.

It is also worth noting that although inflationary pressures are showing signs of “stickiness” – the headline Consumer Prices Index (CPI) was 2.7% in December 2012, unchanged for the third month in a row – they are materially weaker than a year ago. While price increases still outpace the typical growth in earnings, the gap is now much narrower and the headwinds facing consumers may begin to moderate.

There are numerous downside risks, of course, especially given the drawn out nature of the rebalancing of our fiscal position and the UK economy more widely. But while the economic backdrop for the housing and mortgage markets remains challenging, there is at least the prospect of some light at the end of the tunnel.

Housing and mortgage markets

Numerous indicators testify to an improving housing market.

The latest credit conditions survey from the Bank of England highlights that the UK enjoyed both better mortgage credit availability and lower mortgage pricing in the fourth quarter.

Chart 1: Overall mortgage credit availability, % net balance

mc January 2013 cc survey

Source: Bank of England credit conditions survey 2012 Q4
Note: Positive balances indicate that lenders reported/expected higher credit availability than previous quarter.


The survey also notes a pick-up in mortgage demand across the board – house purchase, remortgage and buy to let.

Recent lending figures largely corroborate this view.

We estimate that gross mortgage lending in December was £11.7 billion which, although a few percentage points weaker than a year earlier, confirms the return of lending onto a stronger path. Our December figure implies total lending for the year as a whole of £143 billion, up modestly from 2011.

Chart 2: House purchase and remortgage activity, number of loans

Source: CML Regulated Mortgage Survey


Our Regulated Mortgage Survey figures suggest a resilient fourth quarter for house purchase activity. For most months in 2012, house purchase lending has been above year-earlier levels. Loans in November were up 6% on October and 13% higher than a year ago. First-time buyer activity looks especially strong, with loans accounting for an unusually large 41% of all house purchase loans for the second consecutive month.

While remortgage lending continues to show some softness, this is against a backdrop of very subdued activity through 2012, as a result of low back book rates limiting incentives to refinance onto new deals. However, the position seems to have stabilised over recent months, as more competitive mortgage deals - on the back of better funding conditions - re-kindle remortgaging appetite.

Forward looking indicators, including the latest Bank of England approvals data, suggest that the picture for house purchase and remortgage activity will change little over the coming quarter. Seasonally adjusted house purchase approvals were up in November and - at 54,000 – 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). Meanwhile, remortgage approvals (seasonally adjusted) dipped a little compared with October.

While some commentators have begun to question whether the FLS is working, the Bank rightly cautions that the appropriate metric for evaluating the FLS is what would have happened in its absence, and that it was not expecting the FLS to materially affect mortgage lending volumes until early 2013.

As the Bank of England has noted, the FLS has helped to improve funding conditions for UK firms, over and above the wider benefits flowing from eurozone policy announcements. Longer-term funding costs for UK banks are substantially lower than last summer, although the rate of further improvement has slowed over recent months.

It is worth noting that the amount actually drawn under FLS – about £4 billion, according to the Bank’s early December report - is relatively small so far. This suggests that much of the initial benefit from the FLS has been an indirect one, as UK lenders need to raise less money from wholesale or retail sources. With limited volumes of issuance, spreads have continued to tighten, and in some cases fallen back to pre-crisis levels.

The recent announcement by the Basel Committee of less stringent global liquidity rules for banks, a wider range of eligible assets and a longer deadline for implementation, appears to have had little market impact, but serves to emphasise that banks face few short-term funding pressures.

Bank of England figures confirm that mortgage pricing has fallen, with new lending rates dropping by as much as 60bps for medium term fixed rate products since FLS was launched.

The credit conditions survey shows lenders expecting further improvements in mortgage availability and spreads, and higher borrower demand, in the first quarter of this year.

Recent household surveys show that raising a deposit and getting a mortgage are beginning to loom less large as impediments to buying a home. We would expect such sentiment to improve further over the short-term.

Chart 3: Perceived barriers to property purchase, % of respondents

mc January 2013 bsapt

Source: BSA property tracker survey, December 2012


While economic headwinds are likely to be an inhibiting factor, there is clearly some upside potential for the housing market.