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Published: 20 March 2013 | Author: Bob Pannell

  • With the Chancellor facing limited room for fiscal manoeuvre, he may see changes in the monetary framework as helpful to supporting UK economic growth.
  • The recent picture of relatively strong house purchase numbers and subdued remortgage activity continues.
  • The funding for lending scheme appears to be helping support modestly higher first-time buyer activity.


This year’s Budget takes place against an interesting backdrop.

As well as the ongoing economic challenges - neatly encapsulated in the recent downgrade of UK sovereign debt by Moody’s - we are roughly mid-term in terms of the UK political cycle. On top of that, the financial regulatory landscape changes fundamentally from April and mid-year sees a change in regime, when Mark Carney takes over as Governor of a more powerful Bank of England.

While the Office for Budget Responsibility report that is published alongside today’s Budget statement will give an updated assessment about the path of fiscal retrenchment, we will learn little that is new about the underlying state of the UK economy.

Our disappointingly weak industrial production figures for January - also echoed in weak figures across the eurozone - provide a stark reminder that near-term growth prospects are weak.

The latest set of private economic forecasts, compiled by the Treasury, suggests that economic growth this year will be less than 1%.

On top of this, recent GDP figures offer little evidence of any rebalancing of the economy. Notwithstanding all the talk of fiscal austerity, government spending has actually edged higher over the past year, as the Chancellor George Osborne has allowed the automatic stabilisers to kick in. Business investment has stalled, while overseas trade has detracted from growth, despite the sharp fall in sterling a few years back.

Chart 1: Spending's contribution to GDP growth, Q4 2012, %

 Market commentary March 2013 gdp2

Source: Office for National Statistics


And, as we highlighted last month, the UK continues to be experiencing inflationary pressures. February’s headline CPI figure rose to 2.8%, after standing at 2.7% for four months in a row.

The Chancellor’s response to the UK’s sovereign downgrade indicates that he plans to stick with his fiscal plans, and to rely on monetary activism to help generate economic growth.

The headline parameters of monetary policy - base rates and the size of the asset purchase programme - have not changed for some while, although last November’s decision to transfer accumulated interest payments on gilt purchases to the Treasury and the recent weakness of sterling both imply a modest easing.

Although the Monetary Policy Committee continues to evaluate the impact of the funding for lending scheme (FLS), it has considered further relaxation measures. February’s vote shows that sentiment has begun to shift in favour of further quantitative easing (QE), but policy has continued “on hold” for the time being.

The FLS metrics for Q4, published earlier this month, provide few new insights. Total drawings under the scheme amount to nearly £14 billion, against a maximum figure - on the CML’s reckoning - that has now grown to about £82 billion. By contrast, net lending by FLS participants fell by £2.4 billion during the quarter. As well as corroborating that lending into the real economy is pretty flat, these figures also reflect the fact that a few large lenders continue to shrink their balance sheets.

Given a degree of ambivalence as to what FLS is currently delivering on the ground, especially with respect to business lending, there have been calls for extending or in some other way re-focusing the scheme.

On top of this, various MPC members have made suggestions on how to ease monetary policy further. The most high profile of these came from Paul Tucker, when appearing at the Treasury Select Committee in late February, when he raised the prospect of negative interest rates. Meanwhile, Charlie Bean recently stressed the importance of how policy-makers communicate their actions.

These comments are perhaps best viewed in the context of the debate on the UK’s monetary framework, recently advocated by incoming Bank of England governor Mark Carney. This future remit of the MPC may well be a theme taken up by the Chancellor when he presents his Budget.

Housing and mortgage markets

As Paul Smee’s blog notes, further policy intervention in the housing market is expected in the Budget. And, if so, it is important that any policy objectives are clearly articulated.

Despite the headwinds from a challenging economic backdrop, there have continued to be modest signs of improvement, both in activity and in sentiment, in our sector.

The latest Bank of England figures show that mortgage lending is in line with our market forecasts, with somewhat slower than expected activity in December broadly offset by a better than expected January out-turn.

According to the Bank, gross lending was unchanged at £11.4 billion in January and 6% stronger than a year ago. Our forward estimate is that gross lending was £10.5 billion in February. This would have been 8% lower on the month, reflecting seasonal factors, but up 1% on last year.

Beneath the aggregates, the underlying position does not appear to have changed greatly over recent months - relatively strong house purchase numbers and subdued remortgage activity.

 Chart 2: Property transactions, UK, seasonally adjusted, 000s 

Market commentary March 2013 hmrc3

Source: HMRC


Allowing for the fact that seasonal factors normally depress activity levels during the early months of the year, the HMRC transaction volumes show that the underlying level of activity has increased a little recently. And if we strip out those periods when stamp duty concessions have distorted the picture, activity levels appear to be their strongest since the housing market buckled in 2008.

Our latest Regulated Mortgage Survey figures confirm the positive trend for house purchase numbers. Loans for house purchase in January – at 38,300 loans – were 11% higher compared to January last year.  

The improvements in credit availability, risk appetite and pricing, as a result of more favourable funding market conditions and the FLS, appear to have nudged first-time buyer activity higher in recent months. First-time buyer numbers – at 15,900 in January - were 25% higher than January last year. And for the third consecutive month, first-time buyers accounted for 42% of all house purchase loans.

Remortgage lending, meanwhile, remains subdued - £3 billion was advanced in January, a modest increase compared to December but still 24% lower than January last year. Remortgage approvals - seasonally adjusted – in January fell by 8% on December and remain close to two year lows.