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Published: 19 April 2013 | Author: Bob Pannell

  • House purchase activity has remained relatively positive over recent months, particularly for first-time buyers.
  • We continue to see better availability of mortgage credit, greater competition and narrowing mortgage spreads.
  • The recently announced Help to Buy mortgage guarantee scheme is still embryonic in nature; its significant firepower offers the potential to improve activity but not until 2014.

Economic background

Recent weeks have brought mixed news on the wider economic front. The broad consensus seems to be that the UK will avoid a triple dip recession, but continue to experience subdued economic growth for some while yet. First quarter GDP estimates – being published on 25 April – will report negligible positive growth, according to most commentators.

Inflationary pressures remain elevated - consumer price inflation held steady at 2.8% in March, for the second month in a row, and its highest level since last May, according to the Office for National Statistics. As the Bank of England has been cautioning for some time that inflation is likely to move temporarily back above 3% level over the coming months, and that it is willing to tolerate this, it came as no surprise that the Monetary Policy Committee left monetary policy unchanged in April.

Labour market developments have been less positive than we have become used to, with figures for the three months to February showing a rise in unemployment (to 2.56 million), a dip in numbers in work and continuing very weak rates of pay growth.

Housing and mortgage markets

Despite the lacklustre economic backdrop, conditions in the housing and mortgage markets continue to show signs of improving.

Seasonal considerations meant that industry gross lending dipped to £10.6 billion in February, from £11.6 billion in January. By contrast, the seasonally adjusted gross lending figure increased for the sixth month in a row to £12.8 billion. Allowing for distortions related to earlier stamp duty concessions, this represents the strongest monthly figure in four years.

Our forward estimate is that gross lending, on an unadjusted basis, recovered to £11.6 billion in March. This would have been 8% lower than a year earlier, although a meaningful comparison is made harder because house purchase activity bunched a year ago because of an expiring stamp duty holiday for first-time buyers. Taken overall, gross lending in the first quarter was broadly on a par with the same period last year.

As has been the case for some while, these aggregate figures continue to mask relatively strong house purchase numbers and soft remortgage activity.

Chart 1: Number of mortgage approvals, seasonally adjusted

 Market commentary April 2013 approvals2

Source: Bank of England


Our Regulated Mortgage Survey figures for February underline the relatively positive picture for house purchase over recent months, particularly for first-time buyers. And overall property transactions, including those bought for cash, continue to look resilient according to HMRC figures.  All in all, the current indications are consistent with the CML’s forecast of moderately higher activity this year.

The latest Bank of England data show a slight dip in seasonally adjusted house purchase approvals during the first few months of 2013, but they have nevertheless continued above 50,000 for the sixth month in a row.

While a succession of housing initiatives by the coalition government will have played a part, the improvement in funding markets over the past year or so, reinforced by the incremental benefits of the funding for lending scheme, has been the key catalyst behind improvements in housing activity.

Chart 2: Evolution of mortgage spreads

Market commentary April 2013 cc

Source: Bank of England credit conditions survey, Q1 2013

Note: Positive balances indicate that lenders reported/expected narrower mortgage spreads compared with previous quarter.


The latest credit conditions survey, undertaken by the Bank of England before the March Budget, underlines the further increase in the availability of mortgage credit that is occurring, alongside greater competition for business, narrowing mortgage spreads and a measured increase in risk appetite.

Lenders report stronger house purchase demand (both mainstream residential and buy to let) and remortgage demand over the recent past, and expect this to build further this quarter.

Help to Buy

As expected, the recent Budget featured a package of new and expanded housing measures. From our perspective, the most important were the two Help to Buy elements.

The equity loan measure immediately replaces and builds on the principles of the FirstBuy scheme. Under the £3.5 billion scheme, the government provides an equity loan worth up to 20% of the value of a new build home, repayable when the home is sold.

The initiative has been warmly welcomed by house-builders, reflecting both its proposed scale and the fact that they will no longer have to co-finance the equity loan portion. NewBuy continues for the time being, although it seems likely that financial incentives will divert builder enthusiasm to the new scheme.

Official estimates indicate that 74,000 loans may be supported over the three year life of the equity loan scheme. As some of this will substitute for activity that would have happened anyway under pre-existing schemes, the overall net benefit from the scheme in terms of incremental new build activity will necessarily be smaller.

The other Help to Buy element is still very much embryonic in nature - a proposed mortgage guarantee scheme, that will offer government guarantees to support up to £130 billion of higher loan-to-value mortgages (those above 80% and up to 95% LTV) over the 2014-16 three year period.

This is an impressive-looking firepower. Treasury estimates that the scheme could support 190,000 such mortgages annually. Coincidentally, our Regulated Mortgage Survey figures suggest that this is similar to the volume of higher LTV lending that has taken place over the past three years.

Chart 3: Recent higher LTV lending, number of loans

Market commentary April 2013 highltvs

Source: Regulated Mortgage Survey

The policy intentions appear to be to lower the deposit hurdle for credit-worthy households to get on to the housing ladder for the first time or move home, and to make it easier for equity-constrained borrowers to remortgage. When giving evidence at a post-Budget Treasury Select Committee hearing, the Chancellor George Osborne presented Help to Buy as a time-limited intervention designed to correct a market failure. This implies that he views lenders’ limited appetite to offer higher LTV loans as a temporary cyclical phenomenon.

With few details about the scheme made publicly available at the time of the Budget or since, it is understandable that a great deal of uncertainty surrounds the initiative and that it has attracted very mixed reactions.

Recent consumer research that we commissioned, highlights that individuals face a very diverse range of circumstances, which may be inhibiting their ability to buy their first home or move within the owner-occupied sector. While the pricing and availability of mortgages are often relevant factors, they do not necessarily head up people’s list of concerns.

When asked whether more low-deposit mortgages would help them specifically, nearly half of respondents thought it would make no difference to their chances of buying a new home in the next two to three years, and even among those who were more positive, most thought it would only make things slightly better.

Most commentators recognise that the scheme has the potential to give economy a short-term boost, and the key areas of difference are around the unintended or longer-term consequences of the policy.

A key issue - touched on by the OBR’s Steve Nickell, when he gave evidence to the Treasury Select Committee - seems to be the extent to which any extra housing demand that is forthcoming is matched by higher levels of new build activity.