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: 20 June 2013 | Author: Bob Pannell

  • The imminent change of guard at the Bank of England takes place against the backdrop of a modestly improving UK economy, albeit one that appears to rest upon a pick-up in consumer spending and a recovering housing market.
  • Funding conditions, helped by the funding for lending scheme, continue to look favourable and are supporting more competitive mortgage pricing and availability and a gradual resumption of lenders' risk appetite.
  • Our forward estimate of gross mortgage lending in May resonates with other survey evidence of strengthening house purchase activity. It also suggests that the long-term contraction in remortgage activity may be drawing to a close.

Economy

There appears to be a growing belief amongst commentators that the worst for the UK economy may now be over. Independent forecasters have become progressively more optimistic over recent months, with June's compilation of economic forecasts compiled by HM Treasury now heralding 0.9% GDP growth for this year.

The Bank of England’s May inflation report neatly captured the prevailing mood, when for the first time in six years the Bank felt able to simultaneously revise up its projections for economic growth and revise down those for inflation over the next three years.

The prospects seem to be for a modestly improving economy, but one that remains susceptible to bad news.

One particular concern, highlighted by the Ernst & Young Item Club among others, is the limited evidence of longer-term rebalancing of our economy. Near-term growth prospects appear to rest largely upon a pick-up in consumer spending and, in part at least, tied to a recovering housing market.

Household spending has been subdued for much of the post credit crunch period, but has shown renewed signs of life. According to ONS, consumer spending has contributed positively to wider economic growth since late 2011, and been the largest and most consistent contributor over the past year.

Chart 1: Contribution to economic growth, year on year, %

 Market commentary June 2013 GDP

Source: Office for National Statistics

 

The latest GfK survey suggests a less despondent mood among consumers. This is likely to stem in large part from the relatively benign labour market situation.

Although the unemployment numbers have bobbled around for some while - the reported headline figure for the three months to April fell by 5,000 to 2.51 million – the bigger picture is one in which employment gains over the past year are being sustained. The number employed rose 24,000 to 29.8 million through to April, and was 432,000 higher than a year ago.

Offsetting this to some degree, the real purchasing power of wage earners continues to be eroded. Rates of pay continue to be subdued and to trail some way below consumer prices. Inflationary pressures have not yet fully abated - the headline CPI figure went back up to 2.7% in May, from 2.4% in April - but the bigger picture is one where there has been a material slowdown since late 2011 and this may have helped to lift consumer confidence.

The more favourable backdrop of recent months means that Mervyn King bows out as Governor of the Bank of England at mid-year on a relatively quiet note.

Although he has personally voted for further stimulus in the form of additional QE for much of this year, the last such action – to increase the Bank’s asset purchases by a further £50bn to £375 billion – was actually announced nearly a year ago.


Funding for lending scheme

Much of the recent monetary policy action has centred on the funding for lending scheme (FLS), the terms of which were recently extended.

FLS metrics published earlier in the month held few surprises. The figures serve mainly to illustrate the major efforts being made by some large banks to restructure their balance sheets.

Participating firms have drawn £16.5 billion under the scheme, a fraction of the eligible maximum amount. Meanwhile, net lending to the real economy by such firms edged £300 million lower in the first quarter and has fallen by £1.8 billion since the middle of last year.  

A news release from the Bank notes that net lending flows to individuals has mostly been positive. Industry net mortgage lending has in fact expanded by £3-4 billion over the comparable period.

Funding costs have fallen significantly since FLS was announced, and this has had a beneficial impact for rates on mortgages and other products. The Bank notes that some fixed rate offers have fallen by a full percentage point since mid 2012, and our own figures corroborate this.

We would also draw attention to the improving LTV profile of lending over the past year.

A pick-up in lenders’ risk appetite has seen wider competition for low deposit mortgages. And as a result, we have seen a discernible, if modest, improvement in the proportion of higher LTV loans that are actually being advanced.

This applies across much of the mortgage market, but is most striking in the house purchase space, helped in part by specific government initiatives such as Newbuy and Help to Buy.

Chart 2 illustrates how things have improved for first-time buyers, although it is worth noting that movers have also benefitted.
 

Chart 2: Proportion of loans advanced to FTBs, by LTV band

Market commentary June 2013 FTB LTVs
Source: Regulated Mortgage Survey


This is a welcome development, but its gradual nature means that many households still depend upon the bank of mum and dad to buy their first or second property.


Housing and mortgage markets

Our forward estimate is that gross mortgage lending accelerated strongly in May – to £14.7 billion. This would be a fifth higher than April and 17% higher than a year ago.

This suggests around 55,000 mortgaged house purchase transactions in May (excluding buy to let deals, which have recently been averaging 6-7,000 a month). This is materially higher than the 43,000 transactions reported for April, and would represent the best monthly performance since the start of the credit crunch (with the exception of December 2009, when an earlier stamp duty holiday distorted activity levels upwards).

While the direction of travel is clear and fits well with the more positive housing surveys from RICS and others, our forward estimate does imply somewhat stronger house purchase activity than we had been expecting. This may reflect a degree of pent up sales following the extended spell of poor weather earlier this year.

As the Bank of England’s agents noted, government-backed incentive schemes have been contributing to the gentle rise in demand for new homes over recent months.

And reports note an encouraging start for the equity loan element of the Help to Buy scheme. These promising early signs suggest that the sector will readily absorb the £3.5 billion three-year funding allocated in the March Budget. The incremental impact of such measures on new build volumes is difficult to gauge.

Although the main story from recent figures is that of stronger house purchase activity, there has also been a subtle improvement in the tone around remortgage activity over recent months.

Business volumes have trailed near 15-year lows for some while, but credit conditions surveys have been anticipating a pick-up in remortgage demand.

Both the Bank of England’s approvals data and our own figures indicate modest gains in recent months, suggesting that the long-term contraction in remortgage business may be coming to end. This is likely to have been helped by the more competitive mortgage deals now on offer.

Remortgage advances totalled £3.4 billion in April, down just 3% from a year earlier. Our forward estimate implies a similar improving narrative for May.