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: 18 July 2013 | Author: Bob Pannell

  • The Bank of England has given its clearest signal to date that higher interest rates remain a long way off.
  • Improvements in the cost and availability of mortgage credit are underpinning a meaningful recovery in the housing market. In recent months, we have seen the strongest performance for mortgage lending since 2008.
  • Favourable conditions in the housing and mortgage markets look set to continue for some while.

UK economy

A generally more positive picture has continued to build over recent weeks.

The latest labour market figures continue to show modest improvement, with headline unemployment for the three months to May down by 57,000 to 2.51 million and employment up by 16,000.

Inflationary pressures have edged up to 2.9% in the year to June – the highest figure for more than a year – but remain consistent with the Bank of England’s view that headline CPI would only briefly exceed 3% in the summer.

In an effort to dispel market turmoil caused by US official comments about the future path of quantitative easing in that country, the Bank has made concerted efforts to play down any suggestions of an impending increase in UK interest rates.

At his valedictory appearance before the Treasury select committee, Mervyn King highlighted that economic conditions remain challenging, and noted that markets were right not to expect interest rates returning to more normal levels, for as long as the prospects for a sustainable economic recovery were poor.

More recently, Mark Carney’s arrival as governor coincided with the Bank taking the unusual step, following his first Monetary Policy Committee (MPC) meeting, of issuing a press statement that signalled that an expectation of higher base rates was not warranted by domestic economic developments.

Governor Carney also appears to have gone some way to defusing a concern that UK banks might pull back their lending to the real economy, in order to plug the projected capital shortfalls identified by the prudential regulator. Nationwide Building Society – one of the firms identified as needing to take action this year - has recently been able to announce that the Prudential Regulatory Authority has endorsed its plan to meet capital targets by the end of 2015.

We are likely to see further evidence of Carney’s “new broom” in early August, when the Bank of England publishes its inflation report and the MPC’s assessment of how forward guidance and the use of intermediate thresholds might support UK monetary policy.

MPC members voted unanimously to keep policy on hold, according to the minutes of its July meeting. This was unexpected, as it represents the first time in three years when no MPC member has voted for stimulus, other than when previously agreed additional asset purchases were already taking place. Given that economic developments over recent months have closely matched Bank expectations, this unusual pattern of voting may well presage an MPC announcement on 7 August that is substantive in nature.

Housing and mortgage markets

There is widespread evidence of ongoing recovery in our sector, with numerous surveys attesting to stronger activity, improving house price levels and positive market sentiment.

Last month’s credit conditions survey from the Bank of England presents a relatively rosy picture of mortgage market conditions, and one that seems likely to persist through the current quarter.

Mortgage credit availability continues to improve, driven by market share objectives and a growing risk appetite. Lenders are expecting their maximum LTV ratios to increase a little further and to lend more at 90% LTV ratios and above.

Meanwhile, helped by generally positive funding conditions, mortgage spreads continue to narrow.


Chart 1: Pricing of 2-year fixed rate mortgages by LTV, %

 Market commentary July 2013 pricing


Source: Regulated Mortgage Survey


At a time when the wider economic and jobs situations have been stable or improving, it should come as no surprise that demand for lending increased strongly across the board in the second quarter of this year. Further improvements are looked for in the current quarter. Stronger borrowing appetite is most evident with respect to house purchase.

The latest report from Bank of England agents also highlights considerable purchase activity by landlord investors, both buy to let and cash-funded.


Chart 2: Demand for house purchase loans, %

Market commentary July 2013 cc2
 
Source: Bank of England credit conditions survey 2013 Q2

Note: Positive balances indicate higher demand than previous quarter.

 

According to the Bank of England, gross mortgage lending in May – at £14.7 billion - was up by more than a fifth on April and 17% stronger than a year ago. The seasonally adjusted gross lending figure grew by 6% to £14.1 billion, confirming that recent months have seen the strongest performance for mortgage lending since 2008.

While all categories of lending have shown signs of picking up – from very subdued levels in the case of remortgage activity - our latest Regulated Mortgage Survey figures underline the marked increase in lending to first-time buyers.

Building on the pattern of earlier months, the number of mortgages to first-time buyers in May reached 25,100 - 29% higher than in April, and 42% higher than in May last year. This was the best monthly outturn since late 2007.

Although the underlying pace of first-time buyer activity is approaching a quarter of a million per annum, it is worth bearing in mind that this is still barely half of activity rates a decade earlier, and so far below what might be considered normal levels.

Recent approvals figures reinforce the positive tone for both house purchase and remortgaging. Our forward estimate is that gross mortgage lending increased a little further in June – to £15 billion.  Allowing for seasonal factors, the underlying picture and profile of lending looks similar to that for May. This reinforces our view that current positive trends are set to continue for the immediate future.