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 August 2013 | Author: Caroline Purdey

  • An improvement in sentiment and activity continues to show in the UK housing and mortgage markets, with a more positive picture starting to emerge in the economy also.
  • Our forward estimate of gross mortgage lending in July reinforces a growing evidence base of a strengthening in the housing and mortgage markets.
  • The signals from the Bank of England about its likely response to an improving economic picture give somewhat greater confidence as to the likely path of future interest rates, although with the built in get-outs and caveats this path remains far from certain.

UK economy

We have started to see some tentative positive signals from the UK economy.  In the second quarter GDP grew by 0.6% compared to the first three months of the year, and was 1.4% bigger than a year ago.  This is a sign that things are starting to look brighter, although, as commented by Stephanie Flanders in her blog, while we can feel pleased about this, we probably shouldn’t be satisfied.

We have also seen the passing of a Bank of England milestone – the Funding for Lending Scheme saw its first anniversary at the beginning of the month.  Launched on 1 August last year the scheme creates incentives for banks and building societies to increase their lending by lowering their funding costs.  The scheme appears to be having positive effects in the mortgage space – with some mortgage rates at record lows and an increase in activity over the last year.

But this Bank of England milestone was perhaps overshadowed by another key event in the history of the Bank when it issued the eagerly anticipated Forward Guidance along with the August Inflation report.   

With the headline message being no change in the Bank rate until unemployment drops to 7% - based on current MPC forecasts this means sometime in 2016.

But the guidance is less hard and fast than may initially meet the eye.  There are three ‘knock-outs’ which mean that if inflation started to run away or if the monetary policy stance poses a significant threat to financial stability then the unemployment criteria would no longer hold and the MPC may act differently.   

Likewise, an unemployment rate of 7% will not automatically mean that the MPC will start to tighten monetary policy, but it is the point at which they will start to consider doing so if other signals indicate the economy is strong enough to support this.

What does all this mean for the MPC when deciding monetary policy? The answer is probably not much – they would be considering all of these factors and much more anyway.  But what the guidance does do is to make the process more open and transparent for the rest of the world and gives some degree of confidence about the future trajectory of the Bank rate which we will use when developing our forward thinking. 

Housing & mortgage markets

Like the wider economy, there are encouraging signs from the housing and mortgage markets with evidence of increased activity, improving house prices and positive market sentiment.

The main house price indices are all showing upwards movements compared to this time last year.  Similarly positive, the latest RICS survey indicates an improvement in sentiment and buyers increasingly returning to the market, and more encouraging, this improvement was not restricted to London and the South East.

Moving to the mortgage space, according to the Bank of England, gross mortgage lending in June – at £14.8 billion - was up by 1% on May and 24% on a year earlier.  The seasonally adjusted gross lending figure grew by 2% to £14.4 billion while at £41.7 billion, Q2 showed the strongest performance for mortgage lending since the end of 2008.

Our latest Regulated Mortgage Survey figures show there have been positive signs among all categories of lending, with lending to first-time buyers showing the most notable improvements – as seen over the last few months (chart 1).  Also positively, remortgage lending continued to trend above year-earlier levels although remains subdued compared to historic levels.


Chart 1: Number of loans advanced to first-time buyers

MC 082013 chart 1

Source: CML Regulated Mortgage Survey

Our latest quarterly buy-to-let figures also show the continued growth in this sector in the second quarter.  A strong second quarter brought the total for the first half of the year to £9.3 billion, an increase of 22% compared to the same period last year.  Within the BTL sector a significant driver of this growth has been remortgage lending – in total in the first 6 months of the year BTL remortgage lending was 24% higher than the same period last year – a larger growth than lending for BTL house purchase which increased by 17%.

Recent mortgage approvals figures dipped slightly in June, both for house purchase and remortgages, but continue to compare favourably with a year ago.  House purchase activity in Q2 was the strongest since Q4 2007 and remortgage activity has continued to pick up from very subdued levels – in fact Q2 saw the strongest performance since late 2011.

This signals that the recent growth in the market looks set to continue. Our forward estimate is that gross lending increased further in July – to £16.6 billion, the strongest single month since the autumn of 2008.

In addition to an improving picture for new mortgage lending, the performance of the back book remains stable.  Our recent quarterly figures show that in Q2 there was little change in the number of people experiencing mortgage arrears, with our headline arrears figures showing a small downwards move.  While the number of properties taken into possession by lenders continued to trend downwards – the number of cases in the first six months totalled 15,700, the lowest number since the second half of 2007.