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Analysis

Published: 18 October 2013 | Author: Bob Pannell

  • The launch of the government's Help to Buy mortgage guarantee scheme takes place against a recovering housing market and economy
  • It is too soon to gauge how much extra housing and mortgage demand the new scheme will stimulate 
  • Regulators appear unperturbed about current housing market developments, but are monitoring closely, in case risks to financial stability surface

Economy

The economic backdrop has changed relatively little over the past month, although expectations around GDP growth in the third quarter have been scaled back a little on the back of disappointing industrial production figures. 

As the EY Item Club has recently noted, the revival of the housing market represents an important element in the strong recovery of consumer sentiment and positive economic outlook for the UK.

Inflationary pressures are sticky, with the headline consumer price index unchanged at 2.7% in September. Although consumer price inflation should ease back a little over the remainder of this year, despite a further round of hefty utility price rises, real incomes remain under pressure.

Against this, labour market developments are generally positive. A record 29.87 million people are in work and the headline number of unemployed fell by 18,000 in the three months to August to 2.49 million. The unemployment rate was unchanged at 7.7%, but continues to run ahead of the projections published by the Bank of England as part of its explicit forward guidance. 

Help to Buy

A key event in recent weeks has been the early launch of the government’s Help to Buy mortgage guarantee scheme.

Although the scheme does not become fully operational until January, a warehousing facility allows participating firms to offer Help to Buy mortgages with immediate effect, even though they will not actually be covered by the guarantee until next year. 

As the scheme rules and written ministerial statement make clear, mortgages with an LTV of 80-95% may be entered into the scheme, subject to a number of eligibility criteria. The guarantees are provided on a commercial basis, with the lender having to pay a one-off fee, initially varying between 28 and 90 bps of the original loan advance, depending upon the LTV band.

The launch of the mortgage guarantee scheme takes place against an already improving picture for the UK housing market.

The latest credit conditions survey highlights that we have already seen several quarters of improving credit availability, growing competition for mortgage business, narrowing spreads and strengthening mortgage demand.

A number of indicators corroborate that we are witnessing the strongest performance in five years, centred around house purchase:

  • Gross mortgage lending totalled £16.4 billion in August, little changed on a month earlier, and our forward estimate suggests a similar pace again in September at around £16.2 billion; 
  • Seasonally adjusted house purchase transactions have averaged nearly 90,000 per month in recent months; 
  • According to Bank of England figures, house purchase approvals – also seasonally adjusted - in August were the strongest since Feb 2008;
  • CML figures indicate home-owners took out more than 61,000 house purchase loans worth £9.7 billion in August, respectively 15% and 20% higher than a year earlier.

First-time buyers continue to feature prominently, accounting for 44% of house purchase loans in August – similar to the share of the past six months.

Chart 1: Mix-adjusted house price index, Jan 2008=100

MC Oct 2013 HP

Source: Office for National Statistics

House prices too have revived over recent months, although much of this reflects the impact of a modest but more broadly based pick-up, overlaid upon what is clearly a resurgent London market. As the Office for National Statistics has recently reported, as at July house prices excluding London are a little over 1% higher than a year ago.

Given the context of a strong pick-up in activity levels and early signs of strengthening house prices across the country, the authorities have signalled their intention to head off fears of destabilising house price increases. 

The record of September’s Financial Policy Committee (FPC) meeting shows that while housing market developments are now very much on the regulator’s radar, it does not view the recovery in the housing market to date as posing a threat to financial stability.

A few weeks prior to the launch of the Help to Buy mortgage guarantee scheme, the Chancellor gave the FPC a more formal role in reviewing the operation of the scheme, including its key parameters, each September.

At the time of writing, a number of lenders have confirmed their participation in the mortgage guarantee scheme, although relatively few are taking advantage of the warehousing facility, available before the scheme launches fully in January.

The scheme gives lenders a variety of options regarding the nature of their participation – both across different LTV bands and types of lending supported. Given also that firms need to prepare for the implementation of the mortgage market review in April 2014, it may well be several months into next year before we get a true gauge of the scale and reach of the new scheme. 

While at this stage there is a diversity of views about impacts, one of the few areas of common ground across market commentators is the importance of how responsive the supply of new housing proves to be. 

Chart 2: Residential planning approvals, Great Britain

MC Oct 2013 Pipe

Source: New housing pipeline Q2 2013 report, HBF

New planning approvals are running at an annual rate of more than 170,000 units, the strongest rate since 2008. While there has been an upsurge in new build activity recently, it is only beginning to show through in completions data and is from very low levels. 

With more than 15,000 properties sold under the Help to Buy banner since the equity loan scheme was launched in April, it is clear that the latter accounts for a significant proportion of private sector development sales (although less clear how much of this represents genuinely additional activity).

As the mortgage guarantee scheme is more universal in nature, and does not provide a direct link with building new houses, close scrutiny of how it is working seems both necessary and sensible.