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: 21 May 2013 | Author: Bob Pannell

  • The focus of recent changes to the funding for lending scheme is on lending to smaller businesses, but the time extension should reassure firms that they can enjoy access to funding on reasonably favourable terms through to early 2015.
  • Stronger house purchase lending continues to underpin mortgage lending more generally, but the underlying picture overall is one of reasonable rather than dramatic recovery.

Economic background

The Bank of England is slightly more positive about short-term economic prospects than three months earlier, according to its May Inflation Report. It thinks that UK economic growth may be a little stronger and inflation a little lower than seemed likely in February.

The change in tone is welcome, even if the overall prognosis is for a continuing weak recovery over the next few years.

Initial estimates are that GDP grew by 0.3% in the first quarter. This is far from spectacular, but still contrasts with the 0.2% contraction recently reported for France, which marked that country’s return to double-dip recession. The latter also offers a timely reminder, highlighted in the latest Inflation Report and elsewhere that the main risks facing the UK continue to emanate from abroad, and especially the eurozone.

While sentiment towards the UK has improved a little, labour market conditions have been less positive over recent months.

During the first quarter, headline unemployment rose by 15,000 to 2.52 million (7.8%) and the number in employment fell by 43,000 to 29.7 million.

There has also been a slowdown in pay growth – average earnings have now slowed to 0.8% year on year, the slowest pace for several years.

With the Bank still expecting inflation to briefly exceed 3% before returning towards its 2% target in two years’ time, this suggests that household finances are likely to remain under pressure for some time. Which means that prospects for consumption growth depend upon to what extent households feel less need to build up their savings.

The monetary policy committee has kept monetary policy on hold since last July.

But, in late April, the UK authorities did announce some changes to the funding for lending scheme - extending it for another year and revamping it to increase the incentives for lending to small and medium-sized enterprises (SMEs). It also goes some way to support certain non-bank providers of credit.

As Bank of England governor, Mervyn King, recognised, when he presented the latest Inflation Report, the move is not intended to be a game-changer in terms of wider economic policy. As funding market conditions have improved since last summer, the funding for lending scheme no longer represents a cheaper source of finance for some firms, but even so, its extension will reassure firms that they will be able to access funding on reasonable terms until January 2015, even in the event of a future credit squeeze.

 

Housing and mortgage markets

Improvements in funding market conditions, as augmented by the funding for lending scheme, have benefitted the pricing and availability of mortgages.

The eventual impact on activity levels does of course depend upon how much borrower demand there is.  

With respect to remortgages, the pick-up in demand signalled in recent credit conditions surveys has proved elusive for the time being at least. Our Regulated Mortgage Survey figures show 68,000 remortgage loans in the first quarter, the lowest figure since 1997.  

But Bank of England approvals data do begin to finally suggest that the underlying position may now be improving. The seasonally adjusted number of remortgage approvals climbed in both February and March, and has totalled more than 30,000 for the first time in nearly a year.

Chart 1: Monthly number of loan approvals, seasonally adjusted

 Market commentary May 2013 HPRem2

Source: Bank of England

 

By stark contrast, there are clearer signs of improvements to house purchase transactions, and particularly first-time buyer activity.

Calibrating the true extent of the pick-up is a little more problematic, however, because seasonal factors are significant in the early months of the year and also because the pattern of lending a year ago was distorted around the end of a stamp duty concession for first-time buyers in March 2012.

According to the Bank of England, gross mortgage lending climbed by 9% to £11.6 billion in March, almost exactly reversing the seasonal dip in lending in February. But gross lending was 8% lower than a year ago (reflecting those stamp duty distortions).

Our forward estimate is that gross lending in April was £12.1 billion. This would have been 4% up on March. The comparison with April last year - 21% higher – is flattered by the temporary dearth of house buying activity immediately following the closure of the stamp duty concession.

The true underlying position is that April is likely to have been one of the strongest months for lending activity since late 2008, but by no means as strong as the year-earlier comparison suggests. Gross lending on a seasonally adjusted basis has been running comfortably above £12 billion for several months, and this is still barely half the average 2003-4 level of lending, for example.

House purchase activity has been fairly strong over recent months, as measured by advances and approvals. Although year-earlier comparisons are rather distorted, as above, the underlying position looks resilient. The seasonally adjusted number of house purchase approvals reached 54,000 in March - the strongest March outturn since 2008 and the seventh month in a row that approvals have been above 50,000 (but again only about half the volume of activity seen in 2003-4).

Regulated Mortgage Survey figures continue to show first-time buyers performing strongly. First-time buyers have accounted for an increasing proportion of all house purchase loans in recent months - increasing to 45% in March from 43% in February.

Taken overall, house purchase activity in the first quarter was 5% lower than a year earlier. Despite the obvious boost to first-time buyer numbers a year ago, first-time buyer lending was only a little shy of year-earlier activity levels whereas loans to those moving house were 5% lower.

Meanwhile, our first quarter figures show that buy to let lending activity is making steady rather than dramatic progress. Gross mortgage lending of £4.2 billion across 33,500 mortgages was advanced to buy-to-let landlords in the first quarter of 2013.   This compares with £4.6 billion the previous quarter, and £3.7 billion a year ago.   Lending for house purchase by landlords represents a little under half of overall lending and shows a similar profile.