2012: a year of slow - but welcome - recovery
Published: 13 December 2012 | Author: Bernard Clarke
As the year draws to a close, what will we remember about 2012? It will, of course, always be associated in popular imagination with the success of the Olympic games and the Jubilee celebrations. By comparison, developments in the mortgage market have perhaps been less memorable, with 2012 going down as a year of continuing slow – but welcome – recovery. However, over and above the picture of gradual improvement, there have been a number of significant developments.
We began the year having just published forecasts for subdued mortgage market activity in 2012. Against a highly uncertain economic backdrop, we estimated that gross lending would decline during the year by around 3%. Encouragingly, however, as we now approach the year-end, it looks as if that forecast will prove to have been too pessimistic. Gross lending has almost certainly grown in 2012 – although we will not have data covering the whole year for a few weeks yet.
Against the backdrop of a modest increase in gross lending, the growth in house purchase activity has been more encouraging. Having originally predicted lending for house purchase to total £68 billion this year, it now looks as if lenders will advance loans worth around £79 billion – 15% higher than expected. Part of this is due to a modest increase in the number of housing transactions. Based on data for the first nine months of the year, purchases have edged up (from a low base) by around 6% in 2012. By contrast, remortgaging in the year has been subdued.
Other positive features of the mortgage market in 2012 include:
- The launch of the funding for lending scheme (FLS) by the Bank of England, which we welcomed in the summer. At the outset, the Bank said that it expected the scheme to make all types of credit to businesses and individuals, including mortgages, cheaper and more readily available than would otherwise been the case. In reporting the first data from the scheme earlier this month, the Bank said that 35 lending institutions, covering 80% of the stock of lending in the economy, were participating.
- Lower borrowing rates for customers. Since the middle of the year, average fixed rates on new mortgage products have been falling, according to data published by the Bank of England (fixed-rate mortgages account for around two-thirds of new lending). This reflects improved funding conditions in Europe, as well as the early effects of the FLS.
- Even though the FLS has been open for only four months, some lenders have already said that it has enabled them to offer lower borrowing rates. Earlier this week, the Bank of England reported that the average five-year fixed rate on a 75% loan-to-value (LTV) mortgage was below 4% in both October and November – the first time that this rate has been at such a low level for two consecutive months. Much of the initial impact of lower rates has been on mortgages at lower LTV ratios. More recently however, there has been greater price competition among lenders for higher LTV lending.
- It is important to stress, however, that rates may not remain at current levels. Although the FLS will remain open for the whole of next year, other developments in the market may exert upward pressure on rates. It will therefore be impossible to determine the full effect of the FLS on the mortgage market until 2014 (but the early signs have been encouraging).
- The successful launch in March of the NewBuy scheme, on which we worked closely with the government and the Home Builders Federation. NewBuy has succeeded in widening the availability of 95% mortgages for newly-built property, so the initiative has been particularly helpful for borrowers who are creditworthy but constrained by deposit requirements. We believe that NewBuy has the potential to contribute to housing supply, as well as economic growth. As we approach the end of the year, the initiative is building momentum in the way that we expected, and buyers have so far made around 2,000 reservations under the scheme.
- The continuing strength of the desire in the UK to be a home-owner, despite the affordability and access problems for first-time buyers. In June, we published research showing that, despite all the challenges for owner-occupiers, 81% of UK adults hope to be home-owners in 10 years’ time. The findings of our survey go back to the mid-1970s and show that, while ambition for home-ownership has fallen back a little in recent years against a difficult backdrop for buyers, it remains firmly entrenched across all age groups.
- An expansion of buy-to-let lending. Lenders continue to fund housing in all tenures, and the continuing expansion of the rental sector provides choice for consumers. Alongside the 15% increase in lending for house purchase in 2012, lenders also significantly expanded buy-to-let activity. In the first nine months of this year, lenders advanced just over 100,000 buy-to-let mortgages, worth £11.8 billion – an increase of 15% by volume and 19% by value over the same period in 2011.
- Lower than expected mortgage arrears and possessions. At the beginning of this year, we forecast that 45,000 homes would be taken into possession during 2012 and that the number of borrowers in arrears amounting to at least 2.5% of their mortgage balance would expand to 180,000 by the end of the year. However, based on data for the first nine months of the year, it looks as if the number of possessions this year could be up to 10,000 lower than we predicted. And the number of borrowers in arrears of 2.5% of the balance may also be lower than expected at the end of the year, at close to 160,000.
- A welcome extension of support for borrowers in difficulty. Earlier this month, the chancellor, in his autumn statement, announced an extension to the current arrangements for paying support for mortgage interest (SMI). These will remain in place for two more years, until March 2015. As a result, SMI will remain available to qualifying borrowers after 13 weeks and continue to cover mortgages up to £200,000. Extending this support will be crucial in enabling lenders to continue to show forbearance to borrowers in short-term difficulty. The government’s decision to maintain support at current levels will help encourage lenders, borrowers and debt advisers to manage their way through temporary periods of payment difficulty, while keeping the number of mortgage possessions in check.
- The continuing ability of borrowers to make capital overpayments, and the reduction in negative equity. As our main article shows, more than one-third of borrowers taking out mortgages since 2005 have managed to overpay capital – despite the challenging economic conditions and pressures on household budgets. In October, we also published data showing that capital payments had helped reduce the number of households in negative equity. In 15 months since August 2011, the number of borrowers in negative equity has declined by more than 100,000 – or by 13%.
As we approach the end of the year, there have been a number of positive developments in mortgage and housing markets. It is important to remember, however, that lenders continue to operate against a difficult backdrop. The economic outlook remains challenging. Household finances are under pressure from a combination of persistent inflation, low income growth and welfare restrictions. Consumer confidence is fragile. Conditions in the euro zone continue to pose a threat. And lenders will have a considerable workload throughout 2013 in implementing the new mortgage rules.
We are therefore not heralding a return to a booming mortgage market; we are, however, flagging that there are some positive signs that have been absent in recent years.
Later this month, we will publish our detailed forecasts for housing and mortgage markets in 2013 and 2014. Those forecasts, and the accompanying analysis, will expand our view of market developments. Clearly, there are forces bearing down on the market – and lenders and borrowers face considerable uncertainty. But there is also scope for some of the more positive developments we have seen this year to continue to contribute to more favourable market conditions for lenders and their customers in 2013 and beyond.