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 July 2016 | Author: Mohammad Jamei

  • Our estimate is that gross mortgage lending was £20.7 billion in June, 3% higher than a year ago
  • Activity is likely to soften modestly over the next six months, and lending will be driven more by remortgaging and less by house purchase
  • We expect some form of monetary easing to be implemented when the Monetary Policy Committee (MPC) meet on 4 August, but its composition and size are still unclear

We would usually publish a mid-year update of our forecasts in this edition of market commentary, but given the uncertainty around Brexit, we do not plan on publishing new forecasts.

Our overarching view in the near term is that activity will soften modestly over the next six months, and lending will be driven more by remortgaging and less by house purchases, as a result of a vote for Brexit.

UK economy

Prospects for the UK economy now look much more uncertain after the result of the EU referendum, as many businesses and households adopt a wait-and-see approach over the next few months.

Although the future is unknown, the UK’s starting position is relatively favourable. Notwithstanding the more sedate economic growth experienced recently, the jobs market continues to perform well, with the highest employment rate since records began 45 years ago, and as a result of low inflation and modest pay growth, real pay growth has now been positive for more than 18 months. The financial sector has also built up considerable resilience.

Forecasters had, over the last few months, revised down growth expectations for the UK economy to around 2% for 2016, but this figure is likely to be revised down further as the period of economic uncertainty extends.

Post referendum forecasts currently range from 1% to 2.3% for this year, with the wide range highlighting just how uncertain prospects are for the economy going forward.

One source of uncertainty was the vacuum of political leadership, which has been resolved.

The handover of power from David Cameron to Theresa May has been swift, a new Cabinet has been announced, with the new chancellor Philip Hammond confirming there will be no Brexit budget; an autumn statement will be delivered as usual. The target of a budget surplus by 2020-21 has also been abandoned. So while we cannot rule out some fiscal action over the summer, it is likely that any major announcements will be delivered in the autumn.

Immediate policy response

Policy-makers’ actions suggest that we may already be facing recessionary headwinds, given the language used in the speeches by MPC members, and the frequency with which they have been made recently.

Mark Carney, governor of the Bank of England made it clear the Bank ‘stands ready to provide more than £250 billion of additional funds’ if required, and also decided to continue to offer Indexed Long-Term Repo operations on a weekly basis until the end of September 2016, given the period of uncertainty has extended.

The governor followed this up by another speech in which he said, “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.”

This was all summed up by the minutes of the MPC meeting in July stating “most members of the Committee expect monetary policy to be loosened in August.” The vote was 8-1 in favour of keeping rates at 0.5%, with Gertjan Vlieghe voting to reduce rates immediately by 25 basis points.

As a result it is widely expected that some form of easing will be implemented when the MPC meet again on 4 August, but its composition and size are still unclear.

The Financial Policy Committee has reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures. This is effective immediately and for at until the next year. This reduced regulatory capital buffers by £5.7 billion, which raises banks’ capacity for lending to UK households and businesses by up to £150 billion.

Early data from the Bank of England agents’ summary of business conditions suggests that banks’ appetite to lend has been maintained post-referendum.

We share the governor’s view that this is not like the financial crisis of 2008-09, and the resilience in the financial sector means that borrower demand, rather than credit supply, will likely to be a more important factor for lending going forward.

The aim of swift policy action has been to reduce the uncertainty that has set in after the vote result.

Housing and mortgages

The decision to leave the EU risks materially affecting prospects for the UK housing market. As most housing transactions are discretionary, activity levels are likely to bear the brunt of any market adjustment over the next six months or so, as buyers and sellers wait to get a clearer idea of where we might be headed. This might in turn dampen house price growth.

But as with the economy, the housing market in the UK is in a favourable place. Activity has increased by almost 80% from post-crisis lows, resulting in more than 100,000 transactions per month for nearly a year to March, before facing distortions by the stamp duty change and then uncertainty around the EU referendum.

There have been few data releases that refer to the period after the referendum result.

The Royal Institution of Chartered Surveyors survey data was the first indicator of housing market sentiment. It showed deterioration with a fall in both new buyer enquiries and properties coming on the market for sale. It remains to be seen whether this is the start of a trend, or a one-off blip, given the survey was carried out in the immediate aftermath of the referendum result.

Higher loan-to-value (LTV) lending might edge down as borrowers and lenders trim their risk appetite at the margins during periods of uncertainty. This will be compounded if employment prospects start to weaken.

The impact is likely to be most felt by first-time buyers, as they borrow at higher LTVs and are more likely to suffer income shocks.

Geographically, London might look more susceptible, given the elevated value of property relative to earnings, its high portion of first-time buyers and the reliance it has on mortgage finance compared to the rest of the country.

On the supply side, construction data from the Office for National Statistics showed a decline in new work in May, with the main contribution coming from private new housing. This corresponds with volume house-builders rowing back on their development plans even ahead of the EU referendum. Prospects regarding new build already look challenging in the absence of additional government support.

Buy-to-let also faces a challenging period, with the Prudential Regulation Authority set to impose minimum standards for underwriting criteria later this year, and forthcoming tax relief changes coming into effect next year onwards.

While transactions fell sharply (the result of fewer buy-to-let and second home purchases after the introduction of the stamp duty change), lending has continued remained strong, helped by buoyant remortgage activity as borrowers took advantage of record low mortgage rates. This could continue as a flight to safety, caused by the referendum result, has pushed down gilt yields and interest rate expectations, allowing some lenders to offer competitively priced mortgage deals.

This divergence between transactions and lending is likely to continue, as transaction numbers soften while lending remains supported more by remortgage activity, less so by house purchases.

But given how close monetary policy is to the zero lower bound and the adverse impact lower rates have on bank profitability, any direct impact on mortgage pricing from cuts in bank rate is likely to be heavily diluted.

Our estimate of lending in June is £20.7 billion, 3% higher than the same period last year and 16% higher than May’s lending figure. On a seasonally adjusted basis, this figure is £18.7 billion, consistent with what we have seen since June 2015 (March excepting).