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 July 2017 | Author: Mohammad Jamei

  • We are entering a period of belt-tightening on the part of consumers, which may become more acute if the economic outlook deteriorates further.
  • The housing market has reached a plateau as activity and lending have been flat since the start of the year.
  • Home-owner remortgage activity and first-time buyers have been the factors supporting lending for some time, but the strength of both could be dampened by a challenging economic outlook.
  • Our estimate of gross mortgage lending for June is £22.1 billion. Accounting for seasonal factors, this figure is in line with average lending over the past year.

UK economy

The economy has shifted down a gear in the first half of 2017, as growth looks set to run at half the rate of recent quarters.

Growth in the first three months of 2017 was 0.2%, and growth in the three months to June looks set to come in at 0.3%.

Yet the jobs market continues to improve as the unemployment rate reached 4.5% in May, the lowest since 1975.

This tightening in the labour market is still not leading to higher wage growth, as would have typically been the case in the past. Wage growth remains sluggish at 1.8%.

Given the weak growth in wages, workers have begun to see their spending power eroded by inflation, as the Consumer Price Index stood at 2.6% in June. It is likely that we will experience a protracted period of falling real wages.

This presents consumers with a hard choice between cutting back on spending, or saving less.

It appears they are doing a bit of both, as the average rate of growth of retail sales has halved since the start of the year, new car registrations are falling short of 2016 levels, and the household saving ratio reached the lowest rate on record, at 1.7% in the first three months of 2017.

A period of belt-tightening now seems to be under way and may become more acute, if the economic outlook deteriorates further.

A number of Bank of England monetary policy committee (MPC) members have recently voiced their opinions on raising interest rates. Despite this, a rate increase when they next meet in August seems unlikely as inflation is currently in line with the MPC’s expectations as set out in May’s Inflation Report.

Housing and mortgage markets

The economic backdrop helps colour what has been happening in the housing markets, as the two are closely linked. The housing market has reached a plateau, as activity and lending have been flat since the start of the year. It is possible that we see a slowdown in activity if economic conditions become more challenging.

This is illustrated by property transactions averaging just over 100,000 a month for the past few months, though the recent weakening in house purchase approvals – a leading indicator of activity – could mean fewer transactions in the months ahead.

Looking at transactions with a mortgage, first-time buyer activity is the only part of the market that has shown consistent growth recently. Home mover numbers have been slowly falling, on a 12-month rolling basis.

Buy-to-let has been more volatile given the tax changes last year, but is currently deeply in negative territory.

Chart 1: 12-month rolling totals growth rate for house purchases

20170719 chart 1 mc

Source: UK Finance

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The latest Bank of England Credit Conditions Survey (CCS) results showed sentiment amongst lenders slightly shifting away from higher loan-to-value lending, potentially as house price growth softens and they shade down their risk appetite a little.

As first-time buyers typically borrow at higher loan-to-value ratios, this could limit their activity.

The CCS also registered the first negative reading in three years when it came to availability of secured credit over the near term. This was down to lender sentiment deteriorating on a number of factors, including the economic outlook and house price expectations.

On the remortgage side, there is still growth amongst home-owners remortgaging. This has been and continues to be driven by market share objectives, which has led to intense competition between lenders, even though funding costs have started to edge up.

Buy-to-let remortgage activity had been growing until very recently. Over the last two months this trend has reversed, as the number of loans for remortgage on a 12 month rolling basis fell relative to the 12 months preceding it (see chart 2). This was discussed in last month’s commentary, as we said the tax changes that came into effect from April 2017 were likely to dampen landlords’ appetite and ability to re-leverage their portfolios. This may be one of a number of factors putting off some landlords from remortgaging.

Chart 2: 12-month rolling totals growth rate for remortgaging

20170719 chart 2 mc

Source: UK Finance

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Despite all these moving parts, total lending in the mortgage space continued to be stable and was estimated to be £19.9 billion in June, on a seasonally adjusted basis. On an unadjusted basis, lending was £22.1 billion. Over the last 12 months, lending has averaged just over £20 billion a month.

Home-owner remortgage activity and first-time buyers have driven lending for some time now. We expect this to continue, but perhaps not as strongly as has been the case of the last few years, as the factors supporting them are dampened by a challenging economic outlook.

The Royal Institution of Chartered Surveyors summed this up by reporting that for the fourth month in a row, there was a fall in the properties coming on to the market and in new buyer enquiries.

Regulation and government policy

The latest Financial Stability Report was published last month in which the Financial Policy Committee (FPC) set out its approach to addressing risks from the UK mortgage market and its review of macro-prudential housing market powers.

The FPC said its Recommendations are likely to remain in place for the foreseeable future, and clarified its affordability test. It now expects lenders to stress affordability at three percentage points higher than the reversion rate specified in the mortgage contract at origination.