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: 22 June 2017 | Author: Mohammad Jamei and Carla Sateriale

  • The housing market has stalled over the past few months, with volumes in line with our forecast.
  • Our estimate of gross mortgage lending for May is £20.1 billion. Accounting for seasonal factors, this figure is higher than average lending over the past year.
  • Our expectation for buy-to-let lending this year is £35 billion, down from our forecast of £38 billion at the end of 2016.

UK economy

The economy grew more slowly in the first three months of 2017 than previously estimated, as GDP growth was revised down to 0.2%.

Despite this slowdown, the jobs market is still improving, with a growing number of people in work. The unemployment rate was 4.6%, joint lowest since 1975.

In the past, we would have expected to see wage growth pick up as the unemployment rate fell. But wage growth remains sluggish.

As a result of weak wage growth, and an inflation rate which has picked up sharply over the last few months, workers are now experiencing a fall in real wages. Inflation reached 2.9% in May, but wage growth was just 2.1% April (May data not yet available).

This will put pressure on consumer spending, which is already showing through in retail sales data, as growth in the retail sector fell to a four year low. Price increases were cited as a significant factor in the slowdown.

This poses a problem for the Bank of England’s monetary policy committee (MPC), rising inflation is typically a reason for increasing the Bank rate, while weak growth is a reason to cut it. It is perhaps then unsurprising to see that in the latest MPC meeting, there was a 5-3 split, as three external MPC members voted for an increase in the Bank Rate, given the increase in inflation.

Despite this, it’s likely an interest rate rise is a little way off, as the governor, Mark Carney, said in a speech recently that “now is not yet the time” to begin raising interest rates, as wage growth remains weak.

Housing and mortgage markets

It’s fair to say that the housing market has stalled, as activity has been subdued for the past few months, with volumes in line with our forecast.

Property transactions have been at or around 100,000 each month since the end of last year, but they could see a slowdown, as house purchase approvals – typically a good leading indicator for transactions – have weakened since the start of the year.

In May, the MPC said it expected to see 71,000 house purchase approvals a month for the rest of the year. We are less optimistic, as approvals have fallen from 69,000 in January to 65,000 in April, and house purchase activity has been driven predominantly by first-time buyers.

While first-time buyers have recovered slowly, home movers have been falling. In the 12 months to April, first-time buyers were up 8% compared with the 12 months before that but movers were down 9%. Over the course of this year, we expect to see a slowdown in growth of first-time buyer numbers.

Despite all this, lending continues to be stable and was estimated to be £20.9 billion in May, on a seasonally adjusted basis. On an unadjusted basis, lending was £20.1 billion.

It’s likely that remortgage activity has helped drive lending, alongside first-time buyers, as has been the case over the last year. Looking ahead, we expect to see this trend continue, but not as strongly, as the factors supporting lending are blunted somewhat by less favourable economic conditions.

Mortgage rates are still close to historic lows, but we see little scope for further improvement with recent data showing a slight increase in mortgage rates on offer. This might also temper appetite for remortgaging.

This is more evident for higher loan-to-value mortgage rates, which have been edging up since the closure of the Help to Buy: Mortgage Guarantee scheme at the end of 2016. This will impact first-time buyers (FTB) disproportionately as they normally borrower at higher loan-to-values (LTV).

Buy-to-let has seen a larger fall over the last year. Buy-to-let house purchase activity is nearly half what it was a year ago, and has averaged around 6,000 purchases a month over the last 12 months. This is weaker than we had expected at the end of December 2016, and is discussed in more detail in the boxed section below.

Home movers are struggling, but that is down to them benefiting less from government schemes than first-time buyers have. We are publishing research later this month that looks into this issue in more detail.

The low number of home movers naturally limits the number of properties that come up for sale. This can dampen activity further, if would-be movers/first-time buyers don’t find properties they would like to move to. According to the Royal Institution of Chartered Surveyors, this is what we are seeing at the moment, with demand and new sales listings both falling.

Supply of new homes has picked up in England recently, as data from the Department for Communities and Local Government shows a 20% increasing in completions in the first three months of 2017 compared to a year earlier. The issue is that new supply accounts for around one in 10 transactions, so while it is positive news, it will do little to reverse the current situation.

Buy-to-let update
Buy-to-let has had a weak start to 2017 and the sector’s contribution to overall net mortgage lending has fallen considerably over the last year.

While falling mortgage interest rates have helped support borrowing, we are starting to see the coming together of tax and prudential measures, which are exerting pressure on the market. Encouragingly, there is evidence that landlords are more aware of these measures and have a range of coping strategies.

After the distortion of the stamp duty change last year, buy-to-let house purchase activity stabilised, albeit at a lower level than before. We had expected a slight recovery in lending levels, but that has not materialised.

From April 2017, landlords who are higher rate taxpayers will see a progressive reduction in the tax deduction they can claim from mortgage interest each year, the first stage of a four-year transition. We have not yet seen any sudden contraction in lending as a consequence, but it will make landlords more cautious and is likely to restrict their ability to re-leverage their portfolios. Signs of this have been evident for some months, with fewer landlords releasing equity when they refinance (see chart).

Chart 1: Proportion of buy-to-let remortgages, by re-leveraging status
chart 1 mc
Source: CML BTL mortgage survey
Download data

Since January, the Prudential Regulation Authority (PRA) has required lenders to stress test new lending by either 5.5%, or 2% above the pay rate, whichever is higher. Lenders had already prepared for this, and in some cases applied the stress tests in advance of the deadline. This makes it more difficult to sustain a highly-leveraged buy-to-let business model, with negative repercussions in regional markets with low rental yields such as London.

This is leading to a regional divergence in LTV of new lending. In London, the median LTV for remortgage loans has declined from around 65% in early 2014 to about 57% now. In contrast, Manchester’s median remortgage LTV has held roughly steady around 70% over the same time frame. A more in-depth discussion of this was published on our website recently.

There has also been a modest rise in the proportion of loans taken out on fixed terms of 5 years or longer, which are exempt from PRA stress testing requirements coupled with more bespoke underwriting criteria based on a variety of factors which may include property characteristics, the landlord’s existing portfolio, and the landlord’s tax bracket, in addition to standard interest cover ratio thresholds.

Although two-year fixed rates remain the most popular deal duration, five-year fixes have more than doubled their share of the market over the past two years, to account for 1 in 5 of all buy-to-let loans.

Taking these factors together, we have revised down our forecast for buy-to-let lending. We expected to see £38 billion in 2017 and 2018. Now, we expect £35 billion in 2017 and £33 billion in 2018.

For the time being, regulators and policy makers have not registered concern with regards to buy-to-let sluggishness. We expect to see the market continuing to be soft, as the implemented measures work through and the market looks ahead to two new requirements – the PRA’s portfolio landlord underwriting requirement and the Bank of England’s new loan reporting requirements – both of which take effect from October this year. 

Regulation and government policy

The current political landscape of a minority government is unlikely to lend itself well to major fresh initiatives, so we expect to see the broad policy approach as set out in the Housing White Paper in February to continue. In the short-term though, it is understandable that fire safety of existing high-rise stock will be a dominant policy focus.

Later this month, on 27 June, the Financial Stability Report will be published and is likely to provide more detail on its review of macro-prudential housing market powers.