Mortgage lending in UK increases but doubts remain about future levels
The latest figures from the Council of Mortgage Lenders shows that gross mortgage lending was up 21% in March at £11.3 billion compared with £9.3 billion in February, but is down 2% decline from the £11.5 billion of March 2010.
‘The housing market has emerged hesitantly from hibernation. Household finances are under a lot of pressure, and as a result demand for house purchase loans fell in the first three months of 2011. Lenders expect mortgage credit availability to improve this quarter, and this should help to underpin house purchase activity albeit at pretty low levels,’ said CML chief economist Bob Pannell.
‘Remortgage demand, meanwhile, continues to firm, presumably linked to expectations of higher base rates. Remortgage approvals in February were the highest for more than two years. Stronger remortgage activity looks set to continue propping up overall lending,’ he added.
But not everyone is optimistic. A recent sharp increase in the proportion of borrowers choosing a fixed rate to buy property in the UK has been reversed, according to the latest mortgage index from brokers John Charcol.
Between September of last year and February of this year the proportion of John Charcol clients choosing a fixed rate more than doubled, but this trend was reversed in March, resulting in virtually a 50/50 split between fixed and variable rates.
‘In March 2010, exactly 1 year after the historic cut in Bank Rate to an all time low of 0.5%, just 17% of our clients chose a fixed rate mortgage. The proportion then started increasing as the cost of fixed rates fell, reducing the premium one had to pay for security, and as people started worrying about rate increases,’ said Ray Boulger, senior technical manager at John Charcol.
‘With the cost of fixed rates bottoming out around the turn of the year and increasing worries about a rate rise as a result of the surging CPI, fixed rate take up jumped sharply from 32.2% in December to 56.0% in February. In March this figure fell to 49.9% as borrowers were put off fixed rates by the hike in price,’ he explained.
‘Looking ahead, the fall in year on year CPI in March has taken some pressure off the MPC and as CPI increased by 0.6% in April last year any increase of less than that this month will result in a further fall in the April year on year figure. That said, in the following 3 months it will be more of a challenge for CPI to continue falling as the previous year's figure which will fall out of the year on year calculations will be + 0.2%, +0.1 and -0.2%,’ he added.
The outlook for increased lending in the real estate sector is still subdued. ‘Despite the probability that CPI will remain well above the target 2% for at least another year there are plenty of reasons to expect our economic growth to remain weak and the first estimate of 2011 Q1 GDP figures on 27 April will be a key factor influencing Bank Rate decisions for the next few months,’[ said Boulger.
‘Another negative number, or even one that only just scrapes into positive territory, would significantly increase the likelihood of Bank Rate still being at 0.5% at the end of the year.
Furthermore, with a Greek Sovereign default increasing looking like a matter of when rather than if, the risk of Eurozone banking contagion from a domino effect which would impact on the UK banks if it reaches Spain is very worrying and will be a factor restraining bank lending as they build up their reserves, and hence inhibiting the recovery, he added.