The CML report:
We publish an updated assessment of prospects for the mortgage and housing markets. For the first time since the downturn, we have extended our forecast horizon beyond the current calendar year to the end of 2012, in the light of a more stable forecasting environment.
Our forecasts assume hesitant economic growth for the rest of 2011, as the pace of fiscal tightening intensifies and households suffer an ongoing contraction in real incomes, but a moderately more positive backdrop as we go into next year.
While inflationary pressures look set to persist for some while, we believe that uncertainty about the resilience of consumer spending and the limited evidence of upward drift in pay settlements should allow the Bank of England to maintain an expansionary monetary policy stance throughout the forecast period.
So, it now seems probable that the base rate will remain unchanged at its current level of 0.5% for most of 2011, before a modest progressive tightening that continues through 2012.
The prospect of a gentler upward profile for interest rates significantly mitigates the adverse impact on household budgets of weak growth in incomes, and this will help borrowers keep up with their mortgage payments.
The key messages behind our forecasts are:
- The UK economy is experiencing a weak and patchy recovery. We are at a difficult juncture, with households suffering a fall in real incomes as a result of consumer price pressures and the accelerated pace of fiscal cuts this year.
- Lenders appear to have made good early progress in repaying the funding advanced through official support schemes and large-scale refinancing of wholesale funding. The availability of credit to support mortgage lending remains constrained, but has eased a little.
- The factors dragging down household confidence point to subdued demand for house purchase loans. Property transactions look set to remain at the low levels of the past few years.
- Remortgaging activity has revived in recent months, and demand may build over the next 18 months. However, the prospect of interest rates staying low for longer dilutes the precautionary motive to remortgage and, as a result, we are not expecting much further increase in the near-term.
- Overall, then, the outlook is for activity in the housing and mortgage markets to remain stable over the forecast period. Buy-to-let seems likely to progress positively relative to the overall market, reflecting strong rental demand.
- Despite the pressure on household finances, we expect the vast majority of households to keep up with their mortgage payments, helped by a relatively gentle trajectory for interest rates. Nevertheless, arrears and possessions are set to rise and to remain at higher levels this year and next.
Mortgage funding
The aftermath of the global financial crisis continues to have a pronounced impact on mortgage and housing markets.
This year and next, lenders need to re-finance large amounts of existing wholesale borrowing and repay much of the funding advanced through official support schemes. However, the prospects of them being able to do this appear to have improved.
There was good progress in the early months of 2011, and signs of a degree of resilience in the face of financial market volatility triggered by ongoing difficulties in a number of eurozone countries.
Lenders also continue to strive to reduce their dependence on wholesale funding, for example by increasing their holdings of retail savings. But there is limited growth in retail deposits, as pressure on household incomes reduces the capacity to save.
Retail deposits grew by just £34 billion in the year to March, half the level of a year earlier. Competition for retail funds is already intense, and the situation risks becoming still more competitive with the re-launch by National Savings and Investments of its index-linked savings products.
Although recent Bank of England credit conditions surveys indicate an ongoing improvement in credit availability, the underlying position remains challenging. Under such conditions, lenders will continue to have only a modest risk appetite, and this will limit lending at high loan-to-value ratios.
Lenders’ caution is understandable in the uncertain economic environment. It is also being reinforced by the higher capital requirements that low-deposit loans entail and conservative lending practices that are being entrenched by the supervision of the Financial Services Authority and the uncertain outcome of its ongoing mortgage market review.
Nevertheless, there have been signs over recent months of increased competition - and a narrowing of mortgage spreads - at lower LTV ratios, and a greater range of higher LTV products.
While the latter will not necessarily show through fully or immediately in actual lending volumes, it is nevertheless a positive development.
Mortgage lending
This modest improvement in credit availability does not alter the uncertainty in the wider UK economy, associated with the poor state of household finances.
Recent fiscal changes will exacerbate the squeeze on real take-home pay, already being seen as consumer price inflation continues to outweigh earnings growth. The Bank of England’s May Inflation Report suggests that consumer price inflation may reach 5% later this year and, although then easing back, stick above its 2% target throughout 2012.
With the pace of public spen
