Why, they have asked, do we expect net lending to decline in 2011 by one-third to only £6 billion – the lowest annual total since 1980 – when we are predicting that gross lending will remain static at around £135 billion?
And why, when there has been such a steep fall in gross lending since 2007 (by 62%, from £363 billion) – has the fall in net lending been even more dramatic? Over a similar period, net lending has declined by almost 95%, from £108 billion to a predicted £6 billion in 2011.
The key difference between gross and net lending is, of course, the repayment of capital borrowed earlier by mortgage customers.
In any given year, capital is repaid in a variety of ways – through routine, monthly capital-and-interest mortgage repayments; by the payment of one-off lump sums; and through the redemption of existing mortgages, even though the borrower may go on to take out a further loan, either to buy another property or as part of the process of remortgaging.
In any year, net lending is “eroded” by these regular monthly capital repayments and payments of one-off lump sums of capital, largely irrespective of how much new gross lending is taking place.
But in current market conditions, net lending is further reduced because gross lending is also constrained by:
- the sharply reduced number of housing transactions (we are predicting a total of only 860,000 in 2011, similar to each of the last three years, but sharply reduced from the annual figure of around 1.5 million we saw before the financial crisis and might expect to see again in a more “normal” housing market);
- an even sharper decline in remortgaging (when we have all the data for the final months of last year, the number of remortgaging deals in 2010 may prove to have been as low as 300,000, worth perhaps £40 billion, compared to an annual total of more than one million in 2007, worth £129 billion); and
- a sharply reduced capacity and appetite for borrowing among consumers (even when borrowers are able to transact in the housing market or remortgage, they are constrained by flat property prices, conservative lending criteria and their own lack of desire to take on large-scale borrowing commitments against an uncertain economic backdrop).
Given this combination of circumstances, the particularly sharp decline we have seen in net lending – and the gap between our forecast of gross lending of £135 billion in 2011 and net lending of only £6 billion – is unusual, but not unexpected. In a market in which there are low levels of remortgaging, low levels of property transactions, and customers are unwilling or unable to increase borrowing, we should expect net lending to grow much more slowly than in more normal conditions.
We may see periods of zero or even negative net lending – when overall mortgage debt declines – a situation that has existed for some time in the unsecured credit market.
