Let banks focus on lending

The forecast for the mortgage market is brighter for 2013. This is largely due to Funding for Lending, despite the scheme’s inauspicious start last autumn.

Richard Sexton
26th February 2013
Richard Sexton - esurv
By acting as an insurance policy against a sudden squeeze on funding from the markets, FLS has helped pull lenders’ confidence up from around their ankles. It has flooded their balance sheets with cheaper funds and increased their appetite for risk. The effects on the market, in a short space of time, have been startling. Rates have fallen. Choice has improved. And criteria are less restrictive.

The statistics tell the tale: high LTV lending up 30% in January, approvals at their highest for almost five years, a 12% increase in first-time buyers last year. And the latest LSL/Acadametrics House Price Index revealed an 8% increase in home sales and a £7,000 increase in house prices over the past year.

Prior to December, a first home for buyers with modest salaries and even more modest deposits must have felt, almost literally, like a lifetime away. Thanks to record low rates on fixed deals, and more relaxed credit scoring, they can now glimpse that first home on the horizon.

Better conditions for first-time buyers have been a long time coming. Since 2008, wealthier buyers have operated on a different plane to the rest of the market. But that is beginning to change. Aside from the third tier of the market – the ultra-prime London buyer – the gap between the top and bottom of the market is certainly closing. There were 14,995 loans on properties worth less than £125,000 in January (a typical first-time buyer property), the highest since February 2008, and a 28% increase from 11,714 in December. The number of loans on more expensive property increased at a much slower rate, illustrating how the improvement is being focused primarily on first-time buyers.

Wealthier buyers now form a much more proportionate share of the market after dominating lending since the Lehman collapse, suggesting the market is beginning to rebalance towards high LTV borrowers. West One Loans, the bridging lender, published research recently highlighting just how weak mortgage funding has been since 2008, and how alternative forms of finance have been used to plug the gap. But funding conditions seem to have turned a corner, and lending predictions for 2013 make for much cheerier reading. The CML has predicted gross lending in 2013 will hit £156, 9% higher than 2012.

It will take more than a couple of strong months before the market can really feel it is en route to a proper recovery. There have been plenty of false dawns since 2008. High LTV lending increased late 2011 but quickly fell again as the Eurozone crisis flared up. And first-time buyer numbers were high in the first half of last year, before collapsing in the second half to the tune of 13%.

Recoveries after an asset bubble burst are always precarious. They are fragile and can easily be derailed, particularly by capricious money markets, where investor sentiment can change like the weather. But this time it feels different. Funding conditions should be better this year, and the strength of the labour market is a solid foundation to build on economic recovery on. The Eurozone crisis also looks to have been neutered, at least for now. The likelihood of a serious downturn has been averted by the direct recapitalisation of banks, although doubts to remain about the structural soundness and economic competitiveness of the Mediterranean countries in the long-term.

The road will still be long and difficult. Austerity is set to last until at least 2018, and that will squeeze bank and borrower credit like a vice. And several pitfalls lie in wait this year. First are capital adequacy requirements. The chronic blight on mortgage credit. Like a leach sucking away first-time buyer funding, but even more difficult to remove. The second is plans to introduce a ring-fence between the retail and investment banking arms of major lenders.

Andrew Haldane, a director for financial stability at the Bank of England, has warned these measures are unlikely to work. And Lord Myners was equally scathing in a speech to the Lords on financial reform last autumn. Both have argued imposing uniform capital ratio requirements on banks will only amplify existing inefficiencies in the way banks go about assessing risk. In short: they don’t make banks any safer, and divert funds away which could be used for new lending.

Instead of over-zealous regulation – which smacks of closing the door after the horse has bolted – government and regulators should get out the way and let banks focus on lending. The first priority should be to secure the economic recovery. Healthy levels of lending must be the lynchpin of that recovery. Restructuring and reform are important, but they should come later.

To its credit, the government seems have realised this. In a speech last month George Osborne towed a clever line. He promised to ‘electrify’ the ring fence between retail and investment banking, as proposed by the Vickers ICB report, but he also promised to give banks more time to implement the changes. The deadline will be extended from 2015 to 2019, meaning banks will now have more time to restructure their businesses to separate their retail banking from investment banking operations. This sort of responsible but pragmatic capitalism is what is needed to keep funding conditions on a sound footing.

And the government has relaxed the deadlines for the pace at which banks have to build their capital buffers. This gives banks extra wiggle room. They should use it suck in as much oxygen from Funding for Lending as they can and breathe some life into the recovery.

Much will depend on the economy. Despite the healthy labour market, productivity is a concern. The UK is expected to slide into a triple-dip recession this quarter. And public borrowing is expected to overshoot its 2012 target by £6 billion, suggesting George Osborne needs to find a plan B to jumpstart the economy.
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