Outlook for 2013

Up until the start of September, the mortgage market was undeniably constrained by the burdens of tough funding conditions and weak economic output.

Richard Sexton
30th November 2012
Richard Sexton - esurv
The load has lifted somewhat since then and the wider economy is also thought to be  moving more freely. House purchase lending was up 10% in October and up 4% on last year, which reversed a five month trend of annual falls. On top of that, gross lending is on the rise. It stood at £12.9 billion in August, the highest for eleven months.

Some aspects of the improvement are down to FLS. In the latest survey of credit conditions by the Bank of England, lenders cited the scheme as the driving force behind a reported 36% improvement in mortgage funds for the fourth quarter.

But to say FLS has been the sole cause of the increase in lending does a disservice to broader improvements in the economy over the last few months. The labour market is stronger. Output is higher. And consumer spending power is greater. However, realistically, tight funding conditions in the wholesale money markets and stringent capital adequacy requirements will continue to keep a lid on lending volumes in early 2013.  The true measure of the strength of the mortgage market will be determined by how it rises to meet these challenges during the next year.

The greatest challenge will be to increase lending to first-time buyers significantly. Lending to borrowers with deposits of under 15% wasn’t disproportionately higher than overall lending during September and October, suggesting lenders are choosing to spread extra FLS funds equally over all LTV bandings as opposed to making a concerted effort to lend to more first-time buyers.

That would explain why criteria for first-timers are still restrictive. There have been rate reductions for people seeking a deal with an LTV of 85% and higher, but that doesn’t tell half the story.

Delve beneath the headline rates, and it is apparent lenders aren’t particularly moving up the risk curve yet, which means people who struggled to qualify for a mortgage three months ago are still stuck in the rental market – the property market’s equivalent of no-man’s land.

This has to change if we’re to see a real improvement in  market mobility. New buyers are historically the beating heart of the property market – they need more help than borrowers with larger chunks of equity.

That brings us to the arguable down side of FLS. Perversely, it has encouraged lenders to give with one hand and take away with the other. While the scheme has made it easier for banks to access funds, which has boosted mortgage lending, onthe flip side is it makes them less reliant on savers’ deposits. As a result banks can afford to set less competitive savings rates: it has triggered a collapse across easy access, notice accounts and fixed bonds, and the average saving rate has fallen from 2.82% to 2.42% since FLS began. Unsurprisingly, this will make it harder for first-time buyers to build the big deposits banks require to unlock affordable mortgage rates.

Regulatory and structural reforms are also hindering an improvement in lending. At the CBI annual conference last week, David Cameron gave a speech which reflected the frustrations of the business community by promising to remove the roadblocks to economic growth. The same needs to be done for the mortgage market. We need to help lenders to lend. The banking sector is in the middle of an unprecedented metamorphosis. It is under severe pressure to mitigate risk and yield to tougher regulatory requirements, while at the same time being expected to increase lending to borrowers and businesses. They are conflicting aims. And something has to give. With the recovery still on a fragile footing, an emphasis on encouraging growth would be seem to have more early wins than  additional regulatory requirements  that reflect past practices. Capital adequacy is a case in point. Requiring banks to hold bigger capital reserves won’t prevent another financial crisis. It only protects lenders from credit defaults, not liquidity issues, funding issues, or a run on the bank a la Northern Rock. Capital adequacy hits first-time buyers particularly hard because it becomes more expensive for a lender to fund a high LTV loan. It has encouraged banks to target lower LTV borrowers – part of the reason why lending to new buyers is still less than half what it was pre-2008.

The Bank of England’s latest Financial Stability Report doesn’t appear to encourage any improvement in high LTV lending levels. The Bank has recommended the FSA put lenders through more stress tests, and has warned banks they may be underestimating the level of risk in their balance sheets, so may need to add between £5 billion and £40 billion to their capital buffers.  

But it’s not just about pure economics, it’s also about attitude. The government should be sending clearer, more positive signals to lenders. Kowtowing to populist anger directed at the banking sector must seem appealing to the government, however making it easier for new buyers to purchase their first home is the key to getting the market moving again.  First-time buyer activity is the furnace which fuels the property market. But it isn’t being properly stoked, and that’s starving the rest of the market of heat.
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