In August last year, the Bank of England launched Funding for Lending – a scheme designed to boost bank lending. Sometime around October, property sales showed renewed signs of life after a summer in the doldrums. Are the two by any chance related?
Hard one that, isn’t it? But interesting all the same because it illustrates the very direct relationship between mortgage lending and property sales.
That may sound pretty obvious, but bear with me. For some time lenders have claimed that the low number of mortgage approvals is as much down to limited demand for mortgages from cautious buyers as it is to any lack of funding. After all, you can’t blame them for limited mortgage lending if nobody wants to borrow.
The launch of the Funding for Lending scheme provided the perfect opportunity to test that argument. If it was true, an improvement in mortgage availability and a relaxation in lending criteria would not necessarily lead to an increase in market activity.
More mortgages = More sales
In fact, it became clear pretty quickly that improved mortgage availability does lead to an increase in property transactions. Mortgage rates started to fall and criteria to loosen shortly after Funding for Lending was launched. You can see the latest data from the Bank of England on mortgage approvals on the attached graph. The source data is here. Approvals in November (the most recent month for which we have data) were higher than for the same month the year before – the first time this has been true since May 2012.
And GSPC started to see sales improve in October. By November they were regularly higher per week than the same time last year. That implies, of course, that the demand to buy was always there (despite some not very encouraging economic news) and that the number of sales really was limited by the lack of mortgages.
That may seem to be a statement issued by the Department of the Bleeding Obvious, but it’s handy to have more evidence backing up what many of us expected to be the case. It also leads to another conclusion: that activity in the property market will be more influenced by mortgage availability than by the fate of the economy. To put it another way, demand for mortgages currently exceeds supply and any increase in mortgage supply will, therefore, be converted in to transactions.
Mortgage lending in 2013
So, what is 2013 going to look like from the lenders point of view?
The Council of Mortgage Lenders ((CML) currently predicts only very modest growth in lending, up from 930,000 mortgages in 2012 to 950,000 mortgages in 2013. You can see their forecast here.
But the CML underestimated the number of mortgages that would be issued in 2012 by a significant figure. In fact, its original forecast (825,000) was over 100,000 mortgages short of the final total. It is just possible that, with the Funding for Lending scheme in full flow, the forecasts for this year will also prove to be an under-estimate.
Moreover, the rules around implementation of Basel III have also been relaxed recently. Basel III is the name for a new set of international regulations designed to make banks safer. The rules spell out how much money the banks must hold to cover potential losses – and so reduce the risk that they have to come running to the taxpayer for a handout. But requiring banks to hoard more money means they have less to lend.
In the last few days, the deadline by which banks have to meet the new targets set by Basel III has been pushed back to 2019, from 2015. And the sort of things that banks are allowed to consider as ‘money’ has been widened to include some mortgage backed assets. That should make it easier for banks to continue lending than it might otherwise have been.
But there are two possible obstacles to improved mortgage lending.
The first is the reluctance of banks to loosen their lending criteria. Until now, the effect of Funding for Lending has been to reduce the cost of mortgages for those with decent deposits, ideally 20% or more of the purchase price. But the banks have been reluctant to lend to those with smaller deposits.
The hope is that increased competition among lenders will prompt them to lend around 90% of the purchase price rather than the current 80%. There are tentative signs that that this starting to happen – Nationwide recently came out with a 95% for regular savers – but it is going to be an uphill struggle.
The second is the apparently never-ending crisis in the Eurozone. Remember all those emergency talks last year about a Spanish default and howGreecewas a tiddler in comparison? That put lending in the deep freeze asUKbanks worried that some European banks and businesses would go bust in the fall out from a default by a major Euro economy. In which case, they would need all the money they had to offset losses.
That situation is not resolved, although it seems to be going in the right direction. The ECB (European Central Bank) has stepped in to buy the government debt of those countries most under pressure and there are plans for European banks to borrow direct from the European Stability Mechanism (rather than their domestic government) once the new European Banking regulator is in place.
But this too is likely to be an uphill struggle and there is no guarantee that the whole thing won’t descend in to crisis once again.
The good news and the bad news
So, the good news is that there is the potential for mortgage lending (and so transactions) to improve somewhat this year with the prospect that the improvement could be better than expected. The bad news is that either a lack of competition between lenders or revival of the Euro crisis could plunge that gradual improvement in to reverse.