Is mortgage lending set to break out of the narrow range it has been stuck in since early 2008? The latest data from the Bank of England on mortgage approvals is looking better than some suggest.
Mortgage approvals rise
Just to recap, mortgage approvals have been hovering around 50,000 a month since mid-2009 and have not exceeded 60,000 a month since March 2008 before the onset of the credit crunch. The attached chart shows monthly approvals since the start of 2008.
According to the Bank of England, approvals rose about 3.5% from February to March this year. You can see the original data here.
But changes from one month to the next don’t take in to account seasonal changes in the Property market. Comparing approvals this year with the same time last year helps to avoid seasonal distortions.
On that basis, mortgage approvals in March were up around 7% compared to the same time last year. Moreover, the increase between March this year and 2012 is larger than the 5% increase between February 2012 and this year.
True, lending in January this year was lower than in 2012, but the results for January last year were unexpectedly high and may be an anomaly. Even allowing for that fall in approvals this January, overall approvals in the first quarter of the year are ahead of the same time last year.
More mortgages = more sales
That would be consistent with recent news of more sales. The Registers of Scotland reported earlier this week that sales to March year were 5% up on the same period last year. Data from GSPC member firms for April suggests that that trend is accelerating.
But what are the chances of a reversal?
But we have been here before. Approvals looked like they were growing strongly at the end of 2009, only to go in to reverse the following year.
The same happened in 2011 when a gradual recovery in approvals in the second half of the year peaked the following January and then went in to reverse.
Is there any reason to believe that this time might be different?
Possibly. Bank lending as a whole has been hugely influenced by events in the Eurozone. UK lenders prepared themselves for potentially huge losses in Europe by holding on to all the money they had.
When the Euro crisis reared its very ugly head again in 2012, mortgage lending in the UK shriveled as a result. That only came to an end when European central Bank’s Governor, Mario Draghi, said the bank would ‘do whatever it takes to save the Euro’. That commitment brought to an end – at least for the time being – fears that a major European economy would crash out of the Eurozone and trigger a potentially huge recession.
So, the chances of another Eurozone crises derailing lending in the UK are much lower than they were.
Shortly thereafter, the UK government launched Funding for Lending which offered banks cheap money as long as they lent it out. That scheme has now been extended to 2015, albeit with greater incentives to lend more to businesses rather than home owners. Nevertheless, it should mean that banks can raise the funds to lend if they want to.
Both of those factors suggest that we are far less likely to see a reversal in lending this year.
What to look out for
If mortgage approvals reach 56,000 or more for April, that would that would suggest that the current growth in lending is being sustained. If it is above that, the recovery is accelerating. If it is below that level, then growth is moderating.
There is a bewildering array of reports on mortgage lending. The British Bankers Association (BBA), the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) all issue regular reports on mortgage lending by their members.
But I prefer to use the data from Bank of England, for two reasons.
Firstly, the changing market share in mortgage lending between the building societies and the banks means that you can’t know whether a change in lending reported by them is down to a change in their market share or actually reflects overall market trends. Castle Trust reports that building society mortgage approvals now account for 29% of total approvals, compared with just 16% after the credit crunch. An increase in approvals reported by building societies might, therefore, be the result of an increase in their share of total lending rather than an increase in lending as a whole. Equally, a decline in approvals reported by the banks might be no more than a loss of market share rather than a fall in overall lending.
Secondly, the Bank of England results are based on what lenders tell them about loans that they have approved – even if the money hasn’t been handed over yet. In other words, the figures are a forward indicator of what is likely to be lent in future rather than what was lent last month.