News from the Bank of England that mortgage approvals to purchase property in December last year reached their highest level for six years (see here for more detail) prompted a question: what volume of mortgage approvals would we expect in a ‘normal’ market?
In other words; what level of transactions would you expect in a stable market that was functioning properly (i.e. allowing people to sell and buy homes without undue difficulty)?
The question is more than academic. If we are already there (or thereabouts), you might conclude that any further increase in activity was a sign of a market overheating. If, on the other hand, activity levels remain subdued, you would be more likely to think that the market has some way to go before it reaches equilibrium.
The trouble is that recent years are hardly a good guide to a ‘normal’ market. Since 2008, transactions have been severely depressed by limited mortgage availability. Before that, they were arguably inflated by a house price boom.
Mortgage approvals in a ‘normal’ market
So, to get a better handle on the number of transactions we might see in a period without boom or bust, I’ve looked at the number of mortgage approvals over the decade from 1994 – 2003 (see graph). To see the full data series, go here and tick the box for the series titled LPMVTVX. That covers a period of reasonable activity avoiding the last downturn in house prices and the years of peak price rises from 2004-2007.
Over those 10 years, mortgage approvals to purchase averaged 1.15 million a year – an average of 96,000 a month (although there are substantial seasonal variations).
2013 approvals 36% below decade average
So, how does that compare with 2013? We now know that there were 734,000 mortgage approvals in 2013. In other words, mortgage approvals last year were 36% below what you might consider a ‘normal’ level.
Of course, I am using mortgage approvals here as a substitute for actual purchases* and that is not a precise measure.
We know, for example, that the number of transactions that don’t involve a mortgage increased during the recession, so mortgage approvals might underestimate the level of activity in the market. On the other hand, the size of the housing stock has also grown (if not by as much as we would want) which should mean that there are more properties to sell and buy.
‘Normal’ is an additional 35,000 approvals per month
Even making allowances for both of these factors, it looks like transactions are still some way below a level that might be considered ‘normal’. To put that in perspective, it would require an additional 418,000 mortgage approvals (to purchase) this year before we got back to the levels we saw between 1994 and 2003. That is almost 35,000 extra approvals per month on average. That still looks a long way off.
* Why use mortgage approvals to purchase property rather than actual transactions? And why use UK and not Scottish figures? Because I can’t find data from Registers of Scotland going back beyond April 2003 and because the Bank of England does not issue separate data on approvals for Scotland alone.