Mortgages  

Mortgage market forecasts

Recovery and revival are probably the watchwords that characterise 2013’s housing and mortgage markets. As Table 1 shows, gross mortgage lending for 2013 is now predicted to be around £170bn, up 19 per cent on 2012’s total of £143bn. Significant in those figures has been the level of activity among first-time buyers (FTBs) and buy-to-let (B2L) borrowers with the number of FTB transactions up 39 per cent and B2L transactions up 24 per cent.

Of course economic recovery forms the backdrop to the revival in the housing market. Government-backed policies and schemes such as quantitative easing, funding for lending and Help to Buy have helped improve credit conditions, boosting mortgage lending. But it works both ways; while the housing market benefits from the improving economy, at the same time a robust housing market can also help boost economic recovery.

Stimulants

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Critics have expressed fears that artificial stimulants such as Help to Buy could lead the market to overheat. Speaking to the CBI towards the end of 2013, Spencer Dale, chief economist of the Bank of England, appears to take such fears on board, describing the UK housing market as having “a microwave-type quality to it with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds”. However, he suggests that the Bank is far better equipped to respond to these types of risks than in the past.

He also points to the exceptional nature of the crisis, the initial impact of which he argues was greatly amplified by uncertainty and fear. He says that we need to be “alive to the possibility that the events of the past few years may colour and contaminate business behaviour for many years to come. It may be a long time before companies look ahead with the same confidence that they did … prior to the crisis.”

The Council of Mortgage Lenders (CML) also dismisses suggestions that government initiatives are likely to cause the housing market to overheat. For example, it argues the main contribution of Help to Buy has been to boost market sentiment rather than helping to fuel a housing boom. It also points to the more conservative lending policies adopted by mortgage lenders in anticipation of the new MMR regime, particularly the safeguards on affordability which make overheating much less likely. It says that, whereas in the past households could stretch their borrowing limits in different ways, today’s market offers a much narrower range of coping strategies.

The flipside is the UK is not necessarily out of the woods yet. Household budgets remain stretched and while employment appears to have held up well, real wages remain weak. Nevertheless, the CML concedes the revival in the mortgage market is stronger than it anticipated in its forecasts for 2013. Table 1 shows that it originally predicted gross advances of £156bn. At the peak of the mortgage market in 2007, however, gross lending totalled £363bn.

Interest rates

In looking forward to 2014, the CML acknowledges the possibility that interest rates will be raised in 2015-16. The Bank of England governor, Mark Carney, has already made it clear that a rise will not even be considered until certain economic thresholds have been reached. In his speech, Mr Dale reinforces that message making it clear that the Bank is aware that extraordinarily low rates are likely to be needed for some time to come. He sought to reassure his business audience that the MPC will keep rates low until the UK has enjoyed “a prolonged period of strong growth” with significantly lower unemployment and higher real incomes. In January, Mr Carney is said to have revised down his original 7 per cent unemployment threshold to 6.5 per cent.