Just as the new mortgage regime is kicking in, the market appears to have reached some new highs since the global financial crash. Both the number of mortgage loans for house purchase and the number of first time buyers (FTBs) were at their highest levels in February 2014 than for the same month in any year since 2007.
The number of loans rose 33 per cent to 48,400 in the year to February 2014, while their value rose 47 per cent to £7.8bn. Over the same period FTB purchases were up 41 per cent in number to 22,200 and up 55 per cent in value to £3.1bn. Figures like these suggest that recovery is truly taking hold.
The minutes of the meeting of the Monetary Policy Committee (MPC) on 9 April show that it noted the strengthening of household spending with retail sales up 1.7 per cent and new car registrations up 2.5 per cent in February. The Bank of England’s Credit Conditions Survey pointed to increased demand for secured lending for house purchase in Q1 of 2014, which it attributed to an improvement in the economic outlook and an increased appetite for risk on the part of mortgage lenders. It went on to suggest that lenders expect the availability of secured credit to increase further in Q2, driven primarily by the desire for greater market share.
The survey also pointed to a significant increase in the availability of mortgage deals with loans to value (LTVs) above 75 per cent and an increased willingness to lend above 90 per cent LTV. However, it also detected other housing indicators that were weaker and, having satisfied itself that the conditions posed no threat to financial stability, the MPC voted unanimously to maintain the Bank base rate at 0.5 per cent.
Warning light
But just as the mortgage industry might have been tempted to heave a collective sigh of relief and welcome the new normal, the Bank of England has voiced its unease at the state of the market. The Deputy Governor for Financial Stability, Jon Cunliffe, a member of the Financial Policy Committee (FPC), the MPC and the Prudential Regulatory Authority (PRA) Board, delivered a speech at the beginning of May warning of the danger of an overheating market. Explaining that the FPC’s role revolves around identifying and dealing with threats to stability, he said that in his view the “growing momentum in the market” is now the brightest warning light on the FPC’s dashboard.
Now the Governor of the Bank of England, Mark Carney, has also sounded a warning about the state of the market, hinting at possible changes to the Help to Buy scheme. It is rising house prices in particular that are giving cause for concern. The figures show that they are back to 2006 levels, as shown in the Graph. Cunliffe believes that some of it may be due to “pent up demand”. He argues that between 2008 and 2012 there were some 3 million fewer housing transactions compared with the long-term average. Now that conditions are improving and confidence is returning, some of those transactions were simply delayed and are now being carried out. His concern is that this pent up demand, coupled with the shortage of housing supply could lead the UK into dangerous waters.
The driving forces
Rising house prices, he explains, affect the way people act and the decisions they make. For example, in a rapidly rising market, buyers will look to get in as soon as possible for fear of being priced out. Sellers, on the other hand will tend to ask for higher prices and ultimately people will be more willing to get into debt to move up the housing ladder. He continues, “It is difficult to know how much expectations are driving the current market. But there is good reason to believe that a mutually reinforcing combination of strong demand, weak supply and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices in the UK.” Whether it poses a threat to financial stability, however, depends on whether that pressure leads to more transactions at higher prices and then to greater household debt and whether that is concentrated.
He is also concerned that the current low interest rates could mask the true cost of mortgages, thus pushing prices up even further.
He concedes that the new MMR rules in themselves may be helping to slow things down in the market and are likely to continue to do so, but remain as yet untested. He says that the direct exposure of the financial system to the housing market and its resilience to a major housing shock must be at the forefront since mortgage lending constitutes two thirds of UK banks’ and building societies’ lending. To determine the system’s strength, eight UK lenders will be stress-tested this year based on the effects of a steep drop in house prices.
The withdrawal of funding for lending from the mortgage market in February was one of the first responses to the momentum in the market. The challenge for the FPC, however, is to determine whether it needs to take any further action – and if so, what – if momentum fails to dampen sufficiently. As Cunliffe says, the FPC will need to be vigilant and ready to act if it is to avoid what he refers to as “a movie that has been seen more than once in the UK.”
