The outlook for the housing market may be more uncertain than it has been for some time, but increased activity by first-time buyers (FTBs) is offsetting a tougher buy-to-let market – at least partially.
First-time buyers took out 24,200 mortgages worth £3.8bn in February 2017, which is up 11 per cent by volume and 11.8 per cent by value on the previous 12 months, according to the Council of Mortgage Lenders (CML). Table 1 gives a breakdown of the value of loans taken out in February 2017, compared with the previous month and a year ago.
Lower borrowing costs
Monetary policy initiatives have helped to keep the market going. The Bank of England’s (BoE) decision to cut the base rate of interest from 0.5 per cent to 0.25 per cent in August 2016 has lowered borrowing costs and helped to sustain activity.
Consequently, mortgage rates have dropped further – Moneyfacts reports, for example, that the average two-year fixed rate 95 per cent loan to value (LTV) mortgage reached a historic low of 3.89 per cent in January 2017.
According to the BoE, the average quoted rate for a two-year fixed-rate mortgage at 75 per cent LTV is currently 1.42 per cent – the lowest it has ever been.
The low interest rates are a reflection of the amount of competition for new business among lenders, as well as the accommodative environment cultivated by the central bank.
The fact that so many FTBs have been able to enter the market is, on the one hand, not that surprising. They have been the biggest beneficiaries of government interventions such as Help to Buy.
Paul Smee, director general at the CML, points to the fact that new-buyer activity has consistently matched home-mover borrowing over the past six months – a trend not seen in the UK for 20 years.
But Moneyfacts adds that the removal of the Help to Buy guarantee scheme in December 2016 has had an impact on the 95 per cent LTV mortgage sector.
It observes that the closure of the scheme leaves lenders “exposed to the full risk of offering a 95 per cent deal that was previously shared with the Treasury. Instead of swallowing the extra cost, these providers are choosing to pass it on to the borrower in the form of higher rates”.
Affordability issues persist. Acknowledging the “lengthy period of rapid house price growth”, which has made it difficult for many to buy, Halifax also points to the fact that income growth has failed to keep up with house prices.
Weak growth
Observations by the BoE confirm this. It says despite unemployment falling to 4.7 per cent in the first quarter of 2017 – its lowest since June to August 1975 – wage growth remains weak, falling to 2.2 per cent in January 2017.
In its Financial Policy Committee report on 22 March, the BoE notes: “UK household indebtedness is high by historical standards and has begun to rise relative to incomes… consumer credit has been growing particularly rapidly”. It suggests these factors represent a risk to lenders “if accompanied by weaker underwriting standards”. The BoE supports a review of the credit quality of new lending by firms overseen by the Prudential Regulatory Authority.
Nevertheless, the relatively sound health of the market suggests that interventions by the government, and the BoE in particular, are having a positive effect despite the persistence of the low-income environment, the uncertainties of Brexit and the issues of affordability.
