Is the housing market hot or not?

The Bank of England has been urged to act as property prices continue to soar. But, as Ben Chu explains, the latest data has begun to paint a more ambiguous picture

Just what is happening in the mortgage market? Is it booming? Or is it slowing? Is easy credit flowing out of the banks just as it did in the boom years? Or are lenders sensibly tightening up their lending standards?

Those are the questions that regulators at the Bank of England have been grappling with as they decide whether or not to take further action to dampen the market with a view to safeguarding the stability of the financial sector.

They are due to report their decision this week, alongside the publication of the Bank’s latest Financial Stability Report. But the deliberations of the Bank’s 10-person Financial Policy Committee, chaired by Governor Mark Carney, are likely to have been complex because the data on the housing market has, unhelpfully, been pointing in different directions lately.

The latest release on house prices from the Office for National Statistics presents a pretty unambiguous picture of boom. Prices nationwide were still shooting up in April. Nationwide prices were 9.9 per cent higher year on year, the fastest increase in four years and with robust growth registered in every region of the country. Home prices in London were up by a whopping 18.7 per cent.

Even more strikingly, the Council of Mortgage Lenders reported this month that the number of mortgage advances (the final stage in the borrowing process) grew by 6 per cent in April alone, a 33 per cent annual growth rate.

But a more up-to-date price index from the Nationwide suggests the market might be slowing. In May prices rose 0.7 per cent according to Nationwide, down from a 1.2 per cent increase in April. The Royal Institution of Chartered Surveyors, in its latest survey, reported surveyors’ expectations of house price rises over the next year falling to its lowest reading since December. There has also been chatter of a correction in the London market, with buyers refusing to pay asking stratospheric asking prices.

Moreover, mortgage approval figures, which signal the earliest stage of the borrowing process, points to a slowdown in the volume of home loans being granted by lenders. The number of preliminary approvals in April was 62,918, 17 per cent down on January. That, incidentally, is also well below the rate seen before the financial crisis when average approvals were running at around 90,000 a month.

Incidentally, the Government has pushed back against those who have accused the Chancellor’s Help to Buy mortgage subsidies of stoking the boom by pointing to official data showing that in the first six months of the scheme (up until March) just 6,313 mortgages were completed with its assistance.

Some market observers say a more rigorous credit-checking regime introduced by the Financial Conduct Authority in April known as the Mortgage Market Review (MMR) has already cooled the market and that any further action from the FPC might be unnecessary. Newspapers now relate tales of bank loan officers asking borrowers intrusive questions about how often they eat steak for dinner or whether they play golf.

Big mortgage market players Lloyds and the Royal Bank of Scotland, sensing the nervousness of regulators about the direction of prices, recently announced that they will not lend borrowers more than four times their annual incomes if they wish to take out a mortgage worth more than £500,000. All that, it is argued, has already blown the froth off the market.

That seems to be supported by yesterday’s quarterly Credit Conditions Survey by from the Bank, which showed lenders expect the approval rate for mortgages to “fall significantly” in the third quarter of the year. Some of the banks surveyed cited the MMR and the new self-imposed loan to income caps as the reason for this.

“Mortgage approval rates are firmly in check as a result of the Mortgage Market Review and we must ensure that activity isn’t dialled down so far that credit-worthy borrowers are disadvantaged again,” says Brian Murphy of the Mortgage Advice Bureau.

Yet even if loan volumes are slowing there remain concerns about the riskiness of these new loans. House prices have bounced back strongly from the falls of the financial crisis but wage growth has been weak. That means most people need to leverage their incomes considerably to buy a house.

Data from the CML (see chart) shows that average loan-to-income ratios for people taking out mortgages have reached all-time highs. For first-time-buyers loan to income ratios have hit 3.4 times, up from 2.5 times in 2000. For all buyers the average ratio is now 3.2 times income, up from 2.4 at the turn of the millennium. The new Lloyds and RBS caps on leverage will not impinge on the average borrower.

Average mortgage loan-to-value ratios are below the pre-crisis levels. But the Bank’s latest survey shows lenders were still willing to increase the provision of mortgages with a ratio of more than 90 per cent in the three months in the second quarter of the year.

The CML also pointed out that the aggregate value of new loans last month was flat on April at £16.5bn. If the number of approvals is falling, this implies the loans being granted must be getting bigger.

This is all revelant to the FPC because high loan-to-value mortgages increase the risk of negative equity for buyers if prices correct while high loan-to-income mortgages increase the risk of financial distress for borrowers if interest rates rise sharply.

It also remains to be seen whether the boom is truly petering out, or whether this is merely a pause. “Implementation of the new regulatory regime is likely to have disrupted the normal patterns of activity, creating statistical ‘fog’ around the published figures” argues Bob Pannell, the CML’s chief economist.

We will discover on Thursday whether regulators at the Bank feel they can see clearly enough to act – or whether they will wait longer before reining in Britain’s property market.

Start your day with The Independent, sign up for daily news emails
News
Bill Gates, founder of Microsoft and co-chair of the Bill and Melinda Gates Foundation
businessUber, Snapchat and Facebook founders among those on the 2015 Forbes Billionaire List
News
news... and what your reaction to the creatures above says about you
News
Jihadi John
newsMonikers like 'Jihadi John' make the grim sound glamorous
News
music
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003