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.