Why the FPC should avoid Recommending Mortgage Restrictions Tomorrow
Posted on 25 June 2014 by
I don’t expect the FPC to announce much, if anything, tomorrow. Mortgage approvals dipped in April and are now less buoyant than the Bank of England’s expectations at the beginning of the year. The MMR is clearly the main factor for the April dip and at John Charcol we are finding that on average it is taking a fortnight longer to get mortgage offers today compared to pre MMR.
This is partly due to some lenders struggling to process applications because of the volumes they are receiving and partly because some lenders are asking more questions after receiving an application, particularly in relation to items on the bank statement, including sometimes trivial amounts. Obviously, where the latter is a factor it also impacts on processing time for the cases involved and then has a knock on effect on other cases.
Below is a table showing the number of mortgage approvals since the beginning of last year, when they started to pick up, to the latest figures, which are for April. These are the actual numbers, which are included on the Bank of England web site but have not been referred to up to now in its monthly press releases, which have only quoted the seasonally adjusted figures. However, from publication of the May figures the Bank’s press releases will include a link to the actual numbers, referred to as “non seasonally adjusted,” which will make it much easier to access those figures as well.
The British Bankers Association has today released figures for mortgage approvals by its member banks for May. These provide an early indication of the trend of figures from the Bank of England. Again, looking at the actual numbers, the BBA May approvals were 4.2% up on April but despite this small increase they were still 5.2% down on March. Meanwhile, remortgage approvals fell off a cliff, with the May number 29.1% down in March.
In 2013 the BBA reported a 34.1% increase in purchase approvals from March to May and a 10.4% increase in the remortgage numbers. Although the numbers for 2013 were boosted by a market that was gathering steam in the first half of 2013, the dramatically weaker numbers comparing March to May this year with last year, both for purchases and remortgages, clearly reflect the impact of the MMR.
Purchase approvals will be the Bank’s main focus and as you can see from the attached table the month on month increase in 2014 v 2013 has declined since the beginning of the year and fell sharply in April. Furthermore, whereas April approvals in 2013 were 11.4% up the previous month, in 2014 the April numbers were 9.4% down on March. I expect May approvals to also reflect the slowdown caused by the MMR and probably for the first month this year to be lower than the same month in 2013.
Remortgage approvals show a similar pattern but these are obviously much less relevant in terms of any impact on house prices.
Although I appear to be in a small minority of people not expecting the FPC to take any material action to curb the mortgage market this month three other reasons I take this view are:
1) There is now clear anecdotal evidence that the only region where one can legitimately argue there is a bubble, i.e. London, is now cooling and the 18.7% increase in London recorded in the latest ONS figures (for April) is likely to be the peak for this cycle, with the year on year figure declining from May. As a result of the time lag from a market change to that change being reported in housing completions the house price indices don’t yet reflect the slowdown in London but the FPC will be well aware of it.
The latest LSL Acadametrics house price index (the only index including 100% of housing transactions) regional figures show that house prices have exceeded their previous peak in only three of its ten regions in England and Wales (London, the South East and East Anglia).
2) Halifax/Lloyds and RBS/NatWest have announced a restriction of 4x income in the maximum they will lend where the mortgage amount is over £500,000 and Halifax and Nationwide have restricted Help to Buy 1 mortgages to FTBs. These two lenders are by far the largest two in this market, with Halifax having a 50% market share.
If lenders announce their own mortgage restrictions, whether or not there has been any political pressure to do so, there is less reason for the FPC to recommend to The Chancellor any mandatory restrictions.
3) The FPC has to set policy for the whole of the UK (and at one extreme prices in N Ireland are still 50% below their peak!) and its fundamental problem is the same as the ECB’s in setting policy for the Eurozone - one size does not fit all.
The seven regions of England and Wales where prices are still below their late 2007 or early 2008 peak and the percentage off the peak are:
· North -7.3%
· North West – 7.0%
· East Midlands-3.6%
· West Midlands -2.9%
· Wales – 7.4%
· Yorkshire & Humber – 6.4%
· South West – 0.9%
Where house prices are still below previous peaks any action to curb mortgage lending risks pushing people who have just come out of negative equity back into it and delaying the move back into positive equity for others. This also has implications for the strength of bank and building society balance sheets as the better the LTV on their mortgage lending the less capital they are required to hold against such loans.
By the time of the September FPC meeting the impact of the MMR will be much clearer, and the house price indices will be reflecting the slowdown in London. By then it will be much easier to make a sensible judgement on whether any action is required.
2013 2014 2013
Jan 37,248 53,513 (+43.7%) Jul 70,221
Feb 45,103 60,394 (+33.9%) Aug 64,266
Mar 55,510 72,476 (+30.6%) Sept 67,172
Apr 61,829 65,689 (+ 6.2%) Oct 75,817
May 68,683 Nov 71,958
Jun 65,188 Dec 52,619
2013 2014 2013
Jan 22,575 31,275 (+38.5%) Jul 36,813
Feb 27,456 32,641 (+18.9%) Aug 34,279
Mar 31,856 36,259 (+13.8%) Sept 35,683
Apr 34,170 31,260 (- 8.5%) Oct 40,305
May 33,744 Nov 36,288
Jun 31,757 Dec 28,276
Source: Bank of England (real figures, i.e. not seasonally adjusted)
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