First-time buyers, movers and remortgagors to drive lending over coming months

The Council of Mortgage Lenders (CML) estimates that gross mortgage lending was £18.5 billion in April, down 29% on March, and predicts that first-time buyers, movers and remortgage customers will drive lending over the next few months as ‘buy to let takes a back seat’.

The CML’s estimated figure for gross mortgage lending in April, which comes in at £18.5 billion, equates to a 16% year on year rise but is 29% down on March’s figure.

The council also warns that uncertainty surrounding the EU referendum is likely to weigh in on housing market activity and predicts that ‘buy to let lending is due to take a back seat’, while first-time buyers and remortgagors are set to drive the market over the coming months.

Another key take-away from the CML’s May 2016 market commentary is that a UK rate rise continues to be highly unlikely, as global uncertainties effect interest rate expectations.

Reviewing UK economic growth so far in 2016, the CML reports a fall in growth from 0.6% in the last quarter of 2015 to 0.4% in the first quarter of this year.

‘This, along with prospects for the second quarter looking even more subdued, has led to forecasters revising down growth for the UK economy to around 2% for 2016 as a whole,’

reports the CML.

And the upcoming EU referendum is adding to the UK’s domestic uncertainty, as is highlighted in the Bank of England’s (BoE) May Inflation Report.

Indeed, the council highlights the fact that the Monetary Policy Committee (MPC) says that it will react more cautiously over the near term to macro-economic and financial data exactly because the referendum may make it harder to interpret this information. The committee voted unanimously to keep interest rates at 0.5%.

According to the CML, predictions of a rate rise have now been deferred until some point during 2019, whereas at the end of 2015, financial market expectations were for the rate rise to occur at the end of 2016.

The CML believes that while the overall picture of the UK housing market is therefore somewhat distorted, given the recent introduction of the stamp duty surcharge for second properties and uncertainty surrounding the EU referendum,‘…if we look past these factors, the underlying picture still shows signs of growth, as the market remains underpinned by strong fundamentals’.

Never the less, it admits that the market has ‘become rather challenging to read’.

Despite the fact that the first quarter of 2016 saw 4% growth in both private and public housebuilding, when compared to the last quarter on 2015, there is still a tension between the supply and demand of existing available housing stock.

According to the Royal Institute of Chartered Surveyors, even though demand from buyers slackened in April, once the stamp duty deadline had passed, supply conditions were still tight. An imbalance which the CML says continues to support house price growth.

In comparing current market conditions to their pre-crisis peak, the CML notes that while property transactions have remained at about 100,000 per month, this is still a third lower that pre-crisis levels and according to the BoE’s Inflation Report this status quo is likely to remain.

“The recovery in activity and transactions had been attributed to the strong pick-up in the buy-to-let sector, but growth in the sector may well be weak over the next few months following the stamp duty change. This could be offset by modest positive growth in lending to first-time buyers, movers and remortgage customers.”

The CML states that its £18.5 billion estimate of lending in April, which equates to a 16% year on year rise, is down by 29% on March’s figures.

However, at just over £20 billion on a seasonally adjusted basis and consistent with what they have witnessed since October (barring March’s figures), the figures comes as a surprise to the CML “as we, along with other market commentators, expected to see a marked slowdown in April’s lending data, to reflect the bringing forward of house purchase activity to avoid the increased stamp duty change”.

One explanation for this might be that transactions that may have been processed over the course of 2016 were brought forward, so that rather than a short, dramatic market correction, a small drop-off in lending will occur over several months.

In figures, this may mean half a billion less lending per month for the rest of 2016, than may have been otherwise.

Lastly, citing the Bank’s Agent’s Summary of Business Conditions, the CML reports that commercial property transactions have fallen significantly, again partly due to global uncertainty and the uncertainty associated with June’s EU referendum. It expects this, coupled with the unwinding impact of the stamp duty change, to impact residential housing market activity in the second quarter of 2016.

Commenting on the report David Whittaker, managing director, Mortgages for Business, said:

“Such a drop in lending isn’t really a terrible drama. Mostly, this is about a change in timings to buy-to-let purchases. Nobody likes being an April Fool, and with thousands of pounds potentially at stake there was a massive incentive for property investors to do business in the first quarter. The fallout from this was always likely to be a subdued lending total in April, and today justifies those suspicions.

“Underneath the month-on-month eddies of lending patterns, there is a strong and steady current of buy-to-let lending critical to meet growing public demand for private rented accommodation. Underlying annual growth in April shows a more sustainable path aside from any short-term fluctuations – and the need for buy-to-let mortgages to support the role of landlords.”