A fall between December and January is usually expected but a decrease of this magnitude is greater than seasonal factors alone would explain.
A mixture of factors probably led to this drop, according to the CML. With the effects of last year’s government spending cuts beginning to bite, and rising inflation and tax measures putting pressure on household budgets, potential house-buyers are likely to have been discouraged. It believes this, coupled with December’s extreme winter weather, and uncertainty over future interest rate rises, has led to a lack of movement in the mortgage market.
There were 28,500 loans advanced for house purchase, worth £4.2 billion, in January, a fall of 29% by number and 26% by value on December. This was also a 12% fall by number (13% by value) from January 2010 and, given that the rush to purchase at the end of 2009 due to the stamp duty concession led to an artificially low level of lending in early 2010, this represents a substantial year-on-year fall.
The CML believes it is likely, given the mix of factors that led to the fall in January, that the market will remain flat. However, one month's data is not conclusive of the likely spring trend, especially in a low volume market where changes can be exaggerated in month-by-month percentage comparisons.
The effect on remortgage activity was not as pronounced. The number of loans advanced in January dropped 6% (7% by value) from December. There were 22,100 mortgages, worth £2.7 billion, advanced in the month, a fall from the previous January of 5% by number and 10% by value. Remortgaging increased its share of total lending from 27% in December to 28% in January. With Bank of England figures showing an increase in remortgage approvals in the last three months, this should feed through into higher CML remortgage completion figures during the next few months.
The fall in house purchase lending was split equally between first-time buyers and home movers. First-time buyers took 10,500 loans, worth £1.2 billion, in January, down 28% by number (29% by value) from December. Home movers saw a fall of 29% by number from 25,400 to 18,000 (28% by value from £4 billion to £2.9 billion) from December to January.
On a positive note, first-time buyers borrowed 80% of their property’s value in January, compared to 77% in December, and for home movers the loan to value ratio remained stable at 68%.
Commenting, CML director general Michael Coogan said: "Pressures on household budgets have been increasing both in terms of take home pay, and indirect tax measures such as the VAT increase and recent inflationary pressures, so we were expecting a fall in transactions early in the year, and a flat mortgage market underpins our forecasts for 2011.
"The bad winter weather and uncertainty over interest rate rises will have exacerbated the fall in lending in January, so it would be premature to draw any firm conclusions about activity levels over the next few months. The market remains stable at low levels of transactions."
John Mawdsley, CEO of Omnii Solutions, said the weather did play its part but it wasn’t the whole story: “Trepidation over interest rates hikes and growing pressure on household budgets has taken a severe toll on buyer finances,” he said.
“Potential buyers are caught between the lack of higher LTV mortgage lending, increasing rents and the state of their personal finances. Although I expect lending to bounce back in February and March, it will be no surprise to see it continue in a generally suppressed state until uncertainties stop praying on the minds of borrowers and lenders alike."
Paul Hunt, managing director of Phoebus Software agreed: “Lending in January was far below seasonal expectations and even pessimists in the industry will be surprised by the sharpness of this fall. We’ll have to wait for the figures from a relatively balmy February to see how much of this fall was a result of the cold weather, but it’s inconceivable that the onset of public sector tax cuts weren’t largely to blame for the falls.
“In areas like London and the south-east, the loss of public sector jobs is a less pressing concern and demand for property has held up strongly which indicating more generous lending. Elsewhere, lenders are rightly concerned about the onset of high unemployment and the floodgates will remain closed until fundamental concerns about the economic future have been allayed.”
Brian Murphy, head of lending at independent mortgage broker, Mortgage Advice Bureau, is optimistic. “Activity overall witnessed a marked increase in February over January both among house buyers and those looking to refinance existing arrangements.
“In a normally functioning market borrower activity tends to rise month on month during the first half of the calendar, generally plateauing during the mid-summer holiday season followed by an autumn uptick, before hibernating as the Christmas period approaches.
“As a result we are mildly encouraged that the market appears to be following its more historic pattern, albeit at significantly lower volumes than at the height of the property boom.
“February has witnessed more borrowers exploring the opportunities that remortgaging offers, with the volume of those remortgaging shifting back to levels last seen in 2008.”
