SPECIAL FEATURE: FPC should avoid restricting mortgages

Mortgage approvals dipped in April and are now less buoyant than the Bank of England’s expectations at the beginning of the year. The Mortgage Market Review (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.

Attached is a table showing the number of mortgage approvals since the beginning of last year, when they started to pick up strongly, 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 in the more comprehensive Bank of England data. 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 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 the attached table shows 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 on the previous month, in 2014 April was 9.4% down on March.

May approvals are likely to also reflect the significant slowdown caused by the MMR. Remortgage approvals show a similar pattern but these are obviously much less relevant in terms of any impact on house prices.

Three other reasons the FPC should refrain from curtailing the mortgage market are that 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).

Halifax/Lloyds and RBS/NatWest have announced a restriction of 4x income in the maximum they will lend where the mortgage amount exceeds £500,000 and Halifax and Nationwide have restricted Help to Buy 1 mortgages (the new build equity share scheme) to First Time Buyers. 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.

The FPC has to set policy for the whole of the UK 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 below 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%

Furthermore, these figures do not allow for inflation and so in real terms the falls over the last 6 or 7 years are even higher. Prices in Scotland and Northern Ireland are also still below their peaks, with Northern Ireland prices around 50% lower.

Where house prices are still below previous peaks any action to curb mortgage lending risks pushing homeowners who have recently 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.