• House purchase loans in August fall 8% year-on-year to 48,913
• Lending volumes and LTVs sinking back to 2010 levels
• High LTV lending falls 10% in August
• Less than 5,000 purchase loans granted to buyers with a deposit of under 15%
• Landlords take advantage of first-time buyer vacuum and pile in to cheap property
House purchase loans in August fell 8% year-on-year to 48,913 – the third worst August for almost 20 years – as tightening credit conditions and the effects of the double-dip recession moved the mortgage market back towards its 2010 levels, according to research released this morning.
The latest Mortgage Monitor, produced by e.surv chartered surveyors, found the contraction was the result of a sharp fall in lending to borrowers with deposits of less than 15%. Tightening credit conditions over a three month period came to a head last month, forcing lenders to toughen lending criteria on high loan-to-value mortgages and scale back their lending to borrowers with small deposits.
High LTV lending fell 10% compared to last August. There were just 4,950 loans to buyers with a deposit of under 15% last month, down from 5,463 in August 2011. This represented just one in ten of all house purchase loans in August, compared to almost one in seven back in January. The average LTV on a house purchase loan has now fallen below 60% for the last three months, reversing a seven month period where it was at least 60%.
Richard Sexton, business development director of e.surv, explains: “Much of the progress the mortgage market has made since summer 2011 has been unravelled by the double-dip recession Lending volumes – particularly to first time buyers – are slipping back towards the dismal levels we last saw in 2010 and early 2011. This is largely thanks to a fall in the number of high-loan-to-value mortgages banks are willing to grant. Credit conditions for banks have become painfully tight, and they’ve responded by toughening criteria on mortgages aimed at borrowers with small deposits. The distraction of the Olympics, the awful weather and holiday season could also all be reasonably cited as potential contributory factors.”
Since 1993, when the Bank of England’s records begin, only 2008 and 2010 have seen lower lending levels during August. On a year-on-year basis, loans for house purchase in August fell from 53,040 to 48,913. It is the third consecutive month where lending has fallen on an annual basis, and was the biggest year-on-year fall for 15 months. This suggests the market is beginning to regress following a period of improvement stemming back to last summer, when, prior to May this year, purchase approvals rose on an annual basis for twelve consecutive months.
The decline in home loans over the last quarter has been stark. The period between August 2011 and May this year saw an average of 52,343 house purchase loans per month. Since May this has dropped sharply by 11% to 46,783. First time buyers, and buyers with low deposits, have been hit disproportionately hard by the drop-off in lending as banks focus on lending to lower LTV, and by extension less risky, buyers.
Richard Sexton comments: “The drop in lending is a measured response by lenders to the increasingly tough economic landscape. Lenders funding costs have increased by around 35% since January, and they have lost a great deal of confidence in the government’s economic growth plan. Many have now accepted the economy is likely to remain, at best, stagnant for the foreseeable future. Instead of increasing their exposure to high loan-to-value mortgages while the economy is in such a tender state, they are focusing on protecting their balance sheets against any more nasty surprises.”
e.surv’s analysis has found more landlords have stepped in to fill the vacuum left by first-time buyers at the bottom of the market. Despite overall purchase approvals falling 8% year-on-year, approvals on property worth less than 125,000 only fell by 4% as landlords looking to take advantage of record rents purchase cheap property that remains out of reach of first-time buyers.
Richard Sexton explains: “With rents pushed up to record levels, landlords are piling in to cheap property. Tight mortgage lending conditions are a virtuous circle for landlords and vicious one for first-time buyers. The fewer first-time buyers there are, the cheaper property becomes for landlords, and the more expensive rents get. We expect landlords to continue to represent a disproportionate share of the buying market in the medium-term. Would-be buyers will hope the government’s Funding for Lending Scheme can help improve the flow of credit in the near future.”
There was some positive news in August. On a month-on-month basis, house purchase loans rose 3% from 47,312 in July. But this shouldn’t be taken as sign that market conditions are set to improve. July was weak by historic standards – purchase approvals were 5% lower than July 2011 – and high LTV lending levels were the same as in August.