2012 was the strongest year for house purchase lending since the financial crisis, with the number of loans breaching the 600,000 mark for the first time since 2007. Purchase approvals rose 3% from 590,425 in 2011 to 607,058. The stabilisation of the Eurozone crisis, and access to cheaper mortgage funds for banks, were the foundations of the improvement. The increase in 2012 took house purchase lending levels to 16% higher than they were during the market’s nadir in 2008.
Richard Sexton, business development director of e.surv chartered surveyors, explains: “The first half of 2011 was pitifully weak for mortgage lending, even by post-2008 standards. The Eurozone crisis was in full swing back then and lenders’ funding lines were painfully constrained. The crisis began to stabilise in 2012, which boosted confidence and increased banks’ appetite for riskier lending to high LTV borrowers. And funding became cheaper for lenders in late 2011 and early 2012, which encouraged banks to offer more competitive rates. The end of the stamp duty holiday in late March also swelled lending levels in 2012. It created a stampede of first time buyers in the first quarter of the year rushing to avoid a hefty tax bill on their first property.”
2012: A YEAR OF TWO HALVES
But 2012 was a year of two distinct halves for first-time buyers. Although the overall number of house purchase loans were split equally between the first and second halves of the year, loans to first-time buyers fell away sharply by 13% in the second half of the year.
Banks sustained lending levels in the second half of the year by focusing lending on wealthier borrowers at the expense of first-time buyers. There were 34,217 loans to borrowers with small deposits in the first half of the year, but just 29,679 in the second half thanks to a squeeze on bank funding and an unexpected dip in the economy.
Although the range of high LTV mortgages available improved, banks continued to keep a close reign on underwriting criteria more generallyin the second half of the year. This was despite a record quarterly increase in Q4 to the mortgage credit available to lenders, in part stimulated by the Funding for Lending Scheme. The ongoing struggles of the economy, and a squeeze on funding from the money markets, meant lenders were reluctant to use the cheaper funds provided by FLS to significantly increase lending to high LTV borrowers.
As a proportion of total house purchase lending, loans to borrowers with small deposits (of 15% or under) in the second half of the year dropped to 9.8%, compared to 11.2% in the first half of the year.
The third quarter was the weakest of the year. The Olympics distracted potential homebuyers over the late summer and early autumn, and also coincided with a weaker than expected quarter of economic growth. There were just 14,887 house purchase loans granted to borrowers with small deposits during Q3, well below the average for the year of 15,974.
The fourth quarter saw a meaningful; improvement in lending compared to Q3, helped in part by the start of the Funding for Lending Scheme, but still lagged well behind lending levels in the first half of the year. The improvement was thanks largely to banks focusing on wealthier borrowers – despite lending increasing in October and November, lending to borrowers with small deposits accounted for the same proportion of overall lending as in Q3.
In line with the poor second half of the year, house purchase lending dipped sharply in December. Purchase approvals fell 9% to 49,113 from 54,036 in November, and there were 7% fewer loans than in December 2011, making it the third weakest December since records began in 1993. Banks continued the trend over the second half of the year of lending disproportionately highly to wealthier borrowers.
Richard Sexton explains: “At first glance the first and second half of 2012 look remarkably similar. There were 304,204 loans in the first half and 302,854 in the second, suggesting a consistent improvement in the mortgage market over the course of the year. But the devil is in the detail, especially for first-time buyers. Lending levels in the second half of the year were only sustained by a disproportionate focus on lending to wealthier buyers, whereas in the first half of the year the improvement in lending was spread more equally between poorer and wealthier borrowers. 2012 epitomised a ‘tale of two halves’ as far as first-time buyers lending was concerned. Despite that, new buyer numbers still climbed to their highest in 5 years by the end of 2012. But the market still has a long way to go until it reaches full health again: there were 177,593 loans granted to high LTV borrowers in 2007, compared to just 63,896 last year.
PROSPECTS FOR 2013
The Bank of England has suggested Funding for Lending will have a much greater impact on lending in 2013. It failed to have much of an effect in late 2012 because of credit lags for loans. On top of that, a relaxation of bank capital adequacy rules – which will give lenders more time to establish the capital buffers stipulated by regulators – should free up more funds for mortgage lending in 2013. Instead of a full buffer by 2015, banks will only be required to build up 60% of the required amount.
Richard Sexton commented: “Funding for Lending hasn’t yet equated into more loans to first-time buyers. But this still remains a realistic prospect. The scheme won’t begin to have a full effect until 2013, and lenders are acutely aware the only way the mortgage market will recover to its pre-financial crisis high is if the first-time buyer market is jump-started. So the prospects for this year are still relatively encouraging. Banking rules on capital adequacy are being eased, which should encourage banks to delay building up their capital buffers and focus more on lending. And our labour market is one of the healthiest in the western world, which should help ease lenders’ concerns about the state of borrower finances.
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