Underlying uncertainty remains over mortgages

Data from the Bank of England showed that a total of 53,710 mortgages were approved in April, slightly up from 53,674 in March, but below consensus expectations.

The value of lending secured on dwellings also increased by £0.9billion in April, beating the previous six month average of £0.6billion.

Compared to July 2012, the monthly number of mortgages approved has risen by 14.3%. One reason that could explain this growth is the Bank of England’s “Funding for Lending” (FLS) scheme which was launched last July. This initiative aims to incentivise banks and building societies to increase the amount they lend to households and small businesses by rewarding them with interest rates that are cheaper than the market level. In theory, this reduction in the cost of funds should be, at least in part, passed on to households and small businesses as they borrow this money from the banks.

The Bank of England’s latest Credit Conditions Survey noted that lenders expected the availability of secured credit to households to increase in the second quarter of this year. Meanwhile, positive GDP growth in Q1 2013 and steady increases in the number of people in full time employment over the past 12 months have helped support demand for credit amongst households. These factors have contributed to better performance in the housing market. The latest round of house price data from Nationwide showed that in May, the average house price had risen by 1.1% year-on-year (although this is still 9.7% below its pre-crisis peak).

Looking ahead, the Chancellor’s Help to Buy scheme could help to boost the number of mortgage approvals, especially so after January 2014 when the scheme will provide up to £12 billion of mortgages guarantees.  However, the UK’s current economic recovery remains fragile. If this recovery falters, or if creditors become less certain that it will be sustained, mortgage approvals would likely fall back from their current levels. Trouble in the euro zone may be less prominent in recent headlines, but if turmoil in the common currency area were to reignite, the UK’s economic recovery would be threatened.

Improving credit market conditions, the FLS and the Help to Buy scheme give us reason to expect that the number of mortgage approvals will rise in the future. However, due to the fragile economic recovery and the risks posed to the UK from the global economic scene, this is not a foregone conclusion.

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