Unusual combined factors led to fall in January lending

A mixture of factors probably led to this drop. 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. 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.

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%.

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."

Paul Hunt, managing director of Phoebus Software said: “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. House prices where there is significant public sector employment fell in both January and February and the latest index from LSL/Acadametrics showed that in northern England and Wales annual house prices are now down by more than 2.6%. 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.”

David Newnes, estate agency managing director of LSL property services said: “Today’s figures send mixed messages to first-time buyers. While it’s clear concerns about rising unemployment and higher taxation – not to mention a possibly shrinking economy – are holding back mortgage lending, affordability for first-time buyers is improving. The average LTV has risen to its highest level in more than 2 years and mortgage repayments represented the smallest proportion of first-timers’ incomes since January 2004. It’s clear that many first time buyers are still frustrated by slow mortgage lending, but with slightly smaller  deposits required and repayments now representing the smallest part of first-timers’ incomes in 7 years, prospective new buyers have plenty of reasons to be optimistic about getting onto the market.”

Nicholas Leeming, business development director at Zoopla.co.uk, said:

“We’re about to hit one the property market’s busiest periods of the year and there will a lot of buyers and sellers who decided to hold out over the winter who now want to join the spring surge. If this happens then people will quickly forget January’s appalling lending figures which are a result of meteorological rather than economic conditions. With April’s changes to the stamp duty thresholds there will be an added incentive for buyers at the top end of the market to get deals done quickly and this will filter down into the rest of the market as up-sizers look for swift closure on their transactions and those in the chain beneath them. The spring market could be the shot in the arm the property market needs but if it doesn’t happen the 2011 will be another very flat year.”

Have your say on this story using the comment section below