There is no doubt the end of the Stamp Duty holiday for first-time buyers had a material impact on the monthly pattern of transactions but I am more concerned about the underlying position of the market and mortgage debt.
If you look at the last three months of gross mortgage lending the figures indicate the market is running at an annual rate of around £150bn. This is somewhat larger than anticipated and I doubt this will be sustained for the remainder of the year.
Looking at the weak economic data in the past six months and the prospect of only a modest improvement in real incomes and consumer spending power this year, I would expect gross lending to reach around £144bn for the whole of 2012. In the longer term we expect gross mortgage lending to rise to around £165bn a year as we return to a more stable economic picture.
Wide mortgage and credit margins combined with lender risk aversion mean subdued growth in lending
The chart below shows our latest central forecasts for the economy for the next few years. The best overall description of the forecast is a protracted and slow economic recovery that only sees economic growth returning to trend by 2016.
This slow recovery fully reflects the UK’s poor investment and export performance in recent quarters and the reluctance of consumers to return to spending. Consumers have had to cope with a record squeeze on real incomes in recent years, with a 1.2% fall in 2011 alone.
The stronger consumer spending picture shown for 2013 and 2014 is based on lower inflation enabling some growth in real incomes and an acceptance that interest rates will remain low for the foreseeable future.
Wide mortgage and credit margins combined with lender risk aversion will ensure lending growth will remain subdued.
An implicit assumption within the central forecast is that leverage and debt is gradually reduced over the forecast period.
For example, consumers’ mortgage debt to income ratio has been easing for the past four years and looks set to ease further in the long term. The graph below shows the mortgage debt to income ratio for the UK economy since 1995. Between 2001 and 2007 the ratio rose sharply as the mortgage and housing markets boomed. The financial crisis in 2007/08 has resulted in the ratio falling back to levels more similar to 2005/06 but still way above levels experienced after the last recession.
The main forecast shown in blue assumes a gradual reduction in the debt-to-income position as stronger income growth and a fairly moribund mortgage market help to improve the adjustment. Sluggish income growth in 2010 and 2011 has resulted in some slowing in the debt-to-income adjustment but this should resume once the recovery gathers pace.
Two alternative forecasts are shown for comparison. The confidence bounce scenario assumes the household sector grasps the advantages of low interest rates and a relatively stable employment market to increase borrowing and spending. Under this scenario gross mortgage lending rises to around £210bn in the long term compared to £165bn under the main forecast. This will require significant improvements in the retail and wholesale mortgage funding markets to achieve this level of lending. However, stronger economic growth and robust consumer spending would be attractive for wholesale lenders and those looking for higher yield.
Of more interest at present is the prospect of faster deleveraging. The government is sticking to its debt reduction plans and many of the top banks are quickly exiting areas involving higher levels of leverage or risk. The risk that consumers will also decide to cut back on future borrowing and spending would not be surprising. Synchronised debt reduction across all sectors will almost inevitably result in weaker UK economic growth and spending. Under this scenario mortgage lending remains broadly flat for several years and averages around £135bn at the end of the forecast period.
The need for stronger economic growth could not be much greater. Without this growth, under the current policy framework, the UK will be under increased pressure to deleverage and cut back debt further. As government is unlikely to change policy we must all hope consumers decide to move in the opposite direction.