Tuesday, 25 January 2011

lack of mortgage lending

Bank of England's Adam Posen warns over lack of mortgage lending

Bank of England policymaker Adam Posen has told Bloomberg that he sees a “downside” risk to the UK housing market due to the lack of credit for first-time buyers and “very low” levels of home sales.

House prices rebounded last year from their worst slump since the early 1990s, as the Bank's Monetary Policy Committee held the interest rate at a record low of 0.5pc, however demand for mortgages weakened. Data last week from the Council of Mortgage Lenders showed mortgage advances for 2010 sunk to their lowest level in a decade.
“You look at the difficulty many first-time buyers or younger people have in getting mortgages [and the] very low volume of transactions – these to me are things saying ‘I am much more worried about a downside risk to the housing market from here than any further appreciation,’” Mr Posen told Bloomberg.
“My view is two things have supported the UK housing market in the last couple of years,” Mr Posen said. “One is our interest-rate cuts and quantitative easing directly affecting mortgage affordability” and the second that the level of UK homebuilding was “relatively small for the size of the economy compared to Spain or Ireland or the US”.
“You have both a demand factor through aggressive monetary ease and a supply factor in that the oversupply was much less,” he said. “That to me is a very straightforward explanation for why housing prices have been relatively resilient.”
Mr Posen has repeatedly urged his Bank of England colleagues not "overreact" to inflation remaining over target by increasing interest rates and in recent months has argued for policy to move in the opposite direction – to provide further stimulus.
He previously said he thinks the economy still has a long way to go to run at full tilt in the wake of the recession. "The workers of the United Kingdom did not wake up one morning ... and find that their left arms had fallen off and half of their offices had disappeared," he said last month.
A total of just £136.3bn was lent during the year, the lowest level since 2000, and 5pc below the 2009 figure, which was the lowest total for nine years, according to the CML.
The group, which is predicting total advances of around £135bn for 2011, also warned that consumer demand could be even weaker than previously expected if inflationary pressures led to an early rise in interest rates.
Advances during the final month of the year were also low, with just £11bn lent in December, the most subdued figure for the month since 2000, and 6pc down on November's total.
It was also the fourth consecutive month during which lending levels had been the lowest for the month in question for a decade.
But while December is traditionally a quiet month for the mortgage market, there were few signs that lending levels would pick up during January.
The Bank of England's Trends in Lending report showed that the number of mortgages approved for house purchase by the major lenders had dropped to just 40,000 during the month, the lowest level since March 2009 and down from 45,000 in November.
The number of homes changing hands also fell during December, with just 75,000 properties sold for more than £40,000, down from 77,000 in November, according to figures from HM Revenue & Customs.
Paul Sabbato, a director of broker First 4 Bridging, said: "The near-paralysis of the mortgage market continues. December is always a quiet month but this was a quieter December than usual.
"There's no doubt that many people who may have been considering buying a couple of months ago have shelved their plans until there is more clarity on when, and by how much, rates will rise."
Howard Archer, chief UK and European economist at IHS Global Insight, said: "Latest data suggest that housing market activity ended 2010 very much on the back foot, which suggests that house prices will remain under pressure in the early months of 2011 at least.
"This evidence of ongoing very weak housing market activity reinforces our belief that house prices will fall further in 2011, although current mounting signs of fewer houses coming on to the market could provide some support to prices."
Although any increases to interest rates are likely to be small, the move would have a big impact on the confidence of potential buyers.
CML economist Peter Charles said: "Money market rates have recently moved higher in anticipation of a rise in base rate and some lenders have recently reflected these increases in their product pricing.
"Against this backdrop, consumer demand may be weaker than we would otherwise have expected. Higher interest rates will also hit the budgets of existing borrowers, although the expected modest rises in base rate will result in a relatively small proportionate rise in monthly payments for most mortgage holders."
He added that the group did not think this would have a big impact on the number of people who struggled to keep up with their mortgage, and it did not anticipate revising its current arrears forecast.

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