Following 8 successive years of increase, the amount of secured credit distributed by lenders fell drastically in the 3 months leading up to the start of September, as lenders declined to engage in risky dealings.
The Bank of England (BoE) has released its latest Credit Conditions Report for Q3, within it revealing its expectation for lenders to increase the supply of home loans into the market in the last quarter of 2014, following a slowdown in activity in Q3.
In its latest quarterly probe into the affairs of banks and building societies, the BoE noted that a reluctance to engage in risky transactions combined with general apprehensions regarding house prices were the driving factors behind the slowdown in lending activity.
Several lenders noted that ensuring their practice was compliant with regulations enforced in Aprilís Mortgage Market Review (MMR) also limited credit availability, whilst others referenced counsel from the BoEís Financial Policy Committee (FPC) over the issue of the overheating housing market as a contributing factor to their constriction on credit distribution.
Across the entirety of Q3, credit availability fell for all categories of borrower, including those with low loan-value ratios and sizeable deposits. Naturally, this does not include individuals using the Coalitionís Help to Buy scheme, with this group assured mortgages of up to 95% loan to loan-value. ñthis aside, lendersí expressed an aversion to the majority of borrowers.
The number of home loan approvals, in a natural consequence of reduced credit availability, fell across Q3 ñ but more perhaps more significantly, demand for lending to fund house purchases also waned considerably over Q3 ñ the first time demand has alleviated since the beginning of 2012. Housing demand is expected to intensify over the remainder of 2014, as lenders complete their adaption to tougher lending rules, and exponentially increasing consumer confidence manifests itself within the market driving lending activity.
ìTougher mortgage eligibility criteria, high deposit requirements and concerns about future rate rises are starting to take steam out of the UK housing market,î said CEBR economist Scott Corfe.
ìPrice falls next year will be modest and we shouldnít be too worried about this ñ we are not anticipating a crash. The market is adjusting after getting ahead of itself in the first half of 2014.î
Overall, the amount of loans afforded to businesses remained unaltered from Q2, seemingly unaffected by the UKís ascent to the heights of pre-recession economic growth. Medium enterprises enjoyed greater obtainability of home loans, whilst the availability of loans for smaller businesses was kerbed by lenders.
Spending less on Mortgages, more on Recreation
As well as dampening lending activity, rocketing house prices and heightened confidence amongst homeowners regarding housing costs saw people paying less towards the upkeep of their mortgages.
Known as a ëhousing equity injectioní, the collective amount people use to pay toward their mortgage decreased for the 5th quarter in a row to below £11bn pound. It stood at £13.6bn in Q1 of 2013, to put consumerís heightened willingness to spend on alternatives to housing costs.
The ratio of housing equity to income fell again, in a further indication that consumers are harnessing higher levels of buoyancy in their outlook on personal finance.
“On the face of it, still relatively high net injection of housing equity in the second quarter of 2014 suggests that there is a pretty marked desire and perceived need of many people to improve their personal financial balance sheets given elevated debt levels,” said Howard Archer, top economist at HIS Global Insight.
“However, recent markedly increased house prices and much improved consumer confidence overall may be causing an increasing number of people to engage in housing equity withdrawal. This would reduce net injection of housing equity.”
This reduction in gross injection of housing equity would in turn free consumersí finances up for spending on leisure items such as a new car, a major home improvement or a holiday. However, a reduction will also stimulate anxiety over the possibility of house prices beginning to plummet. Despite experts concurring that any fall in house prices would be gradual and not a cause for concern, with a base rate hike anticipated next year, consumers will be wary of any potentially hampering market fluctuation.