Bill Jamieson: Renewed worries for UK housing market as mortgage funding dries up

Published on Saturday 13 March 2010 14:18

WITH an election just weeks away, it is remarkable that very little has yet been said by the main parties on the state of the UK mortgage and housing market. It is an eerie silence, and one I do not expect to last once the election campaign proper gets under way.

The state of the housing market matters, not only because it is a real concern for millions of households, but also because it is a key area of the economy, with hundreds of thousands of jobs related directly or indirectly to it. While housebuilders have enjoyed a relief recovery after the dramatic falls in orders and activity last year, the sector has good reason to fear that this bounce may prove short-lived. That would be a disaster for the industry and very bad indeed for the wider economy.

A hint of the onset of troubles came on Friday with figures showing that mortgages agreed with house buyers in January plunged 49 per cent compared with December. There were just 32,000 loans approved for house buyers during the month. Arguably the most worrying figure from the Council of Mortgage Lenders was that the number of loans for first-time buyers fell by 54 per cent to just 11,300.

Both the Halifax and the Nationwide reported last week that prices had fallen in February, by 1.5 per cent and 1 per cent respectively. It is the first time since last June that Halifax house prices have fallen. Another survey, from Acadametrics, while confined to England and Wales, suggested that the effect of the slump in lending would last for longer than just one month.

Now these figures have, of course, been distorted by the bitter winter weather and the bringing forward of house purchases in late 2009 to beat the price threshold for stamp duty on house purchases moving back down in January from 175,000 to 125,000. This explains why the drop in mortgages for first-time buyers was particularly pronounced.

But while this downturn was predictable, CML director general Michael Coogan warned that he expects lending over the coming months to remain weak. And this is far from being the end of the mortgage market's woes.

The loss of investor confidence in wholesale debt markets has left a 300 billion funding gap for mortgage providers. This has only been filled on a temporary basis by government funds under the special liquidity and credit guarantee schemes. These are due to expire between 2011 and 2014, leaving uncertainty about how far, and through what sources, lenders will be able to refinance this funding.

Retail deposits will not be large enough to fill the gap – nor are they likely to do so as long as interest rates remain at historically low levels. Since November 2009, mortgage rates have been falling, but to fund these cuts, savings rates have fallen too.

The biggest rate reductions have been on fixed rate bonds, but numerous easy access deals have also been withdrawn.

Michelle Slade, spokesperson for Moneyfacts, says that despite providers having many more savers than borrowers, it is savers who are being neglected, with those who rely on their savings to supplement their income being hardest hit. "It is already virtually impossible for savers to find an account paying a positive real return after tax," she adds, "and inflation and falling rates are only going to exacerbate the situation."

The CML fears, set out in a paper to the Financial Services Authority a few weeks ago, are that the government has not yet recognised the need for a strategy to put mortgage funding markets back on a sustainable footing. Unless it does so, the likelihood is that the mortgage market will shrink.

"UK government policy measures," said the paper, "have focused on bank capital and liquidity, and on tightening mortgage market regulation. There has been no focus on identifying or developing a sustainable funding model for the UK mortgage market."

Howard Archer, economist at Global Insight, fears that the marked relapse in mortgage activity in January fuels suspicions that house prices are likely to be prone to falls this year and that they will be essentially only flat over the year.

Although the Bank of England may well hold off from raising interest rates until 2011, the overall economic environment – high unemployment and low earnings growth – is still far from supportive for house prices while credit conditions remain tight.

Prices, particularly in the south-east, have been lifted by a shortage of properties for sale, but the February survey by the Royal Institution of Chartered Surveyors suggests that this prop is beginning to crumble, as the number of new properties coming on to the market picked up more than new buyer enquiries after a weather-related drop in January.

The fall in house prices last month points to corrections ahead and a performance no better than flat over the year. That will trigger two concerns within the Treasury and Downing Street. One is that flat house prices will slow the pick-up in housebuilding activity while working to dampen domestic demand. The second is that a weak housing market will do nothing for homeowner confidence and the "feelgood factor". Expect the parties to start wooing the mortgage industry before too long.