Mortgage market endures annual slump as lenders draw back

The mortgage market had its third worst August for almost two decades, a firm of valuers has predicted.

e.surv, part of LSL, takes its forecasts from its own activity and reckons to be correct to within a near margin of official statistics which are issued later.

The firm is predicting that house purchase loans in August fell 8% from last August, down from 53,040 to 48,913 – making last month the third worst August for almost 20 years.

Whilst last month’s figure was up from July’s 47,312, e-surv said this shouldn’t be taken as a sign of improving market conditions, saying that July was weak by historic standards with purchase approvals 5% lower than July 2011.

The firm said tightening credit conditions and the effects of the double-dip recession are moving the mortgage market back towards 2010 levels.
 
It says the annual contraction is the result of a sharp fall in lending to borrowers with deposits of less than 15%.
 
High LTV lending fell 10% compared to last August, says e.surv.

It forecasts that there were just 4,950 loans to buyers with a deposit of under 15% last month, down from 5,463 in August 2011. This represented just one in ten of all house purchase loans in August, compared to almost one in seven back in January.

The average LTV on a house purchase loan has now fallen below 60% for the last three months, reversing a seven-month period where it was at least 60%.
 
Richard Sexton, business development director of e.surv, said: “Much of the progress the mortgage market has made since summer 2011 has been unravelled by the double-dip recession.

“Lending volumes – particularly to first-time buyers – are slipping back towards the dismal levels we last saw in 2010 and early 2011.

“This is largely thanks to a fall in the number of high loan-to-value mortgages banks are willing to grant.

“Credit conditions for banks have become painfully tight, and they’ve responded by toughening criteria on mortgages aimed at borrowers with small deposits.

“The distraction of the Olympics, the awful weather and holiday season could also all be reasonably cited as potential contributory factors.”
 
Since 1993, when the Bank of England’s records begin, only 2008 and 2010 have seen lower lending levels during August, said the firm.

e.surv said August was the third consecutive month where lending has fallen on an annual basis, and the biggest year-on-year fall for 15 months.

The period between August 2011 and May this year saw an average of 52,343 house purchase loans per month. Since May this has dropped sharply by 11% to 46,783.

Sexton said: “The drop in lending is a measured response by lenders to the increasingly tough economic landscape. Lenders’ funding costs have increased by around 35% since January, and they have lost a great deal of confidence in the Government’s economic growth plan.”

e.surv’s analysis found that more landlords have stepped in to fill the vacuum left by first-time buyers at the bottom of the market. Despite overall purchase approvals falling 8% year-on-year, approvals on property worth less than £125,000 fell by only 4% as landlords purchased property that remains out of reach of first-time buyers.
 
Sexton said: “With rents pushed up to record levels, landlords are piling in to cheap property. Tight mortgage lending conditions are a virtuous circle for landlords and a vicious one for first-time buyers. The fewer first-time buyers there are, the cheaper property becomes for landlords, and the more expensive rents get.

“We expect landlords to continue to represent a disproportionate share of the buying market in the medium term. Would-be buyers will hope the Government’s Funding for Lending scheme can help improve the flow of credit in the near future.”
 
There was some positive news in August. On a month-on-month basis, house purchase loans rose 3% from 47,312 in July.

But this shouldn’t be taken as sign that market conditions are set to improve. July was weak by historic standards – purchase approvals were 5% lower than July 2011 – and high LTV lending levels were the same as in August.