Spending cuts, rising inflation and taxes blamed for decline

An unusual combination of factors led to a 26% fall in house purchase lending in January, according to new data from the Council of Mortgage Lenders. A fall between December and January is usually expected but a decrease of this magnitude is greater than seasonal factors alone would explain.

A mixture of factors probably led to this drop. With the effects of last year’s government spending cuts beginning to bite, and rising inflation and tax measures putting pressure on household budgets, potential house-buyers are likely to have been discouraged. This, coupled with December’s extreme winter weather, and uncertainty over future interest rate rises, has led to a lack of movement in the mortgage market.

There were 28,500 loans advanced for house purchase, worth £4.2 billion, in January, a fall of 29% by number and 26% by value on December. This was also a 12% fall by number (13% by value) from January 2010 and, given that the rush to purchase at the end of 2009 due to the stamp duty concession led to an artificially low level of lending in early 2010, this represents a substantial year-on-year fall.

It is likely given the mix of factors that led to the fall in January, that the market will remain flat. However, one month's data is not conclusive of the likely spring trend, especially in a low volume market where changes can be exaggerated in month-by-month percentage comparisons.

Table 1: Loans for house purchase and remortgage

The effect on remortgage activity was not as pronounced. The number of loans advanced in January dropped 6% (7% by value) from December. There were 22,100 mortgages, worth £2.7 billion, advanced in the month, a fall from the previous January of 5% by number and 10% by value. Remortgaging increased its share of total lending from 27% in December to 28% in January. With Bank of England figures showing an increase in remortgage approvals in the last three months, this should feed through into higher CML remortgage completion figures during the next few months.

Table 2: First-time buyers, lending and affordability

The fall in house purchase lending was split equally between first-time buyers and home movers. First-time buyers took  10,500 loans, worth £1.2 billion, in January, down 28% by number (29% by value) from December. Home movers saw a fall of 29% by number from 25,400 to 18,000 (28% by value from £4 billion to £2.9 billion) from December to January.

Table 3: Home movers, lending and affordability

On a positive note, first-time buyers borrowed 80% of their property’s value in January, compared to 77% in December, and for home movers the loan to value ratio remained stable at 68%.

CML director general Michael Coogan said: "Pressures on household budgets have been increasing both in terms of take home pay, and indirect tax measures such as the VAT increase and recent inflationary pressures, so we were expecting a fall in transactions early in the year, and a flat mortgage market underpins our forecasts for 2011.

"The bad winter weather and uncertainty over interest rate rises will have exacerbated the fall in lending in January, so it would be premature to draw any firm conclusions about activity levels over the next few months. The market remains stable at low levels of transactions."

Council of Mortgage Lenders

March 16, 2011