The Council of Mortgage Lenders’ gross mortgage lending target looks set to be missed this year as the market becomes more subdued, say industry experts.
In December the CML forecast gross lending of £222bn in 2015, up by 8.8 per cent from £204bn last year, and rising to £240bn in 2016.
But in a “state of the market” report published last week, the Intermediary Mortgage Lenders Association predicts gross lending will be £210bn in 2015 and £220bn in 2016, in what it says is a “new normal” trend of stability.
Imla executive director Peter Williams says: “The CML forecasts were made in December and conditions have become more subdued since then and the numbers are clearly not looking as strong.
“Political uncertainty surrounding the election is one factor having an impact, and there is also evidence of a continuing overhang from the MMR.
”Stability with moderate year-on-year growth is what everybody wants.”
John Charcol senior technical manager Ray Boulger says: “It is just a matter of time before the CML has to revise its lending forecasts down. Even Imla is being optimistic; I recently revised my forecast for 2015 down from £225bn to £200bn.
“The market did not experience the usual pick up in activity in autumn due to the impact of the Bank of England’s stress test and income multiple changes, which have meant that for a lot of people the maximum loan they can get is significantly less than what they can afford.”
A spokesman for the CML says: “It is still very early in the year and we would not consider revising our forecasts at this stage.”
Imla forecasts a “relatively subdued” housing market this year, with average house prices predicted to increase by 3.9 per cent to £275,000. In 2016 the trade body expects a further 3.6 per cent increase in prices.
Imla says there are two major positive developments which will impact the mortgage market this year and next.
The first is the drop in the price of oil which has reduced the rate of inflation, boosting real incomes and delaying an increase in base rate.
The second is the overhaul of the Stamp Duty regime announced in the Autumn Statement, which it expects to encourage housing activity, particularly among first-time buyers.
However, it says political uncertainty around the general election and the continued impact of the MMR will constrain the market.
Williams says a long-term downward trend in the number of housing transactions will also act as a restraint on mortgage activity, creating a more “sustainable” market.
Imla is forecasting a 1.8 per cent drop in the number of housing transactions to 1.2 million this year, followed by a 4.2 per cent increase in 2016 to 1.3 million.
Williams says: “People are coming into home ownership later and staying in their first property for longer, older people are less likely to downsize and there are more landlords who turn over property infrequently. If you put all that together it creates a faltering market in terms of property transactions.”
London & Country sales director Michael Aldridge says: “The election affects consumer confidence and will lead to some people holding off from buying. Whether or not there is a hung parliament will affect how quickly the market recovers.”
Imla also expects the percentage of property transaction values that are mortgaged will continue to fall.
In 2014, 41.7 per cent of transaction values were mortgaged, down from 42.7 per cent in 2013.
Imla expects this to fall to 41.2 per cent this year and to 39.3 per cent in 2016.
It says this is down to the central London housing market becoming “decoupled” from the mortgage market.
And it says the Government’s pension freedom reforms which came into force on 6 April will free more cash to enter the buy-to-let market and further push down the mortgage share in house purchases.
High LTV premium
Imla says one aspect of the market which is yet to normalise is the cost of high LTV mortgages.
It says that despite a rate war in the second half of last year, the differential between rates paid by lower and higher LTV borrowers reached new highs in 2014.
Analysis of Bank of England data shows the marginal cost of borrowing between 75 per cent and 95 per cent LTV increased from 15.1 per cent at the start of 2014 to 17.2 per cent at the end of the year.
And the marginal cost of borrowing between 90 and 95 per cent LTV shot up from 17.8 per cent at the start of 2014 to 30.1 per cent in December, although it fell back to 22.8 per cent in January.
The report says: “30 per cent is higher than the rate on many credit cards and shows how reluctant lenders remain to take on the risk of lending above 90 per cent LTV.”
Aldridge says: “There is a huge gulf in rates between 90 and 95 per cent LTV. The only firms really lending at 95 per cent are those offering the Government’s Help to Buy scheme.”
Boulger adds: “This is entirely down to the onerous capital requirements which make it very expensive for lenders to lend at 95 per cent LTV. It makes no sense to have regulatory bodies constraining high LTV lending at the same time the Government is trying to encourage first-time buyers.”