Lending to home buyers sinks to lowest level in two years

7th October 2014

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Lending to home buyers has sunk to its lowest level in two years following tough new regulations in the mortgage market.

The Bank of England’s credit conditions survey showed that the amount of lent by the banks in the third quarter fell significantly following the introduction of the Mortgage Market Review (MMR) in April, which introduced strict affordability checks on borrowers

The survey found that the reduction in credit available was driven by lenders’ lower appetite for risk and concerns over house prices.

Many lenders also reported operational issues stemming from the MMR and some said they had scaled back lending  somewhat in response to warnings by the Financial Policy Committee about the need to mitigate risks in the housing market.

However, there was better news for prospective homebuyers as lenders expect mortgage availability to increase in the next three months.

The survey reported that the scoring criteria for granting mortgages had been tightened in the third quarter and the proportion of mortgage applications being approved had fallen.

However, credit availability for mortgages is expected to rebound significantly in the fourth quarter, as lenders look to increase market share objectives. Mortgage approval rates are also expected to rise.

The survey also revealed that demand for mortgages fell significantly in the third quarter after a rising trend since early 2012. This is also expected to improve in the next three months.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The Bank of England credit conditions survey fuels uncertainty over the extent of the current slowdown in housing market activity and moderation in house price growth.  It certainly suggests that the housing market is unlikely to go into full reverse.

“We think it is most likely that housing market activity will be solid but not spectacular over the coming months and that this will result in more restrained house price increases.”

He pointed out that while the Bank of England’s credit conditions survey expects demand for mortgages to pick up in the fourth quarter, buyer enquiries have moderated recently according to both Hometrack and the Royal Institution of Chartered Surveyors. RICS reported that agreed sales had fallen in August for the first time since September 2012.

He argued that increased buyer interest in the coming months will be limited by stretched house prices to earnings ratios, the prospect that interest rates will start to rise before long  and tighter checking of prospective mortgage borrowers by lenders

But the housing market will be supported by relatively strong economy, high and rising employment, elevated consumer confidence, interest rates remaining relatively low and some pick up in earnings growth in 2015.

He added: “On balance, we expect house prices to increase around 1% quarter-on-quarter in the fourth quarter of 2014 and by some 5% in 2015.”

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