Credit Conditions Survey (Q1 2021) - Capital Economics
UK Housing

Credit Conditions Survey (Q1 2021)

UK Housing Market Data Response
Written by Andrew Wishart
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Robust house price growth and the prospect of a strong economic recovery have caused banks’ risk appetite to return. As a result, banks expect to increase the availability of high LTV loans and reduce mortgage rates over the next three months which will ensure buyer demand remains very strong.

Confirmation banks’ risk appetite is returning

  • Robust house price growth and the prospect of a strong economic recovery have caused banks’ risk appetite to return. As a result, banks expect to increase the availability of high LTV loans and reduce mortgage rates over the next three months which will ensure buyer demand remains very strong.
  • Banks expect a renewed strengthening in demand in Q2. Lenders reported a dip in Q1, consistent with mortgage approvals coming off the boil in January and February. (See here.) But while the demand balance fell to -21.9 in Q1 the balance of expected demand for Q2 was +42.8, the highest on record. So the extension of the stamp duty holiday, high household saving, and incentives to move from increased home working are set to ensure demand remains strong over the summer.
  • At the same time as demand is expected to strengthen, banks will improve their mortgage offering. The headline mortgage availability balance rose from +2.4 to +13.7 in Q1. And the pace of the easing in credit conditions is expected to accelerate in Q2, with a balance of +37.6 reporting they will increase supply. The survey suggested that will be delivered by a reduction in mortgage rates (see here), a continued return to lending in higher LTV segments of the market, and a slight easing in credit criteria.
  • The main reason for the increase in mortgage credit availability has been the prospect of a strong economic recovery. (See Chart 1.) Indeed, we forecast that the economy will recover to its pre-virus size in early 2022, and that the bulk of job losses are already behind us. Against that backdrop, concerns about a possible drop in house prices continue to diminish, leading banks to report that their risk appetite is beginning to return and that they are aiming to increase market share. That comes despite a balance of +20.3 of lenders reporting a rise in defaults in Q1. Note, though, that the rise in defaults has been far smaller than banks anticipated.
  • For commercial property, lenders reported a continuing fall in the availability of credit at the start of the year. That’s unsurprising given that landlords incomes remain under pressure and investment activity is still weak. The balance of -21.3% in Q1 was similar to the -23.5% balance in Q4 20. Looking ahead, banks indicate there will be little change towards lending to commercial property and that pricing remains a concern. This is consistent with our view that lending conditions will be constrained in the near-term due to the weak recovery in commercial real estate.
  • Overall, the recovery in mortgage credit availability appears set to pick up pace in Q2. That will ensure that buyer demand remains very strong over the summer. In contrast, the ongoing reluctance to lend to commercial property investors could reinforce concerns about the weak upturn in capital values.

Chart 1: Factors Contributing to & Overall Change in Mortgage Credit Availability (Balances, %)

Sources: Bank of England, Capital Economics


Andrew Wishart, Property Economist, +44 (0)7427 682411, andrew.wishart@capitaleconomics.com
Prohad Khan, Property Economist, prohad.khan@capitaleconomics.com