Credit Conditions Survey (Q4 2020) - Capital Economics
UK Housing

Credit Conditions Survey (Q4 2020)

UK Housing Market Data Response
Written by Andrew Wishart
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Very strong demand allowed banks to maintain tight lending standards in Q4 2020 while still increasing mortgage lending volumes. Of course, buyer demand is likely to drop sharply when the stamp duty holiday ends. And we doubt that the gradual loosening in credit conditions that banks anticipate will be enough to prevent a big drop in mortgage approvals and transactions over the summer.

Strong demand allows banks to maintain stringent lending standards

  • Very strong demand allowed banks to maintain tight lending standards in Q4 2020 while still increasing mortgage lending volumes. Of course, buyer demand is likely to drop sharply when the stamp duty holiday ends. And we doubt that the gradual loosening in credit conditions that banks anticipate will be enough to prevent a big drop in mortgage approvals and transactions over the summer.
  • Buoyant demand more than offset tight credit conditions in Q4, allowing mortgage approvals for house purchase to surge to their highest level since 2008 in November. (See here.) A balance of +31.5% of lenders reported an increase in demand in Q4. Except for the +95.6% reading in Q3 when the market reopened, that was the highest balance since 2015. That allowed lending volumes to rise despite credit conditions not easing materially since the sudden tightening in Q2 2020. (See Chart 1.)
  • Banks have been able to be selective, increasing lending standards and volumes at the same time. Credit scoring criteria were tightened further in Q4, and the average credit quality of new mortgages increased again, with a balance of +29.2% of lenders reporting an improvement.
  • Looking ahead, if banks were to maintain current high credit standards after the stamp duty holiday ends at the end of March, the drop in buyer demand would be very sharp. So it was reassuring that banks expected the sharp reduction in credit availability that took place in Q2 2020 to start to be reversed in Q1.
  • But the recovery in credit availability will be gradual. The +24.7% balance of lenders that expect availability to rise in Q1 compares to a balance of -72.1% in Q2 2020. (See Chart 1 again.) And the survey dates were 23rd November-11th December; before the latest lockdown so banks may have reassessed since.
  • The slight improvement in credit availability in Q4 was due to banks worst fears about house prices easing. A balance of +18.9% said house price expectations had led to an increase in mortgage availability. Looking ahead to Q1, the main reason banks expected mortgage availability to rise was a +11.9% balance expecting their appetite for risk to increase. Again, lenders would probably still be much more cautious than before the pandemic given the risk appetite balance fell to -35.0% in Q2 last year.
  • As for commercial property, the availability of credit remained tight in Q4. Given income for landlords remains under pressure, this probably pushed some to take further loans. A balance of 23.5% of lenders reported a reduction in the availability of credit, which eased slightly from 30% reporting a fall in Q3. Looking ahead, banks indicate they will act slightly less cautiously towards commercial property lending, but that pricing remains a concern. This is consistent with our view that falling all-property capital values in 2021 will hold back lending to the sector.

Chart 1: Change in Availability of Secured Credit Provided to Households (% Balance)

Source: Bank of England


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