A weaker economic outlook and stronger risk aversion among lenders led banks to tighten credit availability in Q3. What’s more, lending to commercial property was also reined in.
Lenders continue to tighten credit
- A weaker economic outlook and stronger risk aversion among lenders led banks to tighten credit availability in Q3. What’s more, lending to commercial property was also reined in.
- According the Bank of England’s Credit Conditions Survey, the availability of mortgage lending worsened in Q3. Indeed, a balance of minus 1% was reported on the availability of secured credit. However, that was an improvement on the second quarter, which recorded a balance of minus 5.9%.
- A further deterioration in the economic outlook was largely to blame, with the balance falling from
minus 3.4% in Q2 to minus 6% in Q3, the worse reading this year. (See Chart 1.) That presumably weighed on lenders’ risk appetite where the balance of lenders reporting greater risk aversion fell to minus 3.5%, from minus 1.7%. And ongoing pessimism among lenders over house prices also appeared to play a role.
- Notably, the data show a sharp fall in the share of mortgage applications approved in Q3, with a balance of minus 11% of lenders reporting a decline. That chimes with mortgage lending data and supports our thinking that lending volumes will probably be pretty subdued this year, regardless of the Brexit outcome.
- That said, the ongoing mortgage price war seems to be making its mark. For starters, banks are trying to stay price competitive with a balance of over 50% of lenders reporting a sharp fall in lending spreads. What’s more, lenders appear more willing to lend at the higher end of the LTV spectrum. Indeed, with the price of a 95% LTV mortgage falling in recent months, it is perhaps not too surprising that the balance of lenders more willing to lend to borrowers with housing equity of less than 10% of the value of their home was up to plus 6.1%.
- Looking ahead, the outlook for mortgage availability appears upbeat. A balance of plus 7.9% of lenders expect looser credit conditions for secured lending in the final quarter of 2019. But that is driven by market share objectives rather than any improvement in appetite for risk. Indeed, lenders were the most pessimistic they have been about the economic outlook in the next quarter since the financial crisis. And with Brexit uncertainty set to persist and lending more constrained by demand rather than supply, we think mortgage approvals will end the year down by 1%.
- Meanwhile, a balance of 10.3% of lenders reported a reduction in the availability of credit to the commercial property sector, the highest balance reported this year. What’s more, the data suggest that lenders will continue to act cautiously in Q4. This is consistent with our view that net lending to commercial property will be subdued over the rest of the year, even if a Brexit deal is secured, with demand held back by falling capital values.
Chart 1: Mortgage Credit Availability and Reported Factors Influencing Availability (% Balance)
Source: Bank of England