Very strong demand allowed mortgage approvals to surge yet higher in October even as banks cut back on high LTV lending. Approvals are likely to rise even further in the run up to end of the stamp duty cut in March, but slump thereafter.
Approvals stay high despite evidence of a cut back in high LTV lending
- Very strong demand allowed mortgage approvals to surge yet higher in October even as banks cut back on high LTV lending. Approvals are likely to rise even further in the run up to end of the stamp duty cut in March, but slump thereafter.
- Mortgage approvals remained at levels not seen since 2007 in October, rising from 92,091 to 97,532 (Consensus: 84,000, CE: 88,000). That’s 50% higher than a year earlier. (See Table 1.) Meanwhile, the average size of approval for house purchase rose from £212,600 to £219,000, a record high, consistent with the boom in activity being driven by existing homeowners trading up.
- Mortgage approvals are likely to remain very high until March given the stamp duty holiday, the release of pent up demand from the first lockdown, and the adjustment to working from home. Remarkably, if the level of approvals in October were sustained in November and December, total approvals in 2020 would exceed that in 2019 despite the two-month closure of the housing market in the first lockdown.
- Digging deeper into the figures, however, reveals signs of lender caution. Lenders have continued to raise interest rates on high LTV lending. In October, the quoted rate on 85% LTV loans rose from 2.54% to 2.97% but the average rate on new mortgages only rose from 1.75% to 1.80%. (See Chart 1.) That shows that the surge in lending is because of a boom in low LTV mortgages. Given most chains require a first-time buyer, who typically need a high LTV mortgage, this could eventually start to weigh on the market.
- Overall, we suspect that the boom in housing market activity will reverse sharply when the stamp duty cut expires in March and pent up demand from the first lockdown is expended. (See here.) And the apparent tightening of high LTV credit could see activity start to ease off before then.
Chart 1: Mortgage Interest Rates (%)
Source: Bank of England
Table 1: Bank of England Mortgage Lending – Key Figures
Value of loans approved £bn
Approvals for House purchases 000s
Source: Bank of England
Andrew Wishart, Property Economist, +44 7427 682 411, email@example.com