The wider economy appears to have performed rather worse than expected only three months earlier with the Bank of England now predicting that the treasury expectation of growth in the economy early in 2010 now looks optimistic. The Monetary Policy committee announced an extension to the quantitative easing (effectively a further increase in the money supply) by injecting a further £50bn over and above the £150bn already undertaken into the economy. As expected the MPC retained the Bank Base Rate at 0.5% and some forecasters are suggesting that this could be the rate well into next year.
Data just reported concerning the level of repossessions shows a fall off in the number in the second quarter 2009 from the first quarter and this is welcome news. We should however be cautious about this apparent positive reduction as lenders are under intense pressure both from politicians and the media to ensure that repossession is the last resort and this is right and proper. There will be situations where repossession is the only realistic outcome and some of the reduction that we are seeing may well be, due to lenders entering into increased periods of forbearance but for some this may purely be putting off the day of reckoning. With unemployment forecast to reach 3. 2 million the reality is that even greater numbers of borrowers are likely to enter into arrears and possession proceedings are likely to increase further.
During July and into August we have continued to see a number of slightly more positive reports commenting on the state of the housing and mortgage markets. Figures from the Council of Mortgage Lenders have reported that gross new advances for house purchase have once gain increased in June from May prolonging the small but rising trend that we have witnessed since the spring. Although recently the volume of re-mortgage transactions had been declining this sector also saw an increase in June and this may be due to fixed rates deals showing a material rise in June and July. This would appear to suggest that interest rates have hit their low point and many borrowers who have been sitting on the sidelines possibly expecting mortgage rates to fall further have now taken action to lock into deals that by historical levels are still extremely low.
With agents continuing to report a shortage of housing stock in many areas, this generally appears to have put a brake on falling prices and in conjunction with rising numbers of buyers competing for comparatively few properties is helping to maybe put a floor in the market.
Fixed rates mortgage although continuing to be the product of choice have lost a little of their appeal largely due to the differential between fixed and tracker rates having widened with the number of deals being arranged falling from nearly nine out of ten in June to eight out of ten in July.
Another welcome development has been the tentative entry into the UK mortgage market of Bank of China who has started to offer their products to UK customers through selected intermediaries. We wait to see if this prompts other institutions from both the far and middle east to consider lending to the UK mortgage market but any new capacity to support the market and to create further competition we see as a positive development.
New capacity is definitely needed as evidenced by a further material change that we have witnessed in our own business with the average loan to value (LTV) on residential purchase mortgages at 68% in the second quarter (down from 70% in Q1 & from 74% in the corresponding period 2008) and provides yet more proof that banks remain ultra-cautious about lending and that securing mortgage finance is harder than ever. While average LTVs have been falling since the beginning of the year, the average mortgage loan amount has increased to £112k, in Q2 2009, up from £107k, in Q1 2009 perhaps providing some further evidence that prices have started to stabilize.