Financing of new housing supply

Supplementary written submission from the Council of Mortgage Lenders (FNHS 44)

· What is your members’ estimate of the likely gross lending market between 2012 and 2015? Of this market how much do you estimate will be focused on new build?

CML has just published its housing and mortgage market forecasts for 2012. As the supporting commentary to that makes clear, there is considerable uncertainty about the short-term direction of the wider UK economy. For this reason, we do not have explicit forecasts stretching beyond 2012. Assuming that Eurozone problems do not materially disrupt things, our general expectation would be that 2012 marks the low-point for housing and mortgage market activity.

With UK interest rates expected to slowly revert to more normal levels over the medium-term, the evolution of UK house prices is likely to lag behind that of household incomes.

We anticipate only a gradual progressive improvement in affordability pressures and credit availability, and therefore a much slower recovery in property transactions than projected by OBR (its November 2001 Economic & Fiscal Outlook report envisaged transactions climbing to 1.3 million annually by 2015-16).

We have no firm view as to what proportion of gross lending will relate to new build, although the new build indemnity scheme that is now supported by government, may lead to an increase in new build transactions relative to those of the market as a whole.

· Over the next three years do you expect to increase: a) the level of lending to housing associations; and b) your support for shared ownership and other affordable schemes? If so, could you give us some indication of the likely scale of the increase?

As the level of government grant for affordable housing has reduced by some 50% we expect to see a significant increase in the level of lending to housing associations. We cannot calculate specific estimates as we do not know the level of funds that will be provided from housing associations themselves, for example, from asset sales.

We do not collect specific data for lending to shared ownership and other affordable schemes.

· As a percentage of total mortgage lending, what levels of 95% mortgage lending do you expect to deliver between 2012 and 2015?

We have no firm view as to the future LTV composition of gross lending.

But whereas 95% plus lending has been virtually absent from the market over the past few years, we would hope that firms will be able to make such lending available where this is justified by the wider affordability characteristics of the borrower. We would expect this to be true with the new build indemnity scheme, where lenders will want to support creditworthy borrowers who can afford their mortgage commitment but do not have a large deposit saved.

· How much Right to Buy lending do you expect to support between 2012 and 2015?

Since 2009, Right to Buy (RTB) lending has run at around 3,000 loans per year. We cannot predict with certainty the effect that government’s reinvigoration of RTB will have on lending to this sector. Although the government’s proposed doubling of the average discount rate through increased price caps will potentially lower the effective loan to value of new RTB loans, lenders will still need to take account of both the borrower’s circumstances and whether the property represents adequate security, just as they do on all lending.

· Aside from demand, what are the key factors limiting your members’ ability to increase lending for new housing?

Since 2007 access to wholesale funding has been constrained by the global financial crisis and remains a serious constraint to lending levels overall. Although the position improved from late 2009 through to the first half of 2011, the Eurozone crisis has led to a deterioration in funding conditions since the summer. UK lenders are significantly better positioned now than in 2007, given their higher levels of capital and liquidity, and the gap between customer loans and customer deposits has shrunk considerably. However, difficult conditions in wholesale funding markets still have the ability to constrain lending volumes generally, not just for new housing, and in 2012 events abroad, particularly in the Eurozone, have the ability to impact UK lenders’ ability to lend.

December 2011