Tough lending criteria still constraining UK housing market

New data from the Council of Mortgage Lenders shows further signs of stabilisation in the mortgage market, but volumes are still weak on a historic basis and the latest RICS UK housing market survey shows the market constrained by lack of supply.

Lending for house purchase and remortgaging both increased in June, albeit from very low levels. There were 45,000 house purchase loans, worth £5.9 billion, up 23% from 36,500 loans in May. However, this is less than half the average number of loans in June over the last seven years. A total of 116,700 house purchase loans were advanced in the second quarter, a 50% increase from the preceding three months but down 22% from the second quarter of 2008. The number of loans for remortgage increased by 13% from May to 34,000 loans in June. But low interest rates have dampened demand for remortgaging in the second quarter with 96,000 remortgage loans, a 21% fall from 122,000 in the previous quarter.

Fixed rate deals have increased in take-up throughout the second quarter and by June made up 78% of new lending, the largest share since June 2007. This appears to be supply-driven, reflecting the more widespread availability of fixed-rate products in the marketplace. There were 17,200 loans to first-time buyers worth £1.9 billion, up from 13,700 loans in May but below the 18,400 in June last year. There were 27,800 loans to home movers worth £4 billion, up from 22,700 in May but down from 29,500 in June last year.

Affordability measures for homebuyers were broadly static in June, but the tightening in criteria since the onset of the credit crunch appears to have ended. The typical first-time buyer had a 25% deposit, unchanged since February. Home movers typically borrowed 69% of the property's value, unchanged from April. Income multiples have also started to increase modestly, with the typical first-time buyer borrowing 3.08 times their income, compared to 3.04 in May, and home movers typically borrowing 2.76, compared with 2.74 in May.

CML economist Paul Samter said: "Low interest rates and realistic selling prices have helped generate a welcome increase in transactions. But there is some way to go before we reach normal levels of activity. There are tentative signs that lending criteria are easing, but remortgaging demand is likely to remain subdued whilst interest rates stay at current levels." According to RICS over the past year, unsold properties on surveyors books have dropped by almost 30% but in July average level of inventory rose to 60 which compares with 57 last month and 69 as recently as April as more seller started to come forward.

Commenting, RICS spokesperson Jeremy Leaf said: "Although demand for property is continuing to rebound, it still remains low from a historical perspective. Crucially it is the lack of supply that is helping to underpin prices at the present time. "Significantly, the more positive news on prices - at least in some parts of the country - may prompt more properties to come on to the market. If mortgage availability remains insufficient to meet the increase in buyer demand, then it is possible that prices may slip back again especially if unemployment continues to rise and mortgage rates increase . "The pattern emerging in the regions is very interesting, with more Chartered Surveyors in London, the South-East and the South West reporting rising prices, whilst those in the North are clearly experiencing a very different marketplace."

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