August 14th, 2014
The Bank of England has confirmed that the new mortgage rules brought in by the Financial Conduct Authority will have a long-term impact on the mortgage sector, and more importantly on the number of approved mortgage applications.
On Wednesday, the BOE released the inflation report for August, which confirmed that mortgage approvals have suffered since the release of the market review in April. In addition, the report also noted that a lack of potential property had impacted on completed sales for the period. The predicted average forecast for approvals in May was 75,000 new loans to be approved, but the recorded level was far lower at 64,000. Due to this significant reduction in activity, the BOE have revised their forecast for the fourth quarter down to 75,000 approved loans, for the original expected 85,000.
As per the body of the report, the belief is that the MMR process has had an effect, but there are several contributing factors that have led to the reduction in sales. The report states: “A number of factors may account for weak mortgage approvals in the early part of the year. The MMR — which was carried out by the Financial Conduct Authority to improve the functioning of the mortgage market — could have weighed on approvals as banks introduced new processes or trained staff.
“The temporary constraints of MMR may now have started to ease, but they could also have more persistent effects, if it affects the availability or terms of credit for some borrowers. In that case, it could take time for those borrowers to adjust their expectations and to find a property that they can afford.”
Although this news may suggest a dim view for the market, the reality is that approvals for loans have started to rise again since July, giving credence to the view of many market experts that this would simply be a bump in the road, rather than a full scale halt on activity for the sector. And while lenders have begun gradually increasing interest rates in recent months, the report also suggests that the BOE will not consider raising interest rates this year, with several factors putting a hold on this move.
Mark Carney has stated on several occasions that an interest rate rise is required to balance the economy appropriately, but consistent evidence that wage growth has not met the 2.5% target the BOE set for the end of 2014 has been the deciding factor for holding back the move to increase borrowing rates. He commented yesterday on the matter, stating: “Pay growth has been remarkably weak, even as unemployment has fallen rapidly. In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs.”
Analysing the data of the report, a senior economist for UK based RBC Capital Markets, Sam Hill, said: “The clear signal that we take from [the August] report is that the odds of a move before the end of 2014 have reduced further. We retain a forecast that the first 25 basis point hike will be in February 2015.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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