Monday, 7 April 2014

Reports of lending's death greatly exaggerated?

Despite headlines to the contrary, banks don't look like turning off the taps of mortgage lending in a hurry. The weekend papers reported that the latest Bank of England quarterly credit conditions survey (published on Thursday) showed bank are planning to scale back credit over the next three months despite a sharp rise in mortgage demand.

This looks to be the case: the percentage balance of banks planning to raise the proportion of loan applications they approve over the next three months fell to -25% from -2%. But this probably reflects an even greater increase in demand, from -2% to +39%. In all probability this represents a rationing in supply, possibly temporarily as banks simply have not the staff or infrastructure to keep up with demand.

In every other regard, it looks like the appetite to lend is undeterred, according to the report's commentary: "In the three months to early March Lenders reported that the availability of secured credit to households increased slightly, the seventh consecutive quarterly increase in availability ... . The expansion in overall availability was reported to be driven by an improvement in the economic outlook and increased appetite for risk on the part of lenders. Lenders expected the availability of secured credit to increase further in Q2, driven primarily by a desired expansion in market share ... There was also a significant increase in the willingness to lend at LTV ratios above 90% — the highest reported balance since the question was first asked in 2013 Q2 ... Lenders expected a slight further narrowing in mortgage spreads over the next three months ... According to lenders, secured household loan performance improved significantly for the third consecutive quarter in 2014 Q1. Default rates and loss given default both fell significantly, with further falls expected in Q2. Several lenders attributed the fall in loss given default to the rise in house prices."

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