The UK Mortgage Market In 2011

The UK Mortgage Market In 2011

by Richard Benson on 9 Nov, 2011

The UK housing market has lost its way. Despite the modestly bullish outlook for the broader UK economy, it seems that mortgage lending is unlikely to be invited along to the party that is the recovery. In fact, net mortgage lending is forecasted to fall to a 30 year low of £6 billion in 2011, down from £9 billion in 2010. Long gone are the days of free and easy credit which fuelled the house price boom we have seen over recent years – in 2006, for example, UK mortgage lending came to a whopping £110 billion. This will come as bad news for all, but especially for first time buyers. As they are the ones who are less likely to be able to afford high deposits, they will no doubt be the hardest hit by the pinch in lending.

For example, only a quarter of the UK mortgages presently on offer are available to those with less than a 25% deposit. With the number of approved mortgage loans falling, house prices have begun creeping lower. But that is not to say that the market is about to crash; supply constraints are to thank for this. The UK has long had a poor track record in expanding the supply of new builds to match increasing demand. This has further been compounded by construction activity falling south in the aftermath of the credit boom years. All this means that there is insufficient housing stock to precipitate a disorderly correction in prices. As such, house prices are expected to fall, but due to the bottleneck, it is likely that they will do so ever so slowly. Another contributing factor is that UK households store their wealth predominantly in property. As such, they are often unwilling to accept offers that would have been higher just a few months prior.

So, given that we’ve counted out the possibility of a sudden collapse in the housing market, the more likely scenario is that we will see a period of mild deflation over the next 5-10 years with prices dropping very gradually. Such a pattern would be in fitting with the housing market correction the UK market underwent in the early 1990s.

But, with Bank of England base rates at historic lows, shouldn’t this be a great time for house buyers to be on the lookout for mortgages, I hear you say? Not so. Firstly, despite the low rates, mortgages are not being approved. And secondly, by all accounts, it is becoming increasing likely that the Bank of England will resort to a hike in the bank rate before the year end – especially with inflation running above projections. Given this, a raise of 25 basis points is considered the most probable, taking the bank rate to 0.75%. However, should the economy continue to falter – as we saw it do it Q410 – the Bank of England would be expected to keep rates flat.

About the Author

Richard Benson is a freelance financial journalist who has written for Corporate Financing Week, Dow Jones Newswires and the Wall Street Journal. He is executive editor of