Tightening credit conditions in the mortgage market

By their very nature, predictions are an inexact science, but they can help us see which way the wind is blowing. With global economies and personal finances under increasing pressure because of COVID-19, the Bank of England's Credit Conditions Survey of banks and building societies is a useful guide to help us understand trends and developments in credit conditions.

The results of the 2020 Q1 survey, conducted between 2 March and 20 March 2020, revealed that lenders expect the availability of secured credit to decrease up until the end of May, especially for borrowers with loan to value ratios above 75%. The availability of unsecured credit to households is expected to decrease as well. Lenders responding to the survey also expect the number of defaults to rise during the second quarter.

Financial institutions, like the rest of the world, are jittery about the uncertain economic future that lies ahead. As a result, many banks and building societies pulled their high loan-to-value (LTV) products. Both lenders and borrowers are facing difficulties.

What Will Happen to the Property Market?

One of the big questions on everyone's lips is what is going to happen to the property market? A definitive answer is difficult to gauge because there are a lot of unknowns and moving pieces. In light of the new economic environment, banks are being more cautious about their lending decisions. Some lenders are taking baby steps by returning to the mortgage market but only with reduced LTVs and lots of caveats.

One of the difficulties facing lenders at the moment is evaluating property prices. In an email to advisers, Hampshire Trust Bank managing director Charles McDowell highlighted the challenges: "The real problem is what number do we put on any valuation in the months following lockdown and how confident will we be to lend against that number."

Non-bank lenders have additional problems to contend with. With their usual funding sources drying up, they're appealing to the government for access to liquidity and the same funding measures that banks can use. Without this, non-bank specialist lenders will most likely have to reduce the availability of some of their products. This could mean less choice for borrowers.

Predictions

Predictions range from a property market emerging relatively unscathed from the crisis to a total collapse, worse than previous crashes such as the dot com bubble of 2000. Those with a more optimistic  outlook hope that governments and financial institutions have learned the lessons of past financial disasters and will do what they can to keep the market going. Those who only see dark clouds on the horizon claim we have perfect storm conditions for a crisis; for example, rising unemployment levels, lack of mortgage money and people not selling for fear of catching the virus from prospective buyers.

The current pause on the property market is undoubtedly annoying for anyone in the process of buying or selling a home, but it doesn't necessarily mean we have to hit the panic button just yet.

What happens next will  be determined by how well the UK weathers the virus in the coming months.

May 2020