Full effects of COVID-19 on credit conditions will not be seen until Q2

The Bank of England warned that the escalating impact of COVID-19 would be reflected in the expected changes for Q2.

Full effects of COVID-19 on credit conditions will not be seen until Q2

The Bank of England’s Credit Conditions Survey found that the availability of secured credit was unchanged in Q1, while the availability of unsecured credit increased slightly.

 

Demand for secured lending for house purchases increased in the first quarter, as did demand for secured lending for remortgaging.

The availability of credit for corporate lending remained the same across all business sizes, while the demand from small businesses increased slightly.

In Q1, overall spreads on secured lending to households remained unchanged, overall unsecured lending spreads widened, and spreads on corporate lending to small firms were unchanged, but widened slightly for medium and large businesses.

The net percentage balance for changes in default rates decreased in Q1 for secured loans to households, increased for total unsecured lending, and increased for loans to small and large corporates.

Commenting on the credit conditions for the first quarter, Tomer Aboody, director of property lender MT Finance, said: “The Bank of England survey confirms what we are all seeing and feeling due to coronavirus.

“The first quarter was an extremely confident one for the property market, with lenders and borrowers alike looking strong in credit borrowings and lower defaults.

“Fast forward a month or two, and the outlook has dramatically changed due to the economy grinding to a standstill and credit borrowing levels decreasing.

“This is all to be expected due to lockdown, but hopefully with the government stimulus and assistance for businesses, the future should be more positive.

“The upward movement should start within two or three months of lockdown ending, leading to a strong fourth quarter of this year and first quarter of next.”

The Bank of England warned that the escalating impact of COVID-19 during the data collection would likely be reflected in the expected changes for Q2, rather than the actual changes in Q1.

For Q2, the survey found that the availability of secured credit was expected to decrease, as was the availability of unsecured credit.

Lenders also expect the availability of credit to the corporate sector to rise in the second quarter.

Demand for secured lending for both house purchase and remortgaging is expected to decrease in Q2, while overall demand for unsecured lending will also likely decrease.

Demand for corporate lending across business of all sizes is expected to increase.

Overall spreads on secured lending to household are projected to widen in Q2, while unsecured lending spreads are expected to remain unchanged.

Spreads on corporate lending to small and medium businesses will likely narrow, but for large firms are expected to widen.

The net percentage balance for changes in default rates on secured loans to households, and on loans to corporates across all business sizes, are likely to increase in Q2.

The net percentage balance for changes in default rates for total unsecured lending, which increased in Q1, is projected to remain unchanged.

Jeremy Leaf, North London estate agent and former residential chairman of The Royal Institution of Chartered Surveyors (RICS) said: “This report has proven to be a reliable indicator of future lending and business activity.

“The latest numbers reflect the calm before the storm when the virus blew the property market out of the water.

“However, it will not be until subsequent reports that we see the full impact of COVID-19 on business activity and values.

“This will be determined by the length of time before restrictions are lifted and the damage suffered by the economy during that period.”