Housing market confidence remains strong

Amanda Jarvis

June 5, 2006

At the beginning of this year, 7 per cent of households said they were thinking of moving, buying a property for the first time or remortgaging by mid-summer. When questioned recently, 15 per cent of households – more than double the January level – said they planned to do so before next winter. Although not everyone acts upon these plans, the change in intentions underscores this year’s much higher activity levels in the housing market.

The first four months of the year saw a significant increase in new mortgage lending – 28.4 per cent up on the same period last year, although April saw a slight cooling of this trend. By contrast, the number of people remortgaging rose just 3 per cent.

The return of the first time buyer

First time buyers accounted for over a third (38 per cent) of new mortgages between January and March according to the Council of Mortage Lenders (CML) and the appetite among first time buyers is growing. Alliance & Leicester’s latest figures show that the proportion of under 30s planning to get on the housing ladder has increased by a third since January – up from 12 per cent to 16 per cent.

Affordability remains good

The latest figures show that by the end of April the total value of mortgage debt in the UK was £999.2 billion and rising at £9 billion a month, meaning that it almost certainly now exceeds the £1 trillion mark for the first time.

However, despite record mortgage borrowing, affordability for those taking out new mortgages remains at similar levels to a year ago – and far better than it was in 1990, the year of Britain’s debt crisis. In the first quarter of 2006, for those taking out a new mortgage, interest payments took up 14 per cent of household income – the lowest it’s been since the second quarter of 2004. In 1990 mortgage interest took up nearly double this level – 27 per cent.

Overall, the average outstanding mortgage in the UK rose 9.6 per cent to £85,992 in the first four months of 2006 compared to the same period in 2005. Affordability, however, remains unchanged, due to lower interest rates and higher incomes. 10 per cent of income was spent on mortgage interest costs, the same as in the first four months of 2005 and far less than the 24 per cent in 1990. In 1990 total mortgage payments including capital took around a third of household income, (33 per cent for new mortgages) whereas today this is around a fifth (20.5 per cent). Pressure on household budgets is now coming from council tax increases and higher utility bills rather than from mortgages.

This suggests that there has been a return to the virtue of ‘waiting until you can afford it’, before people take those all important steps up the housing ladder. It also suggests that the predictions made by some commentators that the industry’s move from lending based on income multiples to an approach based on individual affordability would lead to a greater debt burden have not been fulfilled.

Chris Rhodes, managing director of Alliance & Leicester Retail Banking, said: “We are seeing greater confidence in the mortgage market from consumers. It’s particularly pleasing to see the increased confidence amongst the under 30s. Increased first time buyer activity enables others to move up the ladder. Affordability remains good, which means that despite renewed mortgage borrowing, consumers are taking a responsible attitude. April’s slightly cooler market should also give some reassurance that the market is not returning to an unsustainable boom.

“While household incomes have grown modestly, interest rates are lower than a year ago. Overall the cost of servicing a mortgage has therefore fallen slightly, despite gently rising house prices.”

Consumers act to repay credit card and other unsecured borrowing

Alliance & Leicester’s figures show that people worry more about their credit card and other borrowing than they do about their mortgages. In January, the majority said they planned to reduce their credit card balances and other borrowing. At that time 42 per cent of households had a credit card balance, with the average standing at £4,720. Credit card borrowing fell £900 million in the four months of the year. Just over a quarter of households (29 per cent) have a personal loan, with the average balance standing at £8,368. Total personal loans stood at £135.90 billion at the end of 2005, by the end of the April this figure had fallen by £360 million, the first time this balance has fallen in seven years.

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