Mortgage affordability still improving despite stronger lending

Data released by the BPFI  shows that new lending growth has picked up in recent months, with 9,500 mortgages for house purchase drawn down in the third quarter, up from 8,000 in q2 and under 7,000 in the first quarter. Lending tends to be seasonal and is normally stronger in q3 but the annual growth rate has also accelerated, to 8.7% from 8.2% in q2. The value of loans drawn down for house purchase also picked up, exceeding €2.2bn ,  the strongest quarterly new lending figure for eleven years.

The average  new mortgage for house purchase is now €235,800 and that too is growing at a stronger pace than earlier in the year, up 3.6% in q3, but still lagging reported growth in household disposable income, which is some 6.5%, driven by rising employment and a pick up in wage inflation. As noted in a previous blog this implies that mortgage affordability continues to improve, aided by the fall in fixed rates over the past year as this now accounts for some 75% of new mortgage lending.

Lending for house purchase accounts for only 80% of all mortgage lending, with the remainder reflecting switching and top-ups. The latter is still tiny, at €70m in q3, while switching amounted to €330m in the quarter albeit slowing  from the growth rates seen over the past few years. Total lending in q3 therefore amounted to €2.6bn, again the strongest quarterly figure since 2008.

Central bank mortgage controls didn’t exist a decade ago of course and they are having a significant impact on credit creation, preventing the rise in loan to income seen in the noughties.The controls have also been  impacting lending through the year , with banks exceeding the amount allowed in excess of the 3.5 LTI limit in the first half of the year, prompting a pull-back in later months in order to meet the annual constraint. This year, however, that is not the case, with Central bank data for the first half of the year indicating that only 16% of FTB lending was in excess of 3.5 LTI, against 23% a year earlier ( the annual limit is 20%).

This implies there is unlikely to be a sharp reduction in approvals as seen in the second half of last year, and the figures available to September indicates the trend is still firm. Consequently, we expect mortgage lending for 2019 as a whole to reach €9.6bn, from €8.7bn last year, with 35,000 mortgages drawn down for house purchase