The number of house purchases is forecast to fall and companies of all sizes are expected to delay decisions on investment, mergers and acquisitions. The UK’s lenders expect these factors to reduce demand for borrowing in the short term, even though they intend to maintain the availability of credit for most borrowers.
The only sector facing a squeeze on credit is corporate real estate, where banks reduced lending sharply in the second quarter of 2016 and say they will continue to do so. This is the first time since the second quarter of 2012 that lending to corporate real estate groups has fallen.
Banks are not alone in worrying about the sector’s future profitability. Seven real estate funds suspended trading last week to avoid a fire sale of assets as many investors requested redemptions.
The Bank of England’s review of credit conditions is based in part on discussions with the six largest UK lenders conducted after last month’s EU referendum. It shines a light on what is likely to happen to the availability of credit to households and businesses and shows how the banks expect people to behave in the next few months.
The BoE made efforts before and after the referendum to ensure bank lending did not seize up, as it did in 2008 during the financial crisis. At the start of July the central bank’s Financial Policy Committee cut requirements for countercyclical capital buffers — which require banks to hoard some spare cash to deal with losses from bad lending — giving banks the capacity to lend up to an extra £150bn.
In the run-up to the referendum, banks tightened their criteria for mortgage lending slightly but increased the availability of unsecured credit to households. The availability and cost of credit to companies outside the corporate real estate sector was little changed.
The banks expect the availability and cost of mortgages and unsecured credit for households to remain broadly the same over the next few months but warned that credit conditions could tighten if the economic outlook deteriorated.
More concerning for the economy and public finances in the short term is the expectation that demand for mortgages will fall, suggesting that housing market activity will drop off.
The financial crisis led to a large fall in the number of house purchases, which led in turn to a sharp decline in tax revenues from stamp duty.
Companies of all sizes are expected to have less appetite for taking on debt over the next few months. A survey by the Institute of Directors, carried out immediately after the referendum, found that more than a third of their members said they would cut investment as a result of the Brexit vote.
Demand for borrowing from large companies had already started to fall over the three months running up to the referendum, reflecting a decline in mergers and acquisitions and greater caution ahead of the vote. But demand for credit among small and medium-sized enterprises rose in the second quarter.
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