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Market commentary

21 May 2015

A favourable economic backdrop and an end to electoral uncertainty should help to underpin a gentle housing market upturn.

Coming months are likely to see additional fiscal restraint, ongoing monetary policies that support economic growth and a plethora of new housing initiatives.

House purchase demand may pick up modestly over the coming months, to the extent that affordability constraints permit.

Economy

Although the initial assessment of first quarter growth from the Office for National Statistics (ONS) - at just 0.3%, compared with 0.6% in the fourth quarter - was a little disappointing, economic developments generally are fairly benign.

In the labour market, further job gains helped the headline unemployment rate dip to 5.5% in first quarter, down from 5.7% in fourth quarter of last year and 6.8% a year earlier. This is the lowest such rate for seven years.

Meanwhile, annual rates of pay growth remain close to 2%, and have consistently outpaced consumer price inflation (CPI) over the past six months.

The headline CPI rate actually turned negative in April for the first time on record, falling to -0.1%. The move was not exactly unexpected, as it follows two months when the measure has flat-lined.

Spending, investment and borrowing decisions may pick up, now that a major source of political uncertainty for businesses has dissipated, following May’s decisive election result and the unexpected emergence of a majority Conservative government.

George Osborne, who continues as chancellor of the exchequer, has announced a second Budget for 8 July. Given election pledges by the Conservatives to eliminate the fiscal deficit, but not to increase income tax rates, national insurance or VAT over the next five years, this is likely to spell out where spending cuts will fall.

Monetary policy continues to support economic growth. May’s Inflation Report was a little less optimistic about demand and supply prospects, but does not signal any real shift in stance.

The Bank of England continues to view the near-term absence of inflationary pressures as mostly due to the temporary effects of lower energy and food prices, rather than posing deflationary risks.

It expects headline CPI to pick up notably, once these effects drop out of the annual comparisons towards the end of 2015 and, further out, to modestly overshoot its CPI target. This is a similar view to that in February’s Inflation Report, despite the assumption of slightly higher bank rates implied by market interest rates.

Chart 1: Future path for Bank Rate implied by financial markets

 Market commentary May 2015 rtaes

Source: Bank of England Inflation Report Conditioning Path for Interest Rates

On this basis, the first increase of 25 basis points in bank rate is likely to take place no later than the third quarter of 2016.

The Bank also suggested that financial markets were too sanguine about expected rate rises beyond three years.

Housing & mortgage markets

Housing issues featured prominently across the political spectrum during the general election period. 

We expect next week’s Queen’s Speech to feature a Housing Bill, extending Right to Buy to housing association tenants and setting out measures to provide homes for sale or rent below market rates. It may also herald measures to promote custom-build and the greater release of brownfield land for housing development. We also await further details of Help to Buy ISA, the incentivised savings scheme to help first-time buyers, first trailed in March’s Budget.

While it is too early to speculate as to the effectiveness of various proposed initiatives, it seems clear that the next five years will see further emphasis on promoting new-build activity.

Housing market conditions have been a little subdued since last summer. In our view, this primarily reflects affordability pressures in the regulated part of the market, as lending rules and macro-prudential actions taken by the Financial Policy Committee limit the scope to stretch income multiples.

But, as our latest monthly figures show, regulated lending activity looks as if it is staging a gentle recovery.

Loans to first-time buyers and movers were strongly up in March, at 23,000 and a little over 25,000 respectively. And although both were still lower than a year earlier, the gap was much smaller than in January and February.

Chart 2: Property transactions by type, 12-month totals, 000s

Market commentary May 2015 segments

Source: CML estimates

Elsewhere, buy-to-let (BTL) lending and cash transactions have been more resilient parts of the market for some time. This looks set to continue for the time being, with the BTL sector posting a series of healthy year-on-year advances.  

Recent housing approvals data are also consistent with a market that is set to improve gently. They have averaged more than 61,000 a month so far this year, and the Bank of England in its latest Inflation Report anticipates this climbing to 65,000 by the fourth quarter.

Several surveys – including the latest from the Royal Institution of Chartered Surveyors - have highlighted a lack of new vendor instructions, but this may now ease as electoral uncertainty evaporates and market confidence returns.

Our forward estimate is for industry gross lending of £16.0 billion in April, which chimes with our expectations for an incipient modest upturn. Although lending was 1% lower than in March and 4% down on a year ago, the seasonally adjusted figure is likely to have exceeded £17 billion in April, for the first time since last summer.

A stronger jobs market and pick-up in real earnings are positive for household finances, while continuing low interest rates and competitive mortgage deals have bolstered sentiment and eased affordability constraints for the time being. This should in turn help to boost buyer activity over the coming months.

CML Research

  1. Name: Mohammad Jamei
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