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Market commentary

22 January 2015

There are early signs that housing market conditions are steadying after the slowdown in the second half of 2014.

Easier funding markets, the recent stamp duty reforms, and the “first round” effects of lower oil prices on UK inflation, should help stabilise activity levels over the coming months.

A more cautious view concerning the second half of 2015 is warranted for the time being, reflecting eurozone and UK political uncertainties.


As the minutes of January’s Monetary Policy Committee (MPC) meeting note, short-term economic prospects in the UK – already relatively positive - have been boosted by the recent weakness in oil prices.

Sharply lower oil prices, and their associated impact on petrol costs and energy bills, have meant a material easing of inflationary pressures here in the UK, writes CML chief economist, Bob Pannell. December’s headline Consumer Prices Index (CPI) increased by just 0.5%, down from 1.0% in November, and the Bank of England gives roughly even odds that CPI may temporarily dip below zero in the first half of this year.

Although this may influence the course of future pay settlements, there has been a fairly immediate and positive effect on real personal incomes and spending power, following several years of protracted weakness. With evidence of pay growth accelerating in recent months, this represents a significant change for households, which is likely to bolster consumer sentiment.

We have also seen funding costs and market interest rates decline in recent months. 

Chart 1: Average quoted rates for 75% LTV mortgage (%)

20.01.2015 newsandviewsfixed rate

Source: Bank of England

Reflecting gentler inflation metrics, all MPC members voted in favour of keeping UK base rate at 0.5%, the first such unanimity since last August. Although the Bank will not formally review its projections for growth and inflation until February’s Inflation Report, the expected timing of the first rise in UK policy rates is likely to move further out.

There is a growing prospect that the European Central Bank is about to launch a major programme of quantitative easing (QE), to counter deflationary concerns across the eurozone. Such measures, if successfully implemented, are likely to boost the availability of liquidity across financial markets and reduce funding costs and mortgage pricing further here in the UK over the coming months.

Looking beyond these short-term effects, a degree of caution seems warranted. 

There may be ongoing headwinds associated with the eurozone, both with respect to the efficacy of any QE and any fall-out from the forthcoming Greek election.

Closer to home, the outcome of May’s general election is one of the most uncertain of the post-war period, and there are material differences between the main political parties in the scale and nature of future fiscal retrenchment.

Housing and mortgage markets

Despite housing market activity cooling and house price growth slowing in recent months, last year was the strongest year for mortgage lending since 2008. 

Gross mortgage lending totalled about £206 billion – 17% higher than in 2013 - and net advances, in reaching £24-25 billion, have convincingly broken out of the narrow £8-12 billion range of recent years. 

As Halifax recently noted, government initiatives such as Help to Buy have helped to push the number of first-time buyers to comfortably more than 300,000 in 2014. This was a positive outcome, representing the highest level since 2007, although we remain a long way from the half a million mark, which our analysis suggests would reflect more normal market conditions.

Adjusting for seasonal factors, most indicators continue to describe the modest slowdown of the second half.

Data from the Royal Institution of Chartered Surveyors (RICS), for example, points to successive monthly decreases in new buyer enquiries and vendor instructions. And HM Revenues & Customs (HMRC) recently reported that monthly house sales eased back a little in November, dipping below 100,000 for the first time in a year.

Chart 2: RICS balance of surveys

20.01.2015 newsandview new buyer

Source: RICS

Meanwhile, our forward estimate is that unadjusted gross lending was about £16.5 billion in December. This is broadly unchanged from November and the year earlier, but likely to represent a modest softening on a seasonally adjusted basis.

Alongside this big picture of a softer market, however, we are beginning to detect signs that underlying market conditions may be stabilising. 

RICS surveyors report agreed that house sales are levelling off and sentiment is positive about the months ahead. 

November’s decline in the volume of approvals for house purchase – to just over 59,000 – was a fairly marginal fall, albeit one that dragged the three-month average below 60,000 for the first time since mid 2013.

Credit conditions survey

The Bank of England's latest credit conditions survey suggests that the mix of factors influencing mortgage lending activity is finely balanced.

The headline finding was an unexpectedly sharp fall in mortgage demand in the fourth quarter.  This was the steepest fall since 2008, and contrasts with a sharp pick-up in unsecured demand. 

Chart 3: Actual demand mortgages v unsecured

20.01.2015 newsandviews unsecured

Source: Bank of England

But it is worth remembering that the survey measures the balance of sentiment, rather than business volumes.  The reported fall in mortgage demand, while it ties in with the weaker housing market seen since last summer, largely appears to echo the equally dramatic fall in mortgage credit availability reported for the previous quarter. Looking ahead, there are expectations of a small pickup in both mortgage demand and credit availability except at higher loan-to-value (LTV) ratios in the next quarter.

The reported narrowing of risk appetite – with some lenders less willing to lend at LTVs above 90% and/or restricting their lending at high loan-to-income ratios – is potentially of greater importance for market developments. 

But looking ahead over the coming months, lenders expect mortgage credit availability to stabilise, mortgage spreads to narrow (for what would be the 10th successive quarter) and a modest pick-up in mortgage demand.

Helped by lower inflation and interest rate expectations and funding costs, mortgage lenders have competed more intensely for business in recent months, and this competition has continued into the first weeks of 2015. 

Mortgage pricing has reduced, with, for example, the average rates on two- and five-year fixed rates touching new lows.

Stamp duty changes

The credit conditions survey took place before the Chancellor announced reforms to stamp duty in his autumn statement in early December.

Market metrics do not yet meaningfully reflect these stamp duty changes, but as we discussed in last month’s commentary, there are good reasons to expect a positive impact. 

The move away from the old “slab” system will benefit 98% of house buyers, with the vast majority of transactions valued up to £937,500 better off.  Although the direct financial impact of the stamp duty changes is fairly limited – averaging less than 1% of the purchase price overall – the reform may also bolster market sentiment and, through reducing upfront costs, boost purchasing power and borrower demand.

While these benefits may be progressively diluted by stronger house prices, we expect that over the coming months the reform will reinforce the positive impact that lower inflation and mortgage interest rates should have on housing demand and mortgage lending activity.

CML Research

  1. Name: Bob Pannell