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Market commentary

23 April 2015

The continuing positive performance of the economy is likely to support a modest recovery in housing market activity over the short term.

This is reflected in sentiment and expectations from several surveys.

Backward-looking indicators of housing activity and mortgage lending are starting to pick up slightly.

Economy

The economy ended 2014 stronger than previously thought, growing 0.6% in the fourth quarter and by 2.8% over the whole year. 

The estimate of GDP growth in the first quarter of 2015 according to National Institute of Economic and Social Research was 0.6%, which indicates the economy is continuing to grow at a strong pace. This is corroborated by an improving labour market, which added 248,000 workers to the labour force in the three months to February. 

Average earnings growth slowed for the second month in a row, increasing by 1.7%, though it has outpaced inflation for the fifth month in a row. Inflation has been flat for the past two months and could still enter negative territory this year.

All of this comes at a time when there is heightened uncertainty in the eurozone around Greece’s ability to repay its debts, and as the Financial Policy Committee noted, a risk that low nominal growth in Europe could create problems for highly indebted eurozone countries. 

Closer to home, the general election is now only two weeks away. The minutes from the last meeting of the Bank of England's monetary policy committee (MPC) before the election showed another unanimous vote to leave monetary policy unchanged.

Housing and mortgage markets

Our forward estimate is that gross mortgage lending totalled £16.5 billion in March. This is about 21% higher than in February and 7% higher than a year ago. This might seem like a significant jump, but after stripping out seasonal factors and accounting for trading days, the underlying trend is one of a gentle rise.

The subdued mortgage lending seen over the past few months has been somewhat at odds with the recovery in the rest of the economy, though March’s lending estimate could be a sign that the market is beginning a modest recovery.

Data from the Bank of England Agents survey suggests that the housing market has recovered since the start of the year, which resonates with approval numbers for house purchase increasing for the third month in a row. Seasonally adjusted property transactions broke though the 100,000 mark once again in February, after falling below the threshold last October.

The direction of travel of these indicators is in line with the survey by the Royal Institution of Chartered Surveyors which suggested transactions will pick up over the coming months. According to the Bank of England’s Credit Conditions Survey, supply of secured credit has remained largely unchanged, while demand for secured credit has been falling since the second half of 2014. Lenders expect a reversing of this trend over the next couple of months and see the low mortgage rate environment of the past two years continuing in the short term.

Some of this current weakness in demand has been put down to a combination of uncertainty about the prospects for the housing market, the affordability of housing and changes in regulation, with the MPC minutes noting the possibility that the effects of the mortgage market review have lasted longer that first anticipated.

Looking ahead, a variety of factors look set to impact demand over the short term. While market fundamentals, such as the strength of the economy and jobs market, helped by stamp duty reforms, should boost demand, the uncertainty around the general election could pare back demand.

In the medium term, as Dame Kate Barker highlighted at the CML annual lunch, a main driver of demand will be “whether the income growth prices more people back into the market than are priced out by the higher Bank Rate”.

In a month we will, of course, know the outcome of the election, and we hope then to be able to offer initial thoughts on the economic and housing market policies that could be in the pipeline.

CML Research

  1. Name: Mo Jamei
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