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Market commentary

17 April 2014

Alongside benign developments in the wider UK economy and the labour market, housing market sentiment continues to strengthen. 

There are as yet no signs of significant market disruption, arising from the imminent application of new lending rules associated with the mortgage market review. While some mortgage lending indicators have eased back gently, this is from the very high levels of recent months.

The FPC continues to be vigilant to housing market developments, and to remind the market of its ability to act before problems to financial stability set in.

Economy

Short-term prospects for the UK economy continue to look robust. The IMF has forecast GDP to grow by 2.9% in 2014, which would make the UK the fastest-growing economy in the G7.

After a brief lull around the turn of the year, the headline rate of unemployment has resumed its sharp decline. 

Latest figures from the ONS show 6.9% of the labour force were unemployed in the three months ended February - down from 7.1% three months earlier. This is the lowest figure for five years, and takes it below the threshold at which the Bank of England said it would consider raising interest rates under its now jettisoned policy of forward guidance.

However, upward pressure on interest rates has abated for the time being, as a result of favourable inflationary developments.

The rate of price growth (as measured by the CPI) fell to 1.6% in March, from 1.7% in February – the third consecutive month inflation has been below the Bank of England’s 2% target.

With average earnings 1.7% higher in the year to February, up from 1.4% in January, and edging above CPI, there are hopeful signs that the protracted period of falling real wages may finally be coming to an end. Earnings have risen by 8.6% since mid-2008, but prices have risen by 16.9%, according to the ONS.

One reason why this is impotant is that recent consumer spending growth has largely been financed by drawing on savings, and so would not be sustainable without a recovery in incomes.

Chart 1: Average earnings and consumer prices annual growth rates

Market commentary April 2014 earnings

Source: Office for National Statistics

 

A recovery in real incomes would also be positive news for those households whose finances are stretched.

The recent FCA risk outlook looks at mortgage borrowers, and estimates that currently about 1.3 million borrowers are vulnerable to potential affordability pressures, primarily as a result of past payment problems. Interestingly, it sees vulnerability edging down over the next few years, under both its most plausible base case and stronger economic growth scenarios, as the impact of rising rates is offset by rising incomes and house prices.

 

Housing and mortgage markets

Market confidence is running high, ahead of the 26th April deadline for implementing the changes to lending rules as a result of the mortgage market review (MMR). 

Despite representing the largest set of changes as to how the mortgage market works in over a decade, the industry by and large appears confident about its state of preparation. However, glitches cannot be ruled out and some institutions may suffer from demand running ahead of their ability to process applicants - at least in the short-term.

According to the Bank of England’s recent credit conditions survey, lenders expect to increase the supply of mortgage credit over the next three months.  

This survey also signals a further pick-up in borrower demand.

This improvement in demand and market confidence has also been noted by RICS who reported a continued increase in sales with new buyer interest exceeding new instructions. However the continued lack of available housing stock hampers the market.

Halifax has also noted an improvement in confidence. Findings from its latest Housing Market Confidence Tracker show more positive sentiment towards both buying and selling homes.

According to the Bank of England, seasonally adjusted gross mortgage lending in February reached £17.8 billion - a little above previous months and the strongest showing since 2008.

Seasonal factors resulted in a dip in unadjusted gross mortgage lending to £14.8 billion. The dip primarily reflected a fall in remortgage lending. Benefiting from the Help to Buy schemes, house purchase activity remained resilient in February. This was particularly true for first-time buyers, where the number of loans advanced increased compared to the previous month. 

Our forward estimate is that mortgage lending increased to about £15.4bn in March. This is 33% higher than March last year. While it continues the trend of strong year-on-year growth, the underlying profile appears to be a little gentler than in recent months. 

The volume of house purchase approvals eased back modestly in February. This was the first reversal in the underlying seasonally adjust figure for a year, but still above 70,000 for the fourth month in a row.

The numerous house price measures continue to depict a market that is gaining momentum. As in previous cycles, the largest increases in house prices have been in London (where prices are 18% higher than a year earlier) and the wider south east, although house price growth is being seen across all countries and regions of the UK.

Chart 2: House prices across the UK, Q1 2014, year-on-year % change

Market commentary April 2014 hp

Source: Nationwide

 

The macro-prudential regulator, the Financial Policy Committee (FPC), continues to keep a close eye on housing market developments and favours “further proportionate and graduated action if warranted”.

By its June meeting, the Committee will have added the power to give guidance on what interest rate stress tests lenders should use in their affordability assessments to its armoury of policy levers. A recent speech by deputy governor Andrew Bailey underlines the resolve on the part of the authorities to prevent momentum in the housing market becoming too strong.

CML Research

  1. Name: Bob Pannell
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