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Market commentary

19 February 2015

Market conditions for the next few months look favourable, given lower inflation, high real earnings growth and stamp duty reforms.

Supply and demand should become more balanced in 2015, leading to lower house price growth.

Political uncertainty in the UK will continue to weigh in on the second half of 2015, though its impact will likely vary by region.

Economy

The UK economy grew 2.6% in 2014 as a whole, with growth in the final quarter of 2014 at 0.5%. The view of the MPC members, as noted in the February’s Inflation Report is for the strong growth in 2014 to continue in 2015, helped by low inflation, a lower expected path for the Bank Rate and monetary stimulus measures taken abroad. 

In terms of monetary policy, the UK is once again positioned between the US and the eurozone. While there are expectations that the first rate rise in the US might come as soon as June, the European Central Bank announced a larger than expected bond-buying plan which will be at least €1.1trillion and interest rate expectations are largely flat over the next three years. Financial markets currently expect the first rate rise in the UK sometime around the mid-2016.

Chart One: Market expectations of BoE base rate at previous two Inflation Reports

Market Commentary February 2015 - chart 1 - interest rate expectations

Source: Bank of England

Minutes from February’s monetary policy committee (MPC) meeting show the second consecutive month where the committee voted unanimously to maintain interest rates and the stock of purchased assets. This comes as inflation reached its lowest ever recorded annual growth rate in January at 0.3%. The MPC judged that there is more likely than not to be a period of deflation in the near term, but that there is little risk of persistent deflation in the UK. The MPC did not rule out cutting the Bank Rate if the risk of deflation becomes persistent or if second round effects, such as depressed pay settlements, materialise. The MPC’s forecast for UK real income growth in 2015 has been revised up substantially, from 1.25% in its November report to 3.5%.

Housing and mortgage markets

Housing market activity was a little muted through the second half of last year, a trend which has continued into the new year. House purchase approvals did pick up after five months of decline, reaching 60,000 in December, but it is possibly too early to draw firm conclusions from this. 

Our forward estimate for gross lending in January stands at £14.3 billion. As seasonal factors, which tend to dampen gross lending in the first four months of the year, fall away, we expect gross lending to pick up against a backdrop of a more robust economy with stronger real income growth, lower unemployment and falling mortgage rates, coupled with recent stamp duty changes. This fits with the Bank’s forecast of mortgage approvals for house purchase, expected to average around 60,000 a month in the first quarter of 2015 and rising thereafter. Our forecast of £222 billion for gross lending in 2015 remains in line with these factors.

Earlier this week, we released UK lending figures for 2014 as a whole which showed the change in the composition of lending over the past few years between first-time buyers and home-movers. First-time buyers have been an important driver of the market, accounting for the highest proportion of home-owner loans for house purchase since 1999. This is likely to have been helped more recently by government schemes such as Help to Buy. 

Chart Two: FTBs and home-movers as a proportion of total loans for home-owner house purchase

Market Commentary February 2015 - chart 2 - ftb homemover split

Source: CML Regulated Mortgage Survey

The Bank’s Inflation Report also gave a potential insight to why there has been weakness in home mover numbers. It notes that a cohort of home-owners may be put off moving as new mortgage products are still more expensive relative to their existing product. Falls in mortgage rates as a result of increased competition and decreasing funding costs are likely to narrow this gap between pre-crisis mortgage arrangements and current products, which may encourage more home-owners to move.

Alongside the subdued nature of mortgage approvals, house price inflation has remained elevated over the past few months, potentially highlighting the short supply of properties on the market. This is reflected in data from the Royal Institution of Chartered Surveyors (RICS) reporting a falling number of instructions to sell for five consecutive months before showing a rise last month.

The RICS survey also shows January as being relatively stable on a national level in demand, supply and price terms. The survey notes that the stamp duty changes are already beginning to have an impact in some areas of the country, such as the south west and Scotland. Market metrics should therefore reflect this impact in the near term.

Looking ahead, expectations of house price growth suggest a better balance between supply and demand of properties on the market as the rate of inflation is forecast to be lower for this year compared to 2014. 

In the buy-to-let (BTL) sector, performance has been stronger compared to the home-owner sector. This is partly down to the BTL sector recovering from a much lower base and remortgage activity increasing at a faster pace compared to remortgage activity for home-owners.

During the crisis, BTL loans for house purchase declined 73% in volume terms between 2007 and 2010, while loans to home-owners for house purchase fell by 47% over the same time period. Looking at remortgage activity in the two sectors, BTL remortgage was at its highest level since 2008 in 2014, whereas current home-owner remortgage activity in 2014 was at its lowest level since 1997. 

Chart Three: BTL and home-owner remortgage as a proportion of gross lending

Market Commentary February 2015 - chart 3 - btl homeowner split

Source: CML Regulated Mortgage Survey

CML Research

  1. Name: Mo Jamei
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