20 October 2014
Expectations of UK base rates have been moving lower and later, amid developing gloom about growth prospects in some major economies and geo-political uncertainties, allied with weak inflationary conditions.
There is growing evidence that mortgage lending activity, and the housing market, are sitting on a plateau.
Recent Financial Policy Committee comments and actions suggest that its concerns about possible housing market developments may be abating a little.
Economic developments domestically have continued much the same over recent months.
Short-term growth conditions are healthy.
The latest jobs figures show nearly 750,000 more people in work than a year ago, with headline unemployment below 2 million and down to 6% for the first time since 2008.
Although earnings growth remains subdued – pay is less than 1% higher than a year ago – inflationary pressures are also easing. Consumer price inflation, as measured by headline CPI, slowed to 1.2% in September. This is its lowest rate for five years, and brings nearer the prospect of an end to the protracted squeeze on household incomes.
Short-term market expectations for base rates have eased in recent weeks, on the back of weaker growth prospects in several major economies, including the eurozone, and heightened geo-political and financial risks. Taken together, these threaten a gloomier outlook for the UK economy going into next year, as Bank chief economist Andy Haldane stated recently, and may imply that interest rates here in the UK may stay lower for longer.
Housing and mortgage markets
Recent indicators and policy actions corroborate our view of a gentle easing in market conditions.
A common thread across many surveys is that, as London's pronounced recovery runs out of stream, house price growth nationally is slowing. While some past housing cycles have seen significant ripple effects radiating out from London, we think that this is less likely this time round. The capital’s housing market has been propelled by a number of unique factors, in addition to the general support afforded by improvements in the wider economy, consumer sentiment and mortgage credit availability. As such, we judge that markets away from London and the south east will for the most part continue to experience fairly modest recoveries.
When thinking about activity levels, it is important to bear in mind that a strong market recovery took hold through 2013, and that this is now colouring the nature of annual comparisons.
By way of example, we reported 65,000 loans for house purchase for August. Even though this represents the second strongest monthly outturn since 2007, it was only 8% higher than a year earlier and, on that metric, was the weakest performance this year by far.
HMRC figures for all residential property transactions, including those bought for cash, clearly indicate that activity is on a plateau.
Chart 1: Housing transactions, seasonally adjusted, 000s
With remortgage activity continuing at relatively subdued levels, industry gross lending figures are closely echoing developments in the housing market, and so also describe something of a plateau.
Our forward estimate is that gross lending was £17.8 billion in September, down just a shade from the month earlier. Year-on-year growth matched the 10% reported in August but, as for house purchase lending, marks a significant easing in growth rates from earlier in the year.
The Bank of England reported a little over 64,000 approvals for house purchase in August (seasonally adjusted). This was one of the weaker figures this year and its longer-term pattern - see chart - also fits with our assessment of a market plateau or gentle slowdown in market activity.
The latest credit conditions survey from the Bank of England presents a rather volatile picture of mortgage credit availability and demand, but some of its metrics may have been distorted following the implementation of new MMR rules from late April and the subsequent June announcements from the Financial Policy Committee (FPC) on stress testing and limits to loans at higher income multiples.
Combining the results of the last two surveys removes much of the “noise” from these survey results, however, and suggests that the underlying picture is close to stability.
Elsewhere, the survey does anticipate that firms would pass on lower funding costs and compete more fiercely for business in the final quarter. We have seen some evidence of this in recent weeks, as lenders launch more competitive mortgage offers, and this is one factor that seems likely to support demand through year-end.
We saw an interesting juxtaposition of macro-prudential announcements following the September meeting of the FPC.
Much attention has centred on the FPC’s decision to ask for additional directive powers - to set limits on LTVs and debt-to-income levels for residential mortgage lending - to guard against financial stability risks arising from potential future developments in the housing market.
However, such a decision is fairly unremarkable for two reasons. Firstly, the Chancellor of the Exchequer had specifically asked the FPC what additional powers would be appropriate. Secondly, the body has always favoured such powers in principle, as long as they were underpinned by prior public and parliamentary debate (which will now take place over the coming months).
Given that directive powers are intended to serve as emergency brakes for the macro-prudential regulator, it is reassuring that the FPC emphasised that seeking these powers “does not reflect any FPC decision about the current state of the housing market” and resisted seeking more extensive powers.
Indeed, the record of its September meeting notes that housing market activity and price pressures may be easing.
Elsewhere, from our perspective, the FPC displays a welcome degree of caution, pragmatism and market sensitivity.
Regulatory scrutiny of the buy-to-let sector has been building for some time, and it is noteworthy that the FPC gives it further attention in its request for additional directive powers. There is no direct read-across to imminent actions, however, and our overall impression is that the FPC is taking the time to build up a good understanding of the sector, and how it interacts with the wider housing and mortgage markets, before contemplating any intervention.
The Committee has also avoided any temptation for micro-tinkering, giving the government’s Help to Buy mortgage guarantee scheme a clean bill of health and proposing no changes to its operating metrics.
- Name: Bob Pannell