Market commentary

While the most recent monthly data have been in line with expectations, there have been some upbeat signals for economy and housing market.

The short-term outlook for the mortgage market seems clear. House buying activity is running at considerably higher levels than around the turn of the year. However it remains weak on any historic comparison and is unlikely to rise much further given the constraints the lending community faces and a still difficult economic backdrop. The September house purchase approvals data from the Bank of England suggest we may be near or have now reached this point. And remortgaging levels remain very low - with little incentive to refinance from reversion rates and limited ability due to equity constraints. As a result, overall lending volumes remain relatively low. Our estimate of gross lending in September is £12.5 bn. This is a little higher than in August, but broadly the same as the underlying volumes seen over the summer. We do not anticipate a significant change in the underlying market conditions in the coming months.

Reasons to be cheerful 

But there are some positive signs to look to. While the retail side, both in terms of mortgage and savings activity, has thrown up few surprises, it is encouraging that the wholesale markets have begun to thaw. Some of the UK's highly rated institutions have been able to issue structured finance products backed by mortgages in recent weeks. This is only an early sign of wholesale investors tentatively coming back into the new issuance market, but is welcome nonetheless.

From a macro economic perspective, last week's unemployment figures are encouraging. The number out of work continues to rise. But although unemployment rose by 88,000 in the three months to August, compared to the previous three months, to 2.47 million, this was the smallest increase in over a year. Greater labour market flexibility is the most likely explanation for why unemployment has not risen by as much as might have been expected. There are anecdotal reports of employers and employees exploring alternatives such as pay freezes and reduced hours rather than redundancy. A lower likelihood of being made unemployed should boost household sentiment. And the latest readings of consumer confidence back this up, with a sharp improvement in the most recent data and households becoming more confident about making major purchases.   

The recent bounce in house prices should also have a positive impact on housing market liquidity. While different indices tell slightly different stories, prices have retraced most of the falls seen in the early part of the year. In fact, prices may end the year slightly up from the end of 2008. While equity stakes are still considerably lower than at the peak of the market in 2007, this should help more borrowers meet current loan-to-value criteria and improve access to mortgage finance. As a result, it should be a little easier to form housing chains.

The current level of interest rates should also be supportive for some time yet. The September inflation figures showed a further fall, although some of this was driven by comparison with a rise in prices a year ago. The path of prices late last year means that significant further falls in the coming months are unlikely. So it is doubtful whether Mervyn King will have to write to the Chancellor to explain why inflation, now at 1.1%, has undershot the target level (2.0%, +/- 1%) - or, if he does, this divergence is unlikely to last for long. But, overall, the data shows inflationary pressures contained at present and adds weight to the view that interest rates will remain at the current historic lows for some time yet.

The outlook for rates has been a factor in driving sterling lower, as well as highlighting the UK's relatively weak position globally. It is worth remembering that there is a global element to the UK's recovery. The weak exchange rate is an additional boost to the economy through foreign trade.   

But still some dark clouds linger 

While the party conference season did not throw up much news directly relevant to the housing market, there was a clear, if rather belated, acknowledgment of the need to address the public sector finances. Relative to the size of its economy, the UK is forecast to see the largest annual deficit of any major economy this year, and politicians from all the major parties appear to have grasped the issue that a major retrenchment will be needed. It is likely that there will spending cuts and some tax increases implemented soon after the general election regardless of who wins power - although there are inevitably disagreements over the exact timing and areas that will be affected.

Greater certainty on reining in the public finances will certainly be welcomed by the investor community. It will reduce pressures on ratings agencies to downgrade the UK's sovereign status and help keep a lid on the cost of servicing the debt. But lower levels of government spending (and/or higher taxes) will act as a brake on the economy, and slow a recovery - making it more likely that the return to "normal" rates of growth takes some time. So, although the environment has improved recently, it is difficult to envisage a buoyant economy and/or housing market in the near future. 

We will provide a more in depth analysis of how we see the housing and mortgage markets panning out over the rest of this year and next when we publish our updated forecasts on 12 November.

CML Research

1. Name: Caroline Purdey
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2. Name: Bob Pannell
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