Market commentary
19 November 2009
The coming months are likely to be dominated by seasonal factors rather than underlying change. But we remain sceptical how much further housing and mortgage market activity can improve from current levels. As a result, we also expect only a modest improvement over the course of next year.
A seasonal slowdown on the cards
Housing and mortgage market activity has been broadly stable in recent months. Our most recent estimate of gross lending in October of £13.5 billion, while seeing a seasonal rise from September, indicates little underlying change.
There has been a significant change in the type of lending taking place from the start of the year. House purchase activity has picked up significantly. In contrast, remortgaging has dropped to decade-low levels as many borrowers have little incentive to refinance when they move onto low reversion rates, and others find themselves unable to do so due to equity constraints.
Chart 1: House purchase and remortgage approvals, number per month (seasonally adjusted)
Source: Bank of England
We expect the coming months to be dominated by seasonal drivers. Housing market activity typically tails off at the end of the year. But early indications suggest that house purchase lending will continue to be stronger than refinancing activity in the coming months. Seasonal factors will make it difficult to determine any underlying movements much before the end of the first quarter next year, by which point a general election will loom large and further complicate matters.
More immediate news could come from the Pre-Budget Report on 9 December. At present, the stamp duty exemption for properties between £125,000 and £175,000 and the VAT reduction are due to be reversed at the end of the year.
Economic backdrop improving
There has been a distinct improvement in the outlook for the economy in recent weeks. Unemployment has not risen as sharply as many had feared a few months ago and consumer confidence has improved. Equity markets have also reflected the brighter outlook. The Bank of England's latest projections and speeches from MPC members give a fairly upbeat perspective on the impact of quantitative easing and the future path of economic growth. Most commentators expect the contraction in third quarter GDP to be revised upwards to nearer no change, and for clearer signs of growth in the fourth quarter.
Supportive monetary policy is expected to continue to stimulate growth next year. However, the need to bring the public sector finances back into better balance, now widely accepted across the political spectrum, will act as a headwind to the recovery. A limited supply of credit to the economy and the private sector repairing balance sheets are also expected to slow the recovery. Few expect a rapid return to strong growth, but there is a general sense that there is at least some light at the end of the tunnel.
The outlook
The coming months will see a seasonal slowdown and make it difficult to assess any changes in the underlying position for several months. As outlined in our latest forecasts published last week, we expect only a modest improvement in the housing and mortgage markets next year. However, low interest rates and lender forebearance should mean that far fewer households fall behind on the mortgage and lose their homes than might have been expected considering the rise in unemployment.
But there are risks to this scenario, mainly from the size of fiscal retrenchment required. Any future government will have to walk a tightrope in terms of reining in the deficit in a credible way (so that the cost of funding the debt is sustainable) and not choking off a recovery. There is also a risk that interest rates could rise earlier than currently anticipated.
While we expect a slow improvement, the housing market is likely to remain subdued throughout next year as the economy gradually recovers.
CML Research
- Name: Caroline Purdey
Email: - Name: Bob Pannell
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