Market commentary
18 December 2009
Concrete decisions on how to repair the public finances will not happen this side of an election. The nearest to a change in policy in the coming months is the likely end to asset purchases under quantitative easing - although the Bank of England will continue to hold these assets on its balance sheet. Some commentators have begun to worry about potentially unsustainable asset price rises, although there is currently no evidence of this in the housing market. The funding markets, while improving, are still in a weak condition. Although we have seen a rise in house prices in recent months, turnover remains extremely low with little immediate prospect of a return to more "normal" levels.
Few surprises in the PBR...
Perhaps unsurprisingly, there was little new in last week's Pre-Budget Report to influence prospects for the housing and mortgage markets. With an election on the horizon it was inevitable that, despite the headline-grabbing bankers' bonus tax, it would be largely a holding operation. The government has little room to manoeuvre and the difficult decisions on how to reduce the deficit were always likely to be postponed until after the election.
We were disappointed that the stamp duty holiday was not extended, although it was already factored into our outlook. This transaction tax restricts liquidity in the market and the exemption for properties in the £125,000 to £175,000 band could have been extended with relatively little cost to the Exchequer given the still low level of transactions. We welcome the decision to extend help with interest payments for working-age borrowers on income support at the current rate for a further six months.
... so expect more of the same...
Housing and mortgage market conditions have changed little in recent months. As our gross lending estimate published today shows, underlying monthly lending volumes have barely moved over the latter part of the year with home buying activity having picked up and remortgaging at very low levels.
There is little reason to expect much underlying change in the coming months. There could be a modest decline in underlying house buying activity in early 2010 due to the stamp duty holiday ending, with activity "bunching" over the last few months of 2009. But, as we pointed out in last month's commentary, seasonal factors are likely to be the dominant driver over the next few months.
Monetary policy is also unlikely to change significantly, at least not in the short-term. Interest rates are not expected to rise for some time. The Bank of England is currently scheduled to end its purchase of assets under the quantitative easing policy in early February, and it is looking increasingly likely that the programme will not be extended further. While the Bank has made clear it does not believe there has been an unsustainable rise in asset prices as a result of the policy so far, several commentators have talked about the policy potentially pushing such prices above "fundamental" levels.
It is difficult to see much evidence of this in the housing market. Reported prices have picked up from the lows early this year, but transactions remain considerably below what might be considered "normal". There has been a modest increase in the availability of mortgage credit recently, including some tentative signs of a few higher LTV products emerging. But there is no sign of a swift recovery in lending volumes, especially with remortgaging set to remain at subdued levels while low interest rates persist. Although funding markets have improved a little, as witnessed by the recent mortgage-backed security issuances by some of the country's largest lenders, they remain in a weak state overall. There is still a large volume of assets sitting temporarily with the authorities under liquidity support schemes that will need to be rolled over. Wholesale markets are unlikely to be able to absorb all of this by the time the support schemes are scheduled to end (in early 2011), let alone provide additional new funding.
... and a quiet 2010
There are a number of factors that lead us to anticipate only a modest pick-up in the housing and mortgage markets from 2009 to 2010. Fiscal tightening, as mentioned above, looks inevitable regardless of who wins the election, although the exact timing is unclear. Any government will be keen to avoid pushing the economy back into recession and will be more likely to remove support late rather than early. However, there will need to be a credible plan for getting the public finances back on track if the markets are to continue to finance the deficit at a low cost.
In addition, the prospect of an election and a potential change of government could make consumers uncertain and reluctant to commit to major purchases.
While the prospect of tighter regulation, including more expensive capital requirements and a more prescriptive approach by the regulator, will inevitably act as a brake on the flow of mortgage credit.
All in all, we still anticipate a slow market next year. The economy is set to recover and confidence will likely pick up, particularly if unemployment does not rise much further. But the pressures hanging over the market are likely to mean only a gradual pick up in activity and lending volumes. However, with interest rates set to remain low for some time, the labour market having performed better than expected and lenders continuing to work with borrowers in difficulty, there is unlikely to be much increase in the numbers falling behind on their mortgages or facing possession.
CML Research
- Name: Paul Samter
Email: - Name: Bob Pannell
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