Market commentary
18 February 2010
The market continues to move broadly in line with expectations. However, we will likely see little underlying improvement this side of the election and then only a slow drawn out recovery.
There remain a number of headwinds slowing the recovery. Funding conditions, while improved, will remain challenging. Mervyn King made clear that some of the support schemes will come to an end from next year. Any replacement funding will inevitably be more expensive and have consequences for the volume and price of credit flowing into the wider economy.
Meanwhile we remain some way short of robust economic growth. The need to rebalance the public finances has been further highlighted by developments in the euro-zone, and will weigh on the recovery. However, the Bank of England is likely to keep rates low, which should continue to mitigate mortgage payment problems.
Recent developments as expected for the housing and mortgage markets
The housing and mortgage markets continued to improve over the second half of 2009 and ended the year in much better state than they began. While the annual totals for transactions and lending volumes were extremely low on any historic comparison, the latter part of the year was better than many had anticipated.
The end of the stamp duty holiday for properties worth between £125,000 and £175,000 at the turn of the year looks to have distorted the profile of activity. Our monthly lending data showed a 56% jump in the number of mortgage advances for properties in this bracket in December - against an 11% increase in transactions across the rest of the market.
So the early part of 2010 will see a fall in activity to the extent that some business, which might usually have transacted at this time, was rushed through to beat the end of the exemption. In addition, the general election will create uncertainty over the spring and slow activity. So, as we have previously outlined, it will be difficult to gauge the true underlying state of the market for some time and the next few months are unlikely to add much to our reading of developments.
Challenges ahead
While underlying conditions are considerably better than a year ago, there remain a number of headwinds limiting the pace of further improvement. These underpin our expectations for only a gradual improvement.
The economic recovery is finally underway, although 0.1% growth over the final three months of 2009 hardly constitutes a strong starting point. Mervyn King's refusal to rule out the possibility of restarting quantitative easing shows that the Bank of England is not confident of the resilience of economic recovery. Some of the data, including a long awaited uptick in manufacturing output, has improved. But disappointing fourth quarter growth numbers, following some improvement in the third quarter, from Europe (including Germany stagnating and Spain's economy contracting) show how fragile a recovery can be.
The fiscal situation has become more high profile following the problems faced by Greece, and bond market concerns over some other eurozone countries. At the time of writing there was still no clarity over how the euro-bloc will deal with these problems. The UK is not in nearly as precarious a situation as Greece - not least due to the long maturity of much of its existing debt, reducing the refinancing need in the short-term. But many commentators have stressed the need for a sustainable plan to get the public finances into better balance and the debate on when, where and how much to cut spending and/or raise taxes will inevitably play a central role in the election. Fiscal tightening after the election will take some of the impetus out of the recovery. The Chancellor will likely unveil his Budget in March.
More directly impacting on the mortgage market, the CML recently highlighted the need to deal with around £300 billion of wholesale funding liabilities currently sitting with the authorities under various support schemes. Mervyn King made clear that the Special Liquidity Scheme would not be extended once it expires next year. This suggests that whatever is used to replace the funding, be it through the markets or modified official support, will raise funding costs. The Bank itself acknowledged this in its Inflation Report - the upcoming rollover of debt, together with regulators requiring institutions to hold more liquid assets, could impact on the supply of credit to households and businesses.
These factors are likely to hold back how far the market and wider economy can accelerate over the rest of this year.
Low rates should continue to help many borrowers
With the Bank still wary over the recovery there seems little immediate prospect of interest rates rising. If anything, the likelihood of rates remaining at or near current levels for longer has increased a little in recent months. The CML continues to see bank rate at the current 0.5% for most of this year. It seems unlikely that the MPC would move before an election, and probably not for some months after. This should help cushion many borrowers from the worst of the recession, although it does nothing to address the low profitability afflicting some lenders.
Reflecting this and the rather better than expected labour market, the latest CML mortgage arrears and possessions figures came in a little better than anticipated. The longer interest rates remain low, the greater the effect will be. Given our earlier comments about rates, it is possible that our forecast for 205,000 borrowers to be in arrears (of 2.5% or more of the value of their mortgage) at the end of 2010 and 53,000 properties to be taken into possession during the year could prove a little pessimistic. However a further wave of job losses or the fiscal position forcing rates higher present significant risks and we are by no means out of the woods yet.
CML Research
- Name: Caroline Purdey
Email: - Name: Bob Pannell
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