Market commentary
18 March 2010
The end of the stamp duty holiday pushed many housing transactions to complete before the end of last year. There was an inevitable drop off in January and little improvement in preliminary February figures. Given this backdrop, it was not particularly surprising to see monthly falls in some house price indices in February, and we will likely see modest volatility in the coming months until greater certainty over the economic and political environment emerges.
The outlook for the economy is also difficult to read. The recession technically ended late last year, and we came into 2010 with a little more momentum than previously thought. But there have been mixed signals from the early part of this year, with several surveys showing an improvement in activity, and the official data continuing to disappoint - all further complicated by the impact of the severe weather in January.
As we look further forward, we do expect some better signs to emerge later in the year as confidence in the economy improves and we move past the election. However, the need for the authorities to rein in the fiscal deficit will inevitably slow the economy. At the same time the funding markets, while certainly better than a year ago, remain difficult and will limit the flow of available housing finance.
A distorted housing market in early 2010
While we do not believe the early months of 2010 have seen much underlying change for the housing and mortgage markets, the volatility of the short-term indicators makes it harder than usual to gauge trends.
The end of the stamp duty holiday for properties in the £125,000-£175,000 bracket pushed many transactions, which might usually have completed in early 2010, into late last year. The number of mortgage-backed transactions in this price band fell by 75% between December and January, against a 36% fall across the rest of the market. The CML's latest gross lending estimate, at £9.2 billion in February, did show some increase from the previous month, which is unusual for the shortest month of the year but unsurprising given the artificially weak January. However, lending remains relatively weak, suggesting that activity is still at low levels.
Mixed signals from the wider economy
A similar mixed picture can be seen for the wider economy. The revised estimate of economic output showed that the UK exited the recession over the last quarter of last year and with a little more momentum than previously estimated. However, the recession is now thought to have been even deeper. A range of surveys show some improvement in activity recently, but the official data remains stubbornly weak. And it is difficult to assess whether disappointing January data was down to the severe weather or underlying weakness.
We would usually expect the weakness of sterling, which has declined considerably over the last two years, to help boost exports, although the most recent data does not support this. The weakness of the UK's largest export market, the Eurozone, could limit the speed of a trade-led recovery.
Against the weak backdrop, the labour market has held up relatively well. There have been signs of unemployment levelling off at around 2.5 million. While a significant deterioration, to date it has not been nearly as bad as feared. Instead, the UK workforce looks to have been very flexible, often accepting pay-cuts and fewer working hours, reducing the need for employers to make redundancies. There has also been a shift to more part-time work. From a mortgage market perspective, in conjunction with low interest rates, this has helped the vast majority of borrowers meet their monthly obligations.
The continuing weakness of sterling suggests that the markets remain nervous about firm plans to address the public finances. There is a widespread consensus over the need to reduce public sector borrowing over the next parliamentary term, although there remains some dispute over when and by how much. We may see some detail of the current administration's intentions in the Budget on 24 March, although concrete plans are unlikely before the next parliament is formed.
Inevitable short-term weakness before a gradual improvement
Given the short-term weakness and distortions in the housing market, as well as more properties coming onto the market, it was perhaps unsurprising to see falls in some of the monthly house price indices in February. With activity unlikely to pick up much in the short term, we would expect to see continuing price fluctuations in the coming months.
Further out, if uncertainty surrounding the political backdrop clears, we see greater confidence in the economic recovery and monetary policy remains supportive, we anticipate a modest improvement in the housing and mortgage markets - although, for 2010 as a whole, activity will likely only be a little higher than in 2009. However, the need to tackle the public finances will act as a brake on the pick-up in output, and has led some commentators to warn of the risk of a "double-dip" back into recession.
Funding markets improved over the latter part of 2009, with several of the larger lenders able to issue new mortgage-backed securities. This is encouraging, although more recent issuance has been a little more costly. But new issuance is dwarfed by the volume of assets that will need to be refinanced, whether held by the private markets or by the authorities under official support schemes which begin to expire from next year. As we pointed out in our Budget submission, this will drag on the volume of new funds that will be available for the mortgage market and limit the recovery in turnover.
CML Research
- Name: Caroline Purdey
Email: - Name: Bob Pannell
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