Market commentary
19 April 2010
Looking further out, the new stamp duty exemption for first-time buyers purchasing properties under £250,000 could have a modestly stimulatory impact, but tight eligibility criteria mean that it is uncertain how many will benefit.
Meanwhile, the wider economic backdrop has improved somewhat. The economy ended 2009 with a little more momentum than previously thought and the first quarter looks to have seen a further modest expansion.
But, while the outlook is for a gradual improvement later in the year, two crucial factors are likely to weigh on the pace of recovery for the economy and housing market. Financial institutions still face the prospect of a funding gap when the official support schemes start to wind down from next year. And, regardless of the outcome of the election, the government will need to start tackling the public sector deficit, which will drag on the recovery.
Little change in the housing and mortgage markets
The housing and mortgage markets are rather quiet at the moment. Despite the increase in activity late last year and subsequent fall early this, due to the end of the stamp duty holiday, the underlying position looks to have barely changed. Activity is subdued, but comfortably higher than in the depths of the recession a year ago.
Our March estimate for gross mortgage lending of £11.5 billion reflects a typical seasonal rise from the two preceding months, but suggests little underlying change. And following a fall in reported house prices in February, both the Nationwide and Halifax data showed a rise in March, and little change over the first quarter as a whole. With transaction levels still low, we would not be surprised to see monthly volatility continue.
There have been modest signs of more credit being made available and on more attractive terms. The Bank of England's Credit Conditions Survey revealed that lenders have increased the volume of funds being made available at higher loan-to-value ratios, but the improvement is only gradual and criteria still remain relatively tight.
And there was some positive news from the Budget. Qualifying first-time buyers purchasing a home for under £250,000 will be exempt from paying stamp duty for the next two years. We would expect this to boost the market somewhat. However, the definition HMRC has produced to define a first-time buyer is relatively narrow and many buyers currently reported as FTBs in the CML data will not qualify. So it is difficult to assess how many will benefit and what the overall impact will be.
Some better signs from the wider economy...
There have been further signs of improvement from the wider backdrop. The latest estimate shows the UK economy ending last year a bit more strongly than previously thought, with growth revised up to 0.4% from the previous quarter.
And, despite what looks to have been largely weather-induced weakness in January, more recent data suggest that the UK expanded over the first three months of this year. There continue to be moderately encouraging signs from the labour market. Manufacturing output looks to be picking up, possibly beginning to take advantage of the boost to competitiveness from the weakening of sterling over the last couple of years. High street sales have also picked up a little.
So the short-term indicators point to a modest improvement, if not exactly suggesting robust growth. Despite some stimulatory policies being withdrawn at the turn of the year, specifically the end of the stamp duty holiday for properties in the £125,000 to £175,000 category and VAT returning to 17.5%, NIESR estimated that growth of 0.4% will be recorded in the first quarter - still fairly sluggish, but a step in the right direction.
As a result, it was unsurprising to see monetary policy unchanged at the April Monetary Policy Committee meeting. While we cannot rule out quantitative easing being extended at some point if there was a downturn, there appears little reason to expect any change in official interest rates for some time.
... but longer-term challenges will hold back the pace of recovery
With the gradually improving economic backdrop and interest rates still low, we continue to expect a gentle improvement in market conditions later in the year. In addition, low rates have clearly helped keep mortgage defaults lower than would have otherwise been the case and will continue to do so.
However, the longer-term problems facing the market remain and will limit the speed of recovery in the housing market and wider economy. Financial institutions still face the prospect of around £300 billion of official support schemes beginning to end from next year, and will need to find alternative funding sources. This will likely limit how much new funding can be made available to the housing market.
In addition, regardless of the result of the election, the government will soon need to take steps to reduce the public deficit. There is likely to be a further Budget before mid-year. The tightening of fiscal policy will inevitably drag on the pace of recovery and, as a consequence, on borrowers' appetite and ability to transact. A slow and drawn out improvement, with the potential for fits and starts along the way, still looks the most likely outcome.
CML Research
- Name: Caroline Purdey
Email: - Name: Bob Pannell
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