Market commentary

Better data but weakening sentiment

Some of the recent data, particularly from the wider economy, have shown the UK in a slightly better light. The economy grew much faster than expected in the second quarter. The 1.1% expansion was the largest quarterly increase in over four years. And the labour market also improved. The number in work has edged up a little and unemployment is gradually decreasing. While most of the job growth continues to be focused among part-time workers, there has been a small increase in the number in full time work.

In the mortgage market, the CML reported a further decline in the numbers of borrowers struggling to keep up with their payments or facing the prospect of having their homes repossessed. There will be fewer properties taken into possession and mortgages in arrears this year than we had originally thought as low interest rates help many who might otherwise have struggled to stay on top of their finances.

Chart 1: Mortgage arrears, % of outstanding balance in arrears

Source: CML 

But despite these positive signs the mood has, if anything, worsened. Consumer confidence has fallen further, and there has been continued weakness in the housing market. Estate agents report modest falls in buyer interest and prices. Mortgage credit is still difficult to come by and this is unlikely to improve significantly for the foreseeable future.

Expectations are pared back

A number of bodies have downgraded their outlook for the economy and housing market.

The Bank of England's August quarterly Inflation Report predicted a slower rate of economic growth than was forecast in May. This was partly put down to measures taken in the coalition's Budget. The Bank judged that the austerity plans will bear down on growth in the short-term. But they should allow longer term interest rates to remain low, with investors more confident that a credible measure has been made to tackle the deficit, supporting growth further out. 

The Bank Governor warned of "choppy" times ahead and that it will take "many years" for balance sheets and the fiscal position to adjust to "anything like normal". This will drag on growth and the MPC still considers the risks as being in favour of a weaker outcome rather than a better one. However, partly due to the plans to tackle the deficit, it does think that these downside risks have lessened. The Bank's outlook is similar to the OBR's forecasts underlying the Budget. They support the view that interest rates will remain at or near current lows for some time to come.

There was also a bearish forecast from the Ernst & Young ITEM club, which was attributed to the rebalancing of the public finances and consumer spending remaining weak as households repair balance sheets. ITEM predicted somewhat slower growth than the Bank or the OBR. The club expects housing market activity to take a long time to recover to "normal levels", although it does not expect prices to fall over the next twelve months.

We reflected similar concerns in our own forecasts. The slow recovery and imminent spending cuts, with the potential for public sector job losses, are not a strong base for a pick up in demand for mortgage finance. And lenders still face funding pressures and excessively tight regulation, which could further restrict the availability, and increase the cost of, credit. 

While encouraged by the recent fall in those having difficulty keeping up with their monthly payments, we remain concerned by future prospects. There has been little improvement in the number deepest in arrears, and therefore most at risk of repossession. The government has announced plans to scale back the safety net. And it is unclear whether the private sector will be able to off-set the material public sector job losses expected in the coming years. Furthermore, while unlikely in the near term, rates will have to rise eventually. A recent CLG study suggested a relatively small increase in mortgage rates could have a large impact on the number in difficulty.

The market is likely to remain stuck in slow lane

Against this backdrop, it is difficult to see anything other than a slow market for the rest of this year. Our July gross lending estimate, of £13.6 billion, represents a fairly typical seasonal rise in the month. But underlying activity remains subdued. The rest of 2010 is likely to see rather lower lending and transaction numbers compared to the same period last year. Late 2009 saw a pick up as some home buyers looked to move before the end of the first stamp duty holiday.

But for most home owners, the situation is not that bleak. The vast majority of households continue to pay their mortgages in full every month, and many have benefited from the record low interest rates. This looks set to continue for some time yet. While there are a range of risks to the outlook, low rates will further help most stay on top of their finances.

CML Research

1. Name: Caroline Purdey
   Email:
2. Name: Bob Pannell
   Email: