21 May 2012
A softer tone for house purchase was already in prospect, following the spike in activity in March associated with the end of the stamp duty concession for first-time buyers.
[This commentary has been written at a time of considerable uncertainty within the eurozone, and market conditions may change materially if events move quickly.]
The current political crisis unfolding in Greece comes after two painful episodes of debt restructuring and may signal the third and final act of this modern Greek tragedy. With politicians and policy-makers now talking openly about the possibility of Greece exiting the eurozone, the odds of such an event happening have narrowed considerably.
Mervyn King, Governor of the Bank of England, pulled no punches when he presented May’s Inflation Report, in stating that the eurozone was "tearing itself apart without any obvious solution".
Financial markets are naturally unsettled by what a Greek exit might mean for other EU member states, individual banks and EU institutions themselves, and funding markets have once again effectively closed.
Fortunately, UK banks have already met a substantial part of their funding needs for this year. But mortgage lenders were signalling back in March that the past tightness of wholesale funding conditions would be a key driver behind lower risk appetite, less overall credit availability and wider spreads this quarter. Clearly if the eurozone crisis persists, we could see further adverse impacts on the availability and pricing of mortgages, other consumer loans and business loans.
These developments are taking place against the backdrop of already subdued economic growth in the UK and across much of mainland Europe.
The Bank of England has just trimmed back the outlook for GDP growth to about 0.8% for this year. While this is broadly in line with the recent economic forecasts from the Office for Budgetary Responsibility, it remains some way above the consensus view of 0.4%, contained in the latest issue of HM Treasury’s Forecasts for the UK economy.
Despite a stagnant domestic economy, recent labour market figures have been moderately positive. The headline unemployment figures fell by 45,000 in the first quarter to 2.63 million (8.2% of the workforce), but the figures are flattered by stronger part-time working.
As expected, May’s Inflation Report crystallised the messages about the stickiness of inflationary pressures that have been voiced by Deputy Governor Paul Tucker and others in recent weeks. The Bank now sees consumer price inflation remaining above its 2% target through to the middle of 2013.
With subdued wage growth continuing - regular pay (excluding bonuses) rose in the first quarter by 1.6% on a year earlier - this is likely to have negative ramifications for real incomes, household finances and sentiment.
Housing and mortgage markets
The short-term prospects for the UK housing and mortgage markets are necessarily tied to wider eurozone developments, but there is no clarity at the time of writing as to how things will pan out.
Meanwhile, we should expect uncertainty, and fear of the more extreme outcomes that are possible in a eurozone context, to foster greater risk aversion on the part of banks and greater caution on the part of households. And this is probably sufficient, in and of itself, to extend the current profile of broadly flat economic activity seen across most of Europe by a few more quarters.
This is not a particularly comforting backdrop for the UK economy or for our housing and mortgage markets.
Mortgage lending activity has been relatively buoyant in recent months. According to the latest Bank of England figures, gross mortgage advances totalled £12.6 billion in March. Helped by seasonal factors, this was more than a fifth higher than in February. But it was also 10% higher than a year ago, continuing a recent run of higher year-on-year lending.
Chart 1: Quarterly analysis of mortgage lending, £ million
Buy to let lending has picked up strongly over recent quarters, but this is from very depressed levels - buy-to-let lending is still only around a third of its 2007 levels – and so this represents only a relatively small part of the overall firmer picture.
With remortgage activity easing back somewhat over recent months, it is really stronger lending for house purchase since late 2011 that has underpinned the more buoyant lending picture.
While we cannot fully explain why this has happened, part of the explanation may be that the temporary stamp duty concession for first-time buyers prompted housing chains to complete and so triggered stronger sales. Given the unfavourable economic and financial backdrop, we find it hard to believe that these stronger levels of house purchase activity will be maintained.
We estimate that gross mortgage lending fell back to £10.2 billion in April, 19% lower than March and only 2% higher than a year ago.
But this may overstate any reversal in fortunes, given that our Regulated Mortgage Survey figures provided clear evidence of a spike in first-time buyer activity in March, immediately prior to the stamp duty concession for first-time buyers being withdrawn. To the extent that first-time buyers brought forwards transactions into March, we would expect to see a mirror effect in April.
The latest RICS survey appears to confirm our expectation of a fall in house sales following the end of the stamp duty concession.
The underlying picture then appears to be one of easing momentum in the housing market, but with potential for a sharper downwards correction on bad eurozone news.
- Name: Bob Pannell