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Published: 23 January 2012 | Author: Bob Pannell

  • The closing months of 2011 saw stronger mortgage lending activity and housing transactions. But this was from low levels, and we would not read too much significance into these recent figures. Immediate economic prospects are challenging and suggest a weak first half for the housing market. 
  • Inflationary pressures have started to fall away sharply, raising hopes that real incomes may stop falling later this year. Looking a little further ahead, there now seems to be a reasonable prospect that real incomes could stabilise and perhaps even start rising moderately by the end of the year. This would boost consumer confidence and help to kindle house purchase demand.
  • The Eurozone crisis continues to make funding conditions challenging and exposes mortgage pricing to upside risks.


The Chancellor George Osborne recently hinted, in an interview with BBC Economics editor Stephanie Flanders, that the UK economy might have contracted in the fourth quarter.

This is by no means unexpected. It echoes what is happening across much of the Eurozone. The OBR forecast a weak final quarter at the time of the Autumn Statement, and this is also broadly in line with the views of many economic commentators.

When the first estimate of Q4 GDP is published on 25 January, we can expect a lively discussion as to whether or not the UK has entered a double dip recession (by which economists simply mean that the economy has shrunk for two quarters in a row). Indeed, the ITEM Club has already jumped the gun. The issue may attract a lot of political heat, resurrecting the debate about whether an alternative economic strategy (“Plan B”) is needed but, from an economics perspective, it is a largely academic point, especially as GDP estimates are liable to later revisions.

The UK may avoid an outright recession, but the key point is that the UK economy has stalled and looks set to remain weak for the foreseeable future. The median expectation for GDP growth this year, contained in the latest set of economic forecasts compiled by HM Treasury, is now just 0.4%.

Our economy is not growing nearly strongly enough to stop unemployment from rising. The latest unemployment figures showed a headline increase of 118,000 in the three months to November, lifting the unemployment rate to 8.4% (its highest since the mid 1990s).

Meanwhile, underlying earnings growth has eased back further, with total pay (including bonuses) rising by 1.9% on a year earlier.

Although this implies a continuing sharp erosion in real incomes, inflationary pressures have begun to fall back sharply.  Headline CPI shrank to 4.2% in December, down from 4.8% in November and its recent peak of 5.2% in September.

With the energy companies announcing price cuts and the impact of last year’s increase in VAT to 20% set to unwind, we should see further reductions over the next few months.

Bank of England Chief Economist Spencer Dale indicated in a speech just before Christmas that CPI should come down towards 3% by March. While he expressed uncertainty about whether CPI would be above or below its 2% target by end-year, the immediate path should allow the Monetary Policy Committee, when it meets in early February, to announce another round of quantitative easing to nurse our economy through its current soft patch.

Looking a little further ahead, there now seems to be a reasonable prospect that real incomes could stabilise and perhaps even start rising moderately by the end of the year.  This would boost consumer confidence and help to underpin a stronger appetite for house purchase.


But UK prospects do of course remain highly dependent upon what happens in the Eurozone.

In December the ECB fulfilled its role as lender of last resort to the banks, offering nearly €500 billion of cheap 3 year funding, to help stabilise markets across year-end and ease credit needs into the early months of this year. This action averted a credit crunch, but the bulk of the extra liquidity has gone to repay shorter maturing ECB money or been deposited back with the ECB. While short-term Euribor rates have eased, there is little sign of an increased appetite for interbank lending.

In recent weeks, financial markets have once again flirted with the possibility of a Greek sovereign default. We have also seen Standard & Poor’s selectively downgrading a number of Eurozone member states, and in turn the European Financial Stability Facility bail out fund. All of this complicates decision-making processes and potentially diminishes the firepower of support mechanisms.

While financial markets have taken heart from the possibility that IMF resources may be significantly boosted to help protect the world economy from the European debt crisis, this is not yet a done deal. Meanwhile, Eurozone problems persist and clearly have the potential to get worse before they get better. 

Funding conditions remain challenging, as highlighted in both the Bank of England’s credit conditions survey and the CBI/PWC Industry Sentiment Financial Services Survey.

A key take-away from these reports is that firms are experiencing higher funding costs as a result of the Eurozone crisis and are under pressure to pass these through to retail customers. Competitive forces and the weak state of household finances are working in the opposite direction, with the result that mortgage pricing decisions over the next few months look finely balanced.

Housing and mortgages

Meanwhile, the latest Bank of England figures point to a relatively strong year-end for mortgage lending.

Gross lending totalled £13.2 billion (unadjusted) in November, 7% stronger than in October, and 15% higher than a year earlier. We estimate that gross lending dipped to £11.7 billion in December, as seasonal factors kicked in. But this would still have been 12% higher than a year ago and the fifth month in a row of higher year-on-year lending. It would also mean that the outturn for the year as a whole was £140 billion, and represented a modest increase over 2010.

Our Regulated Mortgage Survey describes a more resilient housing market in the closing months of last year, after languishing some way below year-earlier levels for much of the year. There were 47,000 loans, worth £6.9 billion advanced for house purchase in November, up on October and only the second time in 2011 showing a year-on-year increase.

The Bank of England approvals data and the HMRC property transactions figures for November underscore the healthier tone, with the seasonally adjusted figures for both at their strongest for nearly two years

With respect to remortgages, there were 31,200 loans worth £4.0 billion in November, up 6% by number and 8% by value compared to October. This marked the eleventh consecutive increase in remortgage lending year-on-year.

Although unadjusted remortgage approvals were up a little in November, according to Bank of England figures, the seasonally adjusted position was weaker than recent months and a year ago. This may signal that borrower appetite driven by the fear that favourable deals might cease to be available has started to wane.

Looking ahead, the credit conditions survey paints a fairly flat picture for the first quarter. Firms aim to be a little more cautious, tightening their credit scoring criteria and approving a lower proportion of loan applications, in part reflecting current pressure on disposable incomes.  

Product innovation may help mortgage credit availability to improve slightly over the coming months, although the planned new build indemnity scheme – designed to allow participating lenders to offer higher LTV mortgages while keeping risk profiles broadly unchanged – will only just be coming on stream at the end of the quarter.

Taken overall, firms are expecting demand for residential mortgages to ease back across the piece this quarter.

Chart 1: Buy-to-let house purchase demand, net percentage balance

cc survey btl
Source: Bank of England’s credit conditions survey 2011 Q4
Note: A positive balance indicates that lenders reported/expect higher demand than previous quarter.


This would mark quite a significant turn-round with respect to buy-to-let, where demand has increased for the past six quarters, especially as firms continue to enter the sector and existing players are easing their lending criteria.

With respect to house purchase, we expect some pick-up in first-time buyer transactions ahead of the current stamp duty exemption for properties worth up to £250,000 expiring in late March.