Published: 20 February 2012 | Author: Bob Pannell
- Housing and mortgage market sentiment has improved a little over recent weeks.
- Over the short-term, activity may be boosted by first-time buyers seeking to complete deals before the stamp duty concession ends on 24 March.
- For the time being at least, funding conditions have eased as a result of European Central Bank operations, so lessening the need for UK banks to tighten mortgage pricing and terms.
- As inflationary pressures continue to fall back, the squeeze on household finances should ease progressively and help support stronger economic recovery going into the second half.
Housing and mortgage markets
Housing market activity has been a little stronger of late, but the pick-up is comparatively recent and from a low base.
Gross mortgage lending increased last year for the first time since 2007 - up by 4% from 2010 to £140.7 billion. But a key ingredient was the recovery in remortgage activity from the very weak levels a year earlier.
According to our Regulated Mortgage Survey, remortgage lending increased by 17% last year, but house purchase lending actually fell by 6%.
Chart 1: Number of house purchase loans and remortgages, % change year on year
As can be seen from Chart 1, the underlying trend in housing market transactions improved throughout last year, but it was only in the closing months that we saw year-on-year gains.
We estimate that total gross mortgage lending was £10.5 billion in January. Although weaker than in December because of seasonal factors, this would be 10% higher than a year ago and the sixth month in a row of higher year-on-year lending.
December’s approvals data from the Bank of England suggests that the profile of January’s lending continued to be one of resilient house purchase demand alongside a levelling-off in remortgage activity.
Buy-to-let has also put in a more robust performance over recent quarters, slowly recovering its share of total gross lending. While much of this reflects greater remortgage business, landlords also bought more properties during the second half.
Chart 2: House purchases by first-time buyers and BTL landlords
But this recovery is also from fairly depressed levels. Our latest figures indicate that lenders newly financed just under 19,000 BTL house purchase loans in the fourth quarter and 66,000 for 2011 as a whole. This is about a third of the volume of loans to first-time buyers and represents less than 8% of total house purchases (including cash transactions).
We see no reason to expect a significant change in BTL lending volumes over next few months.
The latest RICS survey reports a fairly brisk start to the year for housing activity generally, and attributes this in part to the unseasonably mild weather in January. It also supports our view that would-be first-time buyers are seeking to complete chains before the current exemption from stamp duty (for first-time buyer purchases of £250,000 or less) ends on 24 March.
Recent trading updates from the volume house-builders have also been relatively bullish.
And, importantly, funding market conditions have also got better. Despite the tumultuous nature of Greek sovereign debt negotiations, the European Central Bank’s move in December to provide nearly €500 billion of cheap three-year funding averted a credit squeeze in the euro area and has helped funding market conditions to improve since the turn of the year. This facilitated greater debt issuance by UK banks in January, including a resumption in public unsecured issuance, and some reduction in funding costs.
With the ECB planning another substantial three-year operation at the end of February, these positive trends should continue over the near-term, barring a disorderly handling of eurozone sovereign debt problems. This should in turn help to further unwind some of the pressure UK banks have been under to tighten the pricing and availability of mortgages.
The recent improvement in housing and mortgage market sentiment is welcome. But we should be careful not to overstate its significance, given the very low levels of activity we are starting from and the protracted and difficult economic rebalancing that the UK and other countries have embarked upon.
February’s Inflation Report from the Bank of England provides a fairly muted assessment of our immediate economic position.
The UK economy shrank by 0.2% in the fourth quarter, and the underlying picture is of an economy that is broadly flat. The MPC’s recent decision to extend its quantitative easing programme by a further £50 billion (to £325 billion) aims to nurse the UK through a difficult period. While most commentators expect economic growth to be weak in the near term, business surveys have been more positive in recent weeks, suggesting that we are likely to avoid a double dip recession (two successive quarters of contraction).
Inflation has fallen back sharply over recent months, much as expected, as the impact of higher VAT and petrol prices have dropped out of the twelve-month comparison. Headline CPI stood at 3.6% in January, down from its recent peak of 5.2% in September. Earnings growth - fairly steady at about 2% - is much lower. But the gap is narrowing significantly and, following a protracted fall in real incomes over several years, this fact alone may already be helping to lift consumer confidence.
Despite uncertainty about whether households have fully adjusted to past income falls and the more uncertain economic outlook, the Bank sees the rate at which inflationary pressures fall away as an important determinant of future growth.
Its reasoning is straightforward. The stagnation of consumer spending largely explains the anaemic pace of the UK’s economic recovery. And, as Bank Governor Mervyn King noted in a recent speech, a fall in inflation will ease the squeeze on real incomes and with it the pressure on consumer spending.
While the MPC does expect inflation to fall further over the course of the year, it is unsure about the likely pace of that moderation from Q1 onwards. Its central expectation is that inflation drops a little below its target 2% towards the end of this year and then stays below target throughout 2013. Consistent with this view, the Bank sees only a weak “zig zag” pattern of economic growth this year, albeit with the prospect of a stronger outturn in 2013.