Published: 23 April 2012 | Author: Bob Pannell
The ending of the stamp duty concession for first-time buyers appears to have caused a significant bunching of property transactions, the flip side of which may be a dip over the coming months. The latest consumer credit survey from the Bank of England signals a less positive mortgage lending environment over the coming months. The pick-up in headline CPI figures in March comes amid concerns that the Bank of England may be closer to modifying its monetary stance. Forthcoming GDP figures seem likely to emphasise the subdued pace of UK economic recovery, and so may add to the near-term negative sentiment in the housing market.
Last month’s Budget signalled no change in fiscal direction.
The measures announced were designed to have a broadly neutral impact on the public finances, so doing little to alter the medium-term profile of deficit reduction.
Elsewhere, the Budget confirmed a rather dull economic landscape. The economic forecasts in the Office for Budgetary Responsibility report, published alongside, nudged the GDP growth estimate for 2012 to 0.8%, marginally above the 0.7% anticipated at the time of the Autumn Statement.
This outlook is only a little stronger than the consensus view of 0.6%, contained in the latest issue of HM Treasury’s Forecasts for the UK economy.
In reality, there is more than the usual amount of guesswork behind any near-term forecasts, given the current erratic reporting of construction figures and the future distorting effects of the Queen’s Jubilee and the London Olympics. As the minutes of the MPC’s April meeting recognise, the headline GDP numbers could fall for three successive quarters. The most recent official estimate is that fourth quarter GDP growth contracted by 0.3%, and the first estimate of Q1 growth (due 25th April) may be modestly negative, signalling a relapse into technical recession.
Meanwhile, the underlying story, supported by a wide range of survey indicators, appears to be one of positive if subdued growth.
Labour market figures seem to bear this out. The jobs situation has been somewhat less negative in recent months, and the latest unemployment figures showed a headline reduction of 35,000 in the three months to February – the first fall since last spring.
The latest inflation figures may prove to be the most important development of recent weeks, however.
The headline CPI figure jumped unexpectedly from 3.4% to 3.5% in March, interrupting the downwards trajectory of consumer price inflation since its peak of 5.2% last September.
The Bank of England has been quick to register its discomfort. The latest MPC minutes and Deputy Governor Paul Tucker, in a recent speech, recognised that inflation was proving stickier than envisaged at the time of the February Inflation Report and that its near-term path was uncertain. Paul Tucker specifically indicated that inflation might remain above 3% into the second half. With fellow MPC member Adam Posen dropping his call for further quantitative easing, the MPC meeting in early May - and the opportunity that a new Inflation Report gives the Bank to recalibrate its expectations for economic growth and inflation - is likely to become a short-term market focus.
Housing and mortgage markets
The Budget held few surprises for the housing market, although we did see the introduction of a new 7% stamp duty band on properties worth more than £2 million, alongside measures to curb avoidance. Their cumulative impact is expected to be just a few hundred million pounds, and will affect relatively few households directly – around 2,000 transactions taking place at these levels over the past year, nearly all in London.
There was no last minute extension of the concession for first-time buyers, which had exempted them from paying stamp duty on purchases of up to £250,000, and so this has reverted to the default threshold of £125,000 since late March.
As with previous temporary stamp duty measures, we appear to have seen a significant volume of transactions just before the concession is withdrawn.
Chart 1: Number of first time buyers, by property value
Source: CML Regulated Mortgage Survey
We estimate that gross mortgage lending in March was £13.4 billion, 30% up on the month and 17% higher than a year ago. The increase appears to be almost entirely due to stronger house purchase activity, a view corroborated by LSL Acadametrics reporting a 32% rise in transactions. HMRC property sales may exceed 90,000 in March, which would be the highest figure since December 2009, when the previous stamp duty concession came to an end.
This then leads on to a question as to how much of a dip in property sales we might see over the coming months.
The underlying picture for house purchase activity has been relatively buoyant in recent months. But it is not entirely clear what has powered this, especially at a time when household finances and confidence have remained fragile. There has not been much change in first-time buyers’ share of house purchase activity, suggesting that – prior to March - the stamp duty concession for first-time buyers had not been a major factor. We have seen buy to let landlords buying more, and while there are few signs that this is set to reverse, it only accounts for a relatively small proportion (no more than 10%) of overall property sales.
Our uncertainty about what has underpinned the stronger house purchase activity of recent months makes it harder to judge what will happen over the coming months.
We would be surprised if we did not see a short-term drop in transactions, following the end of the stamp duty concession, especially as it will take some while for NewBuy transaction levels to build.
The Bank of England figures for house purchase approvals may have provided a first hint of this in February, with the seasonally adjusted number dropping below 49,000 in February, its weakest figure since mid 2011.
Chart 2: Availability of mortgage credit
Source: Bank of England
The latest consumer credit survey from the Bank of England was one of the most newsworthy to date, with mortgage lenders signalling lower risk appetite, less overall credit availability and wider spreads. Tighter wholesale funding conditions – albeit better than in late 2011 - and wider balance sheet pressures are a key driver of these changes.
The SVR increases announced by some lenders over the past few weeks appear to have triggered renewed interest in remortgage activity, with anecdotal reports of higher applications coming through.
Remortgage approvals had been easing back since last summer, with the seasonally adjusted figure in February - at just under 28,000 - the weakest since June 2010. But a modest pick-up now seems likely over the coming months.