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Market commentary September 2012


Published: 20 September 2012 | Author: Bob Pannell

  • House purchase activity continues to be a little above year-earlier levels, but the housing numbers are by no means strong.
  • We expect to see stronger take-up of NewBuy over the coming months, especially as the builders offer a more concerted approach to marketing.
  • While not a panacea for all housing market problems, the funding for lending scheme does offer the potential to improve the lending environment. Unfortunately, it will be difficult to reach an initial assessment of its impact before year-end.

Housing and mortgage markets

Most indicators depict fairly subdued market conditions.

Bank of England figures for July showed only a modest pick-up in lending from the weak outturn in June. Gross lending was 7% higher at £12.7 billion in July, but this was just 2% up on a year ago and left the seasonal picture looking its weakest for a year.

Our forward estimate is for gross lending of £12.6 billion in August. This would have been 4% lower than a year ago, although an "Olympic effect" may account for some of the apparent weakness.

Remortgages continue to trend some way below year earlier levels, and this is weighing down the overall lending figures. Remortgage approvals (seasonally adjusted) rose by 5% to over 25,000 in July, but the 3-month moving average was the weakest since early 2010.

For house purchase, the broad picture appears to be one where activity continues to trend a little above last year, but the housing numbers are not particularly strong.  This should not be a big surprise, during a period when the UK economy is pretty flat and household confidence is in the doldrums. 

According to HMRC, transactions eased back in July, and were also modestly weaker than a year earlier, although the underlying seasonally adjusted position continues to trend a little above 2010 levels.

By contrast, seasonally adjusted house purchase approvals in July were 5% lower year on year, and e.surv signals a fairly dismal August.

Chart 1: Housing transactions and house-building, 000s per quarter

Market commentary September 2012 activity2

There are also signs of weakness in house-building activity, notwithstanding the seemingly healthy profits being reported by the volume house-builders. Private starts and completions in England, for example, are at a very low ebb, and materially below their 2007 peaks. And the latest figures from the Home Builders Federation's Housing Pipeline report reveal that planning permissions granted – a forward indicator of new build activity over the next three or four years – are similarly depressed.

Housing measures

This was the challenging backdrop to the government’s announcement in early September of a fresh housing package, aimed at boosting house-building and so promoting wider economic growth.

A variety of measures were proposed.

The government once again hopes to leverage its high credit standing among investors, this time by offering guarantees to encourage investment in the private rented sector and for affordable homes.

Elsewhere, it builds on its earlier efforts to cut the red tape around planning decisions, and also makes it easier for developers to renegotiate planning agreements in order to make them economically viable.

The government has also extended its FirstBuy scheme through to March 2014, offering an extra £280m of funding to help a further 16,500 households on to the property ladder.

There is a possibility that a re-invigorated FirstBuy may affect uptake under the Newbuy scheme. Take-up under NewBuy has appeared slow since its launch in March, but has in fact been broadly in line with that for FirstBuy after its launch. 

We are optimistic that we will soon see stronger levels of NewBuy activity.  Developers have embarked on an autumn marketing campaign to promote awareness of NewBuy and the recently launched funding for lending scheme (FLS) has facilitated some reductions in NewBuy mortgage rates. Both factors should stimulate buyer interest.

We have also seen the launch of MI New Home. This Scottish initiative is broadly similar to NewBuy, albeit with a lower maximum sales price. MI New Home is moderately less ambitious than NewBuy, but nevertheless aims to help up to 6,000 households into home ownership over the next three years.

Funding for lending scheme (FLS)

The FLS represents a different form of intervention by the authorities. It is a bold move that clearly has the potential to greatly influence the course of the housing market over the next year or so.

As Spencer Dale, MPC member and Chief Economist at the Bank of England, recently remarked:

“It is bigger and bolder than any scheme tried so far to get the banks lending. In terms of the cost at which funding is being made available, the maturity of that funding and, most importantly, the strong price incentives it provides to banks to expand their lending”.

The nature of the FLS intervention has generated strong expectations that it will transform mortgage pricing and boost lending availability. This is understandable, although there is a risk of expecting too much.

The FLS offers cheap funding, equivalent to at most 5% of existing balances, plus any incremental lending over the reference period by individual participating firms. These arithmetic limits on the absolute scale of cheap funding would necessarily imply a fairly diluted impact if they worked through to affect mortgage pricing across the board. Any impact on pricing could be much more pronounced, if focused only in specific market niches.

Any benefits in terms of lower pricing also depend upon the ongoing state of economic and financial headwinds more generally.  The external financial environment has improved over recent weeks, helped by the announcement by the European Central Bank of an initiative to buy sovereign bonds, and so bear down on the funding costs of member states undertaking reforms.  But market conditions can easily change.

It is also important to recognise that the starting point for individual mortgage firms varies greatly. 

While some firms strongly advocate the volume benefits that FLS will bring, others, including some of the major UK banks had been looking to deleverage.  One consequence of the latter, as our recent report on the largest lenders in 2011 illustrated, is that the rest of the industry then has to run hard to deliver overall growth in lending balances. So, while the prospect of cheap funding may drive significant shifts in the lending shares of individual firms, the overall impact upon the availability or pricing of mortgages is less clear cut. 

The bottom line is that there continue to be lots of uncertainties associated with the FLS.  While there have been some early signs of a fillip from the FLS – with Moneyfacts reporting an increase in higher LTV offers, and a small number of lenders announcing improved mortgage deals – it really is too soon after the launch of the FLS to try to gauge its likely impact.

We do not expect the Bank of England to confirm which lenders have signed up to FLS, nor report on their lending volumes, until around the year-end. Moreover, fieldwork for the Bank’s credit conditions survey due out on 26th September will have been undertaken during the second half of August, and so too soon after launch of the FLS to give a useful reading.

So, while the FLS clearly offers some potential to stimulate credit flows through the UK economy, lift the housing market and support the government’s wider growth agenda, it may be several months before we can really begin to calibrate its impact.

The Bank has intimated that it mayneed to make an initial assessment of FLS before deciding its next monetary actions, but at this stage we see nothing to preclude a further wave of quantitative easing in due course.


The picture for the wider economy does not appreear to have changed very much over recent weeks.

Reported growth in the third quarter is expected to be strong. This would recoup the losses in Q2 associated with the extended Jubilee bank holiday, and confirm that the economy is more or less flat. The jobs figure continues to be relatively benign, suggesting a slightly more favourable view.

Elsewhere, the easing of inflationary pressures has stalled a little – the annual CPI eased back to 2.5% in August, down from an unexpectedly strong 2.6% in July.  Commentators expect the CPI to fall again in September, as last year's energy price rises drop out of the figures, but then to rise again as university tuition fees and other factors show through.  The upshot is uncertainty as to how quickly real incomes will stabilise.

For some considerable time, the government has relied on monetary policy to do the “heavy lifting” to underpin economic growth, while it tries to rein back public sector debt.

The weakness of the UK economy over several quarters has occasioned disappointing public borrowing figures so far this tax year. As a consequence, the Chancellor faces a sizeable fiscal overshoot this year.  Many commentators now believe that he will be unable to satisfy one of his self-imposed fiscal targets – for the ratio of public debt to GDP to be falling by the end of 2015-16.

With the Office for Budget Responsibility providing an independent oversight function on fiscal progress, the Chancellor would appear to have little wriggle room. The Chancellor will reveal his choice, on whether to miss his own target or to implement a fresh wave of fiscal cuts over and above what has already been scheduled, when he presents his autumn statement on 5th December.