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Analysis

Published: 21 January 2014 | Author: Bob Pannell

  • Short-term growth prospects for the housing market and the wider economy look very positive.
  • Mortgage lending was stronger than we expected in the closing months of 2013, but lenders expect little if any boost to borrower demand this quarter.
  • Bank of England governor Mark Carney sees growth in housing transactions and mortgage lending slowing from 2015, a view we share.

Economy

The year begins with considerable confidence in the short-term prospects for the UK economy.

Economic growth has picked up significantly over recent quarters. The consensus view among commentators is that GDP will grow by about 2½% this year, finally returning the UK to its previous peak level of output.

Meanwhile, consumer price inflation (as measured by headline CPI) has eased back to its target rate of 2% in December, for the first time in four years.

Although earnings still lag behind inflation, the jobs market continues to be strong. An extra 250,000 in employment over the three months to October helped push the unemployment rate down to 7.4%, compared with 7.7% three months earlier.

Better growth prospects have allowed the authorities to make the first tentative steps to withdrawing the support measures that have been nursing our economy since the credit crunch. 

With funding markets in a healthier state and our housing market showing renewed vigour, the decision to remove the funding for lending scheme incentives for mortgage lending in 2014 looks well-judged (as it is unlikely to have any discernible near-term impact on the market).

For the time being, however, a return towards normality seems unlikely to mean higher policy interest rates.

Despite a growing consensus amongst economists that this year the unemployment rate will fall below the 7% threshold level, set out in the Bank of England’s forward guidance policy last August, few see base rates rising before 2015. The Bank of England is unlikely to wish to perpetuate the policy uncertainty that results from the sharply improving labour market situation.

This leads us to expect a restatement of forward guidance in the near future. 

February’s Inflation Report gives the Bank an opportunity to set out its revised projections for the UK economy, and so would represent an early opportunity for the governor, Mark Carney, to recalibrate forward guidance policy.

Any action by the Bank that underscores its desire to defer higher interest rates would further bolster short-term sentiment in the housing and mortgage markets. 

Housing and mortgage markets

The closing months of last year were stronger for mortgage lending than we had envisaged, when we produced our market forecasts.

According to the Bank of England, gross mortgage lending (not seasonally adjusted) in November was a shade below £17 billion, extending the strongest lending performance for five years. Our forward estimate suggests more of the same, with a further £17 billion lent in December. This would lift the outturn for 2013 as a whole to more than £176 billion, compared with the £170 billion we factored in as the baseline to our forecasts.

As in previous months, much of the strength in lending reflects house purchase activity. First-time buyer numbers have improved significantly over the past year, with a pick-up in the number of movers too in more recent months.

While some of these gains reflect government schemes, the rationale for the positive narrative is a much broader one, reflecting such factors as the improving economy and jobs market, consumer confidence and competitive mortgage deals. 

Help to Buy transactions represented a fraction of the overall 120,000 increase in housing transactions in 2013. There were about 13,000 Help to Buy equity loan transactions last year, and fewer than 1,000 under the mortgage guarantee scheme. 

Despite the closing months of last year being stronger than we had expected, we continue for the time being to be comfortable with our £195 billion forecast for gross mortgage lending this year.

Here we explain why.

Chart 1: Demand for mortgages for house purchase, net percentage balance

 Market commentary January 2014 cc

Source: Bank of England credit conditions survey

Note: Positive balances indicate that lenders report/expect higher demand than previous quarter.

 

The latest credit conditions survey was generally quite bullish. It reported a further improvement in mortgage credit availability in the fourth quarter, both generally and for higher LTV loans (helped by government schemes). Increased risk appetite and competition among lenders meant tighter spreads, and also helped to underpin the strongest reading of house purchase demand since the survey began. 

But lenders expect only a further slight narrowing in spreads and little if any further boost to demand this quarter, despite credit availability improving further.

Lower mortgage pricing was a key factor that underpinned borrower demand last year, and these two factors are likely to be closely inter-linked.

As we signalled in our forecasts paper, this is about as good as we should expect for mortgage rates generally - a similar point was made recently by FPC member Richard Sharp when he appeared in front of the Treasury Select Committee.

An exception may be high LTV mortgages. 

The Help to Buy mortgage guarantee scheme has only been fully up and running since the start of the year. The number of firms participating has increased, with most of the initial focus being on 95% house purchase activity. MoneyFacts figures testify to the increasingly competitive nature of 95% LTV products compared with just a few months ago.

While momentum at the higher LTV end may therefore build strongly over the coming months, it will continue to represent a modest share of overall business. Higher LTV (95% plus) loans have represented no more than 2% of total new mortgage lending over the past five years.

Elsewhere, we should expect affordability pressures to build, as further market recovery stimulates more house price gains. House prices nationally ended 2013 about 8% higher year-on-year, according to both Halifax and Nationwide, and further increases are likely through 2014. 

The CML does not forecast house prices, but most industry commentators and forecasters are suggesting increases in the 5-8% range.

Whilst the prevailing view is that the recovery will continue to broaden out beyond the capital, views differ as to how the London market performs relative to the rest of the UK.  

Chart 2: Index of property purchase intentions, UK and London, second half 2002=100

Market commentary January 2014 jgfr

Source: GfK NOP/John Gilbert Financial Research

 

Some indicators suggest that the London market continues to have considerable upwards momentum. For example, the latest financial activity survey from JGFR still shows a stronger sentiment to buy in London than the UK as a whole.

With household incomes still under pressure, affordability pressures seem likely to counterbalance the increase in consumer demand to an extent that will ultimately constrain activity levels. The FCA’s new mortgage market review rules – coming in this April - are likely to reinforce this effect.

The authorities continue to stress that they see no danger yet of a destabilising housing market boom developing, which suggests that any macro-prudential intervention in the near future is an unlikely prospect.

Indeed, speaking to the Treasury Select Committee earlier this month, Bank of England governor Mark Carney appeared to anticipate an orderly deceleration in housing transactions and mortgage lending from around the middle of 2015 towards 2016.

This closely aligns with our view of market developments.

While it is not immediately clear how buoyant the housing market will be over the coming months, there continue to be good grounds for thinking that affordability pressures will place a lid on activity levels in due course.