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Analysis

Published: 20 February 2014 | Author: Bob Pannell

  • Bank of England signals bank rate to stay at ½% for some while yet and a lid on interest rate rises for several years to come.
  • The strong pace of mortgage lending seen in the closing months of 2013 persists into January, with gross lending of £15.5 billion a third higher than a year ago.
  • Further evidence that Help to Buy is well-targeted, mostly helping first-time buyers living outside London and the south east.

Economy

As expected, governor Mark Carney took the opportunity of February’s Inflation Report to update the Bank of England’s forward guidance policy.

Its earlier version, precluding the Bank from even considering higher rates until headline unemployment rate had fallen to 7%, had become progressively less meaningful as a result of a rapid recovery in the jobs market. 

In practical terms, the new phase of forward guidance represents a “one step forward, two steps back” change in policy. The Bank has discarded the unemployment threshold measure, in favour of a broader set of indicators to guide its monetary policy decisions, only some of which describe the amount of slack in the economy.

Although this means that the policy outlook is somewhat less certain, key aspects have not changed. 

The Bank has reiterated that it will look first to macro-prudential measures to guard against any destabilising housing boom developing. MPC member David Miles subsequently stressed that higher interest rates would only be used to cool the housing market as a last resort. 

Mark Carney’s comments on the Andrew Marr Show provide clear evidence that the Bank is closely monitoring housing market developments, and aware of the special drivers influencing the capital. 

Critically, however, the Bank continues to see the need to keep interest rates low for some considerable while, reflecting the economic headwinds facing the UK and the ongoing need for balance sheet repair.

Chart 1: Market interest rate expectations

 Market commentary February 2014 rates

Source: Bank of England

Against the backdrop of market expectations of earlier rate tightening, we sense that there has been a subtle shift from the Bank. Even before the Inflation Report, speeches by Mark Carney and other MPC members have given more emphasis to the likely future trajectory of interest rates, rather than the timing of a first rate rise.

Nevertheless, Mark Carney’s opening remarks at the Inflation Report press conference made it clear that it would be some while yet before the MPC raises bank rate, that increases would only be gradual and that even in the medium-term rates would be materially lower than (the 5% level) before the crisis. 

On balance, the Inflation Report is likely to represent a modest net positive for the housing and mortgage markets. 

While the policy outlook is a little less certain than before, the MPC anticipates stronger economic growth alongside moderately gentler CPI pressures near-term, and has been more explicit in signalling a relatively benign medium-term profile for interest rates.

January figures, showing headline CPI inflation at 1.9% - below the Bank's 2% target for the first time since the end of 2009 – may have bolstered the positive sentiment.

Housing and mortgage markets

Housing market indicators continue to be generally positive, although seasonal factors are likely to have affected activity levels. 

Our forward estimate is for gross mortgage lending of £15.5 billion in January. This would have been 8% lower than December’s very strong showing, but still a third higher than a year earlier.

Monthly approvals for house purchase averaged 70,000 in the final quarter of 2013, the strongest for six years. 

Chart 2: Property transactions annually, by type

Market commentary February 2014 sales

Source: CML, HMRC

The Bank of England envisages that approvals may climb to 90,000 a month in the second and third quarters. Unless the Bank is expecting cash purchases to fall away sharply (and they have been resilient over recent years), this would seem to imply property transactions running for a while at an annualised rate of 1½ million or so.

This looks like an optimistic outturn, and somewhat counter-intuitive, given the growing anecdotal reports of a shortage of prospective sellers.

Help to Buy

There has been further evidence in recent weeks that Help to Buy is mainly helping first-time buyers living away from London and the south east. 

The chancellor of the exchequer George Osborne provided robust defence that Help to Buy was working as planned, when he addressed the House of Lords Economic Affairs Committee earlier in February.

The Institute For Fiscal Studies provided an early evaluation of Help to Buy in its recent Green Budget report. Its overall conclusion is that the two Help to Buy schemes are fairly well-targeted, but notes some inevitable uncertainties about the extent to which they are boosting new construction or assisting those who would have been able to buy anyway. 

The EY Item Club stated that tweaks to the Help to Buy schemes would do little to help cool the very strong London market, but might risk derailing a return to normality elsewhere.

Arrears and possessions 

Despite studies highlighting the protracted fall in real wages and pressure on household living standards over recent years, we have reported a further modest improvement in arrears and possessions performance. Both have improved almost continuously since 2009, helped by low interest rates, an improving jobs market and effective arrears management.

Chart 3: Possessions by county court bailiffs, England & Wales

Market commentary February 2014 possessions

Source: Ministry of Justice

This is a positive achievement, and one which contrasts sharply with the increasing (and record) number of tenant evictions.

Looking ahead, we are hopeful that prospective gains in living standards – although likely to be modest - will take place alongside, and so help to largely mitigate, any adverse impact on borrowers from modest interest rate increases.