Published: 20 March 2014 | Author: Bob Pannell
- Housing market indicators have continued to be strong over recent months, once seasonal factors are taken into account.
- First-time buyers have benefitted most from the government?s Help to Buy initiatives, with the more recent mortgage guarantee scheme now starting to push average loan-to-value levels higher.
- The housing market got a further boost from this week?s Budget. This, together with benign developments in the economy more widely, should bolster short-term sentiment and activity.
Better short-term economic growth prospects mean that the Chancellor George Osborne had some latitude in this week’s Budget to announce a few headline measures – including further stimulus for house-building - without sacrificing the broader fiscal framework.
The underlying message, though, remains one of continuing fiscal austerity.
The latest fiscal projections by the OBR - somewhat better than those published last December – confirm that progress is being made in reducing the government’s deficit.
The underlying structural borrowing position is more than balanced over a rolling five-year period, while net borrowing is projected to decline progressively from £108 billion in 2013-14, before moving into a modest surplus of nearly £5 billion in 2018-19.
Meanwhile, public sector net debt now follows a slightly gentler profile, peaking at 78.7% of GDP in 2015-16 (down from 80.0% previously) and then easing back gradually.
Chart 1: Public sector net debt as % of GDP
But these figures contrast sharply with those initially outlined by the Coalition government back in 2010, and demonstrate why significant further spending cuts will need to be delivered after the 2015 election.
While fiscal matters are briefly under the spotlight, the reality continues to be that our current economic recovery depends crucially upon the ongoing conduct of monetary policy.
Although forward guidance has recently become fuzzier, as an indirect consequence of strong labour market gains over the past year, Bank of England governor Mark Carney and other MPC members have sought to emphasise that this does not signal a markedly different monetary stance. Policy-makers have in recent weeks been making a concerted effort to present a clear message, that base rates should remain at or below 3% for some years ahead.
Housing and mortgage markets
Even before this week’s Budget, housing and mortgage markets looked resilient, once the usual seasonal factors in the early months of the year are taken into account.
Industry gross mortgage lending amounted to £16.1 billion in January, and our forward estimate is that it dropped to £15.2 billion in February. Although this was 6% lower than January, and the fourth monthly dip in a row, lending was still 43% stronger than a year ago.
Indeed, the underlying (seasonally adjusted) picture continues to depict the strongest and most sustained activity levels for more than five years.
While remortgages and buy to let lending are also on positive trajectories, the owner occupied part of the housing market continues to take up much of the running.
Chart 2: Year on year growth in house purchase
Much of this in turn reflects the strong recovery in first-time buyers since the spring of 2013. But we have also seen a clear if more gentle improvement on the part of home-owners moving house, which should bode well for wider market liquidity and the ability of housing chains to form and complete.
Recent data from the Bank of England confirms the positive near-term outlook. Approvals for house purchase totalled nearly 77,000 in January, the third month in a row above 70,000, and the strongest reading for six years.
Government initiatives have clearly acted to boost market sentiment and activity. This is especially true amongst first-time buyers, who have accounted for the lion’s share of the two Help to Buy lending streams.
Our latest CML figures highlight that the Help to Buy mortgage guarantee scheme is beginning to affect the deposit requirements of first-time buyers. The (median) average LTV for first-time buyers nudged up to 82% in January, amid growing signs that the better availability of higher LTV mortgages, following the launch of the mortgage guarantee scheme, has begun to show through more fully in our completions data.
As an NAO report recently highlighted, the long lead times involved in developing building sites meant that property developers were facing a growing source of uncertainty, associated with the scheduled closure of the Help to Buy equity loan scheme in 2016.
The Chancellor’s Budget decision to extend the Help to Buy equity loan scheme in England by another four years - through to 2020 - eliminates such uncertainties, and so is good news for the new-build sector and short-term market sentiment.
Chart 3: Completed sales under the Help to Buy equity loan scheme
The government will provide an extra £6 billion of funding to support the construction of 120,000 homes, over and above the 74,000 envisaged in the original scheme.
This would represent an average 2,500 completions per month, a step-increase compared with the current phase, but on a par with the pace of activity seen in the fourth quarter of 2013.
The government plans to consult on self-build, with plans to create a new "Right to Build", giving custom builders a right to a plot from councils, and to extend the equity loan scheme to them.
It has also promoted large-scale housing developments, including its backing for a "garden city" development of up to 15,000 new homes in Ebbsfleet in Kent, and financial support to unblock stalled developments with small- and medium-sized developers.
Alongside all these stimulus measures for house-building, the Chancellor also asked the macro-prudential regulator, the Financial Policy Committee, "to be particularly vigilant against the emergence of potential risks in the housing market". We shall be able to report on the latest views of the FPC in our next market commentary.