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Published: 20 August 2014 | Author: Caroline Offord

  • Economic conditions have strengthened but while the Bank of England has signalled an improved economic outlook since May, headwinds remain and the message about future rate rises being measured and gradual remains unchanged.
  • There has been some cooling in housing market activity and sentiment in recent months.   Mortgage activity seems to have remained robust following the regulatory changes but the impact of these remains uncertain.


The economic picture continues to strengthen.  GDP is now estimated to have returned to the 2008 level – and at 3.2% growth compared to a year ago was a little stronger than suggested in the ONS first estimate a few weeks ago.

Trends in the labour market also continue along an improving path, with an extra 167,000 in work compared to the previous quarter and the unemployment rate nudging down to 6.4% in June. Wage growth remains muted, up by just 0.6% compared to a year ago - falling in real terms (chart 1).  

Chart 1: Average earnings and consumer price annual growth rates


Source: Office for National Statistics

Expectations for the future path of the economic recovery have also improved.  The Bank revised up their forecast for near-term growth to 3.5% this year and also gave a stronger jobs outlook that at the time of the May Inflation Report.   

But, given muted wage growth and the Bank’s view is that there is more slack in the economy than was previously thought, there is less  pressure on the MPC to increase base rate than would otherwise be the case given this strengthening economic position. 

The dip back in consumer price inflation in July to 1.6% reinforces this. The overarching message from the Governor remains unchanged – that rate rises will come at a time when the economy is in a position to withstand a tightening in monetary policy and will be measured and gradual. 

Housing and mortgage markets

With the continued improvement in economic conditions and the labour market we have reported a further reduction in numbers of borrowers experiencing payment problems in the three months to June, continuing the trend seen since 2009.    

The prospect for interest rate rises has the potential to interrupt this improving picture.  The impact of rate rises on borrower finances and payment problems remains uncertain.  But, given that rate rises are likely to be in reaction to a strengthening and robust labour market and given the Governor’s over-arching message that when rises do come they are likely to be measured and gradual, , there is at least a reasonable expectation that the majority of households will be able to adjust to increasing rates over time.  For some households this will not be the case, as such we expect a slow increase in arrears volumes following rising interest rates and a muted pick up in possessions.  

The statistical fog of the MMR continues to hang making it difficult to unpick trends in the market - but we seem to be seeing the emergence of what looks like a robust mortgage market.

Bank of England lending figures for June depict a modest pick-up from recent months.  After contracting over the previous four months, June saw a recovery in house purchase approvals to more than 67,000 – 8% up on the month and 14% stronger than a year ago.

Gross mortgage lending at nearly £17.9 billion was well above year-earlier levels and makes June the strongest month for nearly 6 years. But we are seeing a softer pace of growth than earlier in the year and the underlying (seasonally adjusted) figure of £17.1 billion was a little below its 3-month and 6-month averages.

Our June lending figures show loans for house purchase and particularly to first-time buyers had the strongest performance in the month – continuing a trend which has been evident for some time.

Our forward estimate is that gross lending totalled £19.1 billion in July, up by 15% compared to July last year, a level last seen in August 2008.  However, year-on –year growth rates again have moderated since the start of the year and July figures always are particularly affected by seasonal factors. But overall this indicates a level of lending that is consistent with that seen in recent months. We conclude that a robust market is emerging post-MMR

Mid-year figures show a similar picture.  Net mortgage lending totalled almost £10.5 billion in the first 6 months of the year, a strong first half of the year compared to the last 5 years when net lending has barely exceeded the £10 billion mark during the whole of the year. This is a sign of growth in the market and not just churn.

Property transactions in the first half of the year showed a 25% increase compared to the same period a year ago but, as set out in our recent market forecast update, we expect that intensifying affordability pressures could start to dampen this upwards trend.

There are indications that this affordability constraint is already starting to have an effect in London.  Surveyors have noted a ‘pause for breath’ in the market, especially in the capital.