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Published: 18 December 2014 | Author: Bob Pannell

  • Current activity in the housing market has eased with transactions back down to levels seen almost a year ago.
  • The FPC has turned its attention more towards the global economy as the UK housing market has softened in recent months.
  • The reform of the Stamp Duty Land Tax is likely to provide a modest short-term boost in activity over the next few months, with its impact fading in the medium-term.


The economy is on course to finish the year positively as the latest forecasts from the Office for Budget Responsibility (OBR) see 0.6% growth in Q4 which would mean 3% annual growth in 2014, the fastest rate since 2006.

The latest jobs figures for the UK show that there were 588,000 more people in work than a year ago, with the unemployment rate remaining at 6.0%.

With consumer price inflation subdued at 1.0% in November and expected to remain low for some time to come, the period of falling real wages over the last five years could soon be coming to an end. The latest wage figures show an increase in pay of 1.6% in the three months to October compared to a year ago. 

While the economy appears in good shape, fiscal projections for the coming years once again show cutting the deficit will be a continuing theme for whichever government forms after next May’s general election.

Chart 1: Cyclically-adjusted net borrowing (as a % of GDP)

Market Commentary December 2014 - OBR public finances forecast

Source: OBR


Housing and mortgage markets

House purchase approvals have now fallen for four months in a row. Property transactions are back down to their levels of about a year ago. Coupled with a continuing fall in the annual growth rate of most house price indices, the market appears to be settled.

This is reflected in our forward estimate of gross lending in November at £16.9bn, which is 9% down on October’s figure and the same as November last year.

While our market forecast is for moderation in the housing market over 2015 and 2016, the reforms in stamp duty may modestly boost activity in the short-term.

Stamp Duty Land Tax reform

The reform will have slightly differential effects – benefitting home-movers a little more than first-time buyers and, ironically given the new higher rate threshold introduced, greater London and southern regions more than elsewhere. Buyers will make the biggest relative savings at values just above the thresholds of the old system, for example just above £250,000 or £500,000. In London and the south east, first-time buyers and home-movers alike will benefit as prices are on average higher so more homes are subject to higher rates of tax.

Chart 2: Effective rates of residential stamp duty

Market Commentary December 2014 - Stamp duty reforms

Source: HMRC


This regional effect means the impact will be greatest in areas where prices have been stronger but activity has been weaker, providing a softer landing than otherwise for those regions. For example, the average saving on stamp duty across the country would have been about £1,200 for purchases under £1.5m this year to date under the new scheme. In London, where growth in the number of loans has been weakest over the past year, this figure rises to £1,800. Regions which have seen stronger growth over the past few quarters will generally see smaller relative benefits from this reform. For example, Northern Ireland sees the smallest relative benefit per transaction, of about £500, according to our data.

Chart 3: Growth in volume of loans over the past year

Market Commentary December 2014 - Regional loan volumes growth

Source: CML RMS


Over time this measure may push up house prices at the lower end of the market as it gives buyers slightly more flexibility and lower upfront costs. The OBR estimates that the new system will cost about £800m per year for the government.

Even at the top end of the housing market, where the tax paid under the new scheme is higher, there may be an indirect benefit. Some of the recent softness in the prime housing market has been down to uncertainties regarding the possible introduction of a mansion tax. Market expectations of these risks may have dissipated somewhat which could aid a recovery at the top end of the market.

Earlier this week we published our market forecasts for the next two years. We note that the reform in stamp duty will help boost transactions in the short term, but its impact will fade away in the medium term. 

While we see a steady state for transactions around 1.2 million over the next two years, the OBR forecasts a return to longer term averages of around 1.4 million. This forecast also underpins the OBR’s strong growth in revenues from stamp duty over the forecast horizon and seems rather optimistic. Our view is that given the ongoing affordability pressures facing buyers, it is unlikely for the market to return to these levels.

Other government initiatives

Moving away from Autumn Statement announcements, Help to Buy mortgage guarantee statistics were released last month showing the number of loans made under the scheme is beginning to settle down. The mortgage guarantee scheme remains responsible for roughly 4% of total transactions in Q3 2014 compared to Q2.

Chart 4: Help to Buy: Mortgage Guarantee loan volumes

Market Commentary December 2014 - HtB MG monthly stats

Source: HM Treasury


Earlier this week, the government announced a consultation on a new scheme to help 100,000 first-time buyers aged under 40 onto the housing ladder. The scheme, called the Starter Home initiative, involves waiving planning costs and levies on some currently unviable brownfield sites in return for housing which is at least 20% cheaper than its market value. There remains a lot of uncertainty about how this scheme will unfold and the time-frame in which these houses will be built and we have not reflected this scheme in our market forecasts.


Macro-prudential update

The Financial Stability Report (FSR) and the Bank of England stress testing results were both released earlier this week. 

On the whole, banks were given a relatively clean bill of health and the Financial Policy Committee (FPC) commented on the improvement in resilience of the banking system made over the course of 2014.

The FSR shows the FPC has turned its attention towards risks posed by the weakening global economic outlook and geopolitical risk since its June 2014 report and the impact they might have on UK financial stability. 

The UK housing market, which featured heavily in the last report, remains on the Committee’s radar but with less prominence. The Committee notes the high debt to income ratios for households but its concern about an increase in risk stemming from the housing market has so far not materialised.