Published: 21 April 2016 | Author: Mohammad Jamei
- Our estimate is that gross mortgage lending was £25.7 billion in March, nearly 60% higher than a year ago
- This month’s lending figure has been distorted by the stamp duty changes on second properties which came into effect on 1 April, and in all likelihood lending figures will continue to be distorted for at least the next few months of 2016
- Our analysis suggests there was £4-£5 billion extra lending than would otherwise have been the case, which translates to about 30-35,000 more transactions as a result
- We expect to see about 10,000 fewer mortgaged transactions each month in April, May and June, than would otherwise have been the case, offsetting the increase in activity seen in March.
Economic growth in the last quarter of 2015 was revised up slightly to 0.6% according to the Office for National Statistics' Quarterly National Accounts, but survey results point to a subdued start to the year.
The prospects for the year ahead are mixed but risks continue to be on the downside. On the one hand, the UK is expected to be the second fastest growing country in the G7, helped by strong domestic demand, but on the other hand world growth is forecast to be 3.2%, which is very weak by historical standards, according to the International Monetary Fund.
The EU referendum remains the largest source of domestic uncertainty with reports that it is weighing on current activity, according to the minutes of the Monetary Policy Committee (MPC).
The UK labour market continues to perform well, recording the highest employment rate since records began 45 years ago and the lowest unemployment rate since 2005, at 5.1%.
Stronger growth in pay remains elusive, as earnings increased by modest 1.8% in the three months to February, compared with a year earlier.
The inflation rate, measured by the Consumer Prices Index, was 0.5% in March, as prices for some goods and services rose over the year, more than offsetting falls in food and transport costs.
A slowdown in the growth rate of earnings, coupled with an inflation rate that is starting to pick up could see real wage growth squeezed over the short term.
The Bank of England's monetary policy committee (MPC) unanimously voted to keep interest rates at 0.5%, and stated that it will react more cautiously over the near term to macro-economic and financial data as it may be harder to interpret because of the referendum.
Financial market expectations of the first rate rise has been pushed out significantly over the course of the last few months, with the most recent data implying a rate rise at the beginning of 2020. To put this into perspective, expectations at the end of 2015 were for the first rate rise to occur at the end of 2016.
Chart 1: Financial market expectations for Bank Rate
Housing and mortgages
The underlying picture in the UK housing market is still showing signs of growth, as the market continues to be underpinned by strong fundamentals, with a growing economy, falling unemployment, and real wage growth enforced by government schemes and competitive mortgage deals.
The tension between housing supply and demand continues to be a pressing issue, as has been the case for some time now. While we saw signs of a potential improvement in the supply of properties coming on the market over the last few months, this seems to have stalled somewhat in March, according to the Royal Institution of Chartered Surveyors. This imbalance is likely to add to house price growth over the near term.
Part of this recovery in activity and transactions has been down to the strong pick-up in the buy-to-let sector, but more recently the owner-occupier sector has been recovering alongside buy-to-let and continues to be up on a year ago. Over the last few months, the driving force behind the increase in total lending had been remortgage activity.
This has led to growth in monthly housing transaction volumes, which have been above 100,000 for nine months now, though activity still remains much lower than pre-crisis levels.
Having said this, the very recent picture has been distorted by the stamp duty changes on second properties which came into effect on 1 April, and in all likelihood will continue to be distorted for at least the next few months of 2016. The distortion caused by this stamp duty change appears to be larger than any previous change we’ve seen.
Though our estimate of lending in March implies this surge in activity came very late, and was based mainly in the final two weeks before the tax change. On an unadjusted basis, lending in March is estimated to be £25.7 billion, which is 60% higher than the same period last year, and 40% higher than February.
While it is hard to pin down exactly how much of this is down to the bringing forward of activity, our analysis suggests there was £4-£5 billion extra lending than would otherwise have been the case, which translates to about 30-35,000 more transactions as a result.
We will have no detailed split of transactions for some time yet, but preliminary analysis points to the bulk of these transactions as buy-to-let house purchases. A portion will also be owner-occupier house purchases which were sped up to complete, for example a chain involving a buy-to-let landlord. The early timing of Easter will have played its part too, as movers generally prefer to complete transactions before the Easter break.
As anecdotal evidence suggests many applications in the pipeline were pushed through to beat the 1 April deadline, we expect to see a quieter second quarter of the year. We expect to see on average about 10,000 fewer mortgaged transactions each month in April, May and June, than would otherwise have been the case, offsetting the increase in activity seen in March.
Chart 2: Illustration of possible distortion in property transactions caused by stamp duty change (000s)
As a result, year-on-year growth for buy-to-let house purchase may well be negative over the next few months, but we still expect modest positive growth in the owner-occupier space.
Uncertainty associated with June’s EU referendum is also likely to impact housing market activity through the second quarter of 2016. Minutes from the MPC meeting highlight that some commercial property transactions are being postponed pending the outcome of the vote, and we also believe there will be some direct effects on residential property transactions too.
The Prudential Regulation Authority (PRA) proposed to introduce minimum standards for lenders underwriting buy-to-let mortgage contracts on 29 March.
One of the proposal’s key points is with regards to likely future interest rates. It recommends that lenders stress test borrowers’ affordability at a minimum of two percentage points above the pay rate of the buy-to-let mortgage, or at 5.5%, whichever is higher.
The majority of lenders’ already stress test at or around the minimum requirements so the PRA proposals were more targeted at some firms it saw as outliers. The overall impact of these proposals is expected to be 10-20% fewer buy-to-let mortgages approved by the third quarter of 2018.