Published: 20 April 2017 | Author: Mohammad Jamei
- Our estimate of gross mortgage lending for March is £21.4 billion. Accounting for seasonal factors, this figure is slightly lower but in line with average lending over the past year.
- Growth in transactions is reliant on first-time buyers, as other parts of the market remain weaker than at this time last year.
- Lending growth continues to be driven by remortgage activity and first-time buyers, as buy-to-let and home mover numbers struggle to grow.
- The number of first-time buyer in the last 12 months reached 342,000, higher than for any period over the last nine years.
The economy is estimated to have grown 0.5% in the first three months of 2017, according to the National Institute of Economic and Social Research, a think tank. This is close to what the Bank of England's monetary policy committee (MPC) expected at its last meeting.
The jobs market is still performing well, as the unemployment rate fell to its lowest rate since 1975, at 4.7%.
But average weekly earnings have shown little response to the continued tightening in the labour market. Compared to the early 2000s, wage growth is running at about half the rate it would typically be when the unemployment rate was below 5%.
The inflation rate was unchanged at 2.3% in March, but this pause – largely down to a shift in the timing of Easter – is likely to be the exception rather than the rule, through this year,and part of next year, as inflation is expected to increase.
With wage growth likely to remain weak, real wages will stagnate for much of this year, bearing down on spending. We are already seeing early signs of this, as February was the first time in 29 months that wages did not grow in real terms.
The Bank of England expects to inflation reach 2.7% by early 2018, but signaled that it was willing to look past this, as it believes raising interest rates to counter inflation would do more harm than good and come at the expense of higher unemployment and weaker income growth.
We do not anticipate that the prime minister’s decision to call a snap election will have a large impact on the housing market.
Housing and mortgage markets
The housing market has been on a fairly even keel over the last few months, both on the approvals and lending side. In short, it has been relatively quiet, with the market in a neutral gear.
House purchase approvals have averaged 68,000 monthly over the last five months, which is about 3,000 less per month that the same period a year ago.
The MPC expects to see an average monthly total of 71,000 house purchase approvals over the next six months or so. We are slightly less optimistic, given that house purchase activity is currently driven mainly by first-time buyers, as other parts of the market remain weak.
Approvals tend to be a good leading indicator for market activity. Transactions (including cash purchases) have been fairly stable, but have managed to top the 100,000 mark for the second month in a row.
Transactions are marginally lower than this time last year, but the main difference is in the breakdown of activity.
We talked about a broad-based recovery in transactions at the start of 2016, but this time round the recovery is being driven by first-time buyers, which have been growing year-on-year.
Cash transactions recovered somewhat in January, but remain weak compared to a year ago. Movers and buy-to-let house purchases are both down on a year ago.
Chart 1: Contributions to growth in property transactions
Despite all this, gross lending has been fairly stable since last April, averaging just over £20 billion a month, give or take a billion or so.
Our estimate of lending in March is in line with this trend, as it comes in at £20.9 billion, on a seasonally adjusted basis. On an unadjusted basis, lending was £21.4 billion.
We do not have a breakdown for March lending at this stage, but the drivers of lending are likely to be first-time buyers and remortgage customers, as has been the case over the last 11 months.
This is likely to continue, at least over the short-term.
The Bank of England’s Credit Conditions Survey points to increased competition over the next three months, as lenders try to increase their respective market shares. The Bank's term funding scheme, launched in August, has also been cited as a factor that has helped reduce mortgage rates.
Looking at the average mortgage rates on offer, a two-year fixed rate mortgage at 75% loan-to-value is 1.37%, the lowest since records began. This will encourage more existing borrowers to remortgage.
First-time buyers are also doing well and are being helped by other factors on top of credit availability and low mortgage rates. There is an assortment of different government housing schemes, predominantly aimed at first-time buyers, which have slowly led to an increase in their numbers since early 2013. On a 12-month rolling basis, there were 342,000 first-time buyers, the highest in nine years.
This is in comparison to movers, who have benefited much less from government help and, as a result, are subdued in numbers. We often use the chart below to show this disparity, and it appears that first-time buyer numbers may exceed movers over the next few months. The last time this happened was in 1996. We have commissioned research to look into the reasons for the low housing market turnover.
Chart 2: Rolling 12 month totals of first-time buyer and home mover numbers
The majority of properties on the market are existing homes, not new ones. So fewer home movers means fewer properties for sale. This is what we have been observing in the market since late 2013, and according to the Royal Institution of Chartered Surveyors, the average number of homes per agent has “dipped to fresh lows” in March.
This imbalance will continue to underpin house price values, though the rate of price inflation has begun to slow, according to both the Halifax and Nationwide house price indices. This reflects, among other things, the elevated price of housing compared to incomes.
It has been a year since the stamp duty change on second properties, and buy-to-let house purchase activity is still down sharply on a year earlier. If March lending data shows activity in this space similar to the last few months, we can expect to have seen around 70,000 buy-to-let house purchases in the last year. This compares to 142,000 in the 12 months leading up to the stamp duty change. That’s 42% lower year-on-year.
Policy and regulation
From this month, the tax relief changes for buy-to-let landlords take effect, the first stage of a four-year transition.
Our view, and one we have expressed on multiple occasions in this section, is that there will be slower or limited growth in landlord portfolios. But, as with most policy and regulatory changes, we will need to wait until they are in place to get a better understanding of the cumulative impact on the sector. It is possible some landlords will only become aware of the changes in late 2018/early 2019, when they come to submit their tax return for the current financial year.