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Market commentary: 2016 and 2017 forecasts


Published: 17 December 2015 | Author: Mohammad Jamei

  • A benign domestic economic backdrop should underpin a gentle improvement in housing and mortgage market activity. Economic risks mainly relate to global and geopolitical factors.
  • We expect gross lending to be supported by house purchase activity from home-owners and remortgage activity across the board.
  • There is only limited upside potential for housing sales over the next two years, as a result of affordability pressures and new supply challenges.
  • Government's fresh housing initiatives may progressively build, but will be slow to take effect through 2016 and 2017.
  • Buy-to-let faces a challenging period, as changes to tax treatment and the prospect of macro-prudential intervention run counter to otherwise strong fundamentals. Buy-to-let house purchase activity in 2015 may peak and fall away below 2014 levels by 2017.
  • We expect limited deterioration in the underlying figures for arrears and possessions in 2016 and 2017, as the majority of borrowers cope with the modest interest rate increases that start in the second half of 2016.

CML market view, December 2015


Residential property transactions

Gross advances


2.5% or more of balance
at end period

Possessions in period



£ billion

£ billion




















































































Note: Figures in grey italics show CML forecasts as at mid-2015


Growth prospects for this year and next have been trimmed back slightly, given the weaker global outlook. Despite this, economic fundamentals in the UK look strong and set to continue. This is helping to underpin the housing market.

Risks around the economy continue to be tilted towards the downside, with the economic slowdown in some of our trading partners weighing on growth prospects. This has been partly offset by the expectation of a lower base rate over the next few years.

Domestically, the picture is more positive, with the jobs market posting the highest proportion of working age people in work since records began over 40 years ago. The current rate of unemployment (5.2%) is the lowest since 2006.

We expect subdued inflationary pressures to support continuing growth in real household incomes over much of our forecast period.

The latest Bank of England Inflation Report sees the consumer price index (CPI) remaining below 1% until the middle of 2016 and only returning to the 2% target by the end of 2017. Although financial markets currently see the first rate rise coming at the start of 2017, our view is slightly more hawkish as we see the second half of 2016 as more likely.

Global factors look set to dictate the timing of MPC decisions to raise rates as the domestic market remains relatively stable. The UK’s referendum vote stands out at as the main home-grown source of uncertainty.

Housing market

We saw a recovery in activity in the second half of 2015 after a slowdown associated with the implementation of the Mortgage Market Review affordability rules in April last year, and macro-prudential interventions two months after that.

The government is adding more firepower in its efforts to promote activity in the housing market. This includes extending the Right to Buy scheme, Help to Buy ISA, Help to Buy shared ownership and the starter homes programme. It is difficult to gauge the overall impact of these, given that there can be considerable delays between policy announcements and delivery, the limited capacity for developers to expand rapidly and uncertainty about the extent to which some measures displace rather than add to overall activity.

On balance we think these initiatives will exercise a progressive but only moderate stimulus from the second half of 2016 onwards.

Firms are already aware of the closure of the Help to Buy mortgage guarantee scheme at the end of 2016 and have already begun to develop alternatives that support higher loan-to-value business. This is likely to help offset any associated dip in activity.

There is a possibility that some house purchase activity is brought forward into the second half of 2016, to take advantage of the scheme before its closure.

Looking ahead, we see only limited market growth potential over the next two years. The main factors restricting activity are the already elevated levels of house prices relative to earnings, regulation in the home-owner market, and uncertainty around buy-to-let.

Chart 1: Property transactions and forecasts, thousands

20151215 Market commentary Dec 2015 chart 1

Source: HMRC, CML calculations

Download data

House prices relative to earnings have been elevated for a considerable period of time now, making it difficult for both first-time buyers to build a large enough deposit to get on the housing ladder and for potential home movers to trade up. This is likely to weigh on demand as house price inflation continues to outstrip income growth across large parts of the country.

Finally, the regulation currently in place in the home-owner mortgage market, which in our view has more or less bedded in, will narrow the tram lines for an upward recovery going forwards.

The future of buy-to-let
There is considerable uncertainty around buy-to-let. This stems from:
1. incoming tax changes from 2017,
2. recently announced stamp duty changes,
3. and the possibility of macro-prudential regulation by the Financial Policy Committee (FPC).

Inevitably, these will adversely impact the rate of growth in the sector and even cause lending volumes to ease back.

Buy-to-let has been a major source of recent growth in lending. Now in its fifth year of recovery, it continues to advance strongly. It will account for about 9% of all property transactions this year – still much lower than in the 2006-8 period, and around 16% of mortgaged transactions. Future prospects are closely tied to potential macro-prudential regulation and incoming tax changes. We currently expect buy to let house purchase activity in 2016 to fall below its 2015 level, and for activity in 2017 to fall below the level seen in 2014.

Chart 2: Buy-to-let activity levels, thousands
20151215 Market commentary Dec 2015 chart 2
Source: CML Economics, CML calculations
Download data

In its Financial Stability Report, the FPC chose not to intervene in the buy-to-let market but continued to remain watchful of the sector as a whole. It noted that buy-to-let borrowers may be more vulnerable than owner-occupiers to unexpected rises in interest rates, or a fall in income, although the evidence for this remains quite thin. This implies the FPC is looking for buy-to-let underwriting criteria to tighten further in the near future.

The impact of the Chancellor’s announcement in the Autumn Statement on stamp duty changes for buy-to-let properties appears at odds with the increasing demand for housing in the private rented sector (PRS). Given demographic changes, this will pose a challenge for the government in the future to meet housing needs in the PRS.

A consequence of the change is that we expect higher activity levels in the first quarter of 2016 than would otherwise have been the case as some landlords bring forward purchases to avoid the stamp duty hike before it comes into effect. The scale in terms of transactions is likely to be in the low thousands, though the overall impact will be close to zero over 2016 as there will probably be a corresponding fall in transactions in subsequent quarters.

Reinforcing our relatively subdued activity forecast is the lack of properties on the market for sale. Given high transaction costs and limited choice of properties to buy, people are deciding to stay put. This will continue for the foreseeable future, which will only worsen the affordability pressure as lack of supply pushes up prices further.

With the current mix of positive economic conditions – rising real incomes, improving housing equity positions, record low mortgage rates and modest expectations of interest rate rises – likely to stimulate demand, there is little evidence that it will produce a corresponding increase in the supply of properties on the market.

While this may help activity over the near-term, the effect may prove temporary if, as seems likely, house prices strengthen and reinforce affordability pressures.

Cash transactions are likely to remain at or around current levels going forward. While we expect mortgage transactions to pick up slightly, cash will still make up a large portion of the market with just over a third of all transactions being cash financed.

Mortgage lending forecasts

The overall shape of our forecasts for housing and mortgage market activity has not changed very much since July, although we are slightly more optimistic about housing market developments with more house purchase activity from home-owners and an increase in remortgage activity across the board.

This reflects signs that the low inflation environment we’re currently in is set to continue for longer, leading to a bigger boost for household spending power, and expectations of interest rate rises are of a more gentle profile starting in the second half of 2016.

While buy-to-let remortgage has been strong for some time, remortgage appetite in the home-owner space has picked up noticeably from a 15-year low and we expect this to continue over the forecast period.

Taken together, roughly half of the increase in gross lending over the next two years is driven by remortgage activity in both the residential and buy-to-let space, as borrowers take advantage of the record low mortgage rates, and better deals as a result of increasing house prices improving their equity positions.

Remortgage activity will also likely be boosted by rate rises when they start to occur, although the impact of this is difficult to measure as the last rate rise was over eight years ago and borrowers’ behaviour will be hard to judge.

We expect typical loan sizes to increase further alongside stronger house prices, and this should help to mask quite narrowly constrained activity levels this year and next.

The modest increase in net lending over the next two years is primarily the result of more first-time buyers entering the market.

Arrears and possessions

Trends in mortgage arrears and possessions have continued to be relatively benign. Arrears and possessions are now at their lowest levels since 2004 and still show signs of underlying improvement.

Since our July forecast, household finances have fared better than expected, helped by low inflation, strong earnings growth and an improving jobs market.

With interest rate expectations lower than six months ago, this provides a favourable backdrop for households to plan their coping strategies.

The underlying picture for possessions is broadly healthy and looks set to continue over the next two years, though a legal case has somewhat distorted repossessions in 2015, causing some possession actions to be put on hold as lenders wait for regulatory uncertainty to be resolved. We expect this to unwind through 2016 and the first part of 2017, which is reflected in our forecasts.

Chart 3: Properties taken into possession in period

20151215 Market commentary Dec 2015 chart 3

Source: CML Economics, CML calculations

Download data

Overall, we expect the majority of borrowers to cope with modest interest rate rises that start in the second half of 2016, with limited deterioration in the underlying figures for arrears and possessions in 2016 and 2017.


We expect a benign domestic backdrop to help underpin a gentle improvement in housing and mortgage market activity, though this will be limited as a result of affordability pressures and new supply challenges. The government’s fresh housing initiatives may build but will only provide a moderate stimulus from the second half of 2016 onwards.

Lending will be supported by house purchase activity from home-movers and first-time buyers and remortgage activity across the board. Buy-to-let faces a challenging period as tax changes and the possibility of macro-prudential action adversely impact the sector over the next two years.