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Published: 18 February 2016 | Author: Mohammad Jamei

  • The UK may not see a rate hike this year, as global risks continue to have profound effects on interest rate expectations.
  • Our estimate is that gross mortgage lending was £17.9 billion in January, 21% higher than a year ago.
  • The recovery in mortgage lending is becoming more broadly based, following several months of year-on-year growth in lending to first-time buyers, movers and remortgage customers.
  • The buy-to-let sector is going through an uncertain period as it is unclear how changes to the tax treatment of the sector will affect it.


The economy grew 2.2%, according to the Office for National Statistics' first estimate of growth for 2015. This was slightly lower than previously expected, as growth was revised down for the second and third quarters of the year.

Prospects for the year ahead are less clear, as domestic demand growth looks strong but the global picture is less rosy, with geo-political tensions rising, global monetary policy diverging, and emerging market economies continuing to struggle. The largest source of domestic uncertainty is the UK’s referendum vote.

The UK labour market remains strong, recording the highest employment rate since records began 45 years ago and the lowest unemployment rate since 2005, at 5.1%.

However, annual pay growth has slackened somewhat over the last few months and was 1.9% in the final quarter of last year. This is starting to cause some concern for policy makers as the possibility that low inflation is feeding through to wage negotiations is being touted as one reason for the slowdown, something which was previously thought to be highly unlikely to happen.

The largest factors causing a drag on inflation continue to be weaker than expected energy and food prices. This reflects a weakening in global outlook, associated with weaker than expected demand in China and other emerging economies.

Despite weaker pay growth, households are still experiencing real term growth in income, as inflation remains at or close to zero. While inflation is expected to rise gently over the coming months, the rate at which it does will be slightly more gradual than the Bank of England's forecast in November, as highlighted in February's monetary policy committee (MPC) minutes. 

Chart 1: Real earnings growth, % change on a year earlier

20160120 Market commentary Feb 2016 chart 1

Source: Office for National Statistics

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After six months of voting for an interest rate rise, MPC member Ian McCafferty voted to keep rates as they were, bringing the committee back to a 9-0 voting consensus.

On the back of this, financial markets’ expectations of the first rate rises have been pushed out recently, as far out as late 2017. We do not completely rule out a rate rise in the second half of 2016, but risks in the global economy mean that an even longer period of record low interest rates is more likely.

Housing and mortgage market

Housing market activity ended 2015 stronger than it started, with this recovery looking set to continue into 2016, though we still hold the view the market has limited upside potential over the near-term.

Market fundamentals underpinning this recovery have been solid, with real wage growth, an improving labour market, competitive mortgage deals, and government schemes all helping to support household demand. Housing transaction volumes remain much lower than pre-crisis levels, but have been growing at a steady pace for the last seven months.

While part of this growth in transactions is no doubt down to the strong recovery in the buy-to-let sector, house purchases by owner-occupiers recovered in the second half of 2015 and continues to be up on a year ago.

Even though on an annual basis the numbers of both movers and first-time buyers were roughly the same in 2015 as they were in 2014, a quarterly profile shows how 2015 really was a year of two halves.

Chart 2: Number of home movers and first-time buyers

20160217 Market commentary Feb 2016 chart 2

Source: CML Regulated Mortgage Survey

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On the remortgage side, the prospects are hard to read as receding expectations of interest rate rises reduce incentives for borrowers to remortgage. However, very competitive mortgage rates encourage them to do so. Quoted mortgage rates, as reported by the Bank of England, are currently close to or at historic lows. The Bank's credit conditions survey shows lenders expect this to continue into the first quarter of this year.

We estimate lending in January was £17.9 billion on an unadjusted basis. Adjusting for seasonal factors, this makes lending around £20.6 billion for the month. Both of these figures are more than a fifth higher than a year ago.

Mortgage approvals, a useful leading indicator for activity, have also posted strong annual growth recently. Approvals for house purchase edged above 70,000 in the last two months and have looked more stable than they have been for some time.

In the most recent Bank of England quarterly Inflation Report, MPC members expected approvals for house purchase to average 76,000 a month in the third quarter of 2016, after a period of volatility before and after the upcoming tax changes for second properties in April. However, the MPC’s judgement on approvals has erred on the optimistic side in the past.

On the supply side the Royal Institution of Chartered Surveyors reported this month that the number of properties for sale has increased slightly but this is only for the third time in the past 18 months, so the pace of demand generally continues to outstrip supply. This will no doubt help drive house price inflation over the near term.

There have been suggestions that some of this demand is being driven in part by buy-to-let investors trying to purchase properties ahead of April’s tax changes, though the evidence for this has been largely anecdotal. We do foresee some activity being brought forward as result of the stamp duty changes in the first quarter of 2016 but expect that this will be modest, and followed by corresponding and similarly modest fall in total activity in the second and possibly third quarters.

As we mentioned in our consultation response to HM Treasury, over and above any disruption that tax changes have on transactions, the introduction of a higher rate of stamp duty on purchases of second homes may have unintended consequences. These could include disruption to housing chains and effects on first-time buyers purchasing with the help of their parents.

This risks influencing liquidity in the mainstream market and creating uncertainty, which is unlikely to dissipate until late in 2016.

The government’s 2016 Budget, which will be presented on March 16, should clarify the policy rules and give clearer guidance on some of the issues raised during the consultation period.