From 1st July the Council of Mortgage Lenders is integrated into a new trade association, UK Finance. For the time being, all UKF mortgage information will continue to be published on this website, and UKF member-only mortgage information will only be available here.

UK Finance represents around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation takes on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Please go to www.ukfinance.org.uk for wider content and updates from UK Finance.

Analysis

Published: 23 February 2017 | Author: Mohammad Jamei

  • Our estimate of gross mortgage lending for January is £18.9 billion, up 2% compared to a year ago
  • First-time buyer numbers continue to recover in 2016, but home mover numbers remain weak
  • Remortgage activity grew 14% over the course of last year, as competition, along with base rate cut and launch of the Term Funding Scheme, have kept mortgage rates at historic lows
  • The Housing White Paper was published earlier this month, but it’s unlikely that it will impact the housing market in 2017 as it takes time for the government to develop and implement the proposed changes

UK economy

The economy grew 1.8% in 2016, driven predominantly by consumer spending.

This led the Bank of England’s Monetary Policy Committee (MPC) to revise up growth for 2017 to just above that of 2016, at 2.0%, at its February Inflation Report.

The MPC also noted that the outlook reflected, amongst other factors, more supportive credit conditions, especially for households.

But inflation poses a risk to consumer spending as it continues to rise this year and is expected to peak at 2.8% by around this time next year. The latest figures show inflation reached 1.8% in January and there are already signs that it is putting pressure on consumer spending, as retail sales in January contracted for the first time in over three years.

Beyond 2017, growth is forecast to slow down to 1.6% in 2018, as the MPC expect unemployment to rise.

But for now, the economy continues to create jobs as the employment rate reached its highest level since records began over 45 year ago.

Even as the economy absorbs labour market slack, average weekly earnings still show little sign of picking up pace, with annual growth at 2.6% in December. In the past, we would typically expect higher wage growth if we were in a similar situation to where we are now, with the unemployment rate below 5%.

Housing and mortgage markets

House purchase approvals recovered in the last three months of the year, climbing to 68,000 in December. While this was still weaker than the 70,000 approvals we saw near the end of 2015, it is a marked improvement from the low of 61,000 which we saw over the summer.

The recovery has also led the MPC to revise up its forecast for approvals. It now expects to see 71,000 approvals each month in the first nine months of 2017.

Approvals tend to lead property transactions by a couple of months, and we are just beginning to see that feeding through, as monthly transactions broke through the 100,000 threshold for the first time in 10 months in January.

Under the headline figure, the drivers of transactions more recently have been cash and first-time buyers. Buy-to-let and home movers have taken a firm back seat as activity in both sectors has been weak since the stamp duty change in April 2016.

On the lending side, gross lending has been stable since April, averaging £19.6bn each month on a seasonally adjusted basis.

The reason is that as house purchase activity for home movers and buy-to-let weakened, remortgage activity picked up much of the slack, so lending on the whole held up well in April and in each month after that, even though transactions fell back.

Adjusting for seasonal factors, our estimate of lending for January would be around £21 billion. On an unadjusted basis, lending was £18.9 billion, as the beginning of the year is usually weak for gross lending.

This would break out of the narrow band lending has followed in the previous nine months.

We don’t have a breakdown of lending yet for January, but given recent trends, it looks likely to show that first-time buyers and remortgage activity continue to be the drivers of lending.

This shouldn’t come as much of a surprise as most government schemes have been aimed at helping boost first-time buyer numbers. As a result, there were 339,000 first-time buyers in 2016, an increase of 8% over 2015.

Home movers on the other hand fell slightly to 360,000, marking three years in which movers have effectively remained at the same level.

This continues to hold back the market, as very few homes are being put up for sale. CML regional data shows in some areas, such as greater London, the number of home movers fell to their lowest levels for 25 years, highlighting the acuteness of this issue. The imbalance is likely to continue underpinning house price values.

Momentum continues to build for remortgaging in the home-owner and buy-to-let space. Activity was up 14% in 2016 compared to the previous year, as competition amongst lenders, along with the recent rate cut and launch of the Term Funding Scheme, have kept mortgage rates at historic lows.

We expect to see this continue for most of this year as the low rates encourage more borrowers to refinance.

Policy and regulation

The Housing White Paper was published earlier this month. The paper did not introduce any dramatic changes, but it did helpfully outline a broad set of policies to try and address snag points in the housing market.

As it takes time for the government to consult and implement the proposed changes, the impact of these policies are likely to fall in 2018 and beyond.

In just two months, we will see the tax relief changes for buy-to-let landlords start to take effect, the first stage of a four year transition.

There is still a large degree of uncertainty as to how landlords react to the tax relief changes, but we do not expect a response similar to the stamp duty change, which led to a surge in activity before the change, followed by a lull for buy-to-let house purchase.

Research carried out by Paragon Mortgages suggests more than half of landlords are already taking action ahead of the changes, to mitigate the impact.

We still hold the view that there will be slower or limited growth in landlord portfolios, but we will need to wait until the changes are in place to get a better understanding of the cumulative impact on the sector.