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Published: 21 January 2016 | Author: Mohammad Jamei

  • The UK may not see a rate hike this year, as global uncertainties continue to have had a profound effect on interest rate expectations.
  • Our estimate is that gross mortgage lending was £19.9 billion in December, nearly a quarter higher than a year ago.
  • The pick-up 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 at a slower pace than first thought over 2015, as growth was revised down for the second and third quarter, with expectation of growth for 2015 as a whole at 2.2% according to the International Monetary Fund.

Prospects for the year ahead are mixed, with domestic conditions favourable but the global outlook presenting large downsides risks, mainly emanating from developing markets, as the Chancellor noted in a speech he gave recently.

Domestically, the labour market remains strong, with 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 a little over the last few months and was 1.9% in the three months to November.

Despite weaker pay growth, households continue to experience 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’s forecast in November, as highlighted in January’s Bank of England monetary policy committee (MPC) minutes.

The largest factors causing a drag on inflation are 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.

On the back of this, financial markets’ expectation of the first rate rises has been pushed back recently, as far out as late 2017. Although we do not rule out a rate rise in the second half of 2016, risks in the global economy mean that an even longer period of record low interest rates is not out of the question, as suggested by MPC members and Bank of England governor Mark Carney.

Housing and mortgages

Housing activity ends 2015 stronger than it started, though our view is that the market only has limited upside potential over the near term.

The continuation of positive domestic economic factors and competitive mortgage deals are helping to underpin household demand, but housing transaction volumes still remain much weaker than pre-crisis levels.

One of the key factors contributing to this has been the supply of properties on the market. For ten months in a row in 2015, the Royal Institution of Chartered Surveyors reported a fall in properties being put up for sale. While fewer existing homes are being put up for sale, the supply of newly built homes also remains low. Housing starts and completions in the 12 months to September 2015 in England totalled 135,000, a figure which remains about 25% below pre-crisis peaks.

More recently though, we have see the level of monthly property transactions, as measured by HM Revenue & Customs, growing on an annual basis for the sixth month in a row, after a weak start to the year.

This partly reflects the strong performance of buy-to-let, but also first-time buyers and home mover numbers, which have grown year-on-year for the past three months and have generally performed better in the second half of 2015.

Chart 1: Lending volumes, % change year-on-year

20160120 Market commentary Jan 2016 chart 1

Source: CML

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As a result, gross lending was stronger in the final months of the year than when it started. According to the Bank of England, lending on a seasonally adjusted basis totalled £20.3 billion in November, a level not seen since mid-2008.

The positive pattern continued into December. Our forward estimate suggests that unadjusted gross lending totalled £19.9 billion and that seasonally adjusted lending touched £19.7 billion. Both figures would be about 25% higher than a year earlier.

The approvals data for November from the Bank of England offers a steady picture for the months ahead.

Monthly house purchase approvals have floated at around 70,000 for the past five months, while remortgages has followed a similar pattern at around 40,000, both continuing their recovery from a low base. Prospects for remortgages may be affected by receding fears of imminent interest rate rises and competitive mortgage rates, with the two acting in opposite directions.

Chart 2: House purchase and remortgage approval volumes

20160120 Market commentary Jan 2016 chart 2

Source: Bank of England

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While buy-to-let has been a major source of growth in lending and transactions over 2015, near-term prospects for the sector are uncertain as a result of upcoming tax changes. The HM Treasury consultation on macro-prudential powers for the Financial Policy Committee over the sector was largely in line with our expectations, although we continue to question whether there is sufficient evidence to justify intervention.

The uncertainty around buy-to-let is unlikely to dissipate soon, and we do not expect to have a clearer picture until early summer, once any impact of the stamp duty changes comes through in the data. The Bank’s Credit Conditions Survey suggests demand for buy-to-let could be strong in the first quarter of 2016, as some transactions are brought forward to avoid the stamp duty hike before it comes into effect. Longer term, however, buy-to-let volumes are likely to fall over 2016 and 2017, returning to levels seen in 2014.

The recovery in mortgage lending is part of a broader picture, in which overall lending to individuals has picked up over a large part of 2015.

While net mortgage lending has been growing at a pace of around 3% a year, consumer credit has been growing faster, at around 9% a year. This is likely to be in part related to a recovery in consumer spending and other factors which have helped secured lending recover too, namely lower unemployment and real wage growth.

Elsewhere, a strong labour market and the low interest rate environment have helped ease financial pressures facing some households.

The latest Bank of England NMG Consulting survey found that households appear better placed to cope with rising rates than they were a year ago and the share of households with high debt servicing costs has fallen.

This has led to fewer households with mortgages reporting concern about their debt.

Government initiatives

The government has started the new year announcing an intention to work on 100 housing estates across the country, either renovate or replace them with high-quality homes.

This was accompanied with another announcement that the government is to directly commission new housing, some of which will qualify as starter homes. Of the 13,000 homes included in the first wave, up to 40%, or 5,200 will be starter homes. In the same announcement, a £1.2 billion starter home fund has been activated. This will enable preparation of brownfield sites for new homes, which aims to provide 30,000 starter homes and up to 30,000 market homes by 2020.

As we have said in our forecast, we expect the government’s housing policies to slowly pick up momentum over the next few years.