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Published: 26 January 2017 | Author: Mohammad Jamei

  • Our estimate of gross mortgage lending for December is £20.4 billion, up 4% compared to a year ago. Lending in 2016 as a whole was £246 billion, up 12% compared to 2015
  • Property transactions in 2016 came to 1.23 million, only marginally higher than in 2015
  • House purchase activity in the buy-to-let sector remains materially lower compared to a year ago
  • The Housing White Paper has upside potential, although most policies will likely bear fruit from 2018 onwards

UK economy

Fourth quarter GDP figures were released at the same time as this market commentary went live. We expect growth to come in around 0.5% compared to the third quarter of 2016. This would mean 2.1% growth for 2016 as a whole.

But for now, based on the numbers available, the economy continues to provide a growing number of jobs as the unemployment rates reached 4.8%. This is the lowest rate since September 2005.

Average weekly earnings have also picked up, with earnings growing by 2.8% on an annual basis in November.

The only wrinkle in all this is inflation. Measured by the Consumer Price Index, inflation reached a two-year high of 1.6% in December. This is still below the Bank of England’s 2.0% target, but it’s expected to break through that threshold over the next few months, as the earlier benign effects from food and energy prices drop out, and the recent Sterling depreciation pushes up import prices.

There is little doubt that this will put increasing pressure on real earnings, the result of which is then likely to be a fall in spending. We may have caught a glimpse of this towards the end of the year, as retails sales growth in December came in much lower than expected.

Given that the economy is predominantly driven by consumer spending, this is one of the key reasons for lower forecasted growth in 2017.

Housing and mortgage markets

The UK housing market, in a similar fashion to the UK economy, is expected to have rounded off the year fairly positively.

Our estimate of lending in December totalled £20.4 billion, which means lending in 2016 was £246 billion, up 12% compared to 2015, in line with our forecasts.

But this figure masks the rollercoaster ride parts of the housing and mortgage market have been on in 2016.

Buy-to-let and cash transactions both saw a big jump in March, just before a 3% stamp duty surcharge on second properties came into effect. This pushed up home mover activity too, as a portion of chains had buy-to-let landlords in them and were sped up to complete before the deadline.

In the months immediately after the change, the flipside was that activity levels were weak.

Given this distortion, it became more difficult to say what impact the EU referendum in June had on the market.

What we know is that there was a summer dip, likely to have been caused by sharp weakening of consumer sentiment and increased uncertainty immediately after the referendum. Part of this uncertainty dissipated soon after, as the political leadership vacuum was resolved, and the Bank of England took swift action.

This led to approvals numbers bouncing back towards the end of the year, from their summer lows. Despite this recovery, house purchase approvals are still lower than they were the same time a year ago.

Chart 1: House purchase approvals, seasonally adjusted

Chart 1 market commentary

Source: Bank of England

Download data

A part of the market that was relatively unaffected by distortions over the spring and summer was first-time buyers. First-time buyer numbers continued to increase, reaching 337,000 in the 12 months to November 2016. This is the highest number in any 12 month period since February 2008.

In aggregate, there were 1.23 million property transactions over the course of 2016, marginally more than was the case in 2015.

On the remortgage side, momentum has built up slowly over the last two years. Competition amongst lenders, and more recently the interest rate cut and launch of the Term Funding Scheme, both of which were in August, have played a part in this.

Looking ahead to early 2017, the recovery in approval numbers should continue to feed through to lending figures, as it has done very recently. Typically, there is only a short lag between the two indicators.

This should be helped by lenders, as respondents to the latest Credit Conditions Survey reported that availability of secured credit, even at high loan-to-values, is expected to improve in the first three months of the year. This is despite the closure of the Help to Buy mortgage guarantee scheme at the end of 2016.

While the availability of credit is unlikely to be a barrier for borrowers, a major snag point continues to be a dearth of properties on the market.

According to the Royal Institution of Chartered Surveyors, the imbalance between supply and demand of properties on the market, something that has been a feature of the market since late 2013, is expected to continue at least in the short term.

The result of this imbalance is likely to be continuing house price growth.

Policy and regulation

A Housing White Paper is expected to be published in January. The White Paper is one of the few upside potentials that we’re likely to see this year in the housing market, although the impact of policies contained in it will fall more in 2018 and beyond, as any new project will typically take more than a year to complete.

On the regulation side, the Prudential Regulation Authority’s stress tests for the buy-to-let market came into effect at the start of this month, but lenders had already prepared and in some cases applied the stress tests in advance of the deadline.

Then in just three 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, as CML commissioned researched suggests that only half of buy-to-let landlords felt they had a good understanding of the changes.

But it’s unlikely to have a response similar to the stamp duty change, which led to a cliff edge for buy-to-let house purchase. Our view is 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.

December 2016 market commentary, plus 2017 and 2018 forecasts