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Analysis

Published: 18 June 2015 | Author: Mohammad Jamei

  • As we expected, activity in the housing market is showing signs of a modest recovery
  • The continuing improvement in the economy and household finances should support activity through the rest of this year
  • However the extent to which we see an increase in activity may be somewhat limited, given affordability constraints

Economy

The second estimate of economic growth from the ONS remained at just 0.3% for Q1. Following revisions in construction data, this figure will be revised up when the third estimate of GDP is published at the end of this month.

The labour market continues the positive trend seen since early 2012, with 114,000 more people in a job compared to three months ago. The headline rate of unemployment fell to 5.5% in Q1 and remains the same in April. This is the lowest rate seen for seven years.

On the wages side, pay rates increased by 2.7% compared to a year ago, and have now consistently outpaced consumer price inflation (CPI) over the past seven months.

The headline CPI measure returned to positive territory in May with 0.1% growth, after falling to -0.1% in April. This is in line with the Bank’s near term view of inflation, or lack of, being driven by commodity prices, which are set to fall away through the rest of the year.

Chart 1: Average earnings and consumer price inflation annual growth rates

Chart 1

Source: Office for National Statistics

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Minutes from the Monetary Policy Committee’s meeting this month showed a unanimous vote on the bank rate, with the view on developments since the May Inflation Report being limited and broadly consistent with expectations.

Financial markets' expectation of the first increase in the bank rate is for the third quarter of 2016. A poll of economists carried out by Reuters suggests the first rate rise will be sooner, in the first quarter of 2016, followed by two more rises in the final two quarters of 2016.

Housing & mortgage markets

Housing continues to feature prominently in the political sphere and is likely to do so for some time given the Conservative party manifesto. Whilst last year housing featured heavily in the chancellor's speech at the Mansion House, where the chancellor gave the Bank of England powers to place limits on high loan to income and loan-to-value lending, there were no housing references this year.

As expected, the Queen’s Speech included a housing bill which seeks to increase home ownership through an extension of Right to Buy, ‘starter homes’ for first-time buyers, planning reforms and measures to stimulate self-build.

We still await further details on Help to Buy ISA, the incentivised savings scheme to help first-time buyers, announced back in March’s Budget. This scheme will sit alongside other Help to Buy schemes, such as the mortgage guarantee, for which new data was released recently. It is likely that more information on this and other housing initiatives will be revealed in the upcoming budget on July 8.

Since last summer, housing market conditions have been a little subdued reflecting affordability, MMR and macro-prudential pressures in the regulated part of the market.

As we have expected over the past few months, the latest monthly lending figures show activity beginning to recover, though from a low base. Loans for house purchase were stable in April, compared to March, though there was a slight dip in the number of loans for remortgage.  

Our estimate of gross lending in May is £16.2bn, a slight increase compared to April but down marginally on a year ago. Adjusting for seasonal factors, this figure is likely to be above £17bn, which would make it the third month in a row lending has been above this threshold, for the first time since the start of 2014.

Approvals for house purchase in April showed a 10% increase compared to March, the largest monthly rise since early 2009. Remortgage approvals also rose by 10%, which could be the result of households trying to take advantage of the very competitive mortgage rates available. Overall, data on housing approvals also point towards a market that is set to improve gently.

Chart 2: Quoted mortgage rates for households

Chart 2

Source: Bank of England

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The economic environment is one that should support increased activity in the near term, coupled with low mortgage rates. But while we expect these factors to support activity, there is a limited upside, driven mainly by affordability constraints.

The RICS survey for May indicated potential sellers unwilling to put their homes on the market as average number of properties per surveyor reached a four decade low. As a result, the survey points to further increases in house price inflation in the short term.

Property transactions remain lower than a year ago, with the Bank’s business conditions survey echoing the RICS survey and reporting a shortage in the supply of homes for sale as the driver of this weakness.

Data released on housing building for the first quarter of this year showed increase in starts and completions. On a rolling four quarter basis, starts are at their highest level since mid-2008, while completions are at their highest level since mid-2009.

Chart 3: Four quarter rolling sum of housing starts and completions

Chart 3

Source: Department for Communities and Local Government

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