Published: 27 June 2016 | Author: Mohammad Jamei
- Our estimate is that gross mortgage lending was £18.2 billion in May, 14% higher than a year ago
- The result of the EU referendum will weigh on housing market activity over the next few months, as some buyers and sellers will adopt a wait-and-see attitude for the foreseeable future
- Lending over the next few months is likely to be driven by remortgage customers, as house purchase activity takes a back seat
- Given the governor’s statement following the referendum result, the UK is very unlikely to see a rate hike this year, and could possibly see a rate cut if the economy falters as a result of post-referendum uncertainty in the next few months
The result of the EU referendum on June 23 was in favour of leaving the European Union. Prospects for the UK economy now look very uncertain, as businesses and households are likely to adopt a wait-and-see approach over the next few months.
The Prime Minister made a speech in response to the referendum outcome, stating that he would not trigger Article 50 of the Lisbon Treaty and that it would be his successor who would need to do so. The Prime Minister also stated that the Conservative party should aim to have selected his successor by October.
The Chancellor also made a speech in response to the referendum outcome, indicating there will be no immediate emergency Budget.
In the near term, attention will be on interest rates, financial markets’ reaction to the result and any response from the authorities.
Economic growth in the first quarter of 2016 was unrevised at 0.4%, according to the Office for National Statistics’ second estimate. Survey data indicates that this subdued rate of growth is set to continue into the second quarter of 2016, partly as businesses postponed investment decisions until after the vote.
Forecasters had already revised down growth expectations for the UK economy to around 2% for 2016, but even this figure is likely to be revised down further as the period of economic uncertainty extends.
In April, the UK labour market recorded the highest employment rate since records began 45 years ago, but the rate of jobs growth has slowed over the last few months. The unemployment rate currently stands at 5%, the lowest since October 2005. Sentiment around the path of the economy is expected to weigh on unemployment, and this may be amplified by the referendum decision.
The inflation rate, as measured by the Consumer Prices Index, remained at 0.3% for the second month in a row in May, driven by a fall in the price of clothing and food, but is expected to rise in the second half of the year.
Stronger growth in pay remains elusive, as earnings increased by a modest 2% in the three months to April, compared with a year earlier.
Slow earnings growth, coupled with an inflation rate that is expected to pick up, could see real wage growth squeezed over the short term.
The Monetary Policy Committee (MPC) unanimously voted to keep interest rates at 0.5% at its meeting on June 16, and stated that a vote to leave could materially impact the economic outlook.
On June 24, after the result was announced, the governor of the Bank of England, Mark Carney, made a statement that the Bank, ‘stands ready to provide more than £250 billion of additional funds’, if required. He also that the Bank will not hesitate to take any additional measures required to ensure they meet their responsibilities.
The Bank is likely to have a balancing act on its hands over the near term, as it potentially faces a trade-off between stabilising inflation on the one hand, and output and unemployment on the other. There is a possibility of a rate cut over the next few months if the economy falters as a result of post-referendum uncertainty.
Housing and mortgages
The decision to leave the European Union will also materially impact prospects for the UK housing market. One of the first elements of the market likely to be affected is property transactions, as most transactions are discretionary so some buyers and sellers will wait to get a clearer idea of where we might be headed. This would in turn dampen house price growth.
Given that the UK housing market continues to be somewhat distorted by the after effects of the stamp duty change on second properties (discussed at more length here) and the build-up of uncertainty in relation to the EU referendum over the last few months, the downside to transactions may not be dramatic, but it may well be protracted.
Chart 1: Seasonally adjusted property transactions (thousands)
And while this uncertainty will linger for some time, house prices remain underpinned by sound fundamentals.
But there will be particular uncertainty in the prime London market, where a higher proportion of buyers are foreigners, who may delay their purchase to assess the impact of the referendum result.
Despite all of this, the characteristics of the UK housing market are unlikely to change dramatically in the near term, as there will continue to be a mismatch of supply and demand, stretched affordability and a relatively low number of home movers.
Survey data from the Royal Institution of Chartered Surveyors shows a fall in activity, both on supply and demand of properties on the market, for the second month in a row in May. So even though there was a fall in new enquiries, it was offset by a fall in the supply of properties coming onto the market. In other words, supply conditions still remain tight.
This imbalance has helped support house price growth over the last few years, especially as new supply of housing remains well below prospective housing needs.
As a result, we have seen affordability becoming progressively more stretched, both amongst first-time buyers and home movers. This is not surprising when looking at house price inflation compared to wage growth. House price inflation has been outpacing earnings for 41 months now.
Chart 2: House price growth against wage growth
The problem has partly been masked by low mortgage rates, as competition amongst lenders has been fierce and expectations of an interest rate rise have been pushed further out. For these reasons, the portion of income allocated to a mortgage payment for first-time buyers and home movers has remained at or close to historic lows, helped by borrowers taking out longer term mortgages and spreading the payments.
Looking ahead, mortgage rates are unlikely to change much over the short term, as funding costs are likely to reflect low rate expectations in the financial markets, even as it comes up against the backdrop of increased uncertainty.
Our estimate of lending in May is £18.2 billion, 14% higher than the same period last year and 4% higher than April’s lending figure. On a seasonally adjusted basis, this figure is £19.5 billion, consistent with what we have seen since October 2015 (March excepting).
This is somewhat stronger than expected, as growth in remortgage activity has helped support total lending, while house purchase activity has seen a slowdown, reflecting the bringing forward of activity to avoid the increased stamp duty change in April. This slowdown is now likely to be exacerbated by post-referendum uncertainty.