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Published: 17 March 2016 | Author: Mohammad Jamei

  • The UK may not see a rate hike this year, as global risks continue to have profound effects on interest rate expectations.
  • Our estimate is that gross mortgage lending was £17.6 billion in January, nearly a third higher than a year ago.
  • The recovery in mortgage lending is more broadly based, following several months of year-on-year growth in lending to first-time buyers, movers and remortgage customers.
  • It is still unclear how changes to the tax treatment of buy-to-let will affect the sector.

UK economy

Economic growth in the last quarter of 2015 was unchanged at 0.5%, according to the Office for National Statistics' second estimate of growth. Growth in the first quarter of this year could be slightly weaker than expected, as some survey results pointed to a subdued start to the year.

Prospects for the year ahead remain uncertain but risks remain on the downside. The largest source of domestic uncertainty over the next few months is likely to be the UK’s referendum vote. The Office for Budget Responsibility (OBR) has revised growth down for 2016, from 2.4% in November to 2% in their latest forecast.

The global picture is even less rosy, with global monetary policy diverging, as the European Central Bank moved further into negative territory with its deposit rate and expanded its bond purchasing programme, and emerging markets continuing to struggle.

The UK labour market continues to perform well, recording the highest employment rate since records began 45 years ago and the lowest unemployment rate since 2005, at 5.1%.

Growth in pay has slackened over the last few months and was 2.1% in the three months to January. While this still translates into real wage growth, as inflation has been at or close to zero, there is slight unease among policymakers that low inflation is feeding through to wage negotiations, something which was previously thought highly unlikely.

After six months of voting for an interest rate rise, Bank of England monetary policy committee (MPC) member Ian McCafferty voted to keep rates as they were last month, bringing the MPC back to a 9-0 voting consensus. It will be interesting to see whether this will remain the case this month against a backdrop of low inflation over the medium term, as noted by the Office for Budget Responsibility in its forecasts.

As a result, financial markets’ expectation of the first rate rises has been pushed out recently, as far out as late 2017. While we still do not completely rule out a rate rise in the second half of 2016, it seems likely that we will need to shift our call into 2017.

Housing and mortgage market

UK housing market activity continues to recover, as it has for the last nine months or so, and at the risk of sounding like a broken record, we still hold the view that the market has limited upside potential over the near term.

The market fundamentals underpinning this recovery have continued to be solid, with real wage growth and falling unemployment helped by government schemes and competitive mortgage deals. These are all helping support household demand, which has translated to growth in housing transaction volumes, though transactions still remains much lower than pre-crisis levels.

Chart 1: Rolling 12 month sum of UK residential property transaction

Market commentary March 2016 chart 1

Source: HMRC

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A more pressing issue of late has focused on the supply side, where a lack of properties on the market has contributed to house price growth. This could be easing slightly though, as a modest increase in the number of properties coming on the market has been reported for the third month in a row by the Royal Institution of Chartered Surveyors.

In terms of the number of new build properties, figures are looking more promising, as just over 140,000 homes were built over 2015 in England but this still falls well short of requirements.

The inescapable fact is that part of this recovery in activity and transactions has been down to the strong pick-up in the buy-to-let sector, but more recently the owner-occupier sector has also been recovering and continues to be up on a year ago.

We can expect this to continue over the next few months, as mortgage approvals data, which is a useful leading indicator for lending, is still posting strong growth.

Looking at the figures, approvals for house purchase have been above 70,000 in the last four months and are likely to remain above that threshold in the near term. The Bank’s MPC members expect this to average 76,000 a month in the third quarter of 2016, after some volatility emanating from tax changes for additional properties in April, though this could turn out to be on the optimistic side.

Approvals for remortgage activity have grown since the second half of 2015, from a very low base. The growth rate has been quicker than approvals for house purchase.

This pickup in remortgage activity has been the driving force behind lending over the last few months, as shown in chart 2. This casts doubt over the suggestions that some of the strong growth in lending recently has been driven in part by buy-to-let investors trying to purchase properties ahead of April’s tax changes.

Chart 2: Contributions to annual growth for house purchase and remortgage lending

Market commentary March 2016 chart 2

Source: CML Regulated Mortgage Survey, CML Economics

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We expect some activity to be brought forward in the first quarter of 2016, but that the scale will be modest, and followed by a similarly modest fall in activity in the second and possibly third quarter.

Our estimate of lending in February is £17.6 billion on an unadjusted basis. Adjusting for seasonal factors, this makes lending around £20.6 billion. Both of these figures represent strong annual growth, being more than a quarter higher than a year ago.

Budget postscript

The Chancellor presented his Budget on March 16, giving more information on the imminent tax changes for additional properties.

From our analysis, the higher rate of stamp duty is likely to impact regional markets in very different ways. In 2015, we find more than seven out of 10 buy-to-let properties in Yorkshire, the north of England, Scotland and Northern Ireland were exempt from stamp duty as they were all below the £125,000 threshold. From April this year, all of these transactions will have a 3% tax levied against them.

This risks influencing liquidity in the mainstream market and creating uncertainty which is unlikely to dissipate until later in 2016. It may also have unintended consequences, such as disrupting housing chains and affecting first-time buyers buying with the help of their parents, as mentioned in our consultation response to HM Treasury.