Published: 23 March 2017 | Author: Mohammad Jamei
- Momentum continues to build on activity levels, as transactions have now been above the 100,000 mark for the second month in a row
- Our estimate of gross mortgage lending for February is £18.2 billion. Accounting for seasonal factors, this figure is close to £21.5 billion, marking a second breakout of the narrow tramlines lending has been on for the past nine months
- Lending is increasingly being driven by remortgage activity, as it grew over 20% over the last twelve months
- The number of first-time buyers rose to over 340,000 in the 12 months to January, unmatched over any 12 month period since early 2008
Economic growth in the last quarter of 2016 was bumped up slightly, to 0.7%. Minutes from the Bank of England monetary policy committee (MPC) showed that Bank staff expect growth to continue close to this rate in the first three month of 2017, at 0.6%.
The economy continues to create jobs as the unemployment rate fell to its lowest rate since early 2005.
But even as the economy absorbs labour market slack, average weekly earnings growth remains weak, with growth in wages falling to 2.2% in January. In the past, we would typically expect higher wage growth if we were in a similar situation to where we are now, with the unemployment rate below 5%.
Looking further ahead to the rest of 2017, the prospect of higher inflation looms large. Consumer price inflation reached 2.3% in February, exceeding the Bank's target for the first time in over three years.
With wage growth likely to remain weak, real wages will stagnate for much of this year, bearing down on spending. An early sign of this is that retail sales have now contracted for the third month in a row.
The Bank expects inflation to reach 2.7% by the early 2018, but signalled it is willing to look past this, as it believes raising interest rates to counter inflation would come at the expense of higher unemployment and weaker income growth.
Housing and mortgage markets
The housing market has been slowly building up momentum over the last few months, largely getting back to activity levels we saw in the beginning of 2016.
House purchase approvals are in a much better place than the low 60,000s we saw over the summer of last year, as it reached 70,000 in January. Approvals have been growing month-on-month for the past five months.
The MPC expects to see an average of 71,000 house purchase approvals over the next nine months.
Approvals tend to be a good leading indicator for market activity. The recent pick-up has started to come through, as transactions topped the 100,000 mark for the second month in a row.
But looking at the breakdown, there are some noticeable differences compared to where we were a year ago. While we talked about a broad-based recovery in transactions at the start of 2016, this time round, there is only one component of transactions which has been growing and that is first-time buyers.
Cash transactions have recovered a little too, but only in the last two months. Home-movers and buy-to-let house purchases are both down on a year ago.
Yet lending has been fairly stable since April last year, averaging just over £20 billion a month.
Our estimate of lending in February comes in at £21.5 billion, on a seasonally adjusted basis, which marks a second breakout from the narrow tramlines it has been on for the past nine months. On an unadjusted basis, lending was £18.2 billion.
We don’t have the breakdown for lending in February yet, but it’s very likely to be the case that first-time buyers and remortgage customer are the drivers.
There has been strong competition between lenders which has encouraged more borrowers to re-finance. This was helped by the launch of the Term Funding Scheme and the interest rate cut, both in August, which helped push down offered mortgage rates even further.
For example, looking at data published by the Bank, the average quoted rate for a two-year fixed rate mortgage at 75% loan-to-value is currently 1.42%, the lowest it has ever been.
So it’s no surprise that remortgage activity growth has been more than 20%, year-on-year.
We expect to see a continued recovery in remortgage activity, as more borrowers take advantage of favourable rates.
First-time buyer numbers have also fared well, but for different reasons. Government housing schemes have predominantly been aimed at first-time buyer, which has led to momentum building slowly. In the 12 months to January, there were 340,200 first-time buyers, the highest level of any 12 month period since early 2008.
In contrast, home movers, who have largely been left to fend for themselves, remain subdued at around 360,000 on a 12-month rolling basis.
Most properties that come onto the market for sale are existing homes, not new ones. So a low level of home movers means few properties for sale, as highlighted by the Royal Institution of Chartered Surveyors survey, which shows an acute supply/demand mismatch since late 2013.
The result of this imbalance is underpinning house price values, especially in areas such as London where there is currently the lowest number of home movers for 25 years.
This is holding back market activity, and we do not see it resolving in the short term.
Finally, buy-to-let house purchases remain sharply down on a year earlier and are showing very little signs of recovery. Our forecast was that we would see an average of just over 7,000 house purchases a month, in 2017. We start the year with just 5,900.
Chart 1: Contributions to lending growth on annual basis
Policy and regulation
The chancellor Philip Hammond delivered the first of his two Budgets this year, which was fairly low key, especially in relation to the housing and mortgage market.
Next month, 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, but we do not expect a response similar to the stamp duty change, which led to a surge in activity before the change, followed by lull for buy-to-let house purchase.
A recent YouGov survey suggests landlords are fairly well informed of the tax changes, with over two-thirds of landlords polled confirming they were aware of the forthcoming changes.
Our view is that there will be slower or limited growth in landlord portfolios, but as with most policy and regulatory changes, we will need to wait until the changes are in place to get a better understanding of the cumulative impact on the sector.