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Analysis

Published: 19 May 2016 | Author: Mohammad Jamei

  • Our estimate is that gross mortgage lending was £18.5 billion in April, 16% higher than a year ago
  • Lending over the next few months is likely to be driven by first-time buyers, movers and remortgage customers, as buy-to-let takes a back seat
  • Uncertainty around the EU referendum could weigh on housing market activity over the next few months
  • The UK is very unlikely to see a rate hike this year, as global uncertainties have a profound effect on interest rate expectations

UK economy

Economic growth in the first quarter of 2016 was 0.4%, down from 0.6% in the preceding quarter, according to the Office for National Statistic’s preliminary estimate.

This, along with prospects for the second quarter looking even more subdued, has led to forecasters revising down growth for the UK economy to around 2% for 2016 as a whole.

The EU referendum has been linked to this slowdown, as businesses appear to be postponing investment decisions until after the vote. The referendum remains the largest source of domestic uncertainty, according to the Bank’s May Inflation Report.

The UK labour market is still recording 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 5.1%.

Growth in earnings, which was a modest 2% in March, is running at about half its pre-crisis average. This, coupled with an inflation rate that is low (0.3% in April) but expected to pick up over the second half of the year, could see real wage growth squeezed over the short term.

The Bank of England's monetary policy committee (MPC) referred to the low level of headline inflation weighing on wage growth, so it is possible that wage growth increases as inflation picks up.

The MPC unanimously voted to keep interest rates at 0.5%, and stated that it will react more cautiously over the near term to macro-economic and financial data as it may be harder to interpret because of the referendum.

Financial market expectations of the first rate rises has been pushed out significantly over the course of the last few months, with the most recent data implying a rate rise at some point in 2019. To put this into perspective, expectations at the end of 2015 were for the first rate rise to occur at the end of 2016.

Housing and mortgages

The overall picture in the UK housing market is somewhat distorted, as we move into the aftermath of the stamp duty change for second properties (discussed at more length here) just as increased uncertainty begins to settle on the economy and households in the lead-up to the EU referendum vote in June.

If we look past these factors, the underlying picture still shows signs of growth, as the market remains underpinned by strong fundamentals.

But, beyond this, the market has become rather challenging to read.

On the supply of new housing, the first quarter of 2016 saw growth in private and public housebuilding, both rising by more than 4% compared to the last quarter of 2015.

But, on the availability of existing housing for sale, there continues to be a tension between supply and demand, which has been the case for a prolonged period now. Even though buyer demand dropped off in April, as the stamp duty deadline passed, supply conditions remained tight, according to the Royal Institution of Chartered Surveyors.

This imbalance has no doubt helped support house price growth and will continue to do so over the near term.

For the past 10 months, property transactions have remained above 100,000 per month. While this figure is impressive in the context of the recent past and may well represent a new normal, it is still about a third lower than the pre-crisis peak.

The Bank’s Inflation Report noted that transactions are likely to remain some way below their pre-crisis peak, as a result of structural changes in the housing market, something we have previously discussed on numerous occasions.

The recovery in activity and transactions had been attributed to the strong pick-up in the buy-to-let sector, but growth in the sector may well be weak over the next few months following the stamp duty change. This could be offset by modest positive growth in lending to first-time buyers, movers and remortgage customers.

Chart 1: Buy to let as a proportion of gross lending

Market commentary May 2016 chart 1

Source: CML Economics

Download the data

Our estimate of lending in April is £18.5 billion, 16% higher than the same period last year but down 29% on March’s lending figure. On a seasonally adjusted basis, this figure is just over £20 billion, consistent with what we have seen since October 2015 (March excepting).

This is something of a surprise, as we, along with other market commentators, expected to see a marked slowdown in April’s lending data, to reflect the bringing forward of house purchase activity to avoid the increased stamp duty change.

One possible explanation is that transactions that would have gone through over the whole course of 2016 were brought forward, so a small drop-off in lending comes through over many months, rather than a shorter, sharper market correction.

This would imply half a billion less lending per month than would otherwise be the case, for the rest of the year.

Anecdotally, our data implies that most applications that were aiming to complete before the April 1 deadline did, in fact, complete in time and that there were few transactions that missed the deadline.

According to the Bank’s Agents’ Summary of Business Conditions, commercial property transactions have dropped off markedly, partly because of global uncertainty and the uncertainty associated with June’s EU referendum. This is likely to impact residential housing market activity in the second quarter of 2016 as it weighs on sentiment, coupled with the unwinding impact of the stamp duty change.

So what happens over the next few months - even more than usual - is anyone’s guess!