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Published: 19 November 2015 | Author: Bob Pannell

  • The UK may not see its first rate hike until 2017, as global uncertainties have had a profound effect on interest rate expectations. 
  • Echoing a more general revival in lending to individuals, mortgage lending is currently enjoying its strongest spell since the financial crisis, with annual growth in mortgage balances reaching 3% for the first time since 2008.
  • Our estimate is that gross mortgage lending was £21.8 billion in October: nearly a fifth higher than a year ago. 
  • The pick-up in mortgage lending is becoming more broadly-based, following several months of year-on-year growth in lending to first-time buyers, movers and remortgage customers.

UK economy

Despite losing a little momentum, the economic picture for the UK continues to be relatively positive.

This is particularly evident in the jobs market, where the latest data shows near record levels of employment, the highest proportion of working age people in work since records began more than forty years ago and the lowest unemployment rate (5.3%) since 2008.

The continuing absence of inflationary pressures – consumer prices fell by 0.1% in the year to October - means that household incomes this year are experiencing their strongest growth in real terms since the crisis.

As the Bank of England noted in November’s Inflation Report, domestic demand growth has been solid, with both consumer spending and business investment robust despite fiscal consolidation.

A significant part of the inflation windfall reflects the continuing weakness in prices for oil and other commodities. This in turn reflects a weakening in the global outlook over recent months, associated with developments in China and other emerging market economies. 

Strong US labour market numbers for October may leave a window open for the Federal Reserve to lift rates when it meets in mid-December, although this has been on and off for much of the year.

Elsewhere, the recent terrorist atrocities in Paris will not be positive for short-term growth prospects in the Euro area, and may strengthen the case for additional stimulus measures from the European Central Bank.

Importantly, concerns about global prospects have materially lowered market expectations for interest rates in just a few months. 

The market-implied path for bank rate, on which the Bank of England's monetary policy committee’s (MPC) projections are based, suggests a much more gradual pace of monetary tightening than in August. 

Chart 1: Market-implied path for UK bank rate

Implied bank rate expectations

Source: Bank of England

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In the face of global weakness, the MPC judges that domestic demand needs such support to eliminate any remaining spare capacity in the UK economy, and to bring consumer price inflation back up to its 2% target in two years.

Near-term housing sentiment will be boosted by the prospect that the first quarter percent rise in UK rates may be delayed until the second quarter of 2017, compared with the estimate of the third quarter of 2016 just a few months ago. 

Housing and mortgages

Nevertheless, we believe that market activity has only modest further upside potential over the short-term.

Although benign economic conditions and competitive mortgage deals are underpinning household demand, the overall level of housing transactions has been slow even to regain the levels of a year-earlier.

A key factor has been the low level of properties offered for sale. This is most obvious with existing homes, where The Royal Institution of Chartered Surveyors has recently reported a drop in vendor instructions for the ninth month in a row. But it may also be the case that positive completions data mask weaker new build activity - recent NHBC figures suggest that housing starts across much of England have lost momentum in recent quarters.

While supply constraints are helping to reinforce upward price pressures across much of the country, this adds further to affordability pressures, and so limits future activity levels.

Nevertheless, we are seeing one or two encouraging developments.

Property transactions, on the HMRC measure, finally nudged higher year-on-year in August and September.

We have also seen the proportion of cash purchases easing back in favour of mortgage-financed transactions.

While some of this reflects the continuing strong performance of buy-to-let, it is worth noting that the number of both first-time buyers and movers have increased year-on-year for the past four months in a row.

Chart 2: Lending volumes, % change year-on-year

Lending volumes, % change year-on-year

Source: CML Economics

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According to the Bank of England, gross mortgage lending (seasonally adjusted) totalled £18.6 billion in September. Lending has been running at similar levels for several months, comfortably making this the strongest period since 2008.

The positive pattern continued into October. Our forward estimate suggests that unadjusted gross lending totalled £21.8 billion and that seasonally adjusted lending touched £20 billion. Both figures would have been about a fifth higher than a year earlier.

The approvals data for September from the Bank of England offers mixed signals about the months ahead. 

House purchase approvals dipped below 70,000, while those for remortgages rose to 41,000, continuing their strong recovery from a low base. Looking ahead, remortgage prospects may be dampened by receding fears of imminent rate rises.

Contextually, the recent brisk pace for mortgage lending is part of a broader picture, in which the pace of lending to individuals has picked up over most of the year.

The pace of net mortgage lending has been accelerating over recent months, and reached £3.6 billion in September. This marks the strongest rate of mortgage lending growth since 2008, but at just over 3% on an annualised basis, it lags substantially behind consumer credit.

Chart 3: Growth rate of mortgages and unsecured credit, annual % change

mortgages and unsecured credit annual change v2

Source: Bank of England

Note: Figures represent annualised 3-month growth rates of seasonally adjusted balances.

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Elsewhere, the benign jobs market and low interest rate environment has helped ease the financial pressures facing some households.

The Bank of England's latest Inflation Report notes that the levels of household debt and debt service payments relative to income have fallen, and that fewer households are reporting debt concerns.