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UK Finance represents around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation takes on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Please go to www.ukfinance.org.uk for wider content and updates from UK Finance.

Analysis

Published: 22 October 2015 | Author: Mohammad Jamei

  • Activity levels in the housing and mortgage markets have picked up over the last few months after a slow start to the year.
  • Mortgage lending is currently enjoying its best spell since 2008. Our estimate is that gross mortgage lending was £20 billion in September, up 12% on a year ago.
  • First-time buyer and mover numbers are now stronger than a year ago for the third month in a row, although these gains are more limited than for buy-to-let.

UK economy

Economic fundamentals in the UK look set to remain strong despite downside global risks emanating from China and emerging market economies, as the Financial Policy Committee (FPC) noted in its recent meeting. While growth in the third quarter of 2015 is expected to be slightly weaker than the second quarter, it’s still forecast to be firmly positive.

The rate of inflation, as measured by the consumer price index, fell by 0.1% in the year to September and has been at or around 0% for most of 2015.

Labour market figures look strong, with the employment rate and level reaching their highest levels since records began in 1971. The unemployment rate fell to 5.4% in the three months to August, the lowest it has been since May 2008. Wage growth also continues to grow at pace, with total pay increasing by 3.0% compared to a year earlier.

Developments in the global economy, coupled with the low inflation meant the Bank of England kept interest rates at their record low of 0.5% for the 79th consecutive month.

Financial markets’ expectation of the first rate rise in the UK has over the last few weeks edged into the first quarter of 2017. This is likely to be dependent on the timing of Federal Reserve action to raise interest rates in the US and the result of downside risks arising from global developments.

The Bank of England's monetary policy committee continues to reiterate that when the Bank Rate does begin to rise, it will be gradual and to a lower level than in recent cycles.

Housing market

As we expected, the second half of 2015 has seen a pick-up in activity in the housing market after a slow start to the year.

Low inflation, strong wage growth, falling unemployment and competitive mortgage deals are all helping to underpin housing demand.

According to the latest Bank of England credit conditions survey, lenders expect spreads on mortgage rates to narrow slightly in the final three months of the year, continuing a trend seen over the last three years or so.

Chart 1: Quoted household mortgage interest rates

20151022 - Market commentary Oct 2015 chart 1

Source: Bank of England

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The latest survey by the Royal Institute for Chartered Surveys (RICS) shows agreed sales rising at their fastest rate since mid-2014 and new buyer demand enquiries continuing to increase for the sixth month in a row.

This rise in demand has not led to an increase of properties on the market. In fact, according to RICS, the number of new listings fell again in September marking thirteen months of decline out of the last fourteen months.

The Bank of England agents’ summary of business conditions survey and the RICS survey both cite lack of properties available for sale as a major constraint on housing market activity.

Mortgage approvals, which tend to be a good leading indicator of activity, have picked up fairly strongly over the last few months. Approvals for house purchase exceeded the 70,000 mark for the first time since the start of 2014 and approvals for remortgage exceeded 40,000, the highest level since the end of 2008. Some major UK lenders have attributed the pick-up in remortgage activity to the media coverage around the path of the Bank Rate.

HM Revenue & Customs property transactions have shown signs of a recovery, too, in recent months. In August there were more than 106,000 transactions, the highest since the start of 2014, echoing house purchase approval figures.

Chart 2: Property transactions, annual growth rate

20151022 - Market commentary Oct 2015 chart 2

Source: HM Revenue & Customs

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CML data supports these trends, as annual growth rates for all categories of borrowers were positive in August and the two months preceding it. The area recovering strongest recently has been buy-to-let, driven by remortgage activity in the sector.

Our forward estimate for gross lending is that £20 billion was advanced in September. This is 2% higher compared to August and 12% higher than a year ago – the fourth month in a row that there has been a sharp pick-up year on year. The underlying picture is likely to show the strongest September month figure since 2007.

Government initiatives

The Housing and Planning Bill was presented to parliament recently, which provided more detail about the government’s starter homes initiative. A new legal duty will be placed on councils to guarantee the provision of 200,000 starter homes in total on reasonably sized new developments. These will be offered to first-time buyers under the age of 40 at a 20% discount on market prices.

The Bill came days after the government announced that an agreement has been reached with the National Housing Federation to extend the Right to Buy to housing association tenants from 2016. These two taken together are likely to impact the shape of the housing market going forwards.

Separately, we are still awaiting the Treasury to release their consultation paper on powers of direction for the FPC on buy-to-let.

The annual assessment of the Help to Buy mortgage guarantee scheme was carried out by the FPC in which it concluded that the scheme does not pose material risk to financial stability. The fee for the three different loan-to-value bands has increased slightly, by two basis points, as a result of a change in membership of the scheme.