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Market commentary September 2016


Published: 22 September 2016 | Author: Mohammad Jamei

  • Hard economic data after the referendum is still scarce, but surveys point to a recovery in sentiment in August
  • Our estimate of gross mortgage lending for August is £22.5 billion, up 15% compared to a year ago
  • Prospects for house purchase activity look slightly subdued but remortgage activity could see growth
  • Following significant monetary stimulus last month, the Bank of England continues to indicate that another rate cut is on the cards, if medium term prospects remain unchanged

UK economy

Hard economic data for the post-referendum period is still quite thin on the ground, though survey data, which is more timely but softer, has become available for August. The problem is that survey data tends to be much more volatile.

This was probably most evident in August, as the purchasing managers’ indices (PMIs) all showed a big bounce back following contractions in July. The services and manufacturing PMIs both recorded jumps of a magnitude not seen since the series began more than 20 and 25 years ago, respectively.

Given the volatility, it can be somewhat difficult to get a clear view, but the picture looks more positive than it did a month ago.

Jobs data, perhaps the timeliest economic data available, supports this point. In the three months to July there continued to be a fall in unemployment, and the proportion of people in employment remained at the highest level since records began. The claimant count, which covers people on unemployment benefit, showed the lowest total for August in more than 40 years.

This has led forecasters to revise up growth expectations for 2017, with most now expecting sluggish growth rather than recession.

While the Bank of England’s monetary policy committee (MPC) expected a recovery in the survey data for August, it had to concede that the bounce back was stronger than it had predicted.

But it seems this has not deterred the MPC from preparing the ground for another rate cut towards the end of this year, if the medium term outlook in November is judged to be broadly consistent with projections in the August Inflation Report.

If the rate is cut, it would be close to, but a little above zero, so down to 0.1% looks likely; the Bank's governor, Mark Carney, has made it very clear that the MPC does not want to move into negative rate territory, and believes that it still has other policy levers available.

Meanwhile, inflation looks set to rise. It has slowly edged up to 0.6% recently and is expected to reach 2% in the first half of next year, as large drags from food and energy prices drop out, and sterling depreciation pushes up import prices.

While this means the MPC would technically hit its inflation target, members have already stated they are willing to accept higher than target inflation, if that means supporting economic growth.

However, it is a widely accepted point that monetary policy cannot be relied on to mitigate all the adverse economic impacts associated with Brexit uncertainty.

For this reason, commentators are anticipating that there will be some complementary fiscal measures announced when the new chancellor, Philip Hammond, delivers his first autumn statement on 23 November.

Housing and mortgage markets

As with survey indicators for the economy, those for the housing market have also recovered in August. The Royal Institution of Chartered Surveyors' survey bounced back, predicting price and sales volumes to rise over the three- and 12-month horizon.

What is perhaps of more concern is the relatively low number of properties up for sale. The average number of properties per surveyor is close to the lowest it has ever been. This has the potential to reduce the number of transactions, if potential buyers struggle to find properties they want to purchase.

House purchase approvals fell to an 18-month low in July, with only around 61,000. This is not too far from the Bank’s prediction of an average of 56,000 approvals over the next nine or so months, which implies transaction levels of just over a million a year. We still see this as overly pessimistic, and expect there to be an uptick over the coming months, as buyers feel more confident.

While the stamp duty change on second properties created a distortion in the first and second quarters of the year, transactions in July and August should begin to show a more accurate, less distorted reading of the market. This means we could be starting to see a market where transactions are a little softer than they have been over the last few years.

Our forward estimate for gross mortgage lending in August totalled £22.5 billion. This is up 15% compared to August last year and stronger than July’s figure. Adjusting for seasonal factors, lending has been stable fairly over the last few months but, under the surface, the mix of lending is moving towards remortgage activity.

Chart 1: Gross mortgage lending including CML estimates (£m)

sep market commentary chart 1

Source: Bank of England, CML, CML estimates

Download data

This is most evident in the buy-to-let sector. House purchase activity for buy-to-let continues to remain subdued, even as we move away from the stamp duty change, and is firmly down compared to a year ago. This looks set to continue going forward, given that lenders have been tightening affordability criteria in anticipation of the forthcoming interest tax relief changes in April 2017.

Alongside this, house purchases for first-time buyers and movers also looks more subdued, as they both fell in July on a monthly and annual basis.

And while the term funding scheme (TFS) will support the supply of finance, allowing lenders to offer more competitive rates, the real constraints lie on the demand side. As well as a lack of properties on the market, lenders remain subject to affordability tests, macro-prudential constraints and their own stress tests, which is likely to leave little opportunity to support demand.

The TFS drawdown period began earlier this week (19 September), so any impact may show in the next few months, though it is not clear how successful this scheme will be in supporting new lending levels.

Remortgage activity, on the other hand, is the one part of the market that looks resilient and could see growth, for both home-owners and buy-to-let, as cheaper mortgage deals encourage borrowers to refinance.

Read our market commentary for August 2016