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Market commentary November 2016


Published: 17 November 2016 | Author: Mohammad Jamei

  • Economic data post-referendum points to the economy holding up better than expected back in August
  • Our estimate of gross mortgage lending for October is £20.6 billion, down 5% compared to a year ago
  • The mix of lending is moving towards remortgaging, as prospects for house purchases look slightly subdued
  • At its November’s meeting, the Monetary Policy Committee (MPC) left interest rates unchanged as it revises up growth forecasts for the economy over the near term

UK economy

Economic data are like buses. You wait for one, and a couple come at once. Data on the two main measures of the economy are now available for the post-referendum period.

The latest release of GDP covers the period of July to September. Growth was stronger than most expected back in June, with the Office for National Statistics reporting that the economy grew by 0.5% compared to the three months to June.

Labour market data supports this. The unemployment rate fell to 4.8% for the period of July to September, the lowest rate for 11 years. The employment rate, the proportion of people in employment, remained at a joint all time high too.

While inflation dipped slightly in October to 0.9%, the upward trajectory of inflation is largely unchanged. This is as large drags from food and energy prices last year drop out, while the recent Sterling depreciation is expected to push up import prices.

In the Bank’s November Inflation Report, the MPC expects inflation to reach 2.7% by the end of 2017. Inflation is then expected to remain at that level for a year, before falling to 2.5% by the end of 2019.

In response to this expected overshooting of inflation relative to its 2% target, the MPC has said it is willing to look past some above-target inflation, as the cost between that, and the alternative, which would be to tighten monetary policy, is too much to consider doing so.

It did however caveat this by pointing out that there are ‘limits to the extent to which above-target inflation can be tolerated’.

Given that earnings growth is currently at 2.4%, the rising inflation outlook could lead to flat or negative growth in real earnings over the next few years.

The MPC at its November meeting left interest rates unchanged and has all but taken an imminent rate cut off the table, as it stated that ‘Monetary policy can respond, in either direction, to changes to the economic outlook…’.

Eyes now turn to the Chancellor, Philip Hammond, as he delivers his first Autumn Statement on 23 November. Given a worsening public accounts forecast, we should perhaps manage our expectations on the possibility of any new policies.

At around the same time as this, a Housing White Paper is due to be published, outlining housing policy until 2020.

Housing and mortgage markets

The housing market has continued to fare better than many expected, with survey indicators still painting a relatively positive picture. The Royal Institution of Chartered Surveyors survey showed demand holding up well.

The problem is that this demand is still not being met with a supply response. New instructions to sell have fallen, or been relatively flat for more than three year now. This has led to the average number of properties per surveyor falling to its lowest level for nearly 40 years.

The impact of this is that it limits the number of potential transactions, as well as pushing up prices, as the relatively few properties up for sale are bid up by a growing number of buyers.

And while net additions to the housing stock reached their highest level for 8 years, it’s still the case that the vast majority of properties on sale are existing homes, not new ones.

House purchase approvals picked up in September from its 20-month low last month to reach nearly 63,000 approvals. As a result, the Bank of England revised up its forecast for approvals from 56,000 to 65,000 after conceding that the housing market is doing better than it expected back in August.

House purchase approvals tend to lead property transactions a few months. So given the weakness in approvals in August, transactions in October are likely to be at or around the same level as September, before recovering slightly in November.

Chart 1: House purchase approvals and property transactions, seasonally adjusted

Nov market commentary chart 1

Source: Bank of England, HMRC

Download data

Our forward estimate for gross mortgage lending in October totalled £20.6 billion. This is flat compared to compared to September but slightly weaker than last October’s lending figure.

On a like-for-like basis, total lending has been stable over the last few months. At this rate, it looks likely that gross lending for the whole of 2016 will be between £240-245 billion, which would represent a 10-12% rise compared to 2015.

Competitive mortgage rates, along with the August rate cut, will help with the debt burden for recent borrowers, but more fundamental factors still limit house purchase activity.

While first-time buyers have been supported somewhat by various government schemes, the real weakness is coming from second steppers and other home movers, whose activity has continued to be fairly subdued since the financial crisis.

Factors limiting activity include uncertainty surrounding the economy, affordability pressures and the macro-prudential rules announced in 2014, which are currently under review, with the outcome expected to be published on 6 December.

As a result, first-time buyers buying with a mortgage have accounted for a higher proportion of house purchases loans in recent years. To put this into context, it was fairly typical for first-time buyers to make up just over a third of house purchases in the early 2000s. They now make up about half of house purchases.

Chart 2: House purchase loans to first-time buyers and home movers, non-seasonally adjusted

Nov market commentary chart 2

Source: CML Regulated Mortgage Survey

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On buy-to-let, a different set of factors are weighing on house purchase activity. Lenders have been tightening affordability criteria ahead of the Prudential Regulation Authority’s stress tests coming into effect in January 2017, and the forthcoming interest tax relief changes in April 2017. This runs alongside the recent stamp duty change on second homes, which means softer buy-to-let activity can be expected to continue for the foreseeable future.

As a result, the mix of lending has slowly moved towards remortgage activity, and it now accounts for just over 40% of lending, compared to about a third over the last few years. This trend is likely to continue in the near future.