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Market commentary October 2016


Published: 20 October 2016 | Author: Mohammad Jamei

  • Hard economic data post-referendum remains elusive, but surveys point to a recovery in sentiment in September, after a bounce back in August
  • Our estimate of gross mortgage lending for September is £20.5 billion, up 2% compared to a year ago
  • The mix of lending is moving towards remortgaging, as prospects for house purchases look slightly subdued
  • November’s Monetary Policy Committee meeting will be widely watched for any movement on interest rates, as the case for a rate cut has faded a little in recent weeks

UK economy

Nearly four months after the referendum, hard economic data is still quite scarce for this period. The first official estimate of gross domestic product for the third quarter of the year will be released on 27 October. The National Institute of Economic and Social Research’s estimate of this figure is 0.4%, better than was expected a few months ago.

Survey data for September shows the recovery witnessed in August has been sustained, with all three purchasing managers’ indices (manufacturing, construction and services) signalling growth.

Jobs data, which is one of the timeliest economic data available, supports this. In the three months to August the proportion of people in employment remained at its joint highest level since records began. The number of people who were unemployed rose by 10,000, but the unemployment rate was unchanged at 4.9%

Meanwhile, inflation looks set to rise. It slowly edged up to 0.6% last month and has now hit 1%. The large drags from food and energy prices last year are now dropping out, and sterling depreciation is expected to push up import prices. Forecasters expect the inflation rate to comfortably exceed the Bank of England’s 2% target by the end of 2017.

Given that earnings growth is currently at 2.3%, rising inflation could quickly erode the growth in real earnings seen over the past two years.

Chart 1: Average earnings and consumer price inflation annual growth rate

20161019 Oct market commentary chart 1

Source: Office for National Statistics, CML calculations

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There is no Monetary Policy Committee (MPC) meeting in October, as the Bank has now moved to eight meetings a year. November’s meeting minutes and Inflation Report, which will be available on 3 November, will be widely watched for any movement on interest rates.

It is not clear whether the Bank will move to cut rates as it comes down to whether the medium term outlook in November is judged to be broadly consistent with the August Inflation Report projections. While short-term indicators looks more positive, the Bank will be looking further down the line to make its decision.

If rates are cut, it would be close to, but a little above zero. This means rates could be cut down to as low as 0.10%.

But almost regardless of what the Bank does in November, it is a widely accepted point that monetary policy cannot be relied on to fully mitigate the adverse economic impacts associated with uncertainty around Brexit.

It is for this reason that commentators are anticipating there will be some complementary fiscal measures announced when the new chancellor Philip Hammond delivers his first Autumn Statement on 23 November.

A housing white paper is also expected to be published before the end of the year, outlining housing initiatives until 2020.

Housing and mortgage markets

Survey indicators in September paint a slightly more positive picture of the housing market than has been the case over the last few months. The Royal Institution of Chartered Surveyors survey, which tends to be a good leading indicator for the health of the housing market, showed new buyer enquiries increase for the first time since February this year.

The issue continues to be on the supply of properties for sale, which fell for the seventh month in a row.

This has the potential to limit transactions if buyers can’t find properties they want to purchase. The corollary to this is that prices are pushed up as the relatively small number of properties for sale are bid up by an increasing number of buyers.

House purchase approvals fell to a 21 month low, with just over 60,000 approvals in August. While the Bank of England’s prediction in August of 56,000 approvals per month over the next nine months looks to be getting closer, we still see this as too pessimistic, and expect a recovery, as sentiment improves. We expect an upward revision to this forecast in its November Inflation Report, as outturn data has been more positive than the Bank originally expected.

The Bank’s Credit Conditions Survey reported that the supply of secured credit to households was unchanged, and is expected to be unchanged until the end of the year.

Demand for secured credit was reported to have fallen significantly in the three months to September, but it is expected to recover in the final three months of the year.

The stamp duty tax change in April created a distortion in the first and second quarter of this year, but data for July and August shows a market where transactions still look soft for buy-to-let.

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, coupled with the Prudential Regulation Authority’s stress tests, which come into effect in January 2017.

Chart 2: Buy-to-let house purchases

20161019 Oct market commentary chart 2

Source: CML Economics

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Our forward estimate for gross mortgage lending in September totalled £20.5 billion. This is up 2% compared to September last year but weaker than August’s figure.

Adjusting for seasonal factors, lending has been fairly stable over the last few months, but the mix of lending is moving towards remortgage activity. This is as house purchases on the whole continue to be slightly subdued, while prospects for remortgaging, both for home-owners and buy-to-let, look positive, as a result of attractively priced mortgage deals encouraging borrowers to refinance.

Chart 3: All loans for house purchase and remortgage, seasonally adjusted

20161019 Oct market commentary chart 3

Source: CML Regulated Mortgage Survey, CML calculations

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The record of the most recent Financial Policy Committee (FPC) meeting showed that the FPC plans to review its June 2014 measures on owner-occupier mortgages, namely the loan to income soft cap and mortgage affordability tests. This is expected to be published on 6 December.