Market commentary September 2017

UK economy

Growth in the economy has been subdued over the first half of this year, and the limited news on activity more recently indicates this will continue in the short term.

Despite the weak economic growth, the labour market continues to run at full steam as the unemployment rate fell to 4.3%, the lowest rate since 1975. In the past, this record low unemployment rate would have translated to wage growth at about twice its current rate, but stagnant productivity means this has yet to materialise, so wage growth remains sluggish at 2.1%.

As the inflation rate reached 2.9% in August, workers have now seen their spending power slowly eroded for just over half a year. In all likelihood, this will continue into the early parts of next year, as inflation is now expected to rise above 3% in October, falling slowly after that.

Given the pay squeeze, consumer confidence has taken a bit of a hit recently, but retail sales growth implies shoppers haven’t cut back on spending just yet. Instead it seems households are saving a bit less each month, rather than borrowing more, as growth in personal deposits has slowed recently, alongside a slowdown in growth of consumer credit borrowing.

The Bank of England Monetary Policy Committee (MPC) kept the Base rate on hold at 0.25%, but did change its tone on future rate rises. It stated that the majority of MPC members would expect “some withdrawal of monetary stimulus” in the near term if the economy continues on its current path. This has shifted expectations of the next rate rise, with some commentators expecting it to be as early as November, when the MPC next meets.

Housing and mortgage markets

Housing market activity has been growing modestly since the start of the year. Overall activity resembles what we saw just over two years ago, in 2015.

The mix of activity under the aggregate figures has shifted though, so while property transactions have averaged just over 100,000 a month since the turn of the year, much of this is driven by first-time buyers, less so by cash and buy-to-let. This level of activity is not expected to change much in the short-term, as the leading indicator of activity – house purchase approvals – has now returned to where it was at the beginning of the year.

Table 1 – rolling 12-months sum of activity (thousands)

The Bank of England’s Agents’ survey suggests part of the strength in first-time buyer activity is down to demand for new-build properties using the Help to Buy equity loan scheme. There are also several other government schemes aimed predominantly at first-time buyers, such as the Help to Buy ISA, that are no doubt helping boost their numbers.

Benefitting much less from government schemes, home movers have largely been treading water over the last few years. The shortage of homes on the market for sale has also meant that some would-be movers are struggling to find suitable homes, and so do not put their own homes up for sale.

In the buy-to-let space, government interventions coupled with regulation has led to a flat market with around 6,000 house purchases a month since April 2016, after the stamp duty change on second properties came into effect.

As well as a change in the type of activity, there is some evidence to show the regional mix has shifted, away from London, the south east and east Anglia, towards the north of England, Wales, and Scotland.

The common characteristic in this divergence is that regions which have typically been less affordable have shown signs of weaker activity, while regions which are relatively more affordable have been more buoyant. Respondents to the Royal Institution of Chartered Surveyors survey and the Bank’s survey reflected this shift in activity.

At a regional level, the difference in affordability (as measured by the typical income multiple for home owners) between the most and least affordable regions has diverged since 2013, with the gap doubling over this period.

This trend may reverse, and we may see some rebalancing, if the shift in activity is sustained. It’s also the case that sentiment and price expectations in regions where affordability is stretched has weakened or is negative.

Chart 1: Difference in home-owner affordability across regions in the UK

Source: UK Finance

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On the remortgage side, strong competition and low funding costs has meant a growing number of home-owners are taking advantage of the near record low mortgage rates. We expect more home-owners to refinance in the coming months, as prospects of the first interest rate rise in over 10 years gains new impetus.

Buy-to-let remortgage activity had been growing until very recently but the number of loans made over the last 12 months has been lower compared with the 12 months preceding it. Tax changes that came into effect in April 2017 are likely to restrict the ability or willingness of landlords to re-leverage their portfolios.

Despite the shift in mix of activity, by buyer type and region, total mortgage lending has been stable, and was estimated to be £24.2 billion in August, of which £15.1 billion was lent by High Street Banks. If we adjust for seasonal factors, this figure would be £21.4 billion which is in the same ball park as monthly lending over the course of 2017.

While we won’t have the breakdown of August lending for some time yet, the drivers of lending are likely to be first-time buyers and home-owners remortgaging, as has been the case for in July. The picture in July is also similar to that of April, May, and June so a continuation doesn’t seem too unreasonable.

Looking ahead, we expect more of the same, though we anticipate the pace of growth to slow somewhat, dampened by a potentially more challenging economic outlook.

Regulation and government policy

From 30 September 2017, portfolio landlords, defined as landlords with four or more buy-to-let properties, will be subject to a more specialist underwriting approach when applying for a new buy-to-let mortgage. This includes looking at the landlord’s experience in the buy-to-let market, the cashflow associated with all their existing properties and inspection of their business plan.

We do not expect this to cause a surge in activity before the change, followed by a lull for buy-to-let house purchase.

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