Market commentary August 2017

UK economy

Economic growth in the first half of 2017 has been slower compared with the average rate we saw during the second half of last year. This is expected to continue over the short-term, as the squeeze on real incomes weighs on consumption.

Despite this slowdown, the jobs market has broken yet another record, as the unemployment rate reached 4.4%, the lowest rate since 1975.

This low rate of unemployment would have typically led to higher wage growth in the past, but that has yet to materialise this time around as wage growth remains sluggish at 2.1%.

With inflation running at 2.6% in July, workers continue to see their spending power being slowly eroded. This is likely to be the case until at least early next year as inflation is forecast to be at or around 2.75% over the second half of 2017 according to the Bank of England Inflation Report.

This means consumers now face a hard choice between either reducing their spending somewhat, or saving less.

Early indicators point to them doing a bit of both, as new car registrations remain lower than the same period a year ago, retail sales growth has halved since the start of the year, and the household saving ratio reached the lowest rate on record in the first three months of this year.

The Bank of England Monetary Policy Committee (MPC) voted to keep the Base rate at 0.25%, despite expecting inflation to rise above its current rate. The reason for this is that the committee has chosen to look through this overshoot, as it puts it down to the impact of “referendum-related falls in sterling.”

Housing and mortgage markets

The economy and the housing market are closely linked, so a slowdown in the economy often leads to a slowdown in the housing market.

We haven’t seen much evidence of this just yet, as the housing market has been steady, with approvals and transactions both in line with their 12 months averages. But if economic conditions soften further, then a slowdown in activity would be very likely.

Property transactions have averaged just over 100,000 a month since the turn of the year, and look set to be around this mark over the next few months, as house purchase approvals – a leading indicator of activity – have been flat recently.

Earlier this month, the MPC updated its expectation for approvals, revising it to an average of 66,000 a month for the rest of the year, down from 71,000 back in May. This updated figure means the Bank now expects to see current approval levels to continue until the end of the year, in line with our expectations.

Chart 1 House purchase approvals (seasonally adjusted)

Source: Bank of England

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Since the stamp duty change back in April 2016, the only part of the market that has been consistently growing has been first-time buyers. The Bank’s Agents’ survey suggests that this is, in part, down to strong first-time buyer demand for new-build properties using the Help to Buy equity loan scheme. Other government schemes aimed predominantly at helping first-time buyers, such as the Help to Buy ISA, are no doubt also helping to boost their numbers.

Other parts of the market are having less luck.

Home movers have benefitted much less from government help and have been left to largely fend for themselves. This, along with continuing shortage of homes on the market for sale, means would-be movers are struggling to move, and therefore not putting their own homes on the market.

Respondents to the Royal Institution of Chartered Surveyors survey expect much of the same going forward. The report noted that there continues to be a fall in the number of properties coming onto the market, as July marked 17 consecutive months where this measure was falling.

Even as the rate of house price growth slows, this supply/demand imbalance will continue to underpin house prices.

It is also likely that given the weakness in income growth recently, and the uncertainty around future income levels, some households are delaying their move. This is not uncommon, as the majority of home owners have some discretion over when they move.

Buy-to-let has been more volatile given the tax changes last year. Buy-to-let house purchase fell sharply in April 2016 but has remained flat since then, albeit at a much lower level.

All in all, the stock of mortgage debt has grown at a stable rate averaging between 2-3% on an annual basis over the last two years.

Remortgage activity also shows a mixed picture. Remortgaging among homeowners is still growing, as lender competition for new business is strong and mortgage rates are competitive.

Up until recently, it was also the case that buy-to-let remortgage activity was growing, but over the last three months that trend has reversed. Looking at the latest 12 months compared to the 12 months preceding that, fewer loans are being made. Tax changes that came into effect from April 2017 are likely to be one of a number of factors putting off some landlords from remortgaging.

Despite weakness in parts of the market, aggregate lending was up on a year ago and estimated to be £23.0 billion in July. Accounting for seasonal factors, this figure would be £21.9 billion, which is above the £20.5 billion average seen over the last 12 months.

First-time buyers and remortgage activity on the part of homeowners have been the drivers for lending for some time now. While we see this continuing over the short term, we anticipate the pace of growth to slow somewhat over the second half of this year, dampened by a potentially more challenging economic outlook.

Monetary policy

At its latest meeting, the Bank’s MPC minutes showed the committee voted unanimously to close the drawdown period for the Term Funding Scheme on 28 February 2018, as planned when the scheme was originally introduced back in August 2016.

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