The Bulletin has been designed to present AMI members with the current economic highlights whilst providing a view on where these key indicators may move in the future. It also focuses specifically on the UK housing and mortgage markets whilst drilling down into mortgage information on markets such as buy-to-let and equity release, plus figures on mortgage delinquency.
Key highlights of the Quarterly Economic Bulletin for Quarter 1 2007:
Inflation
- Consumer Price Inflation has hit its highest level since the Bank of England took charge of monetary policy and is likely to head higher.
- The Governor of the Bank of England, Mervyn King, narrowly avoids an explanatory letter to the Chancellor, for now.
- Energy prices, higher wage demands, stronger than expected retail sales and rapid house price growth are all influencing the Monetary Policy Committee (MPC).
- The MPC has raised base rates to its highest level since the Summer of 2001.
- The financial markets expect further rate rises to come, even after February’s decision to hold.
- Falling energy prices should relieve the pressure on interest rates, but not quite yet.
- Inflation expectations need to be tamed first.
- The strength of house prices and mortgage borrowing has given the MPC cause for concern.
- There is already early evidence that the market may be cooling in response to further rate hikes.
- Further rate rises do risk choking the market.
“We see a number of economic challenges on the horizon. For example, slower economic growth in 2007, pressured by higher than expected interest rates, suggests that unemployment is likely to rise further in 2007. Higher unemployment and higher interest rates are likely to put downward pressure on consumer borrowing this year and increase savings, so a major retail resurgence seems unlikely. As energy prices fall out of the base, inflationary pressure will reduce, but the question is the extent to which core inflation responds to interest rates, and whether consumers’ expectations for inflation can be re-anchored at a lower level. Wage settlements will be a key factor in achieving this.
“In terms of house prices, figures from the Department of Communities and Local Government (DCLG) show there was a marked resurgence in London and the South East in 2006. Property transaction volumes were also relatively strong during the year compared to historic averages. RICS reports available supply on agents’ books is edging lower. These supply constraints have arguably been the principal driver of house prices of late and will sustain housing inflation in the short term. The November and January interest rate rises and the prospect of more to come are likely to suppress demand to buy homes. Whether higher rates will also convince sellers price gains are over, and that the time to sell has come, remains to be seen.
“In 2006 the appetite for unsecured debt on credit cards and loans slowed dramatically. Mortgages on the other hand roared ahead at annual growth rates consistently above 10%. While approvals for new purchases grew fastest in the early part of the year, towards the end of the year, remortgaging approvals grew more quickly. We are expecting mortgage volumes to slow. In 2004, the increase in interest rates caused the levelling off of house prices in late 2004 and early 2005. There was also a sharp decline in mortgage approvals from March 2004 onwards with the knock-on effect on advances. The longer rates stay high (and the higher they go) the greater the slowdown we should expect.”
Economic data covered in the Bulletin includes:
- Consumer price inflation.
- Interest rates.
- House prices.
- GDP.
- Unemployment.
- Earnings growth.
- UK house prices.
- Property transactions.
- Mortgage/income ratio.
- Proportion of income spent on interest.
- Housing market confidence.
- Housing market forecasts.
- Mortgage net advances.
- Mortgage approvals.
- Nominal sport curve.
- Buy-to-let – values paid by landlords for new purchases.
- Buy-to-let – rents and yields.
- Mortgage delinquency.
The next Bulletin will cover Quarter 2 2007.
