The latest survey of the property market from HBOS shows that prices across the country as a whole jumped by, on average, 1.8 per cent in the final month of last year. This estimate is not dissimilar from the figure provided by the Nationwide Building Society and confirms that the market remains generally quite buoyant. The report also highlights a continuing regional divergence in house price inflation. Prices rose by 8.9 per cent in the North during the last quarter of 2003 while only edging up by 1.2 per cent in the South East.
Although the key fundamentals, mortgage rates and employment, that drive the property market remain supportive one particular area of concern to us is the diminishing support being provided by first time buyers (FTB’s). This is something that has been picked up by both the Council of Mortgage Lenders and HBOS. Indeed, the latter has pointed out that the number of FTB’s entering the housing market has fallen to its lowest level since records began in 1974. We believe that this will increasingly begin to act as a drag on property prices over the course of 2004.
The Purchasing Managers Index for the service sector, which excludes both retail and government, slipped back slightly in December but remains at a level consistent with healthy growth in output. The increase in new business was, once again, a particularly strong element in the survey but, interestingly, the results also point to an improvement in the employment picture.
The expectations component of the series also continued to be firm and now stands at its highest level since September 1999. One area of concern according to the results of the survey relates to profit margins. The index measuring average prices charged remains only just in positive territory with the ‘overwhelming majority of companies unable to raise their prices’. On the other hand, the rate of increase in input costs ‘remained robust’.
Meanwhile, the CBI Distributive Trades survey reported a sharp pick up in sales in December. The reading of +33 was, with the exception of October, the best figure since April 2002. However, a note of caution is warranted despite the strong headline number; the improvement in ‘sales for the time of the year’ between November and December was rather more modest and currently stands at just +1. This is well below where this series stood through much of last year.
The expectations series suggests that retailers are still quite concerned about the outlook with projected sales volumes for January down on the December level and ‘sales for the time of year’ moving back into negative territory.
Notwithstanding the positive trading statement released by Next this morning, it still appears likely that the overall assessment of the Christmas spend will be a little downbeat with steady rather than spectacular volume gains. Next week will see the release of a clutch of statements from the major high street stores and provide greater clarity on the behaviour of the consumer in the run up to the festive season.
Today’s three reports will offer support to those members of the MPC who believe that a further tightening in monetary policy is warranted. At the very least, a split vote is likely at this week’s meeting with Andrew Large, arguably, not being quite so isolated as in December; on that occasion, he was the only member to vote for a rate hike. We still suspect that the authorities will wait to view the new Inflation Report at the February meeting before reaching a decision to lift base rates to four per cent. This will also provide the MPC with the opportunity to assess whether the strong run of data towards the end of 2003 is being sustained into the new year.
