Housing market activity has been unseasonally strong during the normally relatively quiet months of the late Autumn and Winter. But there are early indications that the underlying market activity may now be stabilising.
According to Halifax and Nationwide, average UK house prices rose by about 2 per cent in the three months to February. In both cases, this three-month growth rate is notably stronger than the lows of around zero experienced around the middle of last year. In the case of the Halifax, the three-month growth rate has moderated from just under 3 per cent late last year, while for Nationwide there has been a steady increase.
Month-to-month movements in the FT House Price Index, which captures cash sales as well as properties purchased with a mortgage, were consistently firmer in the six months to January 2006 compared with the previous five months, although the annual rate of increase has continued to moderate to only 1.8 per cent. And the ODPM index shows essentially unchanged prices throughout the second half of 2005.
Surveyors and estate agents report a continuing strengthening in demand relative to supply. According to the Royal Institute of Chartered Surveyors (RICS) buyer enquiries continue to increase while the stock of property on surveyors’ books has fallen over the past three months to the lowest level for 15 months. This suggests some upward pressure on prices. The National Association of Estate Agents (NAEA) reports a similar picture. Hometrack data shows that the average time to sell a property fell in February after stabilising over the previous six months and that the sale price achieved as a per cent of the asking price has been rising since November. The strongest rises are being seen in the southern parts of the country where the imbalance between demand and supply is greatest.
Some of the rise in demand since the middle of last year reflects increased buy-to-let activity. CML data shows a rise of nearly 70,000 in the number of buy-to-let mortgages outstanding between the middle and end of the year. This followed a period of relatively weak activity over the previous 12 months. It is in line with Bank of England figures, which show a clear pick up over this period in the number of loans approved for house purchase by other specialist lenders. And it ties in with the latest RICS survey, which reports a substantial strengthening in new landlord instructions between last April and January this year in the face of strong tenant demand.
Mortgage market developments
The upward trend in the total number of mortgage loans approved, evident since the beginning of last year, may be losing momentum. Total approvals were essentially unchanged in January, close to December’s 306,000 figure which was the highest since July 2004. The value of loans approved was fractionally lower, but still close to December’s record high level.
The number of loans approved for house purchase was flat in January at 122,000. The number of approvals for remortgaging peaked in September and has since fallen. The weakening in remortgage activity is not a surprise given the profile of fixed-term lending two and three years ago and we expect it to pick up again in the Spring. The number of approvals for other loans – mainly further advances – rose in January and now looks to have been on a modest upward trend since Summer.
Data from the recently launched Regulated Mortgage Survey (RMS), the successor to the Survey of Mortgage Lenders (SML), shows that first-time buyers currently account for 38 per cent of all loans for house purchase, and that this percentage has been stable since last Spring. Also, fixed-term lending now accounts for nearly 75 per cent of all loans compared with around 55 per cent last Spring, spurred by the relative attractiveness of fixed-term rates.
CML data shows a rise in gross lending for buy-to-let purposes to £14.6 billion in the second half of last year. This was equivalent to 9 per cent of all gross mortgage lending – the highest proportion yet recorded. At the end of last year there were 701,900 buy-to-let mortgages outstanding, equivalent to 6 per cent of all mortgages. Borrowing for buy-to-let accounted for 7.6 per cent of all mortgage debt outstanding.
Outlook
The MPC is quite upbeat on the outlook for the economy. On the basis of its central projection, any spare capacity is likely to be eliminated by the middle of next year. Recent indicators have been ambiguous, but services sector activity has been strong.
The upward trend in housing market activity evident over the past year might now be drawing to an end. If it is, it would be in line with our forecast of some moderation during the course of this year and may dampen the recent rates of growth in house prices. Our forecast of 2 per cent growth in the year to the fourth quarter is still realistic as long as this happens.
Affordability pressures remain intense for first-time buyers and we expect the attractiveness of moving to be adversely affected by high transactions costs, notably stamp duty, the rising costs of home ownership in the form of Council Tax and utility bills and the prospect of only modest house price growth. We doubt that the recent strength of buy-to-let will be maintained. But we do expect remortgaging to be stronger from the Spring as large numbers of fixed-rate deals mature.
Financial markets seem to accept the Bank of England’s prognosis for the economy. They continue to discount an essentially unchanged repo rate over the coming year, but the bias has shifted from a possible fall towards a possible rise. Two and three-year rates have also firmed a little. This suggests little scope for a cut in rates unless activity is somewhat weaker than projected.
