Paul Samter, economist for the CML, commented: "As Gordon Brown takes over the premiership with a desire to see a “home-owning, asset-owning, wealth-owning democracy”, it appears that housing will be near the top of the political agenda.
"Upon taking over the Labour party leadership, Mr Brown declared that “in 2007, housing will be a priority” and pledged to do more to provide greater levels of home ownership and end the situation where young people cannot afford their own homes. He also pledged to increase the number of homes built each year up to 200,000. More specific to the mortgage industry, he has called on lenders to “show sensitivity” to the group who have got themselves into “real difficulty” with debt.
2However, despite the change in emphasis, there is yet to be much in the way of clear new policy, although housing minister Yvette Cooper will now attend Cabinet meetings “when necessary”. The Government has been pushing the need to build more homes for some time. The target of 200,000 new homes per year was part of its response to the Barker Review of housing supply, but is in fact lower than official projections for how quickly the number of households in England is set to increase over the next 20 years (more than 220,000 per annum).
"The initial response to the demand for more homes was a push by planning authorities to encourage builders to build more homes on less land. Consequently, the share of new homes built as flats has risen from around 20% at the turn of the millennium to around 50% at present.
"This has led to concerns that, not only are too few new homes being built, but also that the mix does not adequately reflect the need for family homes. However, if there were to be a shift to building a greater share of family sized homes, due to a change in Government policy, housebuilders have raised concern that lower build densities would mean fewer homes built unless additional land becomes available. There are also questions over whether there is a pool of labour available to meet a rise in construction.
"Despite the long-term pressures from demand, the immediate prospects appear to be for housing market activity to ease. Bank of England Deputy Governor Sir John Gieve added weight to the view that rates may have further to rise and may stay higher for longer. The minutes of the June Monetary Policy Committee meeting revealed that the decision to keep rates unchanged was only passed by the narrowest of margins, with four of the nine members voting for an increase.
"Sir John explained his vote for an rise as “partly because I was not convinced that current rates would be sufficient to bring credit growth and nominal demand back to their long term sustainable path”, and questioned whether against the current backdrop of lending growth “we have done enough”. Governor Mervyn King, who also voted for a rate rise in June, noted concerns that “when volatility of energy prices has settled down we may see inflation above target” and believes “it’s better to take action sooner rather than later”. The markets are currently anticipating a ¼% rise in July or August and one further increase after that with rates peaking at 6% and remaining at that level for most of next year.
"Despite the prospect of rates continuing to rise, the latest round of data continue to show a strong market. House prices look to have moved higher at a fairly steady pace according to most of the major indices with tentative signs of a modest slowing in recent months yet to solidify. Estate agents continue to report little change in demand from new buyers. And, while house purchase mortgage approvals have fallen back a little from the peaks of late last year, they still remain reasonably strong. We would anticipate some slowdown in activity as higher market rates feed further into higher mortgage rates.
"In a development that may be muddying the short-term waters, there looks to have been a surge in the number of properties coming onto the market in May, with both RICS and Rightmove reporting a rush by sellers to beat the proposed Home Information Packs (HIPs). However, following the postponement of the introduction of HIPs, and the fact that they will initially only apply to homes with four or more bedrooms, any impact is likely to dissipate over the coming months.
"Looking ahead, remortgaging is likely to increase in importance this year and next. The number of remortgage approvals was up 6% in the first five months of the year compared to the same part of 2006. The CML estimates that over 2 million fixed rate deals will mature over this year and next. This has the potential to make a sizeable impact on more highly leveraged borrowers who refinance, or go onto a variable rate, in a higher interest rate environment than when they took out their initial deals. The Bank reports that the average fixed rate for outstanding mortgage balances was 5.13% in May, while the average fixed rate on new loans was 5.44%. In many cases there could be a squeeze on discretionary incomes, that is income left over after paying household bills, and slower household spending as a result. Consequently, the medium term prospects for the economy might turn out to be weaker than the Bank of England is currently projecting."
