The second estimate of GDP confirmed that growth slowed to 0.5% in Q3. But the labour market is still a source of good news, and business surveys imply that Q4 got off to a good start.
Sellers were again in short supply, but at the same time, growth in buyer interest has also moderated.
More subdued demand growth may largely reflect a lack of choice for buyers. And the stock of unsold homes hit another low last month.
Mortgage advances for house purchase recovered some of last month’s dip in activity, although that dip fed through to lower transactions volumes in October. And while buy-to-let continued its upward progression, the planned stamp duty hike, once in place, should dampen demand.
The Halifax index reported an almost 10% gain in house prices in the year to October. But with most measures of house prices pointing to a growth rate of between 4% and 7% y/y, it is a clear outlier.
There has been little change in housing market conditions over the last month, as the shortage of homes for sale persisted. But it wasn’t all bad news, as the economic backdrop strengthened a little, and mortgage approvals recovered after a weak September. Buy-to-let continued to race ahead, although the stamp duty hike should dampen activity by next year.
The Economic Backdrop
The second estimate of Q3 GDP, released this month, confirmed that growth did indeed slow to 0.5% during last quarter. That said, on the plus side, the CIPS/Markit composite PMI picked up during the month, from 53.3 in September to 55.4 in October. This implies that activity has strengthened a little in the early stages of the fourth quarter.
Furthermore, there was good news from the labour market. Employment picked up by 177,000 in the three months to September to reach 31.2 million, taking the employment rate among the over 16s from 59.9% to 60.0%. This helped to push unemployment down by 0.1 percentage points to 5.3% – its lowest level since the financial crisis. Admittedly, September’s figure for wage growth slowed to 2.1% y/y, down from 3.1% in August. But with CPI inflation at just below zero, real incomes are growing at a healthy pace.
However, continued fears about the global economy, as well as events in Paris, meant that consumer confidence dipped for the third month in a row in November. (See Chart 3.) But this fall was only marginal, and encouragingly, confidence in making a major purchase ticked up a little, suggesting that the index may be stabilising after falling in the previous two months.
While Bank Rate was held constant at 0.5%, effective mortgage rates on new loans fell by five basis points to 2.52% in October. This has been driven by markets pushing out their expectations for the timing of the first rate rise, which has led to a renewed fall in the cost of fixed rate loans over the last few months.
Housing Market Data and the Home Buying Process
The imbalance between active supply and demand persisted during the month, as a rising number of new buyers and falling number of sellers drove unsold stock per surveyor to a record low. And the picture for house prices was again mixed, with the number of indices recording accelerating and slowing price growth evenly split. That said, October’s mortgage approvals numbers did bring some positive news, reversing part of September’s surprise dip. And while HMRC recorded a small drop in transactions for October, this was probably down to a lagged effect from last month’s fall in mortgage approvals.
Market Conditions and Search Activity
There was little good news in October’s RICS survey. Hopes of an improvement in the new sales instructions balance were dashed as the number of homes coming onto the market fell again during October. Indeed, the survey’s new instructions balance worsened to minus 9.8%, from minus 5.6% in the previous month.
However, demand growth also appeared to soften a touch, with the new buyer enquires balance falling from 17.8% to 12.2% during the month. This gentle cooling of demand growth seems to be broadly consistent with the recent moves in mortgage interest rates – which are no longer falling as quickly as they were at the start of the year.
The shortage of homes for sale, which worsened during the month, is not confined to London. Indeed, while the stock of unsold homes per surveyor in the capital is 42% below its long term average, this figure is even worse in 5 of the 9 other regions. And at the extreme, the stock of homes for sale in Yorkshire and Humber is now less than half of past norms. On the other hand, the shortage homes on the market appears to be less acute in both Wales and the North East.
NHBC and DCLG’s measures of housing starts gave off mixed messages for Q3. On the one hand, DCLG’s measure picked up marginally during the quarter, making up a little of Q2’s fall. But, NHBC’s measure fell quite sharply – by 12% q/q and a more modest 2% y/y. That said, this has brought both measures broadly back in line, at around 35,000 starts per quarter.
Agreed Sales, Mortgage Approvals and Transactions
After dipping last month, mortgage advances for house purchase recovered a little in October, rising by 0.9% to 69,630 loans. And while this was still a little below the 70,748 loans approved in August, house purchase approvals are up by 17.2% y/y – the strongest annual gain seen in 19 months. On the other hand, remortgaging fell by 3.3% m/m to 39,629 loan approvals – a tentative sign that the recent surge in remortgaging is starting to lose steam.
The third quarter’s data for buy-to-let showed a brisk rise in house purchase lending, with approvals volumes growing at 27.4% y/y. But both the volume and share of BTL lending are still below pre-crisis levels. Furthermore, the hike in stamp duty on additional homes might cool demand a little next year – an effect that may be amplified if buyers think the sector is vulnerable to future tax rises too.
Both the RICS survey’s measure of sales per surveyor and HMRC transactions data were essentially unchanged in October. That said, the annual growth figures told very different stories – RICS’ figure is down by 9.3% over the last year, while HMRC’s figure is up 6.2%. But as the RICS measure can be affected by changes in surveyor numbers, we are inclined to put more weight on the HMRC data.
What’s more, the RICS sales expectations balance rose to 30.8% during the month, up from 26% in September. Although this measure tends to overestimate future sales, October’s reading is above the long term average of 17.7% – suggesting a degree of optimism among surveyors.
House Prices
Growth in asking prices picked up a little in November to 6.2%, up from 5.6% in the previous month. Over the past year, Rightmove’s index has grown at broadly the same pace as the other house price indices. That suggests that, despite excess demand, sellers are not able to boost asking prices aggressively.
October’s data also showed that the divergence between the Halifax and Nationwide house price indices persisted, with the Halifax growing at 9.7% y/y, while the Nationwide recorded a more subdued 3.7%. With most of the other house price indices pointing to growth of between 4% and 7% y/y, we suspect that the 5.6% recorded by the Land Registry in October may be most representative of current price pressures.
On a regional basis, Land Registry data revealed that London retained the top spot, with house prices growing at a brisk 10.6% y/y in October – up from 8.4% last month. Yorkshire and Humber was the worst performing region, growing at 1.4% y/y. Interestingly, the North East saw a rapid turnaround in annual growth, rising from minus 1.3% to plus 2.9%, resulting in the gap between the slowest and fastest regions narrowing.
And looking ahead, surveyors’ price expectations, having strengthened to the middle of the year, now seem to be moderating. This may reflect the slowdown in buyer demand growth that they have been reporting.
