The Bank of England’s August inflation report revealed that the Bank is confident of further recovery in the volume of mortgage transactions for the remainder of this year but warned over the next three years, changes to landlord tax relief and the inheritance tax threshold could weigh on transaction growth by 2%.
The report said: “It is unclear how much further, and how quickly, mortgage approvals will rise.
“The rise in approvals in Q2 was concentrated in April and, although the near-term outlook for approvals is stronger than at the time of the May Report — with 68,000 projected on average per month in Q3 — the changes announced in the Summer Budget 2015 are likely to weigh on activity in the medium term.
“The announced reduction in mortgage interest tax relief for rental properties may reduce demand in the buy-to-let sector and associated mortgage lending.
“And the announced increase in the inheritance tax allowance for homeowners is likely to reduce the incentive for older homeowners to trade down, weighing on secondary market housing supply and the number of housing market transactions.”
Overall, the measures announced in the Budget are projected to weigh on mortgage approvals by around 2% in three years’ time.
The report said the current weakness in housing transactions “in part seems to reflect relatively few existing homeowners putting their homes up for sale” and said that for some homeowners this may be because the terms on a new mortgage would be more expensive than those on their existing mortgage.
It said: “This would be especially true for those wanting to buy a more expensive property, because mortgages with a higher loan-to-value ratio have higher rates than those with a lower LTV.
“Although the spread between these rates has narrowed somewhat over the past year, it remains wider than prior to the crisis, and may be restricting the ability of transaction chains to form.”
The monetary policy committee noted that although supply remains weak, demand for house purchases may have begun to pick up.
The new buyer enquiries balance from the Royal Institution of Chartered Surveyors survey has become more positive during 2015.
And consistent with that reported rise in demand, mortgage approvals for house purchase increased in Q2 to 66,000 per month on average - slightly stronger than expected at the time of the May inflation report, although still well below expectations of a year ago.
The August report also revealed that the monetary policy committee anticipates that house prices are likely to continue rising - by just over 0.5% a month in Q4 2015 and in the first quarter next year.
The report said: “The balance between housing supply and demand may be putting upward pressure on house prices.
“In Q2, the average monthly rise in the Halifax and Nationwide house price indices was 0.75%, a little stronger than expected at the time of the May Report. Leading indicators suggest that house prices will continue to rise at that pace in Q3.”
