It has been largely a story of more of the same for the UK housing and mortgage markets over the last month. Activity levels continue to rise gently from the lows around the turn of the year and prices increased over the summer months – supported by a restricted supply of property on the market.
But, by any historic comparison, it remains a quiet market. Turnover remains well below “normal” levels and mortgage lending remains constrained. In fact several commentators have raised the possibility that recent developments might be a false dawn, citing the continuing lack of mortgage finance and weak economic backdrop hitting potential borrowers' confidence.
The outlook certainly remains difficult. The need to gradually unwind support to the economy, not least addressing the public debt, will limit the speed of the recovery for the economy at large and the housing market. But tentative signs of activity in funding markets offer some hope for improvement.
Tentative recovery continues for now
Market developments continued to move in line with expectations over the last month. The housing market has shown further signs of improvement, with a range of evidence suggesting that it is in far better health than around the turn of the year. House prices have risen over the course of the summer. Estate agents are now reporting a rising trend, supporting data from most of the price indices. And activity levels continue to pick up, with house purchase mortgage approvals rising for the sixth consecutive month in July to the highest level since April last year.
But we remain wary of how much further this can go. Some of the firmness in house prices has been driven by a lack of properties coming onto the market. Potential movers might have been reluctant to sell at lower prices, while there was anecdotal evidence of some choosing to rent their homes. RICS has recently reported more sellers, which could alter the balance between supply and demand.
Some commentators have warned of the possibility of a period of renewed weakness. The Ernst & Young ITEM Club predicted a modest fall in prices over the first half of next year, describing the recent bounce as unsustainable and driven by a lack of supply and cash-buyers who have a limited supply of funds. ITEM predicted that the lack of mortgage finance and a reluctance to commit to significant purchases while the outlook for employment remains fragile will weigh on the market.
We believe the difficulties in raising lending volumes and a still weak economic outlook will continue to hold back a recovery in activity. Transactions volumes remain some way below what could be considered “normal”. Despite the modest pick up recently, 2009 will still see a very low level of housing market turnover.
This was highlighted by negative net lending figure for July, showing that mortgage repayments outstripped new lending for the first time on record. Despite press comment to the contrary, it is not predominantly a sign that households are repaying more – underlying repayments are broadly steady. It is more indicative of the low levels of new lending currently taking place. Please see our recent News & Views article for a more detailed explanation. Our estimate for gross lending of £12.6 bn in August shows lending volumes remain subdued and that another negative seasonally adjusted net lending figure is possible.
The likelihood of a significant pick-up in lending remains weak, but the prospects for wholesale funding markets are improving. This could result in a gradual easing in constraints on the supply of funding over time. However, demand from consumers and a prudent approach to lending criteria are likely to mean that the market remains subdued.
Authorities' exit strategies moving into focus
Recent evidence suggests that we have probably turned the corner on the economy, even if it is liable to be a slow improvement. In appearing before the Treasury Select Committee, Mervyn King said that the third quarter is likely to see some growth in the economy, breaking a run of five consecutive quarters of contraction. However, many international commentators expect the UK recovery to lag somewhat behind other advanced economies.
And the Bank of England only expects a gradual acceleration of activity as well. Indeed, RBS CEO Stephen Hester noted there is an argument that there needs to be a slow recovery so the economy can rebalance and fix underlying problems, allowing households, businesses and the government to reduce debt. As signs of life emerge, there has been a noticeable shift in political circles to addressing the imbalances created by stimulus measures. All the major parties have acknowledged that steps will need to be taken to reduce the budget deficit and get the public finances back onto a more sustainable trajectory. Significant public spending cuts seem the most likely path.
The growing political consensus in favour of fiscal retrenchment has had positive ramifications for the cost of servicing the national debt. Moody's made clear it has no plans to downgrade the UK, and the markets remain willing to buy UK debt. This reduces pressure to take immediate action. Authorities globally will also need to look at exit strategies for the range of support in place. The tone of the recent meeting of central bankers in the US suggest that they have strategies in place, but see little need to act quickly. A gradual and measured withdrawal seems the most likely outcome.