26 September 2016
It is now just over three months since one of the most momentous days in British politics and arguably one of the most significant days in the UK’s modern history. But reflecting on the immediate period after the referendum and more recent times, including Teresa May’s announcement to commence the formal Brexit negotiation process by the end of March 2017, what next for the UK Housing and Mortgage Markets?
As with all periods of economic and political uncertainty, investor confidence was impacted, with both the value of the pound and equity prices falling, particularly for banks and house builders. In a period of uncertainty, most market observers and analysts look for ‘indicators’ that demonstrate the direction and next steps for the economy and the housing market, but we are in uncharted territory.
An emerging picture
The challenge is that post-referendum, the overall picture is not much clearer. As most economic and market indicators are backward looking, it is hard to build a future trend. However, a number of recently published indicators have been arguably more positive, or at least less negative than had been initially expected.
In the immediate period following the vote most market commentators have adjusted downwards their economic growth forecasts for 2016, and looking further ahead, the Bank of England and the Monetary Policy Committee (MPC) saw the potential of more significant headwinds, which were likely to impact household demand and therefore create a drag on economic growth.
Given this background, in early August the MPC announced a package of measures with the aim of stimulating the economy into 2017. The most visible change was the 0.25% reduction to base rate, the first change in more than 7 years. The second measure was to announce a new £100bn term funding scheme, which had two main aims.
Firstly to help lenders lower mortgage rates available to customers and cushion some of the effects of the base rate reduction, as banks and building societies can borrow at advantageous rates for the next 4 years. The second aim is to support lenders’ overall balance sheet growth. And of course there is the Chancellor’s autumn statement, which is eagerly anticipated.
At the same time, a picture of the housing market is now beginning to emerge, albeit a little early to be crystal clear on direction, given the backward looking nature of most indicators.
The Council of Mortgage Lenders (CML) most recent lending numbers for July showed a mixed picture with lending for house purchase down 13% month on month and 12% year on year. By contrast remortgage borrowing was up 7% on June and 20% compared to a year ago. The CML noted it is hard to determine whether these figures reflect a first uncertain reaction to the referendum vote, or are a sign of a market which was already cooling.
More recent, forward looking indicators have suggested that we may now be in a ‘bounce’ period following the initial shock. With particular relevance to housing, in July, RICS had predicted a sharp downturn in house sales as buyer enquiries had dropped off post-Brexit.
However, for August RICS’s monthly house price index had climbed to +12 from July’s three year low of +5, indicating that the housing market and consumer demand was probably more robust. In August the Recruitment and Employment Confederation recorded increased hiring activity for permanent staff, whilst builders including Barratts and Redrow posted stronger than anticipated results.
Set against these emerging trends, several analysts have reissued their growth forecasts for the UK economy and whilst Morgan Stanley is now forecasting flat growth, it is up from the 0.4% contraction forecasted in the prior month. Credit Suisse and Goldman Sachs have also made upward revisions, indicating a less pessimistic outlook and Bank of America Merrill Lynch anticipated that Britain may now avoid recession.
Turning to the housing market the ONS showed average house price growth in July at 8.3%, slowing from 9.7% in June. RICS, for the first time since April, now expect prices to rise in the final quarter of 2016 and forecast a 1.1% increase in 2017. But on balance, the House Purchase market is likely to have a less favourable backdrop post-referendum and moving in to 2017. This is based on a renewed squeeze on real household incomes, principally due to an increase in inflation, with the CPI in August at 0.6% and the prospect of a further increase driven by the pound’s 31-year low. As a result the market may see some volatility in the medium term, impacting different regions and different property segments.
What does this mean for mortgage lending?
For Mortgage Lenders, the impact of inflation and a squeeze on household incomes is likely to result in the continued growth in remortgage activity and is building on a 12-month trend that has seen a growth in customers looking to switch to a better deal in order to offset other impacts on their household budget.
The most recent base rate reduction adds a further emotional driver for existing mortgage customers to seek a better rate, as around half of all lenders are yet to announce a reduction in their standard variable rate and there are around 2.2 million families thinking about a rate reduction. Even the 3.5million families on fixed rates will be keen to manage their outgoings and the impact of inflation as they emerge into an uncertain economy and where mortgage rates remain at an all time low.
With circa £130 bn of mortgages coming to the end of their initial rate in 2017, a great remortgage proposition is even more relevant for consumers and lenders alike. With established and streamlined processes, such as a reduced title check service, lenders have the option to extend their remortgage product ranges with the benefit of reduced costs. For many lenders it may be the opportunity that offsets any softening in demand from the house purchase market.
Non Executive Director
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