Housing market continues to stutter as the Bank of England (BoE) reports mortgage approvals at a 9-month low in June.

The housing market is under pressure from an increased squeeze on consumers and heightened caution over engaging in major transactions.

House prices look unlikely to rise by more than 2% over 2017, and are expected to be essentially flat over 2018. Consumer credit growth eased to a 13-month low in June, which will be welcomed by the BoE and further dilutes the case for an interest rate hike. June’s dip in inflation and ongoing muted UK GDP growth in the second quarter have already weakened the case for a near-term rate hike.

House made of money (PD)

By Howard Archer, Chief Economic Advisor to the EY ITEM Club:

Housing market activity continues to stutter as the Bank of England (BoE) reported that mortgage approvals for house purchases fell to a 9-month low in June. Specifically, mortgage approvals dipped to 64,684 in June from 65,102 in May. This means mortgage approvals were 5.8% below January’s peak level of 68,654.

Housing market activity is being pressurised by weakened consumer purchasing power and increased consumer wariness over engaging in major transactions.

Weaker housing market activity has also recently been weighing down on house prices. June data from the Halifax showed annual house price inflation at a more than four-year low of 2.6% in the three months to June, while it had been limited to a 47-month low of 2.1% on the Nationwide’s measure in May before rising to 3.1% in June.

Outlook for house prices

House prices look unlikely to rise by more than 2% over 2017, and are expected to be essentially flat over 2018.

The fundamentals for house buyers are likely to remain weak over the coming months with consumers’ purchasing power continuing to be squeezed by inflation running higher than earnings growth. Additionally, housing market activity is likely to be hampered by soft consumer confidence and limited willingness to engage in major transactions.

Potential house buyers may also be concerned by recent speculation that the BoE could be close to hiking interest rates (although this looks less likely after the June dip in inflation). While any increase in interest rates would be small, and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since mid-2007 could have a significant effect on housing market psychology.

Housing market activity and prices are also likely to be pressurised by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house price to earnings ratio reached 5.80 in December (the highest level since August 2007) and was still as high as 5.66 in June. This is well above the long-term (1983-2017) average of 4.19. Furthermore, mortgage lenders are under pressure from the BoE to tighten their lending standards.

The downside for house prices should be limited markedly by the shortage of houses for sale. High employment and very low mortgage rates are currently still supportive. The June RICS survey showed new instructions to sell fell for a 16th month running in June, sending average stock levels on to a new low.

Relief for Bank of England as consumer credit growth slowed to 13-month low in June

BoE data also showed a much-desired slowdown in consumer credit growth in June. Specifically, consumer credit growth moderated to a 13-month low of 10% in June from 10.4% in both May and April, and a peak of 10.9% last November. Nevertheless, this was the 14th successive month of double-digit year-on-year consumer credit growth.

Unsecured consumer credit actually dipped to £1.5bn in June from £1.8bn in May as a slowdown in loans and advances outweighed a slight rise in net credit card borrowing.

It may well be that heightened uncertainties over the outlook and increased concerns over personal finances are encouraging some consumers to be more cautious in their borrowing. However, the increased squeeze on consumer purchasing power has also likely increased the need for some consumers to borrow

Evidence of slowing growth in consumer borrowing will be of some relief to the BoE. The BoE sees the recent uptrend of consumer borrowing as a significant risk to the economy. The latest credit conditions survey indicated that banks are becoming more cautious in their behaviour by making less unsecured credit available to consumers and tightening lending standards.

The BoE wants banks to provide evidence that they are lending responsibly to consumers, but has stopped short of tightening borrowing controls. The BoE’s Financial Policy Committee (FPC) has reversed the cut in the banks’ countercyclical capital buffer (from 0.5% to zero) it previously announced last July. The buffer increases the capital that banks have to hold against their loan portfolio and is set to increase it further to 1% in November, providing there is no change in the economic outlook.

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