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Is the Heat Off the UK Housing Market?

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Council of Mortgage Lenders  BoE''s Monetary Policy Committee 

Is the Heat Off the UK Housing Market?

By - Tuesday 24 June 2014

According to the British Bankers' Association, mortgage approvals in May were down for the fourth consecutive month, 3.5% lower overall than in the same month of 2013. The BBA suggested that the "heat is coming out of the housing market" despite 100,360 homes being sold in May, up from 95,600 in April as data from HM Revenue and Customs (HMRC) shows.

Richard Woolhouse, chief economist at the BBA has said that new affordability tests for home loan applicants under the Mortgage Market Review (MMR) had taken the heat out of the market.

"These are the first mortgage approval figures we have seen since the introduction of the MMR, so it is significant they have fallen for the fourth month in a row," he said. "This is being driven by a drop in re-mortgaging and fewer people borrowing against the value of their homes."

Mortgage Data is "Statistical Fog"

Last week, the Council of Mortgage Lenders (CML) described current mortgage data as a "statistical fog". Bob Pannell, chief economist for the CML said: "Market indicators point to a slowdown in activity levels, in part associated with new mortgage rules but it is unclear how lasting this will be. Implementation of the new regulatory regime is likely to have disrupted the normal patterns of activity, creating statistical fog around the published figures."

"As this lifts over the coming months, a clearer picture as to any lasting impact of the MMR rules on lending activity should emerge," he added.

New MMR regulations mean lenders have to grill mortgage applicants more thoroughly about their spending habits, to make sure their repayments will be affordable, both now and when interest rates eventually increase.

House Prices Reach New Peak

Average house prices in the UK have hit a new peak of £260,000 after increasing 9.9% over 2013, according to figures released by the Office for National Statistics (ONS) last week.

Property market experts say the MMR rules have already dampened demand in the housing markets with some estate agents reporting that lenders are initially applying the rules in a 'knee-jerk' manner and following them to the letter, leading to house sales falling through.

The Royal Institute of Chartered Surveyors (RICS) also commented recently that the sharp rises in some house prices and the stricter mortgage lending rules are starting to take some of the strongest heat out of the property market.

Loss of Momentum in Housing Market May Not last

Howard Archer, chief European and UK economist at research firm IHS Global said: "It remains to be seen whether this loss of momentum in housing market activity is lasting and whether it significantly dilutes the recent marked upward pressure on house prices."

"At the moment, house prices still look more likely than not to see solid increases over the coming month although there will probably be some easing back from recent very strong increases."

Concerns over the strength of the market has fuelled expectation that the Bank of England (BoE) will need to take further steps to cool the housing boom such as issuing lending restrictions or ultimately raising rock-bottom interest rates.

Minutes published last week from the June 4-5 meeting of the BoE's Monetary Policy Committee (MPC) showed concerns that markets had underestimated the chances that stronger-than-expected growth in the second half of 2014 will eat up spare capacity in the economy.

'In that context, the relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising,' the MPC minutes said.

Is Now the Time for an Interest Rate Increase?

At the meeting, MPC members voted unanimously to keep interest rates on hold at a record low of 0.5% this month although it is expected that this view will be tested in coming months, particularly in view of the imminent changes in the composition of the committee.

MPC member Martin Weale has long since championed a tighter monetary policy and in a speech he gave in Belfast last week he said: "Even if there is more spare capacity than the employment and labour force data suggest, a slightly less stimulatory monetary policy will still be making a very substantial contribution to ensuring that spare capacity is absorbed."

"Moreover, other things being equal, the policy of raising the bank rate gradually does imply that the first rise needs to come sooner than would otherwise be the case."

Economists have expressed concerns that if interest rate adjustments are delayed any longer, when they are inevitably increased; the adjustments would have to be more abrupt, causing shocks within the housing market.


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