And it is going to continue. The Monetary Policy Committee expects the economy to grow by 3.5 per cent this year — the fastest annual rate of growth since 2003 — and for it to continue to grow at a fair pace for longer than it previously thought. That is a big relief.
More good news is that a sharp fall in unemployment has brought the number of jobless to the lowest rate since 2008, before the banking crisis. More than 800,000 jobs have been added in the past year, and what is more encouraging is that the number of hours worked has risen even more sharply.
Unemployment is expected to drop below 6 per cent by the end of the year and to around 5.5 per cent by the end of the forecast period in 2016. As governor Mark Carney has said: “A marked reduction relative to [our] expectations in May.”
For the housing market, this is great news on the face of it, especially as inflation looks set to remain within the target range. The labour market is critical to the performance of the housing market, and so far that has helped the market to stay in reasonable shape.
Yes, house prices fell sharply and transactions hit historic lows during the recession, but the resilience of employment, despite expectations, meant arrears have remained remarkably low, which prevented an even deeper downturn.
The latest data from the Council of Mortgage Lenders shows arrears at their lowest since 2008 and repossessions at their lowest since 2006.
Historically low interest rates have been the main reason for low arrears and possessions, of course. But taking into account the other outlays that families have had to deal with makes the result even more impressive.
The cost of essentials in general has risen faster than the general rate of inflation, so the drag on household incomes is even bigger than it appears from the main consumer price index.
General inflation is within its target range — and expected to remain so for the rest of the Bank’s forecast period — but there is no guarantee the cost of essentials will not rise faster and continue to hit households very hard in the pocket. Indeed, rail fares are rising by 3.5 per cent (RPI at 2.5 per cent, plus an extra percentage point) yet the rate of general consumer price inflation is just 1.6 per cent.
For commuters, in particular, that will be a big increase in outgoings. That might be all right were wages rising in line with inflation, but they are not — and have not done so for more than five years.
In the three months to June, basic pay increased by just 0.6 per cent — that is the weakest growth since comparable data began in 2001. To put that in its rather gloomy context, that is even lower than during the recession.
For an average family, both working full time with two children in full-time childcare, mortgage payments at current rates take up about 15 per cent of their post-tax income (assuming the average house price and an 85 per cent loan).
But once one takes into account the cost of spending on essentials such as childcare, transport, food and utilities, payments take up 32 per cent of available household income.
That would seem to compare favourably with 2008, when the equivalent percentage was 45 per cent — but there is a crucial difference. Back then, interest rates were running at about 6 per cent and the average house price was higher, making the loan size about £7,500 more.
With the same 6 per cent mortgage rate today — even with the lower average house price — mortgage payments would take up a similar proportion (46 per cent) of the family’s available income.
But in London, where house prices have increased most rapidly, the situation is much more difficult. Already, mortgage payments are taking up the same proportion of post-tax income as in 2008, but when essential spending is taken into account, affordability is even more difficult than it was at the height of the pre-crash market, with payments taking up almost two-thirds of income compared with about half back then.
Looking ahead, the double edge of the message for the housing market from the Bank of England’s report is that it does not anticipate wage growth picking up any time soon. While employment growth has been rapid, it has not been accompanied by higher wages as would normally have been expected.
The Bank of England has halved its estimate of wage growth from 2.5 per cent to 1.25 per cent this year. Given that the Monetary Policy Committee expects inflation to remain at, or slightly below, its 2 per cent target, that suggests a further contraction in real wage growth, making things yet more sticky for home-owners.
The upside is that interest rates are less likely to rise as soon as some were predicting just a few weeks ago, so existing mortgages should remain relatively affordable outside of London and the South-East.
When rates do rise, the Bank is clear it should be a cautious affair as the risks of shattering the fragile and indebted household sector is large. So is uncertainty about the sensitivity of the rest of the economy to interest-rate changes. Small, slow increases will help mitigate the risk that higher borrowing costs trigger a sharp slowdown in domestic demand — and an increase in possessions.
The MPC’s expectations for gradual and limited rate increases are shared broadly by markets. The markets expect the bank rate to rise by only 15 basis points a quarter and reach just 2.25 per cent by the end of the forecast period in 2016.
At that rate, mortgage payments on the average house for our typical two full-time parents with two children in childcare would add up to 38 per cent of available income, up from 32 per cent now.
That is even assuming wages increase by 1.25 per cent each year and that there is no increase in current prices of essentials. In London, the proportion would be 68 per cent — a much more significant slice of income.
Overall, the messages from the inflation report for the housing market are a bit mixed. The strengthening economy is very welcome, but the road ahead will still be difficult for borrowers for some time to come.
Affordability remains a challenge for reasons other than interest rates — especially in London and the South-East — and the regulator’s eyes remain firmly fixed on the sector.
Fionnuala Earley is residential research director of Hamptons International
Key points
■ The Monetary Policy Committee expects the economy to grow by 3.5 per cent this year.
■ The labour market is critical to the performance of the housing market and that has helped it stay in better shape than might otherwise have been the case.
■ Interest rates are less likely to rise as soon as some were predicting just a few weeks ago.
