Mortgage spotlight: Market forecasts

Mortgage spotlight: Market forecasts

There is ample evidence of a relative slowdown in the UK housing and mortgage market towards the end of 2014, which looks like setting the tone for 2015. The slowdown is evident in both lending and purchase activity, as well as house price movements. The CML (Council of Mortgage Lenders) reported gross lending is estimated to have totalled £16.9bn in November, down 9 per cent from October 2014 and at roughly the same year-on-year level. Also, figures from HMRC show seasonally adjusted property transactions are down 2.1 per cent to 98,490 from October to November 2014. The figure is also down 0.8 per cent on November 2013.

Add to that a reported slowing in house price inflation, especially in London, once considered a serious housing hotspot. Rics (the Royal Institute of Chartered Surveyors) describes the London market as “pausing for breath” towards the end of 2014 in terms of both pricing and activity. It predicts that UK house prices will increase on average by 3 per cent during 2015 (with widespread regional variations, of course) thanks to a booster effect from the Autumn Statement’s stamp duty changes and the lack of property supply.

The lack of supply is still a factor in house prices. Rics forecasts the number of starts to rise to 155,000 in England, compared with 125,000 in 2013 and 100,000 in 2012.

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In light of these trends, the CML has published its forecasts for the next couple of years. The Table shows that residential transactions are forecast to fall slightly from 1.3bn in 2014 to 1.2bn this year and then to plateau in 2016. Gross lending, however, is expected to rise from £207bn in 2014 to £240bn.

People get ready

One of the longstanding predictions for the year is that interest rates will rise. While the first increase in Bank base rate is currently not expected to come into force until the autumn – or at least well after the election – it appears that borrowers are getting themselves ready for the inevitable. Bank of England figures show the proportion of borrowers opting for fixed rate mortgages has been increasing over the past two years. The proportion taking a fixed rate deal rose to 82.6 per cent in the third quarter of 2014, the highest since 2007. That percentage is expected to continue to rise.

The CML attributes the slowdown in housing market activity in 2014 to affordability considerations. While all the evidence suggests house prices are faltering, the organisation argues that house prices are still high compared to incomes. The economic backdrop to the housing market explains some of this. The Office for Budget Responsibility, for example, predicts that the economy will lose momentum in 2015.

Despite unemployment falls, the UK economy, like those of many of its peers, is dogged by persistently weak productivity. While unemployment is expected to continue to fall, albeit more slowly, wage growth remains weak. Consequently, growth in spending is also expected to slow in line with the growth in people’s incomes.

However, the Bank has published research that suggests most UK households will be able to cope with rate rises. If rates were to rise by two percentage points, and household incomes by 10 per cent, it estimates the proportion of households at risk of distress (where mortgage repayments exceed 40 per cent of income) would rise from 1.3 per cent to 1.8 per cent.

While the Bank’s concerns about increased stability risks emanating from the UK housing market have subsided, it acknowledges debt levels remain high relative to incomes.