Mortgage approvals up in January, but housing market still weak

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The Bank of England have reported that mortgage approvals for house purchases rebounded sharply to a six-month high in January after slowing in December.

Despite this, the EY Item Club, UK economic forecasting group, have offered predictions on a continuing weak housing market.

Howard Archer, Chief Economic Advisor to the EY ITEM Club said: “The Bank of England reported that mortgage approvals for house purchases rebounded sharply to a six-month high of 67,478 in January after dipping to a 16-month low of 61,692 in December (the lowest level since August 2016) from 65,315 in November. Mortgage approvals had previously trended down to December’s low from 69,037 in July 2017.

January’s sharp rebound in mortgage approvals suggests that there may have been a hit to activity in December as a knee-jerk reaction to the Bank of England raising interest rates in November. It is also possible that cutting stamp duty for first-time buyers in November’s Budget may have provided limited support to mortgage approvals in January.

“It is possible that the rebound overstates the current strength of the housing market just as December’s drop overstated the weakness of housing market activity. It should be noted that housing market activity can be particularly volatile around Christmas and New Year.

“The latest survey evidence from RICS largely points to still weak housing market activity early on in 2018. New buyer enquiries were down for a 10th month running while agreed sales fell for an 11th month.

“Meanwhile, the Nationwide reported that house prices fell 0.3% m/m in February. This marked a clear correction after prices had risen 0.8% in January and 0.5% in December. Annual house price inflation on the Nationwide’s measure dipped to a 6-month low of 2.2% in February after rising to a 10-month high of 3.2% in January from 2.6% in December, and a low of 2.1% in August, which had been the weakest annual rate since June 2013. Indeed, February’s rate of 2.2% was only marginally above the 38-month low of 2.1% seen last August.”

“The stronger January Bank of England mortgage approvals data does little to dilute our belief that 2018 will be a difficult year for the housing market. Price gains over the year are likely to be limited to a modest 2%.

“The fundamentals for house buyers are likely to remain challenging. The squeeze on consumers’ purchasing power remained significant going into 2018, and it is likely to only gradually ease as the year progresses. In addition, housing market activity could be hampered by fragile consumer confidence and a limited willingness to engage in major transactions.

“House buyers may also be concerned about further interest rate hikes in 2018. While November’s increase in interest rates was just 0.25% and mortgage rates are still at historically very low levels, there does appear to have been some impact on house buyers’ psychology. We now expect the Bank of England to raise interest rates twice in 2018 (each time by 0.25%), with the next move likely in May.

“Housing market activity and prices are also likely to be impacted by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders.

“The downside for house prices should be limited by the shortage of houses for sale. High employment is also supportive for the housing market. The latest RICS survey showed new instructions to sell fell again in January, meaning that there have now been 24 successive months without a positive reading. Furthermore, January’s fall in new instructions to sell was the sharpest since May 2016. Consequently, average stock levels on estate agents’ books in January fell back close to June 2016’s record low.

“The abolition of stamp duty for first time buyers for properties costing up to £300,000 (and on the first £300,000 for properties costing up to £500,000) should also provide some support to house prices. However, even if successful, the Chancellor’s measures to boost house building in the Budget will take time to have a significant effect so are unlikely to influence house prices in the near term at least.”