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Industry in depth
Housing market review
31 March 2007
Jeremy Claridge reviews the state of the housing market in the first quarter of 2007
2007 has certainly kicked off with a bang. A Base Rate rise in January, record gross mortgage lending in February all followed by a surprising Budget in March. That’s not even touching on the situation with house prices, which seem to be generally increasing, depending on which indices you follow.
House prices
Starting with the house price picture across the UK, it is often a tricky exercise determining the actual level of prices and any rise or fall, simply because of the number of indices reporting each month. Each has its own methodology, which means, of course, that every one of them could potentially produce a different outlook. That said, looking at the three following indices we can gain an understanding of the general direction.
The Halifax House Price Index revealed that UK house prices increased by 1.8 per cent in February, leaving annual house price inflation unchanged at 9.9 per cent. Nationwide Building Society figures for February showed the average price of a UK house now stands at £174,706, a monthly increase of 0.7 per cent pushing annual house price inflation into double digits at 10.2 per cent.
Turning to the government, the Department for Communities and Local Government’s (DCLG) latest figures for January 2007 show the average mix-adjusted average house price standing at £205,286, up from £201,090 in December 2006. This also pushed annual house price inflation up to 10.9 per.
Of course, it is often something of a red herring to talk about house prices in the UK as a whole when the real story often lies at the regional level, and generally it seems that across the regions the picture is positive. The DCLG figures saw all four home countries experience increases in house price inflation. Breaking this down even further to the English counties, we see London leading the way with the highest inflation rate at 13.2 per cent, followed by the North West with 11.1 per cent. The only two English regions where inflation fell were the North East and the West Midlands.
Many commentators cite the London market as the leader in the regional pack, meaning that where London leads the other regions eventually follow. The DCLG figures seem to suggest that London house prices are pushing on again after a period of relative small increases. We await to see if the rest of the market will follow suit.
Coming to terms
Across the piece, it seems that the market is still coming to terms with that surprise increase in the Bank Base Rate announced in January. Many commentators had expected a rise in Q1 but perhaps not as early as the very first month of the New Year. This increase made it three rate rises in six months, and figures from the Council of Mortgage Lenders (CML) have recently shown that many borrowers are now locking into fixed rate mortgages to provide budgetary certainty.
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Indeed it is first-time buyers who are most inclined to fix their mortgage payments, with 85 per cent choosing a fixed rate deal in January, according to the CML. Overall 70 per cent of home movers chose a fixed rate mortgage and 72 per cent of all new loans were on a fixed rate basis. It is perhaps unsurprising therefore that many lenders are putting a fresh focus on their fixed rate products with a number, most recently Nationwide, opting for longer 25-year terms.
Historically, there has been no great appetite amongst UK borrowers to lock-in for terms as long as 25 years. That said, there will be some borrowers who want to know what their payments will be for the life of the mortgage and, with many commentators expecting a further rate rise sometime in the near future, now may be the time they lock-in for the duration.
Robust performance
The mortgage market as a whole has continued to perform robustly throughout the first quarter. CML figures show gross mortgage lending hitting its highest ever levels for a February at £24.6 billion, up 9 per cent on the £22.5 billion in February last year, although slightly down on January 2007 figures of £26.6 billion. The CML continues to predict that gross mortgage lending will hit £360 billion by the end of this year.
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The various sub-sectors of the mortgage market have also experienced continued growth. Figures from the CML for last year show that 330,000
buy-to-let mortgages were taken out in 2006 – a figure which represents 11 per cent of all new lending. The total number of buy-to-let mortgages at the end of 2006 also hit the 850,000 mark with a value of £94.8 billion. The positive news continues with buy-to-let arrears continuing to fall from 0.64 per cent at the end of the first half of 2006 to 0.59 per cent at the end of the second half.
The growth in the non-conforming market can also be evidenced by the number of new lenders looking to enter the sector and the competitive products that are now available. But, perhaps the biggest news in the housing and mortgage market in Q1 occurred in the non-conforming market ‘across the pond’ in the United States where a number of non-conforming lenders have already been placed in liquidation causing a ripple effect into the global stock markets. Of course, the non-conforming sector in the US is very different to our domestic market but it is one area on which UK lenders are keeping a watchful eye.
Overall, there is much to be cheerful about in the UK market, notably the continued strength of the mortgage intermediary distribution channel. In a highly competitive market, many borrowers need the services of a professional adviser and the range of products and services available to both mortgage intermediaries and their clients is a real positive. We await the rest of the year with much anticipation.
Peter Charles, Chief Economist at Mortgage Express
At the start of the year the prospects for the UK housing and mortgage markets were, to say the least, uncertain. How could mortgage demand, which had been so buoyant during the fourth quarter, possibly be maintained?
The strength of demand in the fourth quarter was, in itself, something of a surprise. The base rate increase in August appeared to have no impact on consumer confidence; demand for mortgages just kept on rising. CML figures for November showed total gross mortgage advances in the month at a staggering £31.5 billion, 17 per cent up on the previous year. House price inflation began to accelerate as a result of this strength of demand and the continuing shortage of properties for sale. Based on the indices calculated by Halifax and Nationwide, UK house prices in the fourth quarter were rising at an annual rate of over 15 per cent.
With the Bank of England’s Monetary Policy Committee having raised base rate in November and again at the beginning of January, there seemed little prospect of further growth. Consumers may be able to stave off the increase in borrowing costs from one increase in base rate, but it was unlikely that they would be able to absorb three rate rises. Besides, there was the fairly convincing argument that, unless the housing market did slow down, the MPC would continue to raise base rate until it did.
So, some weakening in demand appeared likely. But, there were understandable concerns that the base rate rises might hit consumer confidence so hard that demand would fall away sharply.
In the event, the mortgage market has continued to show a remarkable resilience through the early months of 2007. Figures from the CML show that, taking into account normal seasonal patterns, lending in January and February this year have barely fallen back from November’s record level. Lending is still some 12 per cent higher than a year ago. And house prices continue to rise; figures for February show that both the Halifax and Nationwide indices recorded annual house price inflation running at over 10 per cent.
The obvious question now is, whether this resilience of demand can continue to be maintained?
For the moment, there seems to be little reason why it shouldn’t. The past couple of months have seen a reduction in the level of mortgage approvals for new house purchase, but these have been comparatively modest. The number of loans approved for house purchase in the three months to November averaged 126,000. The average for the last two months is 117,000. This hardly suggests a major crisis of confidence.
And, in terms of gross lending, activity must be expected to be bolstered by continuing high levels of remortgage activity. Three year mortgage deals written in the very buoyant market at end-2003/early 2004 will now be coming to an end. As borrowers endeavour to keep their interest costs down, they will be searching for the next good deal. It certainly looks like being an active market for brokers for the time being.
The Scottish market - John Lloyd, head of sales at Bank of Scotland mortgages
According to The Council of Mortgage Lenders, the mortgage market started the year in good shape, with the underlying level of gross lending in January the second highest on record. Within the Scottish market, the average mortgage is now £98,000.
Research carried out by economists at Bank of Scotland Mortgages shows that a healthy Scottish economy and a growing labour continue to provide a very solid base for the Scottish housing market, while the relative affordability of Scottish house prices compared to the rest of the UK remains a strong point. The latest data from Bank of Scotland Mortgages suggests that the rate of growth in the Scottish economy will peak at 2.2 per cent in mid 2007.
The number of FTBs has already decreased this year due to the recent growth in house prices however Scotland remains the most affordable place in the UK to buy a home. In fact, seven of the ten most affordable towns in the UK are located in Scotland, with the average price of purchasing a house currently just £122,511, 32 per cent lower than the UK average of £179,425.
The more inexpensive towns in Fife and Renfrewshire are likely to record the highest house prices rises in 2007. Additionally, Edinburgh could see its average house price push through £200,000 in 2007 as the strength of the economy in the capital, boosted by a growing business and financial services sector, boosts housing demand.
Looking ahead, a key change to the Scottish market will be the introduction of the Purchasers Information Pack (PIPs). This is good news for the Scottish homebuyer, as it is estimated that they collectively waste £7million a year on surveys for properties that are sold to other people. But, one concern is that the extra survey expense, usually taken on by sellers, will be added on to the cost of the property.
In 2007 the gradual slowdown of the Scottish housing market is expected to continue with prices rising by upto 7 per cent. As in 2006, Scotland should again outperform the UK average, which we expect to be 4 per cent house price growth.