Brian Murphy is head of lending at Mortgage Advice Bureau
The economic news continues to improve and this is certainly reflected in the mortgage and housing markets where January data from the CML estimates that gross mortgage lending is 33% up on the corresponding period in 2013.
Some people may be quite alarmed by what appears to be significant percentage increases, but people need to understand that the extremely low level of transactional activity that the market has been operating at since 2008 puts these figures into some kind of context.
During 2007, generally regarded as the peak of the mortgage market, approvals for home movers were running at monthly levels of between 80,000 and 100,000. Throughout 2008 to 2012, numbers plummeted to around 40,000 per month, between only half and as little as a third of their previous levels.
The second half of 2013, and the final quarter in particular, saw a steady increase in transactional activity, partly stimulated by the government Help to Buy schemes and increasing consumer confidence and, as a result of this, monthly approvals averaged 70,000 in the final quarter of 2013.
House builders have responded to the surge of buyer demand by opening sites that have lain dormant and are pushing ahead with planning consent on land that they acquired during the boom years.
New home builds started in 2013 were just shy of 123,000 – a 23% increase on 2012. However, builders increasingly report problems with a lack of skilled labourers and material shortages, so future growth, although increasing, will be limited in the short term by capacity.
Recruitment and training, although underway by many of the large builders, takes considerable time to bring suitably skilled people on stream. And with materials, suppliers will need to invest in plant and machinery to gear up to the production levels required by the increase in demand.
On the wider economic front, employment continues to grow with more than 30 million now in work and, more encouragingly, the majority of jobs that have been created in recent months have been full-time.
The rate of unemployment now stands at 7.2%, and this measure was one of the key planks of, Bank of England Governor, Mark Carney’s forward guidance interest rate policy.
Last August, the Bank of England said that interest rates would not rise until unemployment had fallen to at least 7% – so long as inflation and financial stability were not causing concerns. With the unemployment rate close to that initial policy level, the Bank have now somewhat amended their guidance.
Firstly, interest rates are not about to go up as there is a lot of spare capacity in the economy, as proven by the BoE’s decision to keep the Base Rate at its record low 0.5% for yet another month.
Secondly, when rates do rise, they will probably only go up gradually as the Monetary Policy Committee (MPC) wants to eliminate this slack over the next two to three years. And thirdly, interest rates are unlikely to get to the 5% level set on average by the MPC before the crisis, even when the economy is back to normal.
The short-lived first phase of forward guidance shows just how difficult it can be to predict the economic future but current expectations could mean that the Bank Rate will start to rise in mid-2015 to around 2% by the end of 2016.