Press release

31 Jan 2020 London, GB

December mortgage approvals up to highest level since July 2017

The Bank of England reported that mortgage approvals for house purchases rose significantly in December to be at the highest level since July 2017.

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  • The Bank of England reported that mortgage approvals for house purchases rose significantly in December to be at the highest level since July 2017.
  • December’s jump in mortgage approvals adds to a growing amount of firmer data and survey evidence suggesting that the housing market could well be changing up a gear after a lacklustre 2019 (with particular softness around the third quarter). Certainly, latest survey evidence (from RICS and Rightmove) indicates that the housing market has got an initial leg-up from increased optimism and reduced uncertainties following the decisive General Election result, as well as greater near-term clarity on Brexit with the UK leaving the EU today with a deal.
  • While we suspect that the housing market may get a further near-term boost from reduced uncertainties, we remain cautious over the sector’s overall prospects for 2020 and suspect that the upside may well be limited.
  • Nevertheless, we have modestly raised our forecast for house price gains over 2020 to 2.8% from 2.0% and there is a possibility that they could rise more than this.
  • Housing market activity – and possibly to a lesser extent prices – could be given a modest lift in 2020 if the Government introduces specific measures aimed at boosting the sector in the Budget on 11 March (although a cut in Stamp Duty looks unlikely). Furthermore, mortgage interest rates are at historically low levels and there is a real possibility that the Bank of England could cut interest rates in the coming months. Additionally, a relative shortage of properties for sale is likely to continue to provide some support to prices.
  • However, the economy still looks set for a pretty challenging 2020 and there will still be appreciable uncertainties, including on the UK-EU relationship front. As such, the upside for house prices in 2020 is likely to be limited. Additionally, while the fundamentals for consumers should still be pretty decent in 2020, we suspect that earnings growth will be below the peak levels seen around mid-2019 and that employment growth will be slower overall.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The Bank of England reported that mortgage approvals for house purchases rose markedly to 67,241 in December, taking them to the highest level since July 2017. This was up from 65,514 in November and a seven-month low of 65,003 in October. Mortgage approvals had previously relapsed to October’s seven-month low from a previous 2019 peak of 67,072 in July.

“Mortgage approvals in December were highly likely to be significantly lifted by increased confidence and reduced uncertainties among housing market participants following the decisive General Election result. It is also notable that employment bounced back in the three months to November after some slippage in the third quarter, although earnings growth was limited to 3.2% (down from a mid-year peak of 3.9%).

“Prior to November, mortgage approvals for house purchases had fallen back for three successive months to be at a seven-month low in October, indicating that activity was being pressurised by heightened uncertainties over the domestic political situation and Brexit. It was also notable that the labour market showed signs of slippage over the third quarter after employment had reached a (then) record high in June and earnings growth hitting an 11-year high of 3.9% in the three months to July.

“Survey evidence suggests that the housing market has got an initial lift from reduced uncertainties following the decisive General Election result. In particular, the RICS housing market survey reported that its December survey pointed “to an uplift in sentiment following the result of the General Election. Sales expectations have risen sharply and a number of key activity metrics have moved into positive territory for the first time in several months.” In particular, the survey showed that the buyer enquiries balance jumped to +17 in December from -5 in November, with interest up across all regions. Additionally, the agreed sales balance improved to +9 (from -6) which was the first positive reading since May. A balance of +31% of surveyors expect transactions will increase over the next three months.

“Additionally, Rightmove’s latest survey (covering 8 December to 11 January) reported that there had been a 15% year-on-year increase in buyer enquiries and also a 7.4% year-on-year increase in sales agreed. Additionally, 65,000 properties were reported to have been marketed, the largest reported rise for the time of the year for the survey.

Outlook for house prices

“Recent firmer data and survey evidence suggests that the housing market may be changing up a gear after a lacklustre 2019 with particular softness around the third quarter.

“Certainly, latest survey evidence indicates that the housing market has got an initial leg-up from increased optimism and reduced uncertainties following the decisive General Election result as well as greater near-term clarity on Brexit with the UK leaving the EU today with a deal. This is clear in latest surveys by the RICS and Rightmove.

“While we suspect that the housing market may get a further near-term boost from reduced uncertainties, we remain relatively cautious over housing market prospects over 2020 and suspect that the upside will likely be limited.

“Nevertheless, we have modestly raised our forecast for house price gains over 2020 to 2.8% from 2.0% and there is clearly a possibility that they could rise more than this.

“Housing market activity – and possibly to a lesser extent prices – could be given a modest lift in 2020 if the Government introduces specific measures aimed at boosting the sector in the budget on 11 March (although the possibility of cutting Stamp Duty appears to have been shelved). 

“Furthermore, mortgage interest rates are at historically low levels. Indeed, there is clearly a very real possibility that the Bank of England could cut interest rates in 2020.

“A shortage of houses on the market will also likely offer some support to prices. The latest RICS survey showed new instructions to sell rose in December following the General Election but this was the first increase in six months and the increase was modest. Furthermore, new instructions to sell were reported to be essentially flat in December outside of London and the South East. Consequently, the number of properties on surveyors’ books remain at historically low levels. Admittedly, Rightmove’s latest survey implied a marked pick up in properties coming on to the market after the Election through to early-January but it remains to be seen if this will be sustained

“Meanwhile, even if ultimately successful, the Government’s recent – and ongoing – initiatives to boost house building will take time to have a significant effect so are unlikely to markedly influence house prices in the near term at least.

“However, the economy still looks set for a pretty challenging 2020 so the upside for house prices is likely to be limited. Furthermore, Brexit concerns could very well pick up again as 2020 progresses, due to concerns over what will happen at the end of the year if the UK and EU have failed to reach agreement on their longer-term relationship and the transition arrangement is due to end.

“While a positive for the housing market is that consumers’ purchasing power has picked up appreciably since mid-2018 and employment has reached record highs, latest developments for consumers have been somewhat mixed. Specifically, having improved from 0.1% in the three months to June 2018 to 2.0% in the three months to July 2019, real earnings growth eased back to 1.6% in the three months to November. We suspect earnings growth is likely to stabilise at or just below recent lower levels.

“Meanwhile, the growth in employment has slowed significantly overall since mid-2019 (notwithstanding a spike in the three months to November). Indeed at 38.901 million in the three months to November, the level of employment was only 90,000 higher than it had been in the three months to June (32.811 million). We suspect employment growth will be less over 2020 than it was in 2019.”

Consumer credit growth picked up in December

  • The Bank of England also reported that year-on-year unsecured consumer credit growth picked up modestly to 6.1% in December from 5.9% in November, which has been the weakest rate since June 2014.
  • Net unsecured consumer credit rose to £1.2 billion in December, with net credit card borrowing amounting to £412 million, the most since February.
  • While December’s pick-up in consumer borrowing could be a sign that they are becoming more prepared to spend, consumer activity was seemingly soft in December itself. Retail sales volumes dipped 0.6% month-on-month in December and were up just 0.9% year-on-year. Additionally, private new car sales were up just 0.1% year-on-year in December.
  • Late on in 2019 it is apparent that consumers became more careful in their spending as they faced the combination of a struggling domestic economy as well as heightened domestic political and Brexit uncertainties. Prior to this they had been pretty resilient – helped by improved purchasing power and recent record high employment.
  • It is still early days to see what impact December’s decisive General Election result and clarity on the UK exit from the EU has on consumer behaviour. There has clearly been an immediate lift in consumer confidence according to a number of surveys, with GfK reporting consumer confidence rose to a 16-month high in January.
  • However, it remains to be seen if this improvement in confidence is sustained and whether or not it translates into greater willingness to spend. The CBI distributive trades survey for January was unchanged from December and flat, although the January/December readings were the highest since last April.
  • Meanwhile, the fundamentals for consumers are likely to be relatively decent over 2020, although we suspect that earnings growth will remain below the peak level seen in mid-2020 and that employment gains will be modest overall. However, consumer spending power should benefit from low inflation over 2020 (we expect it to average 1.5%; it was at a more that three-year low of 1.3% in December) while some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April. 
  • There are other factors which may limit the consumer spending. In particular, with uncertainties far from over and the savings ratio still relatively low, many consumers may be keen to avoid dissaving. Meanwhile, lenders have reduced the availability of unsecured consumer credit and tightened lending standards.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The Bank of England also reported that annual growth in unsecured consumer credit picked up modestly in December from November’s lowest level since June 2014.

“Specifically, annual unsecured consumer credit growth rose to fell back to 6.1% in December after slowing to 5.9% in November from 6.2% in October. October had marked the first increase in the annual growth rate for 16 months after it had trended down to a previous low of 6.0% in September.

“Annual unsecured consumer credit growth has been on a downward trend since November 2016, when it peaked at 10.9% in November 2016. The overall slowdown in consumer credit growth has clearly been significantly affected by markedly weaker private car sales as this has reduced demand for car finance.

“Net unsecured consumer credit amounted to £1.218 billion in December. This was up from just £653 million in November, which had been a six-year low. It was also up from the December 2018 level of £792 million.

“Net credit card borrowing amounted to £412 million in December; this was the highest since February and followed credit card repayments exceeding borrowing in November (by £132 million) for the first time since July 2013.

“While December’s pick-up in consumer borrowing could be a sign that they are becoming more prepared to spend, consumer activity was seemingly soft in December itself. Retail sales volumes dipped 0.6% month-on-month in December and were up just 0.9% year-on-year. Additionally, private new car sales were up just 0.1% year-on-year in December.

“It appears that in the latter months of 2019 that consumers had become more concerned by the combination of a struggling domestic economy as well as heightened domestic political and Brexit uncertainties. Up until then, consumers had seemingly been prepared to brush off Brexit and other uncertainties and keep spending at a reasonable pace – helped by improved purchasing power and recent record high employment. Real earnings growth improved significantly from mid-2018, rising from just 0.1% to a near four-year high of 2.0% in the three months to July 2019.

“Also helping matters, employment reached a record high of 32.811 million in the three months to June. However, there was some slippage in consumer fundamentals in the third quarter as employment came off its June peak and earnings growth slipped back.

“Consequently, the ONS reported that that real household disposable income fell 0.5% quarter-on-quarter in the third quarter of 2019 after a gain of 0.9% in the second quarter, thereby reducing year-on-year growth to 0.9% from 1.6%. There was better news on the employment front though in the fourth quarter as it rose strongly in the three months to November to reach a new record high of 32.901 million.

Effects of the Election result remain to be seen

“It is still early days to see what impact December’s decisive General Election result and clarity on the UK exit from the EU has had on consumer behaviour.

“There has been an immediate lift in consumer confidence according to a number of surveys. GfK reported consumer confidence rose to a 16-month high in January from November's equal lowest level for 2019 (and since mid-2013). A recent Barclaycard survey also showed a marked rise in consumer confidence.

“However, it remains to be seen if this improvement in confidence is sustained and whether or not it translates into greater willingness to spend. The CBI distributive trades survey for January was unchanged from December and flat, although the January/December readings were the highest since last April.

“The fundamentals for consumers are likely to be pretty decent over the coming months, although annual earnings growth is unlikely to match the 11-year high of 3.9% that was seen in the three months to July 2019 and employment growth will probably be lower overall in 2020 than in 2019.

“Average earnings growth moderated to 3.2% in the three months to November and we suspect it is likely to stabilise around this level. We also suspect that employment growth will be relatively modest over 2020.

“However, good news for consumer purchasing power saw consumer price inflation fall to a more than three-year low of just 1.3% in December and we suspect it will remain low over 2020 averaging around 1.5%.

“Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April.

“There are other factors which may limit the consumer spending. In particular, with the savings ratio relatively low, many consumers may be keen to avoid dissaving.

“Additionally, lenders have become more careful about advancing unsecured credit. Indeed, the latest Bank of England’s credit condition survey indicated that lenders reduced the amount of unsecured credit available to consumers in the fourth quarter of 2019 for a 12th successive quarter. It was expected to decline modestly further in the first quarter of 2020. Additionally, lenders were reported to have markedly further tightened their lending standards for granting unsecured consumer loan applications in the fourth quarter of 2019. This was a 13th successive quarter of tightening standards. A further significant tightening of lending standards was anticipated over the first quarter of 2020.”