Mortgage approvals up in January, but housing market still weak

The Bank of England has reported mortgage approvals for house purchases rebounded sharply to a six-month high of 67,478 in January after slowing in December when they dipped to a 16-month low of 61,692 (the lowest level since August 2016) from 65,315 in November.

Analysts pointed to the cutting of stamp duty for first-time buyers in November’s Budget for providing some limited support to mortgage approvals in January.

However, experts at EY suggested that January’s sharp rebound may overstates the current strength of the housing market just as December’s drop may have overstated its weakness when it can be particularly volatile around Christmas and New Year.

Howard Archer, chief economic advisor to the EY ITEM Club said 2018 is likely to be a difficult year for the housing market and price gains over the year may be limited to a modest 2 per cent.

This view is reinforced by the Nationwide reporting house prices fell 0.3 per cent month-on-month (m/m) in February, thereby cutting the year-on-year (y/y) gain to a six-month low of 2.2 per cent.

With the Bank of England expected to raise interest rates twice in 2018, Mr Archer of EY said housing market activity is likely to remain lacklustre as the extended squeeze on consumer purchasing power only gradually eases, confidence remains fragile and appreciable caution persists over engaging in major transactions.

The downside for house prices is being limited by the shortage of houses for sale. High employment is also supportive for the housing market while mortgage interest rates are still at historically low levels despite November’s rate hike.

Mr Archer said: “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 per cent.

He added: “Housing market activity and prices are 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 inJanuary 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.”