Mortgage Approvals in December and House Prices in January
The Bank of England is expected to report on Tuesday that mortgage approvals for house purchases fell to a 20-month low of 45,000 in December, from 48,019 in November and a peak of 59,019 in November 2009. This would be substantially below the 70,000-80,000 level that in the past has been considered consistent with stable house prices. Mortgage approvals have actually averaged 90,000 a month since 1993. It is highly likely December's severe weather had some negative impact on mortgage activity, while the underlying trend is expected to have remained weak.
The Bank of England is also forecast to report that net mortgage lending slowed to just £0.7 billion in December, from £0.8 billion in November and £1.2 billion in October. This is very low compared to long-term norms and is expected to be the consequence of both muted new mortgage activity and people making increased repayments.
Meanwhile, the Nationwide lender is expected to report during the week that house pricesfell 0.3% month-on-month in January. This would follow a rise of 0.4% in December, which had been the first monthly increase in house prices on the Nationwide's measure since May 2010. There were drops of 0.3% in November and 0.7% in October. A 0.3% month-on-month decline in house prices in January would lead to them being down 0.9% year-on-year.
The Halifax lender is also likely to release its house price index for December during the week. This, too, is forecast to show that prices fell 0.3% month-on-month. Previous data from the Halifax show that house prices fell 1.3% month-on-month in December and 0.2% month-on-month in November. A 0.3% drop in house prices on the Halifax measure would see prices down 3.1% year-on-year in the three months to January. House prices would actually be down 4.5% year-on-year in January itself (the Halifax prefers to highlight the three-month year-on-year house price rate to smooth out erratic movements).
We maintain the view that house prices will fall around 10% from their peak 2010 levels by the end of 2011. Given that house prices have already fallen 3-4% on the Nationwide/Halifax's measures, we believe they will fall around 6-7% in 2011. We believe the fundamentals remain largely unfavourable for the housing market, even though signs that fewer houses are now coming on to the market could prove supportive for house prices if sustained.
The housing market is being dogged by high and likely-to-rise unemployment, muted wage growth, the increasing fiscal squeeze, very low and falling consumer confidence, and difficulties in getting a mortgage (particularly for first-time buyers).
Further bad news for the housing market is the mounting speculation that the Bank of England could raise interest rates in the first half of 2011 to counter above-target and rising inflation. Any early interest rate hike would be bad news for the housing market and likely to weigh down on prices—not just the rate rise itself, but also the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates.
Meanwhile, affordability measures are mixed. On the favourable side, mortgage payments as a percentage of disposable income are currently very low compared to past norms; however, the house price/earnings ratio is above its long-term average.
It is clear that critical to the development of house prices over the coming months will bethe amount of houses coming on to the market, mortgage availability, how well the economy and jobs hold up as the fiscal squeeze increasingly kicks in, and what happens with interest rates.
Consumer Credit in December
The Bank of England is also expected to report on Tuesday that there was a net consumer credit repayment of £200 million in December after a repayment of £121 million in November. Data already released by the British Bankers Association show there was a net repayment on credit cards as well as on personal loans and overdrafts in December.
A further net repayment in consumer credit in December would indicate that consumer appetite for new taking on new borrowing remains limited while there is also an ongoing desire of many consumers to reduce their debt. This is a reflection of current very low consumer confidence and is the consequence of an uncertain and somewhat worrying longer-term outlook for the economy and jobs as the major fiscal squeeze increasingly kicks in over the coming months. Meanwhile, there remains limited availability of unsecured credit from banks.
Manufacturing Purchasing Managers Survey for January
The manufacturing purchasing managers' survey (PMI, out on Tuesday) is expected to show that the sector continued to expand at a very decent rate in January. Specifically, we forecast the PMI to have only edged back to 58.0 in January from a 16-year high of 58.3 in December (the manufacturing sector appears to have been little affected by December's severe weather). This would keep the index substantially above the 50.0 level that indicates flat manufacturing activity. The Confederation of British Industry has already released a largely upbeat industrial trends survey for January, although there were some signs that orders growth may be coming off their recent highs.
Manufacturers have been benefiting from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and a major rebuilding of stocks after they had been slashed during the recession.
The concern is that manufacturers will find life more difficult as 2011 progresses as stock rebuilding draws to a close and tighter fiscal policy weighs down on domestic demand. There is also the danger that problems in the Eurozone could harm foreign orders.
Construction Activity in January
Construction activity is expected to have returned to marginal growth in January after being hard hit in December by the severe weather. We forecast the construction purchasing managers’ index (PMI, out on Wednesday) to have improved to 50.5 in January after slumping to a 10-month low of 49.1 in December from 51.8 in November. The index peaked at 58.5 in May 2010. A reading above 50.0 indicates expansion, below 50.0 shows contraction.
Even before the appreciable hit to construction activity from December's severe weather, it was apparent the sector had lost substantial momentum in the latter months of 2010. The preliminary national accounts data for the fourth quarter of 2010 (when U.K. GDP unexpectedly contracted 0.5% quarter-on-quarter) show that construction output plunged 3.3% quarter-on-quarter, in sharp contrast to growth of 3.9% quarter-on-quarter in the third quarter and 7.0% quarter-on-quarter in the second quarter.
While the fourth-quarter 2010 contraction in construction activity was heavily influenced by December's severe weather and there could be a modest bounce back from this at the start of 2011, it seems unlikely the economy will see a major contribution to growth from construction this year. Construction activity in the second and third quarters of 2010 was influenced by a number of special factors that have now largely run their course. There was a strong element of catch-up reflecting the fact that the rise in output came off a very low base, as the construction sector suffered deep contraction during the 2008/09 recession. In addition, the construction sector benefited in the second and third quarters from past government stimulus measures.
The construction sector appears to be facing an increasingly challenging environment.In particular, construction activity will be hit appreciably by the coalition government's extended pruning of public spending, as this is clearly going to hit expenditure on public buildings, schools, hospitals, and infrastructure (even though the government is keen to prioritize some infrastructure projects). Furthermore, housing market activity has been moribund in recent months, house prices are softening, and the outlook for the sector is currently worrying, which could weigh down significantly on house building. Indeed, the December construction purchasing managers' survey indicated that house-building activity contracted for a fourth month running and at the fastest rate since April 2009.
Service-Sector Activity in January
Service-sector activity is expected to have seen a limited bounce back in activity after being hit appreciably by December's severe weather. Specifically, we forecast the business activity index of the service sector purchasing managers' survey (out on Thursday) to have climbed to 52.0 in January after sinking to a 20-month low of 49.7 in December from 53.0 in November. The index had been largely up around 55 during the first half of 2010. December's reading indicated marginal contraction in activity, as it was below the critical 50.0 level. Furthermore, incoming business also contracted modestly in December.
While December's apparent contraction in services activity was heavily influenced by the severe weather, it seems the sector has lost momentum in recent months. It is evident that some services sectors are already being affected by the cutbacks in government spending. For example, in their January survey, the Bank of England's regional agents reported that "recruitment and advertising were being supported by rising activity in the private sector, but that was dampened by a decline in public sector work." In addition, services activity related to the housing market is being hit by the weakness in that sector.
1 Feb - Bank of England Consumer Credit, December (GBP/Billion): -0.2
1 Feb - Bank of England Net Lending Secured on Dwellings, December (GBP/Billion): +0.7
1 Feb - Bank of England Number of Loan Approvals for House Purchase, December (000s): 45.0
1 Feb - Manufacturing Purchasing Managers’ Index, January: 58.0
2 Feb - Construction Purchasing Managers’ Index, January: 50.5
3 Feb - Service Sector Purchasing Managers’ Index, January: 52.0
During Week - Nationwide House Prices, January (Month-on-Month): -0.3%
During Week - Nationwide House Prices, January (Year-on-Year): -0.9%
During Week - Halifax House Prices, December (Month-on-Month): -0.3%
During Week - Halifax House Prices, December (3-Month/Year-on-Year): -3.1%