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Marktkommentar June 2017 - Council of Mortgage Lenders
In the first three moths of 2017, the economic expansion was slower than previously assumed as GDP was reduced to 0.2%. We would have hoped in the past that salary increases would accelerate as the jobless factor sunk. However, salary increases are still slow. Due to low pay rises and a sharp rise in recent month rates of inflation, employees are now witnessing a decline in actual salaries.
In May, headline inflation was 2.9%, but in April wages rose by only 2.1% (May figures not yet available). It will increase the pressures on consumption expenditure, which is already reflected in retailer turnover figures as retailer output dropped to a four-year low. The Bank of England's MPC is concerned about this, as a rise in headline interest rates is usually a result of higher rates of inflation, whereas low rates of economic expansion are a cause of lower rates.
In spite of this, it is likely that a hike in interest is a little remote, as government official Mark Carney said in a recent statement that "now is not the time" to start increasing interest levels as salary increases remain depressed. Quite fairly, the real estate markets have come to a standstill as activities have slowed in recent month and volume is in line with our guidance.
Since the end of last year, real estate deals have been at or around 100,000 per month, but they could see a deceleration as home buying permits - usually a good early sign of a transaction - have slowed since the beginning of the year. The MPC said in May that it was expecting to see 71,000 home buying permits per month for the remainder of the year.
Our optimism is less pronounced, as the number of permits fell from 69,000 in January to 65,000 in April, and the home purchases were mainly supported by first-time purchasers. Whilst first-time purchasers have gradually recuperated, do-it-yourselfers have dropped. During the 12-month period to April, first-time purchasers rose 8% over the previous 12-month period, but purchasers fell 9%.
In the course of this year, we anticipate a deceleration in the rate of increase in the number of first-time purchasers. In spite of all this, credit is still strong and has been valued at £20. Loans were 20 on an adjusted base. It is likely that remortgaging activities have contributed to the acceleration of credit, alongside first-time purchasers, as was the case last year.
For the future, we believe that this tendency will persist, but not so strongly, as the drivers behind credit will be somewhat weakened by less favorable business environment. Mortgages are still approaching historical highs, but we see little room for further improvements as recent figures show a small rise in mortgage interest offered.
In particular, this is reflected in higher loan-to-value mortgage interest payments, which have risen since the closing of Help to Buy: Mortgages guarantee arrangement at the end of 2016. The effect on first-time purchasers will be disproportionate as they are usually borrowers with higher loan-to-value (LTV). The buy-to-let market experienced a major decline last year.
Home-buy-to-let buying action is almost half what it was a year ago, and has averted around 6,000 buys a month in the last 12 month. DIY enthusiasts struggle, but that's because of them, who benefit less from state programs than first-time shoppers. That can further curb activities if potential removal companies/first purchasers do not find real estate to move to.
New housing supplies in England have increased recently as Department of Communities and Municipal Authority figures show that completion in the first three month of 2017 was up 20% on the previous year. However, the problem is that about every tenth transaction is attributable to the new offer, so there is good news but little to change the present moment.
The buy-to-let trend got off to a poor start in 2017, and the sector's share of the total net mortgage volume fell significantly compared with the previous year. Whilst declining mortgage interest has contributed to supporting credit taking, we are beginning to observe the merging of fiscal and supervisory pressures on the markets.
Following the bias of the amendment to postage stamps last year, buying activities stabilized from door to door, albeit at a lower base than before. While we had anticipated a modest credit rebound, this did not happen. Starting in April 2017, lessors who are higher-interest payers will see a gradual decrease in the amount of income that they can withhold each year from mortgage interest, the first phase of a four-year switch.
As a result, we have not yet seen a sharp decline in credit, but it will make lessors more prudent and should limit their capacity to re-use their portfolio. There have been indications in recent months that fewer less lessors are approving capital for refinancing (see chart).
Since January, the Prudential Regulation Authority (PRA) has been calling on creditors to consider new credit from one of the two 5th PRAs. As a result, it is becoming more challenging to maintain a heavily indebted buy-to-lease franchise structure with adverse effects on low -rent London - low - yield local economies. As a result, there is a disparity in LTVs for new loans between regions.
Even though two-year interest rate freezes are still the most common transaction term, five-year freezes have more than doubling their overall audience in the last two years to reach 1 in 5 of all buy-to-lease loan deals. Taken together, we have lowered our buy-to-lease credit guidance. In 2017 and 2018 we anticipated 38 billion pounds.
We are now expecting 35 billion pounds in 2017 and 33 billion pounds in 2018. So far, regulatory authorities and political decision-makers have not expressed concerns about the buy-to-rent weakness. In the course of this week, on 27 June, the Financial Stability Report will be released, which is expected to give more details on its assessment of macro-prudential power in the residential property sector.