Developments in housing and mortgage markets cannot be looked at in isolation from the rest of the economy and happily, economic data since the referendum has been surprisingly benign. Despite fears that uncertainty about the UK leaving the EU would affect investment and consumer spending, initial data suggests that hasn’t been the case. Retail sales have been better than expected, employment has been stable and real (inflation adjusted) earnings have continued to increase.
This upbeat news has led to upward revisions of UK economic growth forecasts across the board, most notably the OECD, which raised its projection for UK GDP by 0.1 per cent to 1.8 per cent for the year. This more buoyant data is also lifting sentiment, which is key to performance in uncertain times. Overall consumer confidence has recovered since June’s shock referendum result, although it has not yet returned to last year’s levels.
While it may appear that the economy is back on track, it’s probably still too soon to be so assured. The Bank of England’s decision to cut interest rates to 0.25% and introduce more quantitative easing, along with a scheme to give banks access to low cost funding in return for lending to households and businesses may have seemed hasty, but may actually have supported sentiment and activity. Forecasters have revised up 2016’s economic growth expectations, but revised down 2017’s. This makes sense as so far nothing has actually changed. The UK is still in the EU and will remain so for some years yet. The clock will only start ticking when Article 50 is invoked in the first half of next year. Until then we do not know what type of exit the UK will make, nor the types of trade deals we can negotiate. The behaviour of investors and employers when that becomes clearer will give a more concrete idea of where the economy is headed.
In the meantime the UK will see a squeeze on household incomes as inflation rises due to the fall in Sterling’s value. That is particularly important for those buying with a mortgage. While mortgage rates are at historic lows – and could fall yet further as the Term Funding Scheme (TFS) gives banks access to still cheaper funds - lenders are still somewhat constrained by the regulator’s affordability rules and their own risk appetites. A weaker economic background and pressures on households’ real incomes will affect this.
Author: Fionnuala Earley - Countrywide's Chief Economist
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