Market Comment

May 2013.

Mortgage Market Update.

The Housing market has seen a rise in activity over the first four months of 2013 and in recent days we have seen the thwarting, for the time being, of the “triple- dip” recession - are we standing on the edge of a genuine recovery or another fall in production?

The UK economy has avoided falling back into a recession after recording faster-than-expected growth in the first three months of the year. The Office for National Statistics said its first estimate for gross domestic product (GDP) showed the economy grew 0.3% during the first quarter of 2013. The growth in GDP means the economy avoided two consecutive quarters of contraction - the definition of a recession. There had been fears the UK would enter its third recession in five years, the “triple-dip”. Economists say the news should give a small psychological boost to consumers and businesses, but the broader picture of the economy remains the same. The UK economy has been on a plateau since the financial crisis hit in 2008, with small spurts of growth and contraction.

Chancellor George Osborne said: “Today’s figures are an encouraging sign the economy is healing. Despite a tough economic backdrop, we are making progress. The deficit is down by a third, businesses have created over a million and a quarter new jobs, and interest rates are at record lows.”

“We all know there are no easy answers to problems built up over many years, and I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future,” he added. We have to hope he is correct in his views as our fragile economy is very vulnerable to sentiment and issues across Europe and the world in general.

Matt Basi, from CMC Markets UK, said: “Growth of 0.3% is hardly cause for celebration, but may ease some of the pressure that has been piling on the government’s austerity plans.”

Just days after these figures were announced, it has also been revealed that the UK economy may never have suffered a “double dip” recession. A report from the National Institute of Economic and Social Research (NIESR) pointed out that latest official revisions to the figures meant it was “increasingly unclear” whether this second recession ever took place at all.

The report shows that gross domestic product dropped by a marginal 0.1% in the last quarter of 2011, followed by the same figure for the start of 2012, though in the second quarter it was a fall of 0.4%. The NIESR forecast growth at a sluggish 0.9% for 2013 as a whole, followed by 1.5% in 2014, with unemployment remaining flat at 8%. It comes as figures from manufacturing yesterday offered a “glimmer of hope” that the downturn in the sector could be about to come to an end.

A review of the data by the ONS also cast doubt on whether there really was a “double-dip”, noting that the declines in output in the three quarters that it covered were all modest. The declines of 0.1% seen in the first couple of quarters were “actually within the statistical margin of error”, it said. So this could be seen as good news - things were not as bad as they seemed or bad news poor reporting of statistics have labelled our economy as failing when perhaps it wasn’t - and all the headlines about doom and gloom were unnecessary and unhelpful. As we have all been told there are lies, damn lies and statistics...

Meanwhile, we are told that UK economic growth will pick up pace this year, according to Bank of England policymaker Ian McCafferty, The newest member of the Bank’s monetary policy committee said improving credit conditions, a brighter international outlook and his expectations of a recovery in business investment all made him “hopeful for the UK economy through 2013 and into 2014”.

McCafferty’s comments gave George Osborne a much needed boost after a difficult 10 days during which he was warned by the IMF’s chief economist, Olivier Blanchard, that he was “playing with fire” by sticking to his strategy of public sector cuts

A group of prominent economists also weighed in behind the chancellor to endorse the overall economic plan, which they said was heading in the right direction.

Stephen King, the chief global economist at HSBC, the former Goldman Sachs economist Gavyn Davies and Roger Farmer, a professor of economics at the University of California, told MPs on the Treasury select committee that it would be unwise to embark on a large-scale spending spree to boost growth while government debt remained high.

Activity in the UK housing market has hit a three-year high, surveyors report, supporting hopes of a revival that would help the economic recovery. Chartered surveyors handled an average of 17.4 home sales over the last three months, according to the latest monthly survey by industry body RICS. That was the highest number reported since March 2010 and meant sales rates have been rising for three consecutive months.

Peter Bolton King, a director at RICS, said: “A buoyant, healthy property market is central to economic recovery and, while these are still very much early signs, it is encouraging that sales are beginning to pick up. The increase in potential buyers getting out there and viewing property is particularly encouraging.”

The Government’s Funding for Lending scheme, launched last August to give banks access to cheap finance, has been cited by lenders as a factor pushing down on bank funding costs and helping to reduce interest rates for customers.

House prices were more sluggish than sales, according to the RICS survey, with respondents reporting that prices were roughly flat in March. RICS said the survey pointed to house prices now having been relatively stable across the UK for the past six months.

Mortgage rates are about to drop further over the next three months, according to a Bank of England survey released early in April, while measures unveiled in the Budget are expected to offer further support for the market.

There are concerns in some quarters that the Chancellor risks supporting a “bubble” in prices through his Help to Buy push, which will massively expand the mortgage guarantee and shared equity schemes available to would-be buyers.

So, what action should borrowers be taking at the moment. Once again the warning is not to sit on your lenders standard variable rate. We are currently seeing another round of Standard variable rate rises, mainly with the Irish owned lenders with Bristol and West announcing a rise.

There are currently some extremely competitive interest rates being offered with five year fixed rates being offered at well below 3%. As well as offering protection against interest rate rises, when they eventually happen, they also offer lower rates that many lenders short term base rate trackers. However with the extremely vigilant underwriting taking place currently now is also not the time to be dabbling with lenders that you are not familiar with. Now, more than ever, the role of an experienced mortgage broker is extremely important in being able to identify lenders that are not only offering competitive interest rates but those that will actually lend.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

A typical fee for arranging your mortgage is 1.5% of the loan amount.

For more personalised comment and for advice about your own mortgage requirements do please pick up the phone and call one of our team on 020 7930 7242 or email one of us having read our profiles on the “about TMM” pages on this site.

Simon Tyler, 18th May 2013.