It looks like the UK economy is streets ahead of everywhere else. The International Monetary
Fund (IMF) now expects the UK to be the fastestgrowing large developed economy in 2014. Growth in the second quarter of 2014 was 0.9 per cent bringing the estimate for the year up to 3.2 per cent - that’s the fastest annual growth in the UK since 2007 and a great step forward after six years of underperformance.
There are still risks though. A sustainable economic recovery depends not just on domestic demand but also that from overseas. The Eurozone economy is still far from stable and continuing unrest across the world upsets supply chains as well as confidence. The relative improvement in the sterling exchange rate hasn’t helped either. Indeed there is strong evidence of a slowdown in manufacturing in the third quarter and that presents a threat to the pace at which the UK can continue to recover.
Furthermore there is still the deficit to consider – even if Ed Milliband did forget about it in his conference speech. Weaker tax and National Insurance receipts means that borrowing has been higher this year than last, meaning that there is still a big job to do. The well respected and independent Institute of Fiscal Studies estimates that less than half of the deficit reduction required has happened so far. So, there is more austerity ahead, despite the tone of party political conference speeches.
There are things to be happy about and on the silver lining side, the latest Bank of England Credit Conditions survey shows that the sentiment about lending to business has improved. This reflects greater confidence in a sustainable recovery as banks increase their risk appetite and facilitate badly needed investment.
The economy is strong and while we can be pleased that growth will continue, we must at the same time be aware of the challenges ahead. Wage growth is set to pick up next year and that will help, but sustainable growth cannot be achieved from domestic growth alone. While the UK is streets ahead of other developed economies, sustained growth is reliant on overseas economies.
Another record, rather telling of the London market, is the biggest increase in Londoners purchasing homes out of the capital. High prices and worries about the London market have seen the numbers of home owners cashing in on the capital increase by 70 per cent in the first half of the year compared to 2013. The London market has cooled, price growth is stalling and the outlook for activity looks somewhat uncertain. It’s London’s records that have contributed to the shift in the market. High price growth has strained affordability, even for some of the wealthiest households, stories of market excesses have lead the BOE to wield Macroprudential regulations and sentiment has declined accordingly. The London market has overshot, and is due for a period of sustained calm. The heat has instead moved out to the country.
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Housing transactions have been waning over the last few months and the latest mortgage approvals data suggests that there may be a bit more of that in store. Approvals tend to lead the count of actual transactions and the latest trend is certainly down.
However, the latest Credit Conditions survey from the Bank of England shows that banks and building societies are in more of a mind to lend than they were. That seems to be backed up by the slide in quoted mortgage rates too. Indeed over the last few weeks there seems to be something of a price war emerging as lenders compete for business. That certainly chimes with the survey results which report that lenders are intent on chasing market share objectives now that economic conditions are better than they were. The fact that the bank rate looks set to remain low for some time to come and swap rates have dropped, will also help to keep mortgage rates low.
Competition for lending is not at the expense of the quality, nor is it with the expectation that house prices will continue to grow quickly according to the survey. That should bode well for something of a resurgence in mortgage approvals in the coming months.
However, the Bank’s survey also shows there is a clear perception among lenders that demand is waning. Mortgage rate reductions can only go some way towards changing this, but the growing resistance to higher house prices is having an effect – the latest survey of house prices from Nationwide shows the first monthly fall in house prices since 2012 and data from RICS shows that surveyors believe that house prices in London are now falling. A rebalancing of the London housing market is certainly welcome, but it may mean a few leaner months before healthy activity is restored.
The number of homes bought by renters has fallen by a third since January. As the sales market has taken pause, so has the flow of tenants from the rental market.