Market Update - February 2010
Mon 01 Feb 2010
2009 ended on a positive note for the UK economy as it emerged from recession in the closing quarter of the year. While the outlook for 2010 is more positive than a year ago it is still anticipated
that the year will be challenging. Growth levels in the UK, akin to other major economies, are expected to remain below trend, with consumer spending subdued and government expenditure levels predicted to decline.
Despite the difficult year for the economy the property market performed well in 2009. This was particularly notable in the London market. This trend appears to have continued into 2010, with activity levels robust in the opening weeks of the year while supply, as defined by the stock of available properties is constrained. However the forthcoming election, concerns about the performance of the labour market and indeed mortgage interest rates may negatively impact the market as the year progresses.
The UK economy recorded positive growth during the final three months of 2009 albeit it at a very modest 0.1%, according to preliminary figures from the Office for National Statistics signalling the end of the recession. This is compared to a decrease of 0.2% in quarter three. Both the services and production industries witnessed a 0.1% increase in output during the three month period.The strongest contribution came from the distribution, hotels and restaurants sector, with a 0.4% increase in output. Construction industry output was flat during the period compared to growth of 1.9% in the previous quarter.
For the year as a whole, preliminary estimates show thatthe economy contracted by 4.8%, compared to growth of 0.5% in 2008. Not surprisingly, the construction industry saw the largest decline during the twelve month period at -10.5%, closely followed by the production industries with a 10.4% reduction in output. Output of the services industry fell by 3.7% during the year.
On a positive note, recent figures published by the Officefor National Statistics reveal that growth in the volume of retail sales improved during the second half of 2009reaching an annual rate of 2.7% in quarter four compared to 2.6% the previous quarter.
In value terms, retail sales grew by 3.6% in Decembercompared to the same month the previous year, representing the highest annual growth rate since May 2008.
The annual rate of inflation as measured by the Consumer Price Index rose to 2.9% in December compared to 1.9% the previous month according to figures from the Office for National Statistics. This sharp increase reflects a number of factors that led to a decline in prices in December 2008 including a reduction in the VAT rate, a decrease in oil prices and pre-Christmas sales.
Although this rate exceeds the 2% target rate, the Bank of England indicated in the November Inflation report that a considerable increase in inflation was expected in the short term. However, it is anticipated that the subdued growth rates in the economy will facilitate a moderation of inflation in the medium term.
In its most recent meeting in February the Bank of EnglandsMonetary Policy Committee voted to keep key lending rates at the current historical low of 0.5%. The base rate has been at this level since March 2009. The Committee indicated that the low lending rate coupled with the 200-billion stock of asset purchases and the lower level of sterling should help stimulate the economy.
The positive economic news also impacted the labourmarket in the closing months of the year. After increasing steadily since the first quarter of 2008, the UK unemployment rate stabilised at 7.8% in the three month period September to November 2009. In addition, the totalnumber of individuals unemployed fell by 7,000 compared to the previous three month period to reach 2.46-million.This was the first reduction recorded since the second quarter of 2008.
Interestingly, the total number of individuals in employment also fell during the quarter to reach 28.92-million,representing a decrease of 14,000 on the previous three month period, suggesting perhaps that migration may be a contributing factor to both figures. It is also important to note that the number of individuals in full-time employment fell considerably by 113,000 in the September to November period compared to the previous quarter, while the numbers in part-time employment rose by 99,000.
Not surprisingly, growth in average pay in Great Britain remained modest during the September to November period, with the level including bonuses rising by 0.7% compared to the same period the previous year. When bonuses are excluded, the annual increase stood at 1.1%, representing the lowest rate since records began in 2001.
In line with the performance of the economy, the London residential market continued to see positive signs of improvement during the final months of 2009. Data collated by Marsh and Parsons reveals that the final quarter of 2009 was the busiest period of the year with over a third of all transactions occurring during the three month period. Similarly average prices recorded during the final quarter were considerably greater than those seen earlier in the year.
An analysis of a sample of Marsh and Parsons transaction levels reveals that cash buyers were responsible for 34% of all sales during the final quarter of 2009, slightly lower than the 36% level recorded in quarter three. First time buyers accounted for approximately 23% of transactions during quarter four, compared to a quarter of transactions in the previous quarter. Approximately 10% of properties sold during the final quarter of 2009 were purchased by investors down from 16% in the previous three month period.
The rise in transactions towards the end of the year is reflected by gross mortgage lending figures published by the Bank of England. On a seasonally adjusted basis, gross mortgage lending reached 13.5-billion in December. This is the highest level recorded during 2009 and is just moderately lower than the 14-billion recorded for December 2008.
Lending Panel data which covers the major UK lenders reveals that lending for house purchase rose steadily throughout 2009 to reach 7.6-billion in December. The surge in December may be due to individuals bringing forward purchase decisions in advance of the removal of stamp duty relief for properties in the 125,000 to 175,000 price bracket in January 2010. In contrast re-mortgaging activity declined during the year reaching 3-billion in December, less than half the level recorded for the same period in 2008.
The number of mortgage approvals for house purchase fell slightly in December to reach 59,023 according to seasonally adjusted data from the Bank of England. This is compared to 60,045 in November. That said, this remains well above the 32,176 figure recorded for December 2008. The number of approvals for individuals remortgaging increased in December to reach 27,276 compared to 25,619 the previous month.
In their latest Trends in Lending report, the Bank of England indicated that the Credit Conditions Survey revealed an improvement in the availability of credit for house purchase during the final quarter of 2009. The greatest improvement was for individuals borrowing in excess of 75% of the value of the property. The survey also found that the demand for mortgages to purchase property increased during the three month period.
Outlook for the Future
The outlook for the economy in 2010 is somewhat more positive than it was for much of the previous year with the somewhat disappointing figures for the final quarter likely to be improved upon as the year progresses. That said, current forecasts suggest that growth for the year will still be below trend coming in at approximately 1%. This slow pace of activity will reflect continued cautiousness among households as unemployment rises and wage growth remains minimal.
Latest forecasts from the National Institute of Economic and Social Research (NIESR) reveal that the economy is expected to grow by 1.1% during 2010 and 2.0% in 2012. The weak recovery will reflect poor consumer spending and declining government expenditure with exports being the main source of growth over the period. Although the annual rate of inflation is expected to rise further in the short term, the NIESR predict that this will ease to average 1.7% in 2011. The NIESR also predict that the unemployment rate will rise further over the coming two years to reach 9.2% in 2011.
The Ernst & Young ITEM club also predict that the UK economy will recover at a somewhat sluggish pace with growth expected to be in the region of 1% in 2010 rising moderately to 2.5% in 2011 and 3% in 2012. The ITEM club also predicts that exports will be the main driver of growth rising by almost 10% per annum over the period 2010 to 2012. Interest rates are forecast to remain at currentlevels for the remainder of the year.
There are a number of factors that will impact the residential market in the year ahead. At a macro level the subdued economic recovery combined with rising unemployment may negatively impact activity levels as the year progresses.
In addition, while it is widely expected that the Bank of England will leave base lending rates unchanged for much of 2010 and possibly until early 2011, some lenders have already increased variable mortgage rates in an attempt to widen profit margins. More lenders may be forced to follow suit in the future making it less attractive for individuals already on low interest rates or tracker rates to move.
Furthermore if the surge in activity during the final months of 2009 was somewhat due to purchasers bringing forward purchase decisions, it is likely that activity levels in the opening months of 2010 may be subdued. The reduced level of mortgage approvals in December may reflect this.
That said, transaction levels in London proved to be particularly resilient in 2009, a trend which does not show any sign of abating in the year to date.
About Marsh & Parsons
Since 1856 Marsh & Parsons has been part of the Central, West and South London property scene. With our 14 offices situated in prime positions in some of the most charming and interesting villages of London we have an intimate and extensive knowledge of the area.
Peter Rollings, Managing Director, Marsh & Parsons
T: 020 8846 2320
Liza Jane Kelly, Director of Sales, Marsh & Parsons
T: 020 8846 2320
Marian Finnegan, Chief Economist, Sherry FitzGerald Group
T: 00 353 1 2376341