Cutting interest rates to their lowest levels ever is unlikely to stave off 25% drop in monthly mortgage approvals.
The Bank of England is forecasting a significant drop in in the housing market despite cutting interest rates to 0.25% and announcing a £170bn stimulus package.
Publishing its view on the housing market, the the Bank of England has revised the number of mortgage approvals to an average of 56,000 a month, from 75,000 a month in the second half of 2016. It expects average of Halifax and Nationwide price indices to decline “a little” and quarterly growth in housing investment to average -1% – almost a two point percentage drop on its current forecasts.
The Bank of England’s quarterly inflation report does not foresee a recession, although all of its forecasts take into account the stimulus measures.
Noble Francis, economist with the Construction Products Association said: “The forecasts from the bank of England do anticipate a significant fall in activity in the housng market. Obviously construction activity is not going to stop as there is significant work in the pipeline. But where is the investment coming from in the future? We could witness significant impact on output in 2017.”
The Bank’s action has come in the wake of a slow down in the economy. Earlier this week the latest index Markit/CIPS Construction PMI Survey signalled the fastest overall decline in construction output since June 2009 following the steepest fall in commercial building for over six-and-a-half years and a drop in civil engineering activity for the first time in 2016.
The Bank of England predicts that mortgage approvals will drop
Meanwhile housebuilders have welcomed the Bank of England’s decision to cut UK interest rates, stating that the move would aid both housebuilders and homeowners.
Peter Andrew, deputy chairman of the Home Builders Federation, said: “Demand for new build homes remains strong and sales rates have been solid since the referendum. Underlying housing need is acute, banks continue to lend and the latest cut sees interest rates at the lowest level ever which, when combined with the impact of the Help to Buy Equity Loan scheme, makes new build homes extremely attractive for buyers.
“We fully expect the high level of demand for new build homes to continue, which will in turn allow the industry to maintain and build on the big increases in output over the last three years.”
"The forecasts from the bank of England do anticipate a significant fall in activity in the housing market. Obviously construction activity is not going to stop as there is significant work in the pipeline. But where is the investment coming from in the future? We could witness significant impact on output in 2017."
Noble Francis, CPA
Stephen Stone, CEO of Crest Nicholson, said that the lower interest rates would help the industry as it continued to work closely with the government to meet housebuilding targets and provide quality housing.
“Now is a great time to buy and we can expect a boost to the economy and in particular the housebuilding industry with renewed confidence amongst potential home buyers,” he said.
The Bank’s range of measures to stimulate the UK economy includes a £100bn scheme to force banks to pass on the low interest rate to households and businesses. It will also buy £60bn of UK government bonds and £10bn of corporate bonds.
Scott Corfe, director of the Centre for Economics and Business Research, said: “Even with this stimulus, CEBR expects economic growth to slow from about 1.5% this year to less than 0.5% in 2017.
"A recession – at least a couple of quarters of negative growth – will be difficult to avoid and unemployment is likely to rise from current levels.”
Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI, said: “July’s survey is the first construction PMI compiled entirely after the EU referendum result and the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building.
“Reduced volumes of new work to replace completed projects contributed to a fall in employment for the first time in just over three years.
“UK construction firms frequently cited ongoing economic uncertainty as having a material negative impact on their order books. In particular, survey respondents noted heightened risk aversion and lower investment spending among clients, notwithstanding a greater number of speculative enquiries in anticipation of lower charges.”
