The economy picked up pace in the three months to June, recording a sixth consecutive quarter of above-average growth and boosting expectations that further interest rate rises will be needed to curb inflation.
Gross domestic product rose by 0.8% in this quarter and by 3% compared with the same period a year earlier, according to the Office for National Statistics (ONS).
David Brown, economist at Bear Sterns, said: “Since the bulk of growth comes from consumer spending, it leaves domestic demand at risk of over-heating with negative consequences for inflation. It would be no surprise if the Bank of England is straining on the leash for another hike in rates.”
The impressive growth record has boosted tax receipts and lifted employment to record levels, but it has also created a challenge for the Bank of England, charged to ensure growth does not spur runaway inflation. However, many including the Financial Services Sector also believe that the economy has peaked and is set to slump.
UK could be set for an economic downturn
Hector Sants, new Financial Services Authority (FSA) chief executive, has reinforced the FSA’s view that the UK could be set for an economic downturn.
Speaking at the FSA’s Annual Public Meeting, Sants suggested that the UK was at the “peak of the economic cycle and have been warning banks for some time to prepare for deterioration in the credit markets”.
Sants said the FSA is focusing on ensuring firms have properly tested their business models to ensure they can withstand market volatility.
The concerns follow a number of warnings from Clive Briault, FSA managing director of retail markets, of potentially troubling times ahead for the sub-prime lending market.
In his last speech as FSA chief executive, John Tiner, said: “We have been keeping a close eye on developments and have commented in the past that risk has been under-priced. For us, the key to understand the exposures and the transmission system from investors into the banking sector which underpins financial stability and to be confident that the banks are stress testing these exposures is to test the adequacy of the amount of capital in each firm and the system as a whole.
“At present, we believe the system overall is robust, but this is clearly an area the FSA will continue to watch very closely.”
Are higher borrowing costs starting to cool demand in the housing market?
According to the British Bankers’ Association (BBA), underlying net mortgage lending growth eased in June suggesting higher borrowing costs may be starting to cool demand in the housing market.
BBA said mortgage lending rose by £5.1bn last month, down from £5.8bn in May and below the recent average of £5.3bn.
David Dooks, BBA director of statistics, said: “We’ve seen the trend gradually slowing down since the turn of the year.”
Data from the Building Societies Association (BSA) supported that view, showing net advances of £0.9bn in June, down from £1.15bn in May. The BSA said approvals amounted to £3.97bn last month, down from £4.24bn in May.
Brian Morris, BSA head of savings policy, said: “It seems the successive interest rate rises is now being felt and is affecting affordability.”
The Bank of England has raised interest rates five times since August last year as it attempts to curb above-target inflation. Financial markets expect it to hike again this year, taking borrowing costs to 6%.
“With many commentators expecting another rate rise soon, lending may well cool further over the remainder of the year and into 2008”, Morris said.
Hunt for surplus land for new and affordable homes
Following the Prime Minister’s pledge to increase the number of new homes by three million by 2020, the Department for Transport and the Department for Communities and Local Government (DCLG) have been working together to identify surplus land.
Around 470 sites have now been identified following a review with BRB (Residuary) Ltd (who looks after the residual responsibilities and liabilities of the former British Railway Board) and the Highways Agency (HA) of their surplus landholdings. These sites could make a considerable contribution to the Government’s increased target of 240,000 homes a year by 2016.
Ruth Kelly, transport secretary, said: “My department has identified over 2,500 acres of land that could potentially be used for new and affordable homes and is working with English Partnerships to ensure that this land is assessed as quickly and efficiently as possible.
“This could mark a significant contribution of land for new homes, and I am pleased that we are making such swift progress in bringing forward proposals to meet the Prime Minister’s priority of more new and affordable housing. In addition, the department is reviewing its land holdings and if further surplus land is identified housing use will be given high priority.”
Consumers, Estate Agents and Redress Bill has received Royal Assent
The Consumers, Estate Agents and Redress Bill has now received Royal Assent but The National Association of Estate Agents (NAEA) still believes there are some key issues which need to be ironed out.
The bill is designed to create a new, stronger and more coherent consumer advocacy body to introduce redress(reform) to the energy, postal services and estate agency sectors as well as improving regulation of estate agents and doorstep selling.
Peter Bolton King, chief executive of NAEA, says: “This is clearly a positive step for the industry. We believe redress for consumers is extremely important, to the extent that we already insist all our Principal, Partner and Director members belong to an independent redress scheme, as provided by the Ombudsman for Estate Agents.
“But redress on its own is not enough. Initiatives need to be put in place to prevent bad practice from happening in the first instance. By requiring all agents to belong to an approved industry body with competency standards the government could very easily address this issue.
“In addition, the issue of redress for residential lettings still needs to be addressed. The lettings market is extremely active in the UK, yet no provision has been made to provide compensation for consumers who deal with lettings agents in the latest bill. Fortunately, this is something the government has now recognised and we eagerly await further feedback on the matter.”
BoE hold interest rates at 5.75% The Bank of England’s Monetary Policy Committee is maintaining the official bank rate paid on commercial bank reserves at 5.75%.
Warren Bright, chief executive of Propertyfinder.com, said: “The Bank of England did the right thing to keep rates on hold. House price growth has slowed to more sustainable levels and housing transactions and mortgage approvals are cooler. Household budgets have been stretched though, and will remain under pressure in coming months as previous rate rises continue to take effect.”
Returns in Irish commercial property increasing
According to IPD’s Irish Quarterly Index, total returns in Irish commercial property picked up in Q2 2007 to 3%, compared to the previous quarter (2.2%). The return on Irish property also outperformed the 2.1% return seen in the UK in Q2 2007.
For the first time in six years, industrials were marginally the best performing sector in Q2, with a total return of 3.2%. Retail returns in this period were 3.1% and last were office returns at 2.9%. The strong return in industrial was down to yield movements. Equivalent yields fell by 10 basis points in the quarter, adding 1.9% to capital values.
The strong returns in retail and office were down to the continued expansion in rental growth, which was 2.4% in retail and 1.7% in offices in Q2. Yields in retail and offices fell by one basis point in Q2, which added 0.3% to capital values in each sector.
Angela Sheahan, IPD research manager, said: “In contrast to the previous four years, where property returns in Ireland have been led by yield compression and rental growth has been slow, Q2 2007 shows yield impacts slowing and returns starting to be driven by robust rental growth.”
UK has an overvalued housing market
According to Fitch Ratings, the UK is second to France when it comes to an overvalued housing market. In addition, the UK’s economy is one of the most at risk from rising interest rates, incomes and asset prices.
Overvalued property and highly indebted consumers makes the UK economy especially vulnerable. According to Fitch, house prices are high compared with their long-run trend with household incomes and with rents. UK house prices have risen more in the past 10 years than in any other nation studied, except for Ireland.
Brian Coulton of Fitch said: “Nominal housing yields are now lower than bond yields.”
According to Coulton, many countries have seen rapid growth in house prices after central banks cut rates during the global slowdown that started in 2001. He said: “Monetary easing earlier in the decade did pump up the housing market. But with five interest rate increases since August last year, I do not expect that to continue in the UK.”
Green grants to cut fuel bills
The Department of Communities and Local Government (DCLG) has announced a new system to help homebuyers get ‘green grants’ to lower their fuel bills and make their homes greener.
Most people are unaware that there are typical grants of £100-300 for cut-price loft and cavity insulation. The programme is expanding next year so more homebuyers can benefit. It is linked in with Home Information Packs (HIPs) and Energy Performance Certificates (EPCs).
According to the Energy Saving Trust, measures recommended in EPCs could save the average consumer £300 a year off their fuel bill. EPCs, giving home-buyers a home energy rating, will make it easier for consumers to get grants to make the improvements recommended in the certificates. The certificates will give consumers energy ratings for homes of A-G, similar to fridge ratings.
Six ‘major’ energy companies have agreed that when buyers move into their home and sign up to an energy contract they will get immediate access and information about ‘green grants’.
Yvette Cooper, housing minister, said: “Energy certificates have the potential to cut family fuel bills by hundreds of pounds. But it can still be a real hassle getting the work done. Most people don’t know these grants are available or don’t know how to apply for them. This means it should be much easier for homebuyers to get help to cut their fuel bills and carbon emissions too.”
Application for EU Flood Recovery Funding goes ahead
John Healey, flood recovery minister, announced that the Government will be lodging an application to the European Commission for support from the European Union Solidarity Fund (EUSF) to help recovery from the recent flooding in the UK.
The Government has already announced over £46m for flood-hit areas as well as more support through the Bellwin scheme (the Bellwin scheme allows Scottish ministers to have additional revenue support to local authorities to assist with the immediate and unforeseen costs in dealing with the aftermath of emergency incidents).
The application to the EUSF is subject to meeting the eligibility criteria set out by the European Commission. The amount of damage caused by a natural disaster has to exceed £2.2bn for the application to be successful.
If successful, resources would be available in nine to twelve months time. The aim of the EUSF is to help member states meet the uninsurable costs of dealing with natural disasters, for example, supporting the costs of emergency services, cleaning up and putting infrastructure back into working order.
Healey said: “ As a member of the EU we intend to exercise our right for support from the Solidarity Fund which was set up specifically to help countries that have experienced extensive damage from natural disasters such as the recent floods.
Number of properties per landlord set to double
According to Mortgage Trust, the amount of properties a buy-to-let landlord owns is set to double by 2012.
Landlords currently own 1.89 properties each on top of their own residence and this is expected to rise to four per property owner in five years time (five properties inclusive of their own home). According to the lender, students now make up 15% of all landlords’ tenants, up from 7% in January 2007.
John Heron, director of mortgages, said: “Some people are skeptical about whether landlords, particularly small scale landlords, are losing confidence in the market due to higher interest rates.
“This is not the case. The majority of small scale investors have no plans to sell their properties; instead they remain confident that they will be able to add significantly to their portfolio over the short and medium term.”
