Preview of Main U.K. Economic Releases for Week Beginning 22 June

While consumers are benefiting from the boost to their purchasing power coming from sharply lower mortgage interest payments and reduced inflation, they are under serious pressure from a number of factors: most notably, including elevated and rising unemployment, markedly reduced earnings growth and heightened debt levels. Meanwhile, credit conditions are still tight and many consumers are keen to retrench due to ongoing serious concerns about the economy and jobs, as well as a desire to improve their balance sheets. Having jumped from 1.7% in the third quarter of 2008 to 4.8% in the fourth quarter, we suspect that the household savings ratio will move markedly higher, thereby limiting consumer spending.

The British Bankers Association is expected to report on Tuesday that mortgage approvals for house purchases rose to 30,000 in May from 27,685 in April; and a low of 18,027 in November 2008. Even so, this would still be a very low level of mortgage approvals compared to long-term norms. Indeed, BBA data show that mortgage approvals have averaged 61,500 over the past 12 years. Meanwhile, the Nationwide lender is forecast to report during the week that house prices have fallen back by 0.4% month-on-month in June, after rising 1.2% in May. Nevertheless, this would cause the year-on-year fall in house prices to moderate to 10.6% in June from 11.3% in May and a peak of 17.6% in February.

The overall evidence suggests that buyer interest is picking up markedly helped by the substantial fall in house prices from their 2007 peak levels and markedly reduced mortgage interest rates, but this is only slowly translating into increased house sales. Consequently, housing market activity is still very low by past norms and at a level consistent with falling house prices. We believe that the pick up in actual house purchases is likely to remain relatively gradual and fitful for some time to come given still tight credit conditions and poor economic fundamentals (even allowing for the recent mounting signs that the economy could be at least temporarily stabilizing). Elevated and still markedly rising unemployment, muted wage growth and an unwillingness of many people to commit to buying a house when they still have serious concerns about the outlook are all factors that are likely to continue to limit the upside for the housing market for some time to come. Meanwhile, it continues to be very difficult for many people to get mortgages, particularly first time buyers. This situation seems to be improving only gradually.

By Howard Archer