What about UK mortgage rates and the housing market?

Yesterday I discussed the state of play regarding official or centrally set interest-rates and the way that many of them are tending towards zero and in some case to below it. However an early theme back in the days that I was a fresh behind the ears green blogger was the issue of the decoupling of official and unofficial interest-rates. Indeed I pointed out back on the 20th of December 2009 that it was a decoupling of official and unofficial interest-rates which had helped exacerbate the credit crunch. It is easy to forget now that savings rates surged to 7% – although of course some of this was driven by the Icelandic banks which subsequently collapsed – way above the Base Rate at the time. There was a familiar feature though as the Bank of England sat on its hands and did not respond until too late.

However we learn a difference between then and now by looking at the interest-rates I quoted back then.

Until this weekend it was possible to invest money on a one year basis with National Savings (backed by the UK government) and get a gross return of 3.95%. Some savings institutions are offering rates of around 3% on instant access. Now if we look at mortgages tracker rates are around 3% for new mortgages at best,and the average 2 year fixed rate according to money facts is at 4.86%.

Savers may be a little shocked at the reminder as deposit rates for savings are now not a lot over 1% and the best current one-year bond offers 1.8%. Of course it was always questionable for a publicly backed organisation like National Savings to be leading the market like that but that was the state of play then. The current situation remains influenced by the Funding for Lending Scheme (FLS) of the Bank of England which took away a lot of the pressure for banks to compete for deposits when such cheap liquidity was available as an alternative.

What about mortgage rates?

Whilst the explicit phase of FLS pumping up the housing market via funding cheaper mortgages is over we still appear to be in an implicit phase. Let me illustrate this with some examples of new mortgage offers. From Mortgage Strategy last week.

Nationwide Building Society has launched a new range of mortgage rates including its lowest-ever fixed rate deal at 1.74 per cent.

The new two-year fixed rate is available up to 60 per cent LTV and offered at 1.84 per cent for new customers, while existing Nationwide mortgage borrowers are offered a rate of 1.74 per cent.

The catch of modern times is the product fee of £999 or £499 for first time buyers. But we see that for those of high credit standing the money can be borrowed much more cheaply than just under five years ago. Even the five-year fix is now much cheaper than the two-year back then.

A new five-year fix available up to 60 per cent LTV is priced at 2.84 per cent for new borrowers and 2.74 per cent for existing mortgage customers.

As for tracker rates the Nationwide is now offering this.

 A 75 per cent LTV two-year tracker is being launched at 1.44 per cent for new customers and 1.34 per cent for existing customers.

Just under a fortnight ago HSBC launched a headline-grabbing two-year tracker with an interest-rate of 0.99% although there was also a somewhat eye-watering £1999 product fee.

What about not so good credit?

If we move to a 90% loan to value mortgage then the interest-rates rise and if we try to peer through the product fee issue these borrowers can get a tracker rate of around 3% so pretty much the late 2009 rate. However they have a clear gain in fixed-rate mortgages thanks primarily to the falls in bond yields I have discussed regularly on here. The two-year fix rate is a bit over 3.29%.

What about existing borrowers?

The Bank of England’s monthly bankstats report tells us this.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 2bps to 3.2% in September.

At first sight this does not look so different to the state of play for trackers back in 2009 but there have been clear reductions in fixed-rate mortgages. Unfortunately the Bank of England data series is not entirely consistent but I estimate an overall reduction of 0.9% in mortgage rates since then. Of course the position with variable-rate mortgages is clouded by the way that some banks raised their standard variable rates when they felt that they had a captive clientele. Accordingly we find ourselves observing something very familiar in the credit crunch era which is that there is quite a lot of inequality.

Those of good credit rating and low loan to value levels can borrow at low levels. In terms of UK economic history at extraordinary low levels in terms of fixed interest-rates. But for those with weaker credit there are by no means the same gains and as we approach the weakest they may be trapped in an uncompetitive mortgage without the ability to make a change. This reminds me of the state of play of the self-employed who due to the backlash from the “liar loans” period can be trapped in such a situation even if their house/flat value has risen. Of course more self-employed is something we are seeing quite a lot of in the labour market data as we observe an increasing fractured financial world.

If you are looking for coast to coast numbers then I estimate that from the peak (2008) mortgage rates have fallen overall by 2.7% although again care is needed with the series. This compares with Base Rate falls of 4.5% as we wonder about yet another implied banking subsidy.

What has all this achieved?

Whilst the effects have been variable (and one more time benefit the better-off in another familiar theme) overall a stimulus has been applied twice to the UK housing market via interest-rates. Firstly via Base Rate cuts and then more latterly by FLS which appears to still be having an impact. But we see again that if we shift to lending the net effect has remained relatively small. From today’s data release.

Lending secured on dwellings increased by £1.8billion in September,compared to the average monthly increase of £2.2 billion over the previous six months.

If you think of the extraordinary effort which has gone into the mortgage market this is a disappointing result. The official view has been to sing along with Elvis Costello and the Attractions.

Pump it up when you don’t really need it.
Pump it up until you can feel it.

The reason for this is that whilst there is plenty of new borrowing there are also plenty of repayments. In the credit crunch era we – or to be more specific some of us – have undergone some ch-ch-changes. Accordingly the overall situation is as shown below.

Gross lending secured on dwellings was £17.1 billion and repayments were 15.7 billion.

Economic theory takes this as one homogenous group but I can see at least two groups there.

Is this now a slow down?

London is considered to be the harbinger of house price trends or the crash test dummy if you prefer. In my patch of south-west London things appeared to peak and turn lower a couple of months ago. Accordingly I noted this from the Land Registry yesterday.

UK House prices down 0.2 per cent since August

The move itself is small and the annual rate of growth remains strong for the UK at 7.2% but we have to consider that this is starting to look like a turning point.

Comment

I wanted to review the picture in this area as in many ways mortgages and the housing market have become metaphors for the credit crunch. What we see is a lot of official effort to simultaneously depress mortgage rates and also give a subsidy to our banking sector. The effect in terms of net lending has been surprisingly weak and so it seems likely that it is the foreign buying which has contributed also to the upwards push in prices. But as some measures like FLS fade we are left with the question, what happens if house prices turn lower? What move would you expect next from an establishment apparently wedded to house price rises.

Let me be clear that my own personal view is that we needed house price falls to realign them with real wages and not rises

More inequality?

Back in December 2009 the unsecured personal loan rate was 6.7% and now it is as shown below

The rate on outstanding unsecured personal loans increased by 9bps to 7.38% in September and new unsecured personal loan rate decreased by 4bps to 7.72%.

Up is the new down yet again. Welcome to a world where one day you can be discussing 0% (official) interest-rates and the next we have 7.7% ones for the rest of us.

Such interest-rates do not seem to have slaked our thirst for this type of credit

Consumer credit increased by £0.9 billion in September, in linne with the average monthly increase over the previous six months. The three -month annualised and twelve – month growth rates were 7.7% and 6.1% respectively.

Mind you many of our fellow citizens find themselves in a world that Ann Pettifor christened as Alice In Wongaland.

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34 thoughts on “What about UK mortgage rates and the housing market?

  1. Hi Shaun,

    Great article as always.

    As I’ve mentioned before, the uk only has one economy and thats selling houses to each other. The powers that be have channelled unprecedented amounts of money into to it to prevent a correction.

    And today another prop emerges:

    http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11194160/Take-your-mortgage-to-the-grave-older-borrowers-told.html

    another bout of mis-selling perhaps 😉

    the uk economy cannot recover until interest rates rise, and the housing market adjusts. But no politican who wants to be re-elected will have make the hard choices required.

    • wasn’t it Charlie Bean who said you should or we will have “generational ” mortgages ?

      instead of leaving proceeds of a sale it will be the debt passed on ( currently illegal but if the kids are living at home I can see them taking over the mortgage to stay in the house )

      wow !

      Forbin

    • also think of this – Pensions reform

      1, many are already planning to cash in and go on holiday !

      2, Some as intended will buy property – hurrah!

      Apparently its our money (!) well so are taxes but I get virtually no say on what thats spent on , even Aid is 0.7% of GDP and we all know that GDP figure is fanatsy land ( well we could always borrow more to pay for giving it away ………kool , eh ? )

      What could go wrong ?

      Forbin,

      PS; Shaun , its still looking very Dune like for the future , near future that is !

    • sorry for a 3rd comment

      Renting off the Bank? that’s what this implies …..

      What could go wrong ?

      House owning , car owing and share owning Democracy

      just the car to go next …. ( Democracy went ages ago 😉 )

      Forbin

    • Another problem with this approach is a lot of elderly go into care homes and the Social Services/NHS sequestrate their homes – except they wouldn’t be their homes, so the Social Services/NHS could then slug it out with the banks as to who was getting the property. I think we know who will win that argument. This would lead to the NHS refusing to provide care for the elderly – welcome to 21st century England…..

    • Hi Anteos, it was bad enough when we were buying and selling between ourselves, the transaction cycle was self-limiting to an extent but in the South-East we have seen a “wall” of cash flowing from Asia, Russia and even southern Europe to exacerbate the situation. Paul

  2. Yes, houses are overvalued.
    However, if there is a “crash”, the general economy will follow very quickly, because it is only housing “wealth” which is the bright spot in many peoples personal economy.
    Remove that and you remove the main asset which people are working to preserve.
    No, I don’t know how to solve the conundrum-but neither does anyone else.

    • I know how to solve it and so does everyone else.
      It’s going to involve pain and financial ruin for many.
      But then people of ordinary means should never have had “property portfolios” in the first place.
      The sooner the crash happens the better for the wider economy in the long term.

      • it will involve pain and financial ruin for all the Banks – and the future careers of many politician with said banks …….

        I’ll give you 3 guesses what will happen 😉

        Forbin

      • I don’t agree with you about “people of ordinary means” shouldn’t have property portfolios.
        People need somewhere to live and are comfortable with property. Everybody lives in one and “understands” the things-even like to do DIY in them, redecorate etc.
        What people do not understand are other investments, where the thing is worth 3x today, but possibly worthless tomorow. Tesco was blue chip, but hey, they were fiddling the figures! Did any of the well paid analysts, brokers, auditors and other panoply of “experts” ever question the figures?
        But all the experts got their percentage commission even if the stock went up down or sideways.
        Most ordinary people believe the City to be crooks (PPI, non performing endowments, Lloyds, the list is endless) and who can blame them.
        People can touch, feel and enjoy living in property-it counts for a lot when they decide where to put their money.

    • Kind of agree with Zak, I believe there is a fix, and it’s a yearly tax on second, third, fourth etc properties. Use the money earned to build houses. Make the tax be in line with general yearly regional price increases and put a baseline figure in place for when there is zero growth or price falls.

      People and businesses, both domestic and foreign NEED to be discouraged from buying property for profit. Feel free to offset tax liability against measurable improvements made it the property, but you will be taxed to the hilt on property rises that are inflated by a rigged market.

      Portfolios would reduce, properties would be freed up, prices could come down, no immediate need for interest rate rises and HOME owners would hardly be affected. Even the BTL crowd would still be able to cash in the majority of the profit accumulated whilst exploiting the imbecilic actions of government and central banks.

      This is a way to actually trigger a reset, but one in which only the massively over leveraged will suffer.

      The BTL gravy train/foreign ownership has to be stopped.

      • There are plenty of BTL people who use cash and will simply pay the extra taxes of which you speak although they may be discouraged from buying any more properties. I favour a blanket property price increase freeze (although substantial price falls would be happily tolerated), where all properties are valued now on a “drive by” basis as in the 90’s for the council tax.

        Each property cannot be sold for more than the valuation unless it has been improved/extended with the increased value being agreed by the planning department before permission to build is granted. The freeze would last until a 3 bed semi was valued at about 3.5 times the average (mode) salary – so for a very very very long time, think scores of years.

  3. Hi Shaun
    I love ‘Alice in Wongaland’ !
    Have you noticed in your neck of the woods property for sale sticking around on the market for months? And property that previously marketed for £2.5m now unsellable unless they drop to £1.999m ? Eventually the national stats will reflect this, but the ‘prime’ bubble has burst!
    ‘Confidence’ is a strange animal, once gone its a devil of a job to get it back. So although the vast majority of property owners in the UK are unaffected directly by the ‘prime’ market, the psychological effects will be widespread. One remaining ‘feel good’ factor is about to go south, and just before a general election.

    • Hi JW

      The peaks of early summer are gone and it is hard to be precise because there always were wide variations in what I thought were similar properties. But my estimate would be that Battersea has retraced 10% from the peaks so far. Usually it reflects what has been happening in Chelsea and Kensington with a lag, however this time around it seems to be up to date.

      As you say this seeping into the wider UK in early 2015 does beg one or two questions.

  4. As Anteos points out, no politician will contemplate a fundamental housing market correction on his/her watch. The problem is, where does the next fix come from to keep prices rising while median wages are stagnant or falling? I suggest print-to-let: the BoE could set up a special purpose vehicle and lend it money to buy houses to let to Generation Rent.
    This may seem daft. Indeed it is daft. But no more so than many other public policies.

    • Hi Ian

      It gives me a wry smile that on the evening that the US Federal Reserve brings the active phase of QE3 to a close we find ourselves mulling further measures in the UK! If current trend progresses then as JW implies above we can expect a response very quickly with the electoral timetable being what it is.

  5. Hello Shaun,

    I see others have commented on the housing correction and how the pollies would not allow it .

    Well they used to ! I remember 15% BoE rates and the ERM debarcle but since 1999/2000 when the dot com bubble burst and Greenspan jumped in we are no longer allowed such things as market corrections .. why ?

    Banks again ? well maybe because they are all still bust ? and the lender of last resort is still the HMG and the tax payer because even now they still don’t trust each other – after 6 years ?

    just wow! really wow !

    Whilst the HMG still needs to borrow 100Billion to balance the budget we will not see rates rise at the BoE voluntary that is, if the Fed forces their hand next year it won’t just be electricity we run out of !

    Then a sharp correction of Oil prices – upwards that is , and they may all get that inflation they desperately want …… uncontrollable at that …..

    Forbin

    PS: if you make too little of a product and you increase demand for it – then we’re all expecting prices to fall? Seems houses always defy economics ! ( so it seems does the stock market – free market ? my arse ! )

    • Yes, there is too little product ( thanks to planning laws), and yes there is always demand.
      But that demand is dependent on funding, and that funding is dependent on incomes, which for the vast majority of the demand ain’t going up much!

      Product can be increased if reasonable amounts of building are allowed in Green Belts (green nooses!), funding is a different matter.

      • building on Green site will not solve anything at all

        go ahead build on them , scrap all the planning laws build rabbit hutches ( oops we already did ! )

        then wonder why the SE looks like the Brazillian slums

        or you could go hi rise and look like Hong Kong

        but it wont solve the issue of too much demand for too little space

        solution ? one would be to stop all immigration but no one wants that – more people means bigger GDP don’t cha know

        Or

        you could make it more economical to live abroad and not to live here , er , wait a mo….

        forbin

  6. The key thing with these mortgage rates is that there are millions of homeowners locked out of them due to the fact that they’re LTV is too high.

    Agree with you abouyt prices needing to come in line with real wages

  7. Hi Shaun, not quite on track with your piece today but it seems to me you have described an ever loosening monetary policy since 2009 which continues even today as mortgage rates continue to fall, although there is at least some tightening in unsecured lending. I am becoming concerned about possible overheating in the UK economy and I hope GDP growth (as far as can be established by official figures) eases back to about 2% pa.

  8. Hi Shaun, not really on the same subject as your piece today, but it seems to me that you have described a continually loosening monetary policy since 2009 which continues even today as mortgage rates fall ever lower without the BOE doing anything much.

    At least there has been some tightening in the unsecured loan arena, as I am becoming concerned about possible overheating of the UK economy and would like to see growth (as far as it can be established via official figures) ease back to about 2% pa to avoid any possible severe corrections later in the cycle.

    • Hi Noo2

      Yes monetary policy was loosened via Base Rates and then via mortgage rates. If we stay in the interest-rate arena then bond yields have fallen too allowing for example the government to run a more expansionary fiscal policy all other things being equal.

      We can add to that the fall in the exchange rate which at 9.12 points from the beginning of 2008 means using the rule of thumb a 2.25% cut in Base Rate cut equivalent.

      What are the signs of overheating that you are using?

  9. Hi Shaun,

    It really is a very depressing reflection on our society that housing has become a gravy train. Twenty five years ago my peer group were bemoaning that fact that housing was so expensive for our generation, but compared with now…………

    I know home ownership is not the be all and end all but to deny this aspiration to virtually a whole generation is scandalous. Personally, like most of my peers, I don’t know or care how much my property is worth and I think a correction whilst unwelcome for recent first time buyers would help the economy in the long run if the banks could withstand it. There’s a disproportionate amount of wealth tied up in bricks and mortar in my opinion. I’m not comfortable with having all our eggs in one basket.

    • Hi Zummerzetman

      The other issue is that the economy gets distorted. What business can reasonably offer the sort of profits that house price rises have offered? Accordingly we twist our economy away from the sort of things that we will need if we are to fix our existing problems such as the balance of payments deficit and the persistent problems with the public finances.

      • Hi Shaun

        This negligence, in this case, is an example of what I label as ‘self-perpetuating self-destruction’…

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