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.
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
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.