What is happening in the housing and mortgage markets of the UK?

As summer has turned to autumn in 2014 we have begun to see various signs of a slowing in the UK housing market. As the past growth was a trigger for the UK’s economic boomlet it poses not a few questions as to what happens next there too and it seems that such matters have also been on the mind of Bank of England Chief Economist Andy Haldane. From an interview with the BBC.

For the forseeable future, those headwinds to growth will be with us,they will be holding us back to a degree. Why is that? Because we are still paying for some of the cost of the crisis. Debt levels are still too high.

The last part about debt is a little awkward as Mr.Haldane is part of a Bank of England which used its Funding for Lending Scheme to boost debt via mortgage lending. As he was not on the Monetary Policy Committee back then perhaps this is a type of implicit criticism although for someone as “gloomy” as him it does beg the question of what he would have done?!

One area where if he was a dog he might catch a frisbee is where Andy Haldane points out that we as people have changed.

One interpretation is just that people are scared. People are scarred by the risk of something else going wrong, and are seeking safety, safety almost at any price

That is particularly awkward as you see when Andy Haldane was head of UK banking supervision he pushed them towards more safety and lower risk. Yes exactly what he is critiquing now! Sadly this is a regular feature of central banking where they are allowed to get away with criticising the consequences of their own actions by a largely supine media. Perhaps this is one of the behavioural biases he wrote about on the 17th of November. Central bankers put on one hat and ask for more bank lending then when they put on the other hat they set rules which restrict bank lending.

So Mr Haldane is in my view in a world described by the band Genesis.

This is a land of confusion.

Of course in the modern world this translate to him being selected by Time magazine as one of the world’s 100 most influential leaders. However my thoughts return to the same song.

Superman where are you now
When everything’s gone wrong somehow
The men of steel, men of power
Are losing control by the hour.

How does this affect the mortgage market?

There are two timing impacts here. Firstly Andy Haldane is telling us that the economic recovery is likely to struggle as we move into 2015. However if we look forwards those with variable-rate mortgages are likely to be cheered by his “lower for longer” view on UK official Base Rates. Regular readers will be aware of my view that an interest-rate cut is about as likely as a rise and Mr.Haldane may not be far away from that. Of course the danger remains that he contradicts himself again.

The Nationwide Building Society

It released its six monthly figures today and they gave a very downbeat view on activity in the UK housing market. Gross lending was down but look at net lending. From the BBC.

Britain’s biggest building society said that the figure was £13.1bn for the six months to September 30, down £900m from the six months to March 30.

Net lending was £2bn lower at £3.6bn.

So not only did total lending see a decline perhaps the “People are scarred by the risk of something else going wrong” factor apply as mortgages were repaid leading to a 36% fall in net mortgage lending. I have commented on this feature before as it is something that has become a regular in the credit crunch era. For example it took an extraordinary effort from the Bank of England’s Funding for Lending Scheme ( a near 1% fall in mortgage rates) to get the overall net mortgage lending figures to be consistently positive.

Of course this is only one lender and others may have done better but the Nationwide thinks not and the emphasis is theirs.

the Society accounted for almost a quarter (24.8%) of all net mortgage lending, ahead of its par market share.

Interestingly the new ISA rules seem to have provoked a burst of saving although much of it is no doubt switching for tax-free status.

Nationwide accounted for more than 20% (20.7%) of the growth in ISA balances.

I wonder about this a lot as a trend towards saving is in direct contradiction of what our central banking Supermen and Wonder Women want us to do.

Today’s overall mortgage numbers

The opening salvo from the British Bankers Association (BBA) has a theme of weakening to it.

Today’s figures suggest that the cooling of the property market has continued in recent weeks. Approvals were 16% lower in October than in the same month last year – the corresponding figure for September was a 10% decline.

Actually those are the new buyers approvals, the situation for remortgages is worse at -21% and the equity release situation is worse still at -34%. If we look back at past mortgage approvals for some perspective the average of the previous six months had been 41,549 and October was 37,076 or 10.8% lower.

We can see more signs of a slow down in house prices to come from these numbers as demand is being drained from the system. In the end this will affect prices and pull them back.

Interestingly demand seems to have shifted to unsecured borrowing.

Annual growth in unsecured borrowing is running at 2.8% – the highest rate since 2008.

This may not seem a high rate but this does represent quite a change on previous trends as if we go back the spring of 2013 the annual change looked like it was heading for a double-digit fall in percentage terms. Has the Bank of England engineered a switch from secured to unsecured borrowing in what would be yet another own goal?

Business lending

The Funding for Lending Scheme was and indeed still is supposed to be boosting this. It deserves a mention as the abject failure is ongoing.

Outside of real estate annual growth in borrowing by the real economy in October is the same as it was a year ago at
-3.3%.

If you are willing to only count the sectors where borrowing is rising then the situation is satisfactory.

There is positive and sustained growth in
the manufacturing, wholesale and retail
sectors.

Comment

Today has seen more evidence that whatever steam the UK housing market has is fading and waning. This will in time move further into house prices as well as the wider UK economy. Should we see house price falls then it will be the first time for a while that houses will become genuinely more affordable. But the danger remains of yet more panic action by the government and the Bank of England and on this road we return to the possibility of more monetary easing which has become a modern theme of this blog. On that front there has been this from Bank of England Governor Mark Carney today.

Carney says MPC discussions on timing of tightening, not easing

Never believe anything until it is officially denied!

Also Mark Carney seems to be morphing into Mervyn King.

A more balanced recovery

Perhaps he has not looked at the trade of fiscal deficits lately. Or perhaps like Time Lords Bank of England Governors look different but are in fact the same person.

If you wish for a Matrix style blue pill

From Businessday.

The cooling impact of global economy, low interest rates and political activities leading to May 2015 general elections have created opportunity for investors and home buyers in the UK property market.

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36 thoughts on “What is happening in the housing and mortgage markets of the UK?

  1. Hi Shaun
    If people are paying 3% plus on mortgages and getting 0.5% on savings ( if they are lucky) unsurprisingly they put spare cash in paying down the debt.
    ZIRP , NIRP and disinflation generally has the opposite effect in real life to that espoused by the ‘dismal science’. As we have discussed often, pyschology is not a strong point of CBs ( or most politicians).
    In that same interview Haldane talked about decades of below average growth. Well without China pumping more liquidity/credit into the system , oil price heading to $40/barrel, no inflation to help remedy ‘debts’; he is optimistic in that appraisal.

      • Ex

        if we get to $40 thats because we’re in a major recession , possible worse than the one I’m expecting next year (!)

        Forbin

        • Hi Forbin – I was interested in the reasons for that prediction. Even allowing for +/- 25% error margin (Range from $32 to $50) it’s going to have big economic (and probably geopolitical) consequences.

    • China’s already made a small move via a cut in the 1 year rate of 0.4% alongside an easing of the fractional reserve lending requirement. As to oil at $40/barrel. I’ll eat my pants if we see that in the next 5 years.

  2. Good read as ever Shaun.

    The UK housing market is so interlinked with the UK economy and the ‘feel good’ factor that I’m certain there will either be a relaxing of the MMR restrictions or a relaunch under some other name pre election to try and keep existing property ‘owners’ happy whilst trying to sucker in any last people sat on the sidelines.

    I also think a lot of people would love to take advantage of the lower rate mortgage deals at the moment but despite their house possibly having increased in value on paper the new MMR Restrictions mean they might not even qualify for their current mortgage making it all feel a little too much like 2008 and my liking!

  3. great article.

    I’d also like to share a similar anecdote about lending restrictions.

    Our two year fix is coming to an end and we’re looking to remortgage.
    Perfect credit rating, 50% ltv and 3X salary mortgage. And we’re struggling
    to remortgage. The reason…childcare, which will finish next september.

    Most lenders are now using affordability calculators, and it seems that childcare
    fees equate to loans in the calculator. No childcare and they’ll lend 5X salary,
    childcare and they’ll lend 2X.

    Hopefully we’ll be able to remortgage with our current provider and they are
    offering better rates…fingers crossed.

    • I think that’s the reason the market is cooling – almost impossible to get a mortgage. My son and daughter have both been refused mortgages due to assumed expenses. In my daughters case they assumed she ran a car despite not owning one and assumed she would be paying for childcare soon as she has a two year old. As a result they assumed she couldn’t afford the mortgage!

      • That’s a lot of assumptions! This is the problem when you assess applications using a tick box system and let the computer make the decision.

  4. The politics is the key factor, I think.
    The party which kills the property market is committing electoral suicide, so there will be further stimulus applied.
    In any event, I believe that the cooling market doesn’t apply to the “normal” London centred market (ie within easy commuting distance-45 minutes, say), which seems to be rising from my personal experience. At least, I surely hope it is!
    Outside the area, there are falls, and the North East is back to prices of at least ten years ago (again normal, not extreme top end stuff).
    The reality is that the UK de-industrialised, and relied on property and financial services which cannot sustain the country.
    Wasn’t it Sir Michael Edwardes who expressed the hope that the oil “windfall” would be used wisely? Some hope!

    • Hi Mickc

      I wonder if the coalition have mistimed things? What I mean is that we may not only have a cooling house market but also house price falls for the General Election. In such a scenario a new government may be willing to let prices drop for a bit before ensuring that they rise for the next election. In a system of fixed term parliaments the game has changed a bit.

      As to house prices I am interested to note that the London commuter belt is still seeing price rises. I think that they are now falling in my part of town (SW London).

  5. Hello Shaun,

    With regards to what happens next , well housing in the UK has been in short supply for some time now , decades even. Plans to tarmac every square inch of the SE will not stop price rises if you dont stop or temper demand.

    Well we’re trying that now with harder to get mortgages – this will be relaxed before the next election as the Con-Libs will want to win and feeling wealthy via house prices seems to fit the bill to most people ( not me btw ) .

    The supply of homes is essentially an engineering one – supply services ( water , gas electricity , waste services ) , types – flats or high rise ….. basically if you want more people in the country you need to plan ahead and think like Hong Kong

    Even then you reach a limit of how many people you can squeeze into a small space ( comparative) .

    So you provide enough homes and the price falls = econ 101.

    Well theres no such plans and those who own the building plots know it and release a little at a time and keep their port folio profitable , and even if you force them to build see my point on demand . But some times figures can help you ….

    Southern England and East Anglia is reportely 64000Km so with :-

    500 Netherlands density x 64000Km = 32 Million (its currently 26 million)

    6650 Hong Kong density x 64000Km = 425.6 Million people

    currently

    London area, 1,569 km2 (606 sq mi) so that 10.4 Million ( Hong Kong was 7.2 M in 2013, London 8.4 M)

    0.64% growth pa for 25 years on 64 million = 76 million approx ( UK over all )

    the logistics of keeping all fed and watered is a nightmare (!) and could we support nearly 1/2 billion people ? People have to choose …….

    Cheers

    Forbin

    PS: better lay in more popcorn stocks !

    • While I would agree that we need more affordable housing construction across the kingdom, I don’t think house price inflation has got much to do with supply – counter-intuitive though that might seem. We had a drop of around 20% in prices after the 2008 smash and that had nothing to do with house building or millions of people suddenly leaving the country. And regards London, I think the population now is about the same as it was in the sixties. There’s plenty of housing, it’s just too expensive for many people to live in. HPI has been supported by easy lending, property being seen as an investment and brazen govt backing. The politicos would much rather talk about irresolvable and dilatory problems like building more houses and go on making more money/debt available through their new schemes than allow prices to correct back to sensible salary multiples, as they keep trying to.

      • Hi Peter

        There is much merit in thinking that the QE fuelled Asset inflation has kept houses above their historic norms regardless of supply but if the supply was more than adequate then I’d posit that said asset inflation would have been difficult to maintain ( shares however are over inflated as well )

        But as the QE was there to prevent a 1930’s style collapse ( and support the pollies banking chums and future jobs in said banks ) we are stuck with how to unwind such action .

        A correction in the housing market is sorely needed but difficult to achieve as I’d posit the banks are really still bust and if the correction happens they would collapse themselves – thus this is to be avoided at all costs

        Thus we would have lots of bad news in the headlines just before the next election ……..

        Forbin

      • actually I forgot to state its actually Cheap quality housing we need – affordable is a loose term that means different things to different people , a bit like Humpty Dumpty

        “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

        Forbin

      • Totally agree Peter – foreign ownership, BTL investment are the cause, and scourge, and they COULD be dealt with without impacting the majority of HOME owners. Too many vested interests in parliament, and the wider political sphere.

        Demand is being created and facilitated at the expense of the many for the benefit of the few.

  6. whats madness is the soviet style local plan logic which does nothing for jobs but carves up greenbelt for developers when there is loads of lower margin brownfield , this is derived from a desire for regional GVA lift , here in S Hants they say we are underperforming the SE – but london has such strong figures that it really means underperforming vs London.

    If you tie up all earners at bubble prices with .5% rates and near zero equity the GVA cannot be improved because debt and mortgage repayments are not included in GVA , all that income will not make it into local goods and services – you need wage growth to substantially outrun interest rates which is not going to happen.

    and commuters GVA contribution goes to london but GVA is per capita so they are counted in the sub region short term house building might lift GVA but long term it destroys it , remember housing assocs are just as debt ridden as households all my HA’s income goes on repayments to high street banks at 3.5% atm.

  7. Hi Shaun,

    I am definitely with the brigade that says, ConLib government will make housing attractive with some wheeze in the run up to the election, for that extra fillip of feel-good. Just what is it going to be? IHT down on 1st property between now and 2020….. I can’t guess really.

    Paul C.

    • Hi Paul C

      If so then I guess the Chancellor will have to pull the IHT rabbit from his hat in time for the Autumn Statement. Will the Lib Dems support that? I guess he could gamble that they would not risk voting against it so near to a General Election when their situation is already so weak according to the polls.

  8. Hi Shaun,

    I am no fan of Andy Haldane but I think you are unfair to him in saying he can’t make his mind up.

    Sure, he pushed the banks to safety and low risk – the right thing to do. He now believes (which I don’t) that the low risk/more safety in order (or so I thought) to encourage people to feel more confident about spending their savings as they looked at (what I consider to be the mirage) the banks who after all were actually safe and well run due to his low risk approach. Unfortunately, he has been listened to carefully by savers as well as the banks and has been confounded by the psychology of individuals, which if I may, seems to be the achilles heel of all economists as they concentrate slavishly on econometrics and it’s models to explain everything, and has found that the borrowers have taken full advantage of FFL (until they were stopped, thank goodness! by MMR) whilst the savers who he hoped would borrow more havent.So a prescribed policy for banks and people, which was later restricted just to banks has been too successful with both parties, so now he suggests that borrowers should borrow less and savers should be confident and spend more. That’s exactly what a Central Bank is about isn’t it? Fine tuning the economy, forever giving it nudges one way and another.

    On the subject of a slowing housing market, I predicted the beginnings of a slow down this September in September 2013 and I view this as good and positive news for an asset class already grossly overvalued, although I fail to see any price falls materialising at least in the next 12 months. I am also heartened by the fall in net lending as I take this to mean the private balance sheet just strengthened a bit more and it needs all the strength it can get.

    • err and that should read “….He now believes (which I don’t) that the low risk/more safety POLICY in order (or so I thought) to encourage people to feel more confident about spending their savings as they looked at (what I consider to be the mirage) the banks who after all were actually safe and well run due to his low risk approach WAS TOO SUCCESSFUL.

    • Hi Noo2

      For once I find myself (in a rare event) in agreement with Baron Adair Turner who apologised for the Bank of England telling banks to strengthen their balance sheets and also to increase lending.

      As to a central banks role being to provide nudges that is the opposite of my view as their nudges are as often pro as anti cyclical. If the ECB starts QE next year it may well be operating just as the lower oil prices also have a beneficial impact. Japan would benefit more from lower oil prices if the Bank of Japan was not so actively engaged in a currency depreciation strategy andso on…

  9. Hi Shaun,
    Another great post. The UK seems to be a one-trick pony-it’s overly reliant on property. Time and time again we hear we need to re-balance, but the property ‘investing’ culture we have nurtured over the last 35 years cannot be easily unwound; or even if it can, it would take a generation. This is one of the main reasons I find very little to be optimistic about for our future economic prospects.

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