The latter stages of the UK coalition government involved various attempts to fire up the UK economy via the housing market. Or if you prefer economic plan A for the UK establishment as we wonder if plan B has ever existed! The political and media emphasis was on the Right To Buy policy but in fact the major driver was the action of the “independent” Bank of England in using its Funding for Lending Scheme to drive mortgage rates lower. This was something of a dream ticket for the Bank of England as it was able to give a further subsidy to UK banks via the provision of cheap liquidity and pump up the value of their balance sheets via house prices all in one go. Overall mortgage rates were pushed around 1% lower on average by this although as I discussed yesterday fixed rates often fell by more. Accordingly we are seeing record lows for mortgage rates as this from yesterday’s Mortgage Introducer indicates.
Offset rates have fallen to record lows with the average offset fixed rate now priced at 2.65%, over one percentage point lower than two years ago, research from Moneyfacts has revealed.
This has happened recently in areas that you might not expect because we were told that high Loan To Value mortgages were a cause of the credit crunch and were to become a thing of the past. More latterly the MMR (Mortgage Market Review) of the Bank of England was supposed to tighten things up. Let us look at what high LTV (90%+) mortgage rates have been doing.
average best-buy fixed and variable mortgage rates fell by up to 0.88% between 11 November 2014 and 30 March 2015. On a mortgage of £150,000 this would save around £1,300 a year in interest payments..
Up is the new down one more time.
The incoming Conservative administration faces a problem which is at least partially of its own making which is that house prices are now so high and mortgage rates so low there is not much room left. An idea of the scale of UK house price rises was given by a BBC 4 documentary on Reverdy Road in Bermondsey which I watched with my mother because she grew up in Bermondsey. A whole estate of 791 properties and 20+ shops was sold in 1960 for less than a refurbished house on the road would sell for now. Extraordinary isn’t it!? I guess the word exponential was developed for situations like this.
Back to the future
We are seeing the past being raided for ideas as the Right To Buy policy of the 1980s gets revived. From the BBC.
Plans to support home ownership and extend the right-to-buy scheme to 1.3 million social housing tenants in England feature in a new Housing Bill. Under the plans, housing association tenants will be able to buy the homes they rent at a discount.
Also we get a continuation of the Starter homes policy.
There will also be help for first-time buyers, with 200,000 starter homes made available to under-40s at a 20% discount.
The fact that both plans are for people to buy at a “discount” is as near to a confession that we will ever get that house prices are too high and unaffordable for the majority. Also these plans have the issue of whether the government can legally force housing associations to do this and whether the latter is a form of age discrimination.
The Bank of England
I discussed only yesterday the way that at least part of the economics establishment was attempting to pressurize the Bank of England into an interest-rate cut. It however has been feeling the pressure and has decided it has been working too hard. From the Financial Times.
The MPC will continue to meet 12 times a year, but this will be reduced to eight if new legislation is passed.
It is quite a strain having to meet 12 times a year apparently! Also as MPC (Monetary Policy Committee) external members are paid some £133,091 per annum (2013/14) I await the Bank of England review of productivity in this area as by my maths we have gone from £11,090 per meeting to £16,636 which also provides quite an inflationary surge! Is this how the Bank of England plans to end deflation?
Also there is another example of inflation at the Bank of England.
This Bill would formalise changes to the Bank’s top team, by legislating to put the new Deputy Governor, Minouche Shafik, on the Court and the FPC.
This inflation of roles has been quite evident in the current Governorship and it particularly applies to what you might call “Carney’s cronies”. If we consider the issue of productivity this inflationary development poses its own questions as the performance of Ms. Shafik has been poor. Let me be clear that I welcome the appointment of women to the MPC but feel it is a shame we scoured the international organisations of the world for “Carney’s cronies” rather than appointing British women.
As the Bank of England has not actually changed Bank Rate for over 6 years it is rather a moot point as to whether 12 meetings of “masterly inactivity” provide more productivity than 8 as dividing by 0 has its problems. But in theory it should do. This issue is a counterpoint to the fact that today’s confirmation of UK GDP growth being 0.3% in the first quarter of 2015 implies yet more productivity issues for the UK economy as the labour market remains strong.
Today’s mortgage numbers
There was indeed something of a pre-election push. From the British Bankers Association.
There was a significant rise in the number of mortgage approvals in April……..which we would expect to continue in the coming months. House purchase approvals were higher than last month and 3% higher than in April 2014.
Whilst the BBA and the Bank of England would deny it there has been an easing in credit conditions overall in the UK.
Unsecured borrowing is growing at its highest annual rate, of 4.9%, since autumn 2010, reflecting strong consumer confidence.
A pre-election splurge? Well there do seem to have been some elements of that if we look at the retail sales and trade figures as well.
Although the actual mortgage lending figures were not as strong, were individuals willing to plan but less willing to actually trade pre-election?
Gross mortgage borrowing in April was £10.5 billion – 13% lower than in the same month last year but 2% higher than in March.
There is much to consider about the UK housing market and its interrelation with the UK economy. It was not long after the beginning of the Bank of England FLS in July 2012 that the UK economy picked-up. Whilst it was not the only cause of it the new government and the Bank of England will be nervous about the implications of turning the tap off especially as it would appear that the UK services-sector has been having a growth hic-cup.
The service industries grew by 0.4% in Quarter 1 2015 (Figure 3), revised down 0.1 percentage points from the previous estimate, marking the ninth consecutive quarter of positive growth. This follows a 0.9% increase in Quarter 4 2014.
That is its weakest effort in this new growth spurt. The problem for the UK is that so much has already been ploughed into the housing market what can they think of next? The moves are getting increasingly expensive as this estimate of Right To Buy costs from the National Housing Federation indicates. The emphasis is theirs.
This means that across the country there are 221,000 households that are eligible for the new proposal and able to afford the mortgage. And if all of these households decide to take up the scheme, it would cost £11.6 billion.
Is that £11.6 billion a type of helicopter drop of money?Then we have the issue that what will they do in say 3/4 years time to get us ready for the next election? I am reminded of this from Alice In Wonderland.
My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.
I am open to suggestions….