What will happen next to the UK housing market and house prices?

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.

Where next?

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.

Comment

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….

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30 thoughts on “What will happen next to the UK housing market and house prices?

  1. Right to buy without investment in building or acquiring more properties is one of the most evil policies ever created. Kicking the ladder away from the next set of people who would have benefited from reduced cost housing. It was wrong when it was done to Council owned housing ( our housing ) and it is even more wrong when forcing an independent organisation to sell its assets when we don’t have any claim over them whatsoever.

    • bootsy

      the next target will be the Private landlords , all those BTL ones and owners of property in Westminster

      Hang on , that’s the door bell

      uh oh , seems the Duke of Westminster is out side with a mob of BTL landlords…….. they seem to be angry about something …….

      gotta run now !

      Forbin

      • You must be joking.
        Westy is pissing it up on finest bubbly, seeing 1.3m competition rental units going off the market.

        • I meant forcing private land lords like him to sell off their property to their tenants

          just think how much Westy could loose ….

          Forbin

      • “I meant forcing private land lords like him to sell off their property to their tenants ”

        Nothing like that will ever happen, it would hit prices.

  2. Hi Shaun

    As you say the Ponzi is being kept on by what seems to me to be a stealth relaxation of the MMR regulations and a surreptitious return to high LTV loans.

    But whilst there is ample evidence in the the US for the expansion of junk loans these egregious practices, both there and here in the UK, must have a limit even in the absence of any regulation and at some point the music has to stop; as you say with the Alice in Wonderland quote you have to run faster and faster to stand still. As an example even prospective debtors might blanche at borrowing £1 million with an income of £20K/annum, regardless of what reckless behavior the banks might adopt.

    There must at some point be a dawning recognition by the authorities (Govt; BOE;FCA etc) that this cannot go on and then what happens? It is not just that the moves are getting more expensive they seem to me to be getting more desperate; we seem to have a “house price pumping” policy move every six months now.

    I cannot see this ending well.

      • Well they may not care – and probably don’t – but there are the Basle 111 rules in place to at least provide a fig leaf for their behavior in terms of a sliver of equity capital and there must surely be some residual doubt as to whether, if push comes to shove a second time, they are indeed TBTF.

        Maybe we need a second bust to have a system which is up to the job of regulating the banks; a depressing prospect but that’s probably where we’re headed.

  3. Shaun, the Bank of Canada has eight interest rate announcements every year. If legislation is being prepared to reduce the number of MPC meetings to eight, it seem to represent the ongoing Canadianization of the Bank of England.

    That being said, no-one here seems to be lobbying for the number of interest rate announcements to be increased from eight to twelve. Your point about reduced productivity of the MPC members is well taken. Maybe the new Conservative government should reduce the pay of MPC members by a third when they reduce the number of meetings.

    • erm, wont they be asking for a pay rise as their productivity has gone up ?

      got to pay the going rate for la creme de la creme , remember ?

      ( that $h!t floats comes to mind )

      Forbin

    • Hi Andrew

      Thank you as I had been thinking of it following the ECB which is true but less true than yours! After all the Bank of Canada also does this.

      “In January, April, July and October, when the Monetary Policy Report is published concurrently with the key policy interest rate decision” as will the Bank of England if the proposed reforms come in.

      This may of course be ominous for Canada as you know what happens next to places presented as an economic example……..

  4. Pensions release and now another sub for the housing market

    all to boost assets – so the Banks arent really bust ? really ?

    I have never seen so much been given to so few for so little !

    Forbin

    • Hi Forbin

      Yes there is indeed also pensions release which no doubt will also boost the housing market to some extent. It is another of the helicopter drops that Noo2 mentioned yesterday. The cupboard for our future is starting to look rather bare isn’t it? Best you stockpile plenty of popcorn I think….

  5. Hi Shaun,
    Not only are new build houses getting more expensive but they also seem to be shrinking in size. It seems whether it’s tea bags, chocolate bars, houses etc you can end up paying more for less.

  6. I’m convinced that the explosion in BTL is a fundamental driver of house prices performances and increasing social divides. Nowt will be done of course, except perhaps ‘helping’ first-time buyers (or any home buyer) compete with investors.

    • mark my words – the hundred year mortgage coming soon …….

      we will do ( well we’ll be forced to do ) anything to Save Our Banks !

      The true S.O.B. story !

      Forbin

      PS: Actually why dont we help those with mortgages with a Right To Buy sub just like the renters of council/ housing assoc. ?

      Anyone with a bank mortgage will then be able to get upto a 60% discount…

      what could go wrong ?

      PPs : and Tories are any different from ?

      Right to Acquire for assured tenants of housing association homes built with public subsidy after 1997,

      ??

  7. Hi Shaun, re your comment about MMR tightening things up, I thought the MMR simply made qualification for a loan more difficult but didn’t ineterfere with interest rates?

    “…we scoured the international organisations of the world for “Carney’s cronies” rather than appointing British women.” Do I detect a whiff of racism? Why do the appointees have to be British? Perhaps they could be of foreign birth but have lived in the UK a few years and so have a feel for the UK. Personally I believe employees should be appointed on merit alone, although in the case of merit I take your point about Ms Shafik.

    I read an IMF report a while ago that demonstrated that 90% of shocks to the UK economy and financial markets emanated from the Housing Market. I guess the authorities already knew this so the show goes on. Meanwhile, risk accumulates in the Housing Market until people decide they can’t afford it any more and then the corporate land lords will move in and take up the slack, but that could be some years away yet – look at Japan.

    • Hi Noo2

      I agree that MMR was supposed to make qualifying for a loan more difficult but it is odd that more of those high LTV loans are being offered at a cheaper price is it not?

      “However the number of 95% LTV deals has grown from 126 to 178, according to The Nottingham.” Why do that if fewer people can qualify for them?

      As to the MPC membership issue I would not bar foreign external members but I would expect them to have particular qualities. Kristin Forbes may yet show this but Ms.Shafik is on a different path. Therefore why was she chosen ahead of quite a few British candidates? That makes me believe that the criteria were different and suited Governor Carney’s ends more than those of the UK.

      Ironically it is Kristin Forbes who fails your test. “Perhaps they could be of foreign birth but have lived in the UK a few years and so have a feel for the UK.” She came her for a holiday once was the sum of it and doesn’t much bother with being here now. I guess she will be the most pleased about the reduction from 12 to 8 meetings as she will now come to the UK even less.

      • Yes you’re quite right about Kristin Forbes, I’m sure I’d rather spend my time in the States than the grey UK if I could afford it.

        So it would seem just the merit of being a good economist applies and I withdraw my “living in the UK” ever qualification.

    • Could it be because people from here might actually take an interest in what is going on, rather than just being the poodle’s poodles?

      • I think the matter of reputation comes into it. Some economists are actually proud of their reputation as I’m sure Shaun is.

  8. Hi Shaun, very timely entry following the Queens speech at opening of parliament. Working for one of the largest housing associations I can reflect upon consternation at being told to sell our assets. You see some counter lobbying but I reckon HA’s can be bought with helicopter money.

    You will see media copy to the effect that most tenants can’t afford the deposit or mortgage, cos they are social tenants for that reason. However there is a realism that “friends and family” of tenants in the most “profitable” subsidy areas will rally around and secure some assets. In a bizarre irony I expect that the tenant buyers may actually find themselves finally as tenants again but at market rates and paying their “friends and family”, if not in the original location then some poor facsimile.

    This will repeat the greed we saw in Thatcher’s 1980’s however if I am not mistaken that behaviour was firmly chastised in the bust of 1987……

    I need pop corn!

    Paul C.

    • Hi Paul C if I was an HA I would follow Shaun’s lead and take legal advice as to whether the Government can legally require this, although they could always cut funding to “encourage” compliance or indeed simply change the law as they have done a number of times in the past and can now get away with it as they have a majority.

      I think they’ll have a harder time of it on the age discrimination challenge because of the Equality Act 2010 which relates inter alia to Ageism in the provision of goods and services.

  9. Sorry the comment is late – the most sensible long term approach is to make housing affordable. It has plusses of social justice and encouraging productive investment. Just look at Germany with it’s rent capping laws. High standard of living and lower social welfare costs caused by a reduced housing benefit bill.

    Oh hang on, the rent collecting aristocracy is called tradition. And the conservatives are dedicated to preserving that. Oh for an effective centerist opposition that knows more than “borrow and spend” and punitively punish those who work hard.

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