It is time for us to dip our toe again into the situation in the UK mortgage market as we know that via its impact on house prices it has an impact on both economic growth and inflation. Or to be more specific officially recorded economic growth but not inflation as the headline Consumer Price Index or CPI excludes owner-occupied housing costs. They were supposed to be added “soon” after its introduction back in 2003 but somehow they got forgotten for a decade and were then shuffled both by going into a subsidiary measure (CPIH) and by morphing into (usually lower) rental costs.
What is current Bank of England policy?
The headline is the Mortgage Market Review of late April 2014 which supposedly ended interest-only loans and tightened rules on the availability of high income multiples. Of course as I discussed last week interest-only loans simply metamorphosed and boomed in the buy to let sector whilst our valiant regulators myopically look elsewhere.
Meanwhile the pedal has been pushed near to the metal in many areas. After all we still have an emergency Bank Rate of 0.5% and £375 billion of QE which amongst other things was expected to reduce the cost of fixed-rate mortgages. The latter will be extended next week as some £6.3 billion of maturing Gilts gets rolled forwards in maturity some of it to the ultra longs as Operation Twist fires up again. Also we have the Funding for (mortgage) Lending Scheme or FLS which now amounts to some £61.4 billion of cheaper funding for UK banks and grew by £4.2 billion in the second quarter of 2015. Of course this is badged as being for business lending (struggling) and not mortgages (booming), but reality is rather different.
What about an interest-rate rise?
This seems to be fading into the ether in spite of the rhetoric and Open Mouth Operations of Bank of England Governor Mark Carney. Yesterday the latest member of the Monetary Policy Committee member Gertjan Vlieghe who had to be forced to give up his links to the hedge fund he previously worked for told us this. Form the Guardian.
A Bank of England policymaker has said UK economic growth must stabilise or pick up before he will be persuaded of the need to raise interest rates.
Actually it has been fairly stable but perhaps there were other priorities than checking on this when he was a hedgie. However he has spotted what since the UK Pound nadir of March 2013 has been a theme of this blog.
“We’ve had a huge tightening from the exchange rate,” said Vlieghe, who added that he would prefer an interest rate cut to another round of quantitative easing–
Ironically a side-effect of the currency rise may have reduced pressure on the UK housing market as for example we rose in round numbers from 50 Roubles to the UK Pound to 100. So some foreign buyers may have been deterred applying a brake for London perhaps whilst of course existing ones do something of a jig.
But Gertjan continued with his message.
there had been “a little bit of disappointment” on wage growth.
Really? I guess nobody challenged him as he ploughed a furrow which headlined with interest-rate rises then moved them into an unspecified future whilst somehow finding the time to mention an interest-rate cut! Have you notice how much more frequently interest-rate cuts are being mentioned by UK policy-makers?
As to QE additions I think that he is in line with Governor Carney here as his body language is plain when the subject is mentioned. Of course Mark Carney is a “dedicated follower of fashion” but as we stand QE in the UK seems fixed at £375 billion.
A substantial interest-rate increase for a few
Ironically one of the government policies to support the housing market has led to an interest-rate rise for some.The Halifax is offering an interest-rate of 4% compared to the 0.8% available on its ordinary cash ISA. This is quite a boost and is before we allow for the 25% bonus which you can get from the government which is tax-free. So a five-year savings plan would earn the equivalent of around 9% per annum.
However the Halifax changes its rates and others are more like 2% then ordinary cash ISA holders may well feel that there much lower interest-rates are cross subsidising the mortgage market. Perhaps our government should take a look, oh hang on, they created it…..
Government schemes
There is a dizzying list of schemes now under the Help To Buy banner. As you peruse the list below you might want to remind yourself that all this “help” is only necessary because the Bank of England policy moves have pushed us to a situation where house prices are up 18% in the credit crunch era and real wages are 6% lower. Indeed the numbers are worse for younger people who are more likely to be saving up for a property purchase.
With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.You won’t be charged loan fees on the 20% loan for the first five years of owning your home.
A mortgage supported by the Help to Buy: mortgage guarantee scheme works in exactly the same way as any other mortgage except that under the scheme the Government offers lenders the option to purchase a guarantee on mortgage loans.Because of this support, lenders taking part are able to offer home buyers more high-loan-to-value mortgages (80-95%).
I have already covered the Help To Buy ISA which subsidises a deposit so you can afford to enter a subsidised scheme! Also you may note that the government is supporting the high loan to value mortgages which were and indeed are supposed to be out of favour. But there is more.
We are seeing the return of Right To Buy in England at least.
The Right to Buy scheme helps eligible council and housing association tenants in England to buy their home with a discount of up to £103,900 (£77,900 outside London).
And we also have this.
Halifax is supporting the Governments MoD Forces Help to Buy scheme, which allows forces personnel to borrow up to £25,000 interest free (repaid over 10 years) to use as a deposit when buying a property to be used as their main home.
It is quite a list which has led to some speculation as to how many of these you could qualify for in one go? From Joe Sarling.
Q: Would I be able to use both
#HelpToBuy ISA (free £3k) and London#HelpToBuy (40% Govt loan) to buy a Starter Home (20% disc) in London?!
Will we end up paying someone to buy a house? That gets ever less ridiculous as we note that the junkie culture at play here needs ever higher doses of the drug. Oh and it would appear that I missed Help To Buy for London off my list so apologies.
Comment
Just when you thought that we had used up the policy measures that could support the UK housing market our establishment finds another. On the “Road To Nowhere” that we are on this has to continue as the “Help” is required because house prices are so high relative to incomes especially if we look at the incomes of those likely to buy a property. Even in a much better year for wages which 2015 has been both nominal and real wages have lost ground to house prices.
Today has seen more evidence of credit conditions doing their bit from the Bank of England dataset.
Lending secured on dwellings increased by £3.6 billion in October, compared to the average monthly increase of £2.8 billion over the previous six months.
The number of loan approvals for house purchase was 69,630 in October, compared to the average of 68,099 over the previous six months.
That is out of sequence with the electoral cycle which makes us wonder what “delights” will be served up as we approach 2020. Also in the past we have seen unsecured lending leak into the housing market when there are restrictions like the current MMR.
Consumer credit increased by £1.2 billion in October, in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.8% and 8.2% respectively.
Meanwhile there are stirrings across the English Channel as we await to see if the European Central Bank fulfills its hints and promises to cut interest-rates even further on Thursday. Such an eventuality will have the Riksbank of Sweden, the Nationalbanken of Denmark and the Swiss National Bank on “action stations” later this week. We are already seeing markets adjust as Swiss ten-year yields fall to a record -0.41% and I wonder if the path for UK Bank Rate will be dragged lower? What about house prices then? Time for some music for prospective house buyers.
Help, I need somebody
Help, not just anybody
Help, you know I need someone, help
Should we hit even harder times and the bubble bursts then they will be joined by the UK taxpayer who is underwriting so much of this.
Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me
Notayesmanseconomics's Blog 
shaun , whats the legal position for housing associations? aernt they private ?
if so , why not then extend the help to buy to private rented houses?
BTL landlords for a start ?
interesting times for all me thinks
and really this is just more help for the Too Big To Fail Banks
Forbin
‘if so , why not then extend the help to buy to private rented houses? ‘
I’m not laughing.I have this vague fear that as George starts staring down the barrel of RBS going pop and ‘systemic risks’ to city bonuses and pensions,he’ll perform a ‘tax credits’ U turn and decide he’ll allow the BTL bubble to continue some more.
Hi Forbin
This is rather awkward for the government as the whole Right To Buy issue posed the question as to whether Housing Associations are public or private. The UK ONS decided this at the end of October.
“ONS has concluded that PRPs are public, market producers and as such they will be reclassified to the Public Non-Financial Corporations (S.11001) sub-sector for the purpose of national accounts and other ONS economic statistics. This classification applies with effect from 22 July 2008; the date of enforcement of the
HRA 2008.”
Only an extra £60 billion added to the National Debt which is even more awkward if you happened to be a Chancellor who keeps proclaiming it is about to fall…
BTL and HA sell-off are both part of the same plan to support the housing price bubble.
Counter-intuitively, perhaps, as although HA sell-off may well put a considerable amount of “affordable” housing into the market, it also closes one of the last decent rental options, and forces as many people as houses into that market, and does nothing to alleviate the housing shortage.
HA sell-off is, in fact, more help for banks.
Hi Shaun
You mention “junkie style economics” but the point about the housing market is that it is 10% economics and 90% politics. In effect we have a government “put” on house prices; let’s face it if house prices suffered a serious decline (never mind repossessions) then this is electoral suicide for the government in power. I think that if prices did start to slide seriously the government would throw everything at the market to get it back.
You are aware that Osborne was advised against HTB because it would inflate prices without encouraging supply, which indeed is precisely what has happened.
The recent attack on BTL I see as a way of reducing demand at the margin and taking some of the heat out indirectly. What the political doctor now wants I suspect is a period of slow growth and stability not more of the same growth.
Of course the maintenance of prices does require more and more debt (which the OBR have acknowledged in their forecasts) so interest rates have to be kept low, otherwise people cannot afford the debt; this is why the debate about IRs is so ridiculous. Using a simple model as an illustration if we have 2% GDP growth and debts at 200% of GDP then a 1% IR rise will preempt all that growth for IR payments. Scale up the IRs and you are quickly into recessionary territory which is why we are trapped. I don’t know where we would be on this scale but it is not with a GDP debt ratio of !0%!
This nonsense will go on until it can’t and I think the BOE et al will have little to say at the end of the day.
It’s not only political, I read an IMF study a few months ago, the link to which I can’t find, which drew a correlation and causation between house market booms and busts and the same events occurring shortly afterwards in financial markets followed a while later by the economy. It’s a pity I can’t find it because imo they proved the point conclusively.
Great post, as ever, although I still cannot quite believe that I have read a sentence with a ten-year bond yield at -0.41%!
There is a common feature in much of this, which is the extent to which the electorate will simply not stomach:
1. Higher interest rates, as it is in so much debt;
2. Higher taxes, despite the deficit;
3. Falling house prices; or
4. Being told that we cannot all buy houses.
So, the government puts in QE to solve 1 and 2 and every scheme under the sun (as you describe so well above) to solve 3 and 4.
It seems to me that we have moved into an era where an unprecedented number of things are all being tested at the same time. First, we have QE on an industrial scale with absolutely no idea how to reverse it (just extend the maturities on the purchases, as you point out). Secondly, we have everyone desperate to buy houses, so that they are now rationed by price, rather than the cost of mortgages. If interest rates did go up, who knows what would happen. Thirdly, government borrowing is increasing in many countries well past what was considered acceptable a few years back.
ps at an anecdotal level, I have been trying to buy a flat in London and prices are definitely not holding up in some areas.
To be fair to the Swiss they’ve been busy on a regulatory level trying to sort out the financial criminals.
This week the HSBC whistleblower was sentenced to 5 years, in abstentia, for telling tales on people dodging taxes.
http://www.theguardian.com/news/2015/nov/27/hsbc-whistleblower-jailed-five-years-herve-falciani
Don’t ever think that govt turns a blind eye to crime and the causes of crime.
Hi James
May I ask in which areas?
As to Switzerland there was a further development as the five-year yield nearly touched -1%. Back in the 1990’s I was involved in discussions in trading pits where we thought such things were impossible. How wrong we were! The credit crunch has been to economics the equivalent of a singularity in physics. But as we move on things like long-term contracts and pensions are subject to the Star Trek phrase “it’s life Jim but not as we know it….”
What happens if someone with a 20% loan from the taxpayer and a 75% mortgage walks away,
i.e. which of the two gets paid off first when the repossessed property is auctioned off at a discount ? For some reason I suspect it wont be the taxpayer.
I suspect that a good many of the 20% taxpayer loans under HTB will never be repaid.
Taxpayer is first charge.
The 5% is as good as gone when you sign on the dotted line.
Hi Shaun
As predicted the FLS scheme has been extended. Focus on business 😉
http://www.ft.com/fastft/433201/uks-funding-lending-scheme-extended
Hi Anteos
Thank you and you may not be surprised to learn that I had a wry smile as I read the announcement earlier. “Who da thunk it?” as Turkish said in the film Snatch.
Fair play to you Shaun,you’ve covered QE/ZIRP/HTB1/HTB2/lax regulation,CPIH/Wages/FLS….etc
There’s nothing left for me to foam at the mouth about.
How about immigration, climate change, whether Andy Murray is Scottish or British, Jeremy Corbyn, Hillary Clinton, Japanese whaling, the EU/loss of sovereignty?
Just trying to raise your blood pressure!
The treasury actions resemble a financial penalty for all homeowners who bought their homes at pre-bubble prices.
Through our taxes, we are retrospectively paying higher prices.
Fine, if you view your home solely as an asset, as it is an indirect equivalent of CGT.
For those of us who just want somewhere to call home, it is grossly unfair.
Although I’d “lose,” I’d much rather see values at a more realistic level.
By the way, on a totally unconnected theme, I thought this might interest, “Andrew Baldwin” and go some way to explaining the bias of CBC.
From 27:20 – 30:00.
Seems Lord Monckton’s confidence in the political longevity of Tony Abbot was misplaced.
“as it is an indirect equivalent of CGT.” well spotted therrawbuzzin. I never thought of it like that. Completely agree on house values and I’d be a “loser” too.
“Also you may note that the government is supporting the high loan to value mortgages which were and indeed are supposed to be out of favour. But there is more.”
Thank you Shaun, you’ve just explained why the fiscal MMR is failing, otherwise, if the house price inflationary fiscal schemes of Help to Buy and Right to Buy were abolished and MMR was extended to Buy to Let then we would see an arrested housing market – Fiscal works if you let it!
I’m not sure the ECB has to carry out any of it’s promises, the Euro economy is doing OK (for these times), the outlook is fair and it doesn’t need any more help.
OOoops -I meant macropru, not fiscal, although on reflection, given that Help To Buy etc are underwritten by the taxpayer I think they could be construed as fiscal too!
Hi Noo2
I think that if you had the job of applying Macropru policy it might have a chance and I might have to review my views on it a bit. But instead it is in the hands of those who see it as another form of Open Mouth Operations and as I have described today they also undermine it. Thus it has little or no chance and it was ever thus…..
As to the Euro area I agree that it does not need more easing but Mario seems to have set his mind on it.
Hi Shaun,
It’s amazing how house price inflation has taken off in the credit crunch era. Who would have guessed that after all the fall out of the last bubble, we’d be busy inflating the next one just 7 years later? I spoke to an estate agent last week who told me buyers vastly outnumber sellers in our area and as a result almost anything is selling straight away at the full asking price and this is why the very limited stock is surging in price. Cheap borrowing, selling off social housing, not building enough new ones……the perfect storm is brewing again. Indications are, interest rates are only going south!
Hi Zummerzetman
There were many dangers after the credit crunch. We have seen two extremes proclaimed which were hyper inflation and more recently deflation of which neither has taken root except in isolated cases. My biggest fear was and is that the crises come faster and faster which as you point out is a game which seems to be in play.
The question is, what does a income-rich, asset-poor young person working and living in the UK to do? Invest savings in stock markets? The said young person has sufficient savings to put down a deposit but does not want to be caught up in the housing price madness/ government-backed Tulip mania. Cheap(er) rents (in comparison to house prices) provide some consolation, but it’s no consolation to watch as the current government backs house ownership to the exclusion of all other factors.
Hi Violet and welcome to my corner of the web
What we are seeing is yet another distorted market, so distorted in fact that it would be declared illegal if it was not for the fact that those responsible also make the laws. As you point out where can they go? Bond markets, oh hang on . equity markets ditto..
So they end up gambling that the put option holds…