How would the UK establishment respond to house price falls?

A major feature of the UK economic landscape in its recent boom phase has been that house prices have been rising. Indeed as the Funding for Lending Scheme (FLS) began in the summer of 2012 and set mortgages rates on a lower path ( estimated to be nearly 2% lower by the Bank of England) we saw around 6 months later a pick-up in both house prices and the economy. A sign of the house price boom was seen in yesterday evening’s London Standard.

A houseboat moored on the Thames in Chelsea has gone on the market for £2.25million, almost four times the price of the average London home. The 3,050sq ft luxury barge is being sold by estate agents Knight Frank, who describe it as “possibly the best houseboat available in London.”

I will be passing that way later so will take a look for myself, maybe I will even find out what the “climate-controlled heating system” is? It seems that with land so expensive the water as represented by the river Thames has got more popular.

The number of people living in floating homes in London has risen by 50 per cent in the past five years, with houseboats – which are exempt from stamp duty – being seen as a cheaper alternative to getting on the housing ladder.

Cheaper? Well that is of course relative to an ultra expensive area.

A three-bed house in the area would cost upwards of £6million, but the new owners will have to pay mooring and maintenance fees estimated at £27,000 a year.

The extremes of the London property situation were also highlighted.

Recently, a flat in Covent Garden was put on the market at £1.3m, making it what is thought to be Britain’s most expensive ex-council property….In contrast, a room rivalling Harry Potter’s cupboard under the stairs was on rent in London last week for £350 per month.

Perhaps another sign of things is this tweeted by Henry Pryor earlier.

Big day for who may join the FT100 group of companies today. Impressive performance, well done to all involved over the years.

He thinks that they have mostly taken business off other estate agents but it is hard to believe that they have not benefited from the house price boom. We can both agree that it has been a UK success story if not for exactly the same reasons.

The Nationwide Index

This morning has seen the house price update from the Nationwide Building Society.

UK house prices edged up 0.2% in May and, as a result, the annual rate of house price growth was little changed at 4.7%, compared with 4.9% in April.

If you read between the lines they are in fact rather nervous.

In the near term, it’s going to be difficult to gauge the underlying strength of activity in the housing market due to the volatility generated by the stamp duty changes which took effect from 1 April.

This is because of what happened before April Fools Day.

Indeed, the number of residential property transactions surged to an all-time high in March, some c11% higher than the pre-crisis peak as buyers of second homes sought to avoid the additional tax liabilities.

Indeed a report with an obvious temptation to upside bias is by its standards rather downbeat.

House purchase activity is likely to fall in the months ahead given the number of purchasers that brought forward transactions……..especially in the BTL sector, where other policy changes, such as the reduction in tax relief for landlords from 2017, are likely to exert an ongoing drag. ( BTL is Buy To Let).

Actually annual house price growth has gone 5.7%, 4.9% and now 4.7% on this measure which some but not the Nationwide might consider to be a trend.

The official view

This is of course to sing along with Depeche Mode about house prices.

You should be higher
I’ll take you higher

Any remaining doubts on this front were extinguished when Chancellor Osborne presented what he thought was a knock-out blow in the Brexit referendum debate. From the BBC.

A UK vote to leave the European Union would cause an “immediate economic shock” that could hold back growth in house prices, the chancellor has said. In the event of a vote for Brexit, by 2018, houses could be worth up to 18% less than if the UK voted to remain, George Osborne told the BBC.

Young people and first-time buyers – who are not necessarily the same group these days – are likely to positively welcome such a development! The Bank of England FLS inspired house price push has seen the house price to earnings ratio for them rise from 4.4 to 5.2 according to the Nationwide this morning. No wonder first time buyers need “Help to Buy”. As I have pointed out before they are also likely to be singing “Please, help me” from the famous Beatles hit.

We need to recall that such price earnings series are on favourable definitions for earnings (£39.300 per annum). But we can note that we are at 5.2 on this series very new to the supposedly unaffordable 5.4 of 2007 to which we were promised we would never return. London has in fact surged past its previous peak of 7.2 to 10.1. The word bubble is over used these days but what other word is appropriate to cover such a number?

Looking ahead

We got a clue this morning from the money and credit release from the Bank of England which needs to be accompanied by the sound of screeching brakes.

Lending secured on dwellings increased by £0.3 billion in April, compared to the average of £4.2 billion over the previous six months.

Which led to this is we look a little wider.

Total lending to individuals increased by £1.6 billion in April, compared to the average of £5.7 billion over the previous six months

Actually consumer or unsecured credit is in the midst of its own boom and ignored the mortgage slow down.

The three-month annualised and twelve-month growth rates were 10.4% and 9.6% respectively.

That leaves us with secured credit strangled but unsecured credit surging which flashes a warning light to say the least. Of course the Financial Policy Committee will be “vigilant” especially to the lunch menu and the cakes on the Bank of England tea trolley.

Actually the overall supply of credit to the UK economy had rather a grim April.

M4Lex is defined as M4 lending excluding intermediate OFCs. M4Lex decreased by £2.1 billion in April, compared to the average monthly increase of £10.4 billion over the previous six months.

Looking further ahead we can say that the outlook is for a slowing in mortgage growth.

The number of loan approvals for house purchase was 66,250 in April, compared to the average of 71,075 over the previous six months.


We are seeing a clear change in the UK house price situation as growth slows. What we do not know for certain yet is if this is temporary or in the new vernacular “skewing” or a permanent change. Should it be the latter then I expect a policy response most likely from the Bank of England. It could cut Bank Rate or undertake a reinforcement of schemes like the FLS one above to further reduce mortgage rates. The catch as we have learned from places like Sweden and Switzerland is that going to negative interest-rates only reduces mortgage rates for a while then they rise again as banks re-establish profit margins. So the establishment would really need to “Pump It Up” this time with all the associated dangers and risks. This of course would ignore the issue which I analysed yesterday where the retail sector has been boosted by lower prices rather than higher ones.

Meanwhile the FLS was supposed to boost business lending how is that going?

 Within this, loans to small and medium-sized enterprises (SMEs) were broadly unchanged, compared to an average monthly increase of £0.2 billion over the previous six months. The twelve-month growth rate was 1.4%.

Three years down the road that is a very poor return when you consider that the growth rate may be just positive but the total is down a fair bit since then. The situation is in fact so bad the official response is to use a long word “counterfactual” . If we look to wider business lending and recall we have been in a 3 year economic boom well the numbers speak for themselves.

Loans to non-financial businesses decreased by £0.1 billion in April, compared to an average monthly increase of £0.9 billion over the previous six months. The twelve-month growth rate was 0.7%.




26 thoughts on “How would the UK establishment respond to house price falls?

  1. “Don’t panic captain Mainwaring !”

    followed by the fifth horse of the apocalypse , Chaos , apparently


  2. House prices are emblematic and the government will not let them fall easily. The existing HTB schemes are already an absurdity but, if prices did start to fall, I wouldn’t at all discount a new scheme which would be even more absurd. I believe that many of the taxpayer loans under HTB will never be repaid and people that do sell at a profit will complain mightily on being told that they have an equity loan which gives part of the gain back to the taxpayer.

    As Anteos has implied the government will bankrupt the country before allowing an HPC which just goes to show how dysfunctional our system has become.

    • Perhaps HTB stands for Help To Borrow, Bob.

      I guess “help” is only needed to buy expensive, or unaffordable, houses whereas lower prices wouldn’t be regarded as helpful.

  3. Great blog as always, Shaun.
    It is a pity that the ONS’s OOHPI series (or OOH(NA) as ONS calls it) is published with such a lag.The May increases in housing prices that you write about will only be reflected in its 2016Q2 update, which won’t be released until September 7. Even if anyone on the MPC were inclined to use such an index as a guide to monetary policy it isn’t really current enough to be useful.
    Today the 2016Q1 update was released, and it is of particular interest since it marks the first quarter where the December 2015 drop in stamp duty rates would have worked its way through the system. Predictably, there was a jump in the annual rate of change from 2.3% in 2015Q4 to 3.0% in 2016Q1. By comparison, the OOH component of the CPIH went from 1.8% in 2015Q4 to 2.1% in 2016Q1. The OOHPI has factors that likely drag down the measured inflation rate, and could be improved. Even so, it shows a substantially higher inflation rate than the counterpart series based on imputed rents.
    Unfortunately, the ONS doesn’t release a composite index for the CPI and the OOHPI (as logical a composite as the CPIH is illogical) but my own crude calculations suggest the annual inflation rate of such a series might have been as high as 0.6% in 2016Q1, up from 0.5% in 2015Q4. The ONS really should include such a composite with the OOHPI series update. It is not obliged by Eurostat to do so, but then it is not obliged to publish the OOHPI estimates either, only to provide them to Eurostat.

    • Hi Andrew and thank you.

      As you know I too am a fan of using house prices in the consumer inflation measure and thanks for reminding me of today’s update. There are issues with the NA methodology but we know that services inflation has been consistently 2%+ in the UK and add your numbers below, where’s the “deflation nutter ” panic?

      “Predictably, there was a jump in the annual rate of change from 2.3% in 2015Q4 to 3.0% in 2016Q1. “

  4. Mortgages for house purchase and unsecured loans increasing, yet business loans to SME static or decreasing – what a wonderful recipe for growth and reducing the current account deficit!
    But, I can sleep a night knowing the BofE are “vigilant”.

    • I think that you will find that the banks learned their lesson from the last recession and never ever go near lending 90 or 100% of the value of a property. They are rock solid institutions run by honest and prudent lenders, with the firm hand of the BofE to guide them.
      Yours enjoying cloud cuckoo land…

        • I still cannot quite get my head around the words “Prime minister Gordon Brown”! If my memory serves me right, he was hailed as the iron chancellor…wasn’t there something about not borrowing over the course of the boom and bust cycle, or did he just abolish boom and bust?

      • Brown and Osbourne have redefined boom and bust by historical standards of debt to GDP.

        Epic stuff.They are talented men and deserve some cushy one day week board positions at former private sector banks and privatized firms.

        You need to retain the talent.

  5. Hi Shaun,

    Excellent article as usual.

    House prices will keep rising until they average 2 x 3.5 or 7 times, where x3.5 is taken for both wage earners these days. London is well ahead of this where it is the global capital and safe haven for funny money from corrupt regimes. Longer mortgages are also now becoming a norm with the 70yo limit going up to 80, 85 and even 90. How long before they are known as ‘Pay until you drop loans’?

    I was reading today about large increases in the sale of steel fireproof safes in countries that have negative interest rates. Maybe that will be the BOE’s next move. I’m sure climate controlled large safes will become all the rage in London, giving compact accommodation and a safe store for your cash!

    Where shrinkage and staying at the same price is all the rage for manufacturers at the moment lets hope they don’t follow by example the property market with shrinking dimensions and massive price rises!

    Property where I live seems to be going up rapidly at the moment with the first digit going up by 1 every 6 months!

    • Hi Rods

      I am fascinated by this bit.

      “I was reading today about large increases in the sale of steel fireproof safes in countries that have negative interest rates. ”

      Do you have a link to it please?

    • rods2 I’ve longer been a believer that the “London house price ceiling” has to be at this 7 times level. I think the growth has been supported through this move to cohabitation at an earlier stage as much as lower rates.

  6. Hi Shaun,
    Yes, a provocative entry today and we all agree that House Prices should not be allowed to fall. That would be the beginning of the end of the maintaining of all things status quo. I do believe this fundamental asset pricing is behind every “remain” argument. The demand for housing, an artifice of scarcity is only maintained through rampant immigration and containment of development.

    I note recent radio adverts imploring the conservative and nimby leaning residents to “write their own neighbourhood plan”. I am guessing that the Govt is hoping that just as political pressure mounts for Govt to actually construct some homes they can hold a mirror back to the voters and proclaim…. but your own neigbourhood plan “bans” concreting over of the duck pond etc…

    Even the idea of legal and illegal immigrants being persuaded to leave the UK must have the rentier land-lords in apoplexy. When you think of every other economic scarcity we have contrived to make people feel insecure and desperate the idea of ample supply and market correction is an anethma.

    Let me try these: Car-parking, Motorways, Railways, Doctors Surgeries, A&E departments, Airports, Public Toilets. Just imagine if we could actually use these services without queueing. That indeed would be the end… a disaster in modern economics.

    So yes, you are right to highlight the worst and most inflated of scarce resources. I suggest the best way to maintain the credit fuelled status quo would be for our Govt to recognise that voters need incentives and promise a new printed money payment to every adult in the country if we decide to stay in the EU. A win in every sense, status quo secured, QE extended, Inflation risen, everyone pleased (even the Brexiters). You heard it from me first.

    Paul C.

    • Hi Paul C

      An economy based on queuing is an interesting way of looking at the UK. The lack of public toilets story is a true one in much of London although there are 3 in Battersea Park which fits badly with the claim that there are none in Wandsworth.

      • This scarcity argument is complete nonsense – unless anyone can tell us about the mass emigrations of the early 90s and 2008-10, when prices fell!

        I thought HTB and Barclys’ 100% mortgage was bad enough, but this has slipped under the radar: – 60% of new mortgages are for longer than 25 years. the funny thing is that the last time I heard this was in the late 80s – so-called “Japanese mortgages” and we know what happened there and in the UK. Funny thing is, it was a boom created by one Nigel Lawson, passionate advocate of Out, who goes unmentioned when Outers are asked to mention one “economist”, who agrees with them.

        If you want proof of the credit issue underlying house prices, simply play Monopoly and every time there is a fine etc., put it in the middle of the board and the next person to land on free parking gets the cash. Watch what happens to the property prices people are prepared to bid – no immigrants involved!

  7. Osborne revealed his own incompetence with that announcement – many youngsters have now been told by Farage that price falls are a good idea. What both forget is that the mortgage payment won’t change – it is just that the interest component will rise and hence the capital component will fall.

    The stupidest move comes from Barclays (no surprise as I predicted it a year ago in a workforce meeting and was fired a few days later by them) with his 100% mortgage if Mum & Dad put up a 10% bond in return for 2% interest. If prices fall 10-18%, M&D will get wiped out and there will also be some negative equity. Bizarrely, some spotty grad, who was deputy to the floor manager said a price crash would not be an issue as the banks were “well regulated”. I refrained from asking him how house prices can be regulated and this scheme just shows the regulation isn’t that good.

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