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 @Rightmove 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.

Comment

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%.