It is hard to keep housing and property out of the news in the UK. In the run-up to the Brexit referendum there was the announcement from Chancellor George Osborne that house prices would fall by 18% is the UK voted to leave the European Union. As the UK did leave we will find out whether that was accurate or more like his forecast that interest-rates would rise which faces a reality of ever lower Gilt yields. Yesterday the UK issued a 5 year Gilt at a yield of 0.38% which was both an all time low and below the Bank Rate of 0.5% which gave a clue as to where the wind is blowing. Here is some news on the front from the Guardian.
The lowest 10-year mortgage rate on record is set to be launched on Friday….Coventry Building Society is to offer a rate of just 2.39% for borrowers willing to fix their loan for a decade.
There has been an effect on commercial property funds where 5 others have followed Standard Life in declaring a suspension usually of 28 days. If we look back we see that they had previously had such a good run that they were vulnerable and of course under a thinnish veneer they are always illiquid. Unless you can sell a shopping centre or mall quickly and those of course poses the questions of to whom and at what price? Also as soon as one went the others were likely to be like dominoes. Should it go very wrong then a familiar crew will be left holding the baby. From Bloomberg.
The major banks have 69 billion pounds of exposure and smaller banks and building societies hold the remaining 17 billion pounds.
According to the analysts quoted this is a sign of success, a view unlikely to be shared by those owning bank shares.
Today has seen an intriguing set of data from the Halifax.
House prices in the three months to June 2016 were 1.2% higher than in the three months to March 2016….Prices in the three months to June were 8.4% higher than in the same three months of 2015 .
Actually they rose by 1.3% in June itself which did not show much sign of pre Brexit referendum nervousness. I also note that the thoughts and indeed for first time buyers hopes of house price falls after the changes to Buy To Let stamp duty in April have so far failed to happen.
It is quite extraordinary that house prices have maintained annual growth which even at a slightly lower annual growth rate of 8.4% is way ahead of wages growth (2%) or economic growth (~2%). Looked at like that not only would a period of decline not be a disaster more than a few would see it as good news. Along the way we have seen the first time buyer earnings to house price ratio go back above 5. Sadly it is no longer available but must have got worse.
The UK ONS
The latest monthly Economic Review has a section which looks as though it has been written by someone who have been living in a cave for quite some time.
Generally, house prices grew strongly in Great Britain before the economic downturn.
I am also not sure about the use of Great Britain when they say they use data from the property service of Northern Ireland but let us carry on.
there has been resurgence in recent years.
However we then get an analysis of the relationship between their data for wages and house prices since 2005 and as you can imagine my eyes lit up at that. So what do they tell us?
Before the 2008 downturn, the annual percentage change in house prices was higher than annual weekly earnings in the UK.
That is hardly news on here but let us bring this more up to date.
From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%
Oh and the ONS has slipped away here from the official view which is that lower mortgage rates has improved affordability. If we move to the ratio between house prices then we see that we are almost back to what was supposed to be one of the causes of the credit crunch.
Prior to the economic downturn, the house price to earnings ratio in Great Britain followed an upward trend due to strong house price growth outstripping wage growth, with the average house price up to 8.5 times the average wage at an annualised level in mid-2007……..The ratio did not markedly increase until late 2013, when a resurgence in house price inflation and relatively slow growth in AWE caused the ratio to increase from 7.2 in August 2013 to beyond 8.0 after August 2015.
It will be above 8.1 in May 2016 if their numbers follow the same pattern as the Halifax/Markit series. Please note the use of the number 8 which replaces the number 5 used for earnings if you look at individual rather than joint numbers. Makes a difference does it not?!
Some of this represents the London effect which has pushed the average numbers higher and there are clear regional differences as for example North East England has become more affordable. There is a data swerve used here for which I apologise on behalf of the ONS but we get this if we switch to annual wages data (ASHE) which is only up to April 2015.
London continued to be the least affordable region in the 2014 to 2015 financial year, in which the house-prices-to-earnings ratio was 9.2. In the North East, the ratio has declined sharply since the economic downturn and stood at 4.0
I would expect the following to take place. Firstly some deals will be stopped due to uncertainty and on an anecdotal level someone told me they were doing that only yesterday although theirs was a wait and see approach. So volumes will take a dip as will at least some prices. Again at this stage such news is anecdotal.
Not convinced this is true in London. Agent rang yesterday with a post Brexit 10% reduction…and sounded desperate. ( @beachcomberpage )
Added to that might be foreign owners who are facing currency losses and fear property price losses as well and in a way this was reflected by UOB of Singapore stopping lending for London mortgages last week. Although the 11 quarters in a row of falls in house prices in Singapore was no doubt also a factor.
On the other side of the equation is this from the Guardian.
The plunge in sterling following the UK’s decision to leave the EU has prompted a flurry of interest in luxury homes in London from overseas buyers, who stand to save about 10% of the cost of buying a £1m property, a property consultancy has claimed.
The caveat is of course “a property consultant has claimed” and I note the intriguingly named Mr. Cleverly has quoted the changes in UK Pounds when surely foreign buyers would be interested in the price in their currency. But for new buyers the currency fall is true.
We find ourselves in a time of heightened uncertainty looking at a UK property market which has become increasingly unaffordable to domestic buyers. There is a nuance here which is that this is massively true in London and influences the area around it. It is less true in the North of England for example where prices have at least adjusted to some extent to weak wages growth.
If we look at the Bank of England which lit the blue touch-paper for the subsequent house price growth with its July 2012 Funding for Lending Scheme then I expect a response next week. It may be too early for a more technical response such as a new rebadged FLS aimed at small business in theory but boosting mortgage lending in practice but a Bank Rate cut and more QE have been heavily hinted at by Bank of England Governor Mark Carney. So the band seems set to play on as we wait to see if they are on the Titanic or not.
Meanwhile let me offer you some insight on HSBC from @DavidKeo of the FT.
this price move may be in either direction
It was about the UK Pound £ and of course they missed the possibility it would be unchanged.
Oh and whilst there may not be many of these there will be some. What about those with a UK property but a mortgage in a different currency?
Don’t mess with Mario
The Slovenian police have upset Mario Draghi by raiding the office of the Slovenian central bank. Apparently when Mario told us that the ECB was a “rules based organisation” he did not mean the rule of law. In response here is the new ECB theme song featuring MC Hammer.