For the Bank of England the only way is up for UK house prices

A major factor in the UK economy is the behaviour of house prices.  These are seen by the UK establishment as a bell weather for the state of the economy itself. The Bank of England Underground Blog offered us these insights back last December.

What explains the strong comovement between the housing market and the labour market in the UK?

it is essential to better understand the drivers of the striking comovement between house prices and labour markets in the UK.

So there is a clear implied view that is you stop house price falls then you are likely to stop unemployment rising. That explains the way that the Bank of England introduced the Funding for Lending Scheme in the summer of 2013 which reduced mortgage rates by up to 2% by its own estimates and sent house prices higher again. Perhaps it also explains this type of rhetoric when he was Chancellor from George Osborne. From the Financial Times on May 20th..

A vote to leave the EU would hit UK house prices by between 10 per cent and 18 per cent, George Osborne has warned, in an escalation of the referendum rhetoric.

So we were supposed to then fear a rise in unemployment? Actually it was never quite as badged because in fact it was a reduction from expected growth.

The Treasury estimates that, by mid-2018, house prices would be at least 10 per cent below their expected trend.

So let us take a look at the evidence so far as we mull the fact that even though this was just rhetoric the Bank of England was so affected by it that it produced a “sledgehammer”.

Nationwide

The Nationwide has offered us its thoughts on the state of play in August.

UK house prices increased by 0.6% in August, resulting in a slight pick up in the annual rate of house price growth to 5.6%, from 5.2% in July, although this remains within the 3- 6% range prevailing since early 2015.

So much more “same as it ever was,same as it ever was” (Talking Heads) than “end of the world as we know it” (REM) on a price measure. As to the future the Nationwide spends quite a few paragraphs telling us that it does not know.

There was one interesting change to note which is this.

However, the decline in demand appears to have been matched by weakness on the supply side of the market.

So for all the furore about prices it is in fact quantity where we are seeing some action and of course this feeds into an existing trend after the spring Stamp Duty changes. Indeed it has led to this.

Surveyors report that instructions to sell have also declined and the stock of properties on the market remains close to thirty-year lows.

Of course lower volumes could be because even on the highly favourable definition used the first time buyer house price to earnings ratio has hit 5.3. Some of that is due to london rising to a breathtaking 10.4 but by no means all of it.

Mortgage Approvals

The Bank of England was singing the same song yesterday as it told us this.

The number of loan approvals for house purchase was 60,912 in July, compared to the average of 68,775 over the previous six months.

So another sign of a quantity fall which has been translated pretty much everywhere as a sign of lower prices to come although as noted above if supply remains low that may be much less certain. Also for completeness  net mortgage volumes fell.

Lending secured on dwellings increased by £2.7 billion in July, compared to the average of £3.5 billion over the previous six months

However care is needed because gross mortgage volumes rose ( not by much but rose) and the change was that repayments were higher by £1.6 billion in July compared to June.

The Bank of England

We now need to consider the Bank of England response to this as we know that it sees the housing market not only as a bell weather but also as a powerful causative agent.

These uncertainties are expected to cause: some companies to delay major decisions such as investment and hiring plans; lower house prices; and less spending by households.

The opening salvo was provided by this.

A cut in Bank Rate from 0.5% to 0.25%

So tracker mortgages will respond to this and may have already cut but for new mortgages the impact of this is very minor as the Mortgage Advice Bureau has reported.

The wealth of product availability, coupled with rock bottom rates has led to the overwhelming majority of people fixing their mortgage; those remortgaging and fixing dropped slightly in July to 88.4%, down from 90.7% in June, with 93.2% of purchase applicants opting for a fixed deal.

The variable rate to fixed rate picture has in fact shifted substantially according to the Nationwide.

The proportion of mortgage balances on variable rate products is lower than average at present (c.45% compared to an average of around 60% since 2001).

Thus we see that the Bank Rate weapon has weakened over time which means that the Bank of England is using other tactics and here is this afternoons effort.

Date of operation 31/08/16 Total size of operation Stg 1,170mn

Stocks offered for purchase UKT_2.25_070923 UKT_2.75_070924 UKT_2_070925 UKT_6_071228 UKT_4.75_071230

This is the current effort to reduce the interest-rate on fixed-rate mortgages which is having an impact. For example whilst you need a 50% deposit the Coventry has offered a 7 year fixed rate mortgage at just below 2% (1.99%). That is the mortgage market flip-side of a UK seven-year Gilt yield of less than 0.5%.

If you look at the UK’s past track record and also likely trends for inflation you can see why people are going for fixed-rate mortgages at this time. It is also noticeable that those doing so now have benefitted from ignoring the Forward Guidance of Bank of England Governor Mark Carney who of course promised interest-rate rises and then cut.

Term Funding Scheme

This does not yet actually exist but seems likely to be the bazooka for the housing market or the real “sledgehammer” of Bank of England Chief Economist Andy Haldane. Somewhat awkwardly for Bank of England pronouncements that the UK economy needs urgent help it does not start until September 19th! Central bankers must have their holidays it seems. But the Nationwide seems to have nailed down what it will achieve.

The creation of the new Term Funding Scheme is also important, as it means that lenders will have guaranteed access to low cost funding from the Bank of England, which should help ensure the supply of credit is maintained.

They of course mean the supply of credit to mortgages.

Comment

Let me hand you over to Bank of England Chief Economist Andy Haldane who told the Sunday Times this over the weekend.

As long as we continue not to build anything like as many houses in this country as we need to … we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.

Actually Andy is forgetting the impact of the policies he so strongly supports but then self-awareness is not one of our Andy’s strengths. “I never have [felt wealthy]”

Haldane owns two homes – one in Surrey and a holiday home on the Kent coast. His basic salary at the Bank is £182,000 and he is in line for a pension of more than £80,000 a year when he retires. (The Guardian).

He has never felt the need for a credit card either. Oh and according to Hargreaves Lansdown if he was more financially literate he might realise this.

Andy Haldane’s pension benefits are estimated to be worth in excess of £3 million, which is not bad going for someone who professes not to even know how pensions work.

Still we at least have a song for Andy’s advice on UK house prices. Cue Yazz.

But if we should be evicted
Huh, from our homes
We’ll just move somewhere else
And still carry on

Oh
(Hold on) hold on
(Hold on) hold on
Ooh, aah, baby

(Hold on) hold on
(Hold on) ooh ooh aah

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now

 

 

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11 thoughts on “For the Bank of England the only way is up for UK house prices

  1. How many people are still “in negative equity”? Those with just a small stake in their home are in the same position. They come to the end of their mortgage deal and cannot negotiate (I’ll damn well take my debt elsewhere!). So they are stuck on the SVR which is a penalty rate probably much higher than the one they are struggling to pay anyway. They are also stuck in their house.

    Are these the people that are being protected by encouraging house price rises. If they all walked away from their houses that would crash the system. Suddenly though they have a stake in their house and feel rich. Trouble is that the price rises mean that someone else is putting themselves in the same position. It’s a market stupid. At least it is “not on my watch”. Can kicked.

    • Hi Chris

      We get a hint of what you are saying from the latest Bankstats release from yesterday.

      “The effective rate on the stock of outstanding secured loans (mortgages) decreased by 1bp to 2.88% in July and the new secured loans rate fell to 2.31%, a decrease of 10bps on the month.”

      Meanwhile the BoE tells us that the effective SVR rate is 4.55% which revealingly is up on when the Funding for Lending Scheme began in July 2012 when it was 4.24%

      As to negative equity I would expect to find it in pockets where house prices have recovered much less than elsewhere such as Northern Ireland.

  2. Hi Shaun
    May I suggest that Haldane and
    all his cohorts have gradually become
    “comfortably numb.”
    This is not how I am
    I have become comfortably numb

    JRH

  3. Very interesting article, as usual, Shaun. A few observations:
    1. I remember living in Clapham before it became expensive and the effect of the house price explosion there was to make it worthwhile to spend a lot doing a house up. The whole of Clapham was transformed from pretty run down to very manicured in about ten years. So, there is at least one benefit of house prices (probably only one);
    2. Retail outlets, on the other hand, selling carpets, white goods etc, always depended on volume, ie the number of house sales and purchases, not the value. apparently, everyone buys new carpets when they move but not very often otherwise;
    3. My blood pressure is EXTREMELY high when I read that his pension is worth three times what we plebs are allowed (the cap of £1 million now) AND that his pension is guaranteed in strict contrast to us plebs who get whatever crumbs the pension companies can spare after their ludicrous cost base and based on returns entirely cratered by QE, the bank’s “policy”.
    Rant over.

    • Hi Chris

      There are various issues with the Bank of England pension scheme as it was. Firstly those benefiting from RPI index linking were silent when the UK switched to CPI as an official inflation measure then for many pensions. It has turned out to be extremely valuable.

      Also in something that Andy ” I don’t understand pensions” Haldane may also not understand his policies make markets of no use. For example I would buy some UK index linked Gilts now if all the ZIRP and QE had not driven them to astronomical levels already. So for their primary purpose ( inflation protection) they are presently useless

  4. I suspect that this was a moment of honesty from Haldane. He knows the future effect the current interest rates will have on pensions and he is probably right that real assets are the way to go. The only problem is that most of us can’t afford to buy a second house and loads can’t even afford a first house!

  5. Shaun, a timely analysis today. Given the deficit in private sector DC pensions schemes and the comparison with State offered final salary schemes. The house price stoking is an obvious sop to the BTLers and other homeowners who have chosen property instead on a conventional pension pot.

    I live in Bristol where prices have risen at circa 8% per annum for the last 3 years. If the CB’s continue with these QE and zirp policies then owners here can look forward to doubling prices every 10 years. Well hey why do you need a pension with those kind of gains? £200K purchase in 2013 and it’ll be worth £400K in 2023 and £800k in 2033 ready for retirement as a near millionaire.

    For Andy H. he has rather more invested. 2 properties and £3M in pension from the state… When it comes to fulfilment. Keep on stoking it might work.

    Well I dont think so… the recent referendum was a shock for Govt and indeed many comfortable homeowners. Who question the system that has been so generous? It seems that as wealth gets more concentrated then actual home ownership is dwindling and the increasing majority, esp the young are not bought in to this ponzi scheme. People may vote for affordable homes and that would be intolerable to the ever dwindling minority of property “lords”.

    We can expect more “state oversight” to ensure that the status quo is maintained, certainly no more referendums I suggest.

    Paul C.

    • Hi Paul C

      Your mention of Bristol reminded me of some numbers I saw in the Nationwide data release earlier. The house price to first time buyer ratio in the south west jumped from 5.8 to 6.1 in the second quarter of 2016 which equals the pre credit crunch peak. Now as real wages are still lower what could go wrong and what sort of bubble is Andy Haldane and his colleagues blowing?

      I suspect you are right about referenda for a while…

    • The State no longer offers final salary pension schemes (other than to BOE officials and Parliamentarians) nor has it done since 2009.

      Here I am talking about:

      1. The Civil Service

      2. NHS

      3. Education Authority

      4. Local Government (County and Town Councils)

      The ONLY pension offered to these groups (i.e. the vast majority of Public Sector workers) is a career salary average calculated at 1/80th of average salary for each years service,although it is still a defined benefit scheme.

      Any one with less than 10 years to go to retirement in 2009 (currently 60) stays on the old scheme (cos they don’t have time to react to the change), every one else is on the “new” 2009 scheme. By 2019 everybody will be on the”new” career average scheme.

      Just thought I’d inject some facts and reality to the Public Sector final pension scheme fantasy.

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