The outlook for UK house prices is turning lower

Today brings together two strands of my life. At the end of this week one of my friends is off to work in the Far East like I did back in the day. This reminds me of my time in Tokyo in the 1990s where Fortune magazine was reporting this at the beginning of the decade.

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

Back then property prices were so steep that these came into fashion and to set the scene the Imperial Palace and gardens ( which are delightful) were rumoured to be worth more than California. Younger readers may have a wry smile at the interest-rates which these days they only see if student loans are involved I guess. But this feature of “Discovering Japan” or its past as Graham Parker and the Rumour would put it comes back into mind as I read this earlier. From the BBC.

The average mortgage term is lengthening from the traditional 25 years, according to figures from broker L&C Mortgages. Its figures show the proportion of new buyers taking out 31 to 35-year mortgages has doubled in 10 years.

We have noted this trend before which of course is a consequence of ever higher house prices which is another similarity with Japan before the bust there. Although there is an effort to deflect us from that.

Lenders have been offering longer mortgage terms, of up to 40 years, to reflect longer working lives and life expectancy.

Let us look into the detail.

The average term for a mortgage taken by a first-time buyer has risen slowly but steadily to more than 27 years, according to the L&C figures drawn from its customer data.
More detailed data shows that in 2007, there were 59% of first-time buyers who had mortgage terms of 21 to 25 years. That proportion dropped to 39% this year.
In contrast, mortgage terms of 31 to 35 years have been chosen by 22% of first-time buyers this year, compared with 11% in 2007.

Should the latest version of “Help To Buy” push house prices even higher then we may well see mortgage terms continue to lengthen. This issue will be made worse by the growing burden of expensive student debt and the struggles and travails of real wages.

If you extend a mortgage term the monthly payment will likely reduce but the capital sum which needs to be repaid rises.

The total cost of a £150,000 mortgage with an interest rate of 2.5% would be more than £23,000 higher by choosing a 35-year mortgage term rather than a 25-year term.
The gain for the borrower would be monthly repayments of £536, rather than £673.

House Prices

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

Prices also held steady in September at the national level, with 6% more respondents seeing a rise in prices demonstrating a marginal increase. Looking across the regions, London remains firmly negative, while the price balance in the South East also remains negative (but to a lesser extent than London) for a fourth consecutive month.

“firmly negative” is interesting isn’t it as London is usually a leading indicator for the rest of the country? Although care is needed as the RICS uses offered prices rather than actual sales prices. Looking ahead it seems to be signalling a bit more widespread weakness in prices.

new buyer enquiries declined during September, as a net balance of -20% more respondents noted a fall in demand (as opposed to an increase). Not only does this extend a sequence of negative readings into a sixth month, it also represents the weakest figure since July 2016,

It is noticeable that there are clear regional influences as some of the weaker areas are seeing house price rises now, although of course that may just mean that it takes a while for a new trend to reach them.

That said, Northern Ireland and Scotland are now the only two areas in which contributors are confident that prices will rise meaningfully over the near term.

The Bank of England

This morning has seen a signal of a possible shift in Bank of England policy. If we look at its credit conditions survey we see that unsecured lending was supposedly being restricted.

Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4 (Chart 2). Credit scoring criteria for granting both credit card and other unsecured loans were reported to have tightened again in Q3, while the proportion of unsecured credit applications being approved fell significantly.

As demand was the same there is a squeeze coming here and this could maybe filter into the housing market as at a time of stretched valuations people sometimes borrow where they can. Care is needed here though as the figures to August showed continued strong growth in unsecured credit making me wonder if the banks are telling the Bank of England what they think it wants to hear.

Also we were told this about mortgages.

Overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — were reported to have narrowed significantly in Q3 and were expected to do so again in Q4.

However on the 6th of this month the BBC pointed out that we are now seeing some ch-ch-changes.

The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low.

Barclays and NatWest have become the latest lenders to increase the cost of some of their fixed-rate products.

At least nine other banks or building societies have also raised their rates in the past few weeks.

Business lending

This is an important issue and worth a diversion. The official view of the Bank of England is that its Funding for Lending Scheme and Term Funding Scheme prioritise lending to smaller businesses and yet it finds itself reporting this.

Spreads on lending to businesses of all sizes widened in Q3 (Chart 5). They were expected to widen further on lending to small and large businesses in Q4.

This no doubt is a factor in this development.

Lenders reported a fall in demand for corporate lending for businesses of all sizes — and small businesses in particular (Chart 3). Demand from all businesses was expected to be unchanged in Q4.

The Bank of England will no doubt call this “counterfactual” ( whatever the level it would otherwise have been worse) whereas the 4 year record looks woeful to me if we compare it to say mortgages or even more so with unsecured lending.


There is a fair bit to consider here especially if we do see something of a squeeze on unsecured lending as 2017 closes. That would be quite a contrast to the ~10% annual growth rate we have been seeing and would be likely to wash into the housing market as well. Some will perhaps borrow extra on their mortgages if they can whilst others may now be no longer able to use unsecured lending to aid house purchases. These things often turn up in places you do not expect or if you prefer we will see disintermediation. It is hard not to wonder about the car loans situation especially as it is mostly outside the conventional banking system.

So we see an example of utter failure at the Bank of England as it expanded policy and weakened the Pound £ as the economy was doing okay but is now looking for a contraction when it is weaker. We will need to watch house prices closely as we move into 2018.

Meanwhile people often ask me about how much buy-to-let lending goes vis businesses so this from Mortgages for Business earlier made me think.

Last quarter nearly four out of every five pounds lent for buy to let purchases via Mortgages for Business was lent to a limited company. With strong limited company purchase application levels throughout Q2, and the softer affordability testing that is commonly applied to limited companies leading to higher-than -average loan amounts, it is no surprise to see them take such a large slice of buy to let purchase completions in Q3.

Now this is something of a specialist area so the percentages will be tilted that way but with”softer affordability testing” and “higher than average loan amounts” what could go wrong?





29 thoughts on “The outlook for UK house prices is turning lower

  1. Hi Shaun

    Glad to hear that you’re on the mend. Great article as always.

    You can tell I’m about to re-mortgage. Last time, FLS was introduced a month later. And now that my fixed rate is about to run out, interest rates are on the rise 😉

    • Hi Anteos and thank you

      You couldn’t let us know when your next re-mortgage will be could you? 🙂 More seriously even with the nudge higher fixed-rates are still very cheap in historical terms. So tactically annoying but still strategically sensible I think.

  2. Of course you are aware there is a ‘ripple’ that emanates from London. The ripple becomes a full on tsunami at the end of housing cycles, trust me. I recall being in York in the 1980’s and winessing the effects of London house price inflation that had been building over some years, visit the city like a plague within the space of just one, even as London prices started to weaken. Prices virtually doubled in the space of a year. It is as though London dwellers move to pocket their ill-gotten, unearned gains and benefiting from ‘first inflation’ emanating from the Bank of England in its core, move to outbid locals using miserable terraces to buy veritable mansions in the so-called ‘provinces’.

    • Hi Hotairmail

      Yes it is like the reverse J curve in balance of payments theory. Sometimes before the prices ripple out from London some of its residents cash in their property stake and buy elsewhere. In recent decades that has invariably turned out to be the wrong thing to do which makes me wonder about this time…….

  3. Shaun,
    Didn’t get a chance to comment before midnight on yesterdays inflation piece.Just wanted to say thanks for your continuing efforts to highlight the inadequacies on the part of the Establishment in terms of measuring inflation for ordinary people.

    The subject came up on HPC with reference to the BoE pension fund being invested 90.7% in RPI linked Gilts and Corporate securities

    Inflation isn’t a threat to the rest of us apparently,but it is to their pension pot.

    • Hi Dutch

      An issue I have with the Monetary Policy Committee is that back in 2002/03 nobody challenged the change of inflation target from RPI to CPI. This is particularly true of the internal members some of whom have retired with pension pots of vast value partly because they are indexed at RPI.

  4. I wonder how much the cost of stamp duty has to do with the the fall in house prices in London and the South East? Having to pay at least 5% or 10% on virtually any property in this area is going to put a portion of people off buying or thinking of moving.
    Here in the Midlands, the properties not selling or seeing price reductions are those over £1m. Everything else sells quickly and around asking price.
    Is the “ripple effect” going to be different this time and not follow the usual pattern, because of the vast difference in London and SE prices compared to the rest of the UK?
    Watch this space!

    • Foxy,
      I think it’s a factor but there are others eg Brexit, foreign buyers dipping out for a variety of reasons such as capital controls.

      There’s also the fact that they are beyond the reach of working people only buying on a salary.

      As HAM said earlier,when London sneezes everywhere in the UK will get a cold.

  5. On the matter of house prices and credit,there surely comes a time when all the ingredients for a perfect storm line up behind one another
    1) fractional reserve lending/credit creation which depends heavily on credit demand to keep things churning and balance sheet being marked to model.
    2) PCP car loans-aggressively sold to sometimes unwitting borrowers who think they own the car but don’t.
    3) unsecured credit where people can roll over credit card balances at 0% interest-if that isn’t sowing the seeds of s future crisis I don’t know what is.
    4) IO mortgages – ten years on there’s still millions out there with no realistic prospect of capital repayment
    5) then the losses start coming and it crimps banks ability to create credit.

    • Hi Dutch

      As this happens the banks start to withdraw credit lines for companies and they create the storm they do not want. My late father hated the banks for this reason as in the good years they tried to force loans on him and in the bad ( when he was himself under pressure) they would try to demand the money back. Another sign is surveyors trimming valuations……

  6. Time for some Shirley Bassey really:

    “They say the next big thing is here,
    that the revolution’s near,
    but to me it seems quite clear
    that it’s all just a little bit of history repeating

    The newspapers shout a new style is growing,
    but it don’t know if it’s coming or going,
    there is fashion, there is fad
    some is good, some is bad
    and the joke is rather sad,
    that its all just a little bit of history repeating

    .. and I’ve seen it before
    .. and I’ll see it again
    .. yes I’ve seen it before
    .. just little bits of history repeating”

    Even Kirsty from Location, Location, Location has acknowledged the 18 years cycle in property – we saw it in 1989/91 and 2007/9, plus a slightly shorter session of bubblenomics in the 2002/3 dotcom bubble repeating in 2017. These “great cycles” are apparently the time it takes for collective memory to drop out of the economic institutions – although that clown Lawson, architect of the 1988 bubble, has been out today denouncing the doomsayers much as he did then (until he ran away). Aussie rockers Midnight Oil again: “Short memory, must have a, short memory”.

    In 1990, there were also proposals for longer-term mortgages in the UK on the basis that you would actually be able to sell at a profit some years down the track, so you weren’t really burdening the next generation. It followed on from lawyers being offered up to 7x pay on the basis that a few years later, their pay would have gone up so much that the mortgage would be abt the normal 3x – except that many of friends lost their London law jobs in 1992 and have worked “in the provinces” ever since.

    Add the economic illiteracy of saying that housing is a supply and demand market and it is obvious why this is happened and the stall is about to come. In an asset market, prices go up until the cheap credit runs out – be it low rates, starter rates, longer periods etc. Govts are so frightened of upsetting the idle middle classes that they try ever more stupid wheezes to keep it going – even journos spotted that the extension of Help to Buy (with £9bn when we are skint) would just raise prices. Today’s wheeze is this – reducing Stamp Duty on energy efficient houses, so buyers can afford to pay more.

    People will do anything to keep their houses and their cars, so they turn to unsecured credit to keep going – today Carney has changed from Steve Priest in disguise to Paramore’s latest:

    “For all I know
    The best is over and the worst is yet to come
    Is it enough?
    To keep on hoping when the rest have given up?
    And they go
    I hate to, say I told you so
    But they love to, say they told me so
    I hate to, say I told you so”

    If the banks cut back on unsecured credit, then the defaults will start in mortgages and car loans. Then London ripple is right – some is taking easy profits, but some is also those moving out, because the asset prices are too high (covered up by claims about bankers moving to Europe due to Brexit). The signals are all flashing red now.

    Looks like I was right to mention Pink a few weeks ago to end this musical session.

    • “If the banks cut back on unsecured credit, then the defaults will start….”

      that will send a shiver down the backs of the establishment ….

      mark my words , its not the middle classes they’re worried about , its the Banks

      Lets hope the TBTF Banks have enough money in the pot now

      my humble opinion is that they are Bust now as they were back in 2007

      remember that saying back in the ’90’s ?

      only a pigeon can afford a deposit on a Porche now…..

      moldy old dough


      PS: you should rejoice Dave , we’ll get to vote again on the EU ……just as planned ….

      • Not so sure about the banks. The capital ratios have been increased, but we will see. When I was fired by Barclays for challenging their lending/PR polices, I was informed that the mortgage problems would not come again as regulation was far better – I did want to ask how you can regulate house prices and negative equity, but it was getting hostile enough already! Of course, Jenkins was sacked by Barclays 4 months later and back they went to investment banking and extending mortgages (including their own dodgy schemes like this but the share price halved since! Then there have been all the other cases of crooked behaviour coming out of the woodwork – Qatar, LIBOR etc. So, we shall see on that one.

        I still think it is more fear of the middle classes and their easy money. Thatcher agreed to join the ERM when she was told that mortgage rates could be cut by 1% and she was asking about raising MIRAS above £30K. Major only won in 92 due to Kinnock being a clown, so the Tories were never forgiven for not just Black Wednesday, but also the Lawson bust, while memories were recent enough. Then in June, we heard a lot about how granny should not be charged on her house value and should be able to hand free cash to her kids, while “someone else” looked after granny.

        You cannot blame Remainers for the economic travails – loose monetary policy was running long before June 16.

        • “I did want to ask how you can regulate house prices and negative equity” – via stringent LTV ratios which would protect current buyers but hammer past buyers if prices fell substantially but then there are the capital tier ratios to fall back upon plus the value realised of any repossessed houses alongside the help to buy guarantees for first time buyers courtesy of the Govt backed up by the taxpayer.

          I don’t agree with HTB but my point is your ex employer was right – that’s a lot of safety nets to fall through before the banks start feeling pain.

          • You are rather overlooking the fact that HTB is only applicable to new builds – hence the Barclays scheme to put your rellies’ nuts in the chopper. Prices fell over 20% in 1992 and 2009, so 25% is not inconceivable given the rises since 2009. Then there has to be credit finance for someone to buy the repossession – the Govt was urging banks not to repossess in 09-11, but to encourage owners to quietly sell up. But my former neighbour has been trying to sell his overpriced house for 11 years. Add to that the reliance on unsecured credit to which the banks are also exposed – and Barclays are not as safe as you think.

      • I hope to see the banks cut loose to sink or swim. It’s the only way to remove the RBS subsidies.

        Big bonuses for failing banksters, austerity for the people – it’s time for a change

      • BTL mortgages need at least a 25% deposit, plus the banks have the mortgagees house as collateral. Many recent owner occupier mortgages have the govt backing them with HTB.

        I think they banks will have done their sums this time and can take a hit on houses prices. Like a broken clock i will be right eventually regards a crash, 2018 will be that year.

  7. Economist Steve Keen predicted that austerity leads to higher private debt. Essentially its the only source of new money once government spending drops and you have a balance of payments deficit.

    Years of neoliberalism is about to completely destroy the economy. I suspect a wave of defaults from the introduction of universal credit coupled with a run on the pound will destroy whatever misplaced faith people have in Tory neoliberal trickle up economics. Nothing has been learnt from 2007, and the same greedy vested interests have bet the wider economy on the never ending rise of house prices. Unfortunately pursuing a set of policies that’s given us the lowest wage growth in 150 years and this huge rise in private debt – has made the debts harder to repay.

    Its absolutely inevitable now that mass defaults will occur. At some point the Tories will have to defend the pound with interest rate rises – and its game over politically for a generation.

    • I think you are crediting the Bank of England with much greater competence and integrity than they deserve there Anne.

      They will let the pound go to zero rather than let house prices correct to where they should be(about a 50% haircut required outside the south east, 60-70% required in the south east), that fits in rather nicely with my long term prediction of the government of the day having to go cap in hand to the ECB/IMF to replace sterling with the Euro once it has lost another 50% or so of its value from here.

      • The Tory party need more owners, TPTB will do what they can to make this happens as they’re petrified of Corbyn.

        The crash in SE England in the £300K category (i.e. 3 bed semis) is just starting from what i’m seeing.

        I look forward to seeing if anything happens with section 24 in November, bringing it forward and/or applying it to basic rate taxpayers is very possible imho.

    • yes indeed !

      back to life time mortgages

      I just hope these fools dont get ill

      there was a reason for council houses …… a brake on predatory house builders



  8. Hi Shaun.
    Fortune calls multi-generational mortgages, “loading up future generations with debt.” but isn’t that a cynical view?
    Could it not also be said to be the reverse, where people pay mortgages knowing that they themselves will never own the property, but that their contribution will be a help for their children/grandchildren?

  9. Great article and some great comments above. I must say that I find it very sad that
    1. housing has become an investment, rather than a place to live
    2. The effect of the massive gains has been to drive a wedge between the haves and the have nots and engendered such bitterness all round. Even on this (very polite and reasonable) blog, I can see feelings running high.
    I am not really sure that I would blame one side or the other politically, as both major parties have presided over the same issue without much progress being made.
    I suspect that ( as well as all the points made above about no politician wanting to see house price falls) the huge effect on house prices of dropping interest rates practically to zero was simply not thought about until too late as the BoE and the (Labour) government at the time were simply desperate to do anything to avoid the whole system crashing. By the time the pernicious rise in house prices had occurred, it was too late as pushing up rates would lead to Armageddon again as the banks would show how bust they are.

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