What can we expect from UK house prices looking forwards?

Today gives us another chance to take a look at the state of play in the UK housing market. This comes in the light of a couple of potential ch-ch-changes in the policy of the Bank of England of which the headline was last week’s rise in Bank Rate to 0.5% although of course that was only a rise from a “panic” back to an emergency level. More of that later as we look at the data from the Halifax which used to be a building society but is now part of the Lloyds Banking Group.

House prices rose by 0.3% between September and October, following a 0.8% increase in September. The average price of £225,826 is the highest on record and 2.8% higher than in January (£219,741).

The first impact is that house prices continue to rise in spite of what has become a more difficult environment for them with economic growth in annual terms having slowed and real wages having fallen so far in 2017. Indeed according to the Halifax things have a hint of a pick- up.

House prices in the last three months (August-October) were 2.3% higher than in the previous three months (May-July). This is the fastest price growth, on this measure, since January.  Prices in the three months to October were 4.5% higher than in the same three months a year earlier. The annual rate in October is higher than in September (4.0%) and at its highest growth rate since February.

The average price being the highest on record means that in terms of real wages house prices have risen by around 3% if you use the official inflation figure and they have risen slightly more than wages on their own. I was expecting things to slow down more in 2017 and whilst time is left as Muse would put it “Time is running out”.

There are some hints of a slow down as for example this.

Both new sales instructions and buyer enquiries fall in September. Shortage of homes for sale continues
to limit activity with the balance of new sales instructions for home sales falling for the 19th consecutive month
in September.

Also it looks as though sentiment is seeing some shifting sands.

Despite the recent rise in house prices confidence in UK house prices has fallen to its lowest level since
December 2012, according to the latest Halifax Housing Market Confidence Tracker. The survey, which
tracks House Price Optimism (HPO1 – consumer sentiment on whether house prices will be higher or lower in a
year’s time – has dropped 14 points from April 2017 (+44) to October (+30), matching the record fall seen
following the EU referendum result.
The HPO index has also fallen by 38 points since the peak of +68 in May 2015 around the time of the General
Election

Bank of England

Last week brought us not only a Bank Rate rise to 0.5% but also this from Governor Carney.

I stressed in my opening remarks, our forecast is conditioned on a market curve which has two
additional rate increases over the forecast horizon, and we, in fact, need those two additional rate
increases in order to get that return of inflation to target.

So we received Forward Guidance that two more interest-rate increases can be expected to raise Bank Rate to 1% although they were some way in the distance and therefore may even be beyond his term as Governor which ends in the summer of 2019. Thus the guidance was not only rather weak and insipid it would bring one of the weakest interest-rate rise cycles the UK has ever seen especially as we note that the current expansion is mature so a recession of some sort is likely in the time frame.

This meant that some mortgage-rates did change as this from Lloyds Banking Group indicates others may not.

• Lloyds Bank Homeowner Variable Rate currently at 3.74% will increase by 0.25% to 3.99%
• Lloyds Standard Variable Rate currently at 2.25% will increase by 0.25% to 2.50%
• Lloyds Buy to-let Variable Rate currently at 4.59% will increase by 0.25% to 4.84%

The others may not above, comes from the fact that a benchmark or guide to fixed-rate mortgages is the five-year Gilt yield which as I pointed out on Friday fell rather than rose. At 0.71% it is 0.11% below where it was pre announcement.

If we look ahead to 2018 we expect another of the legs supporting UK house prices to begin to weaken somewhat. Here is the letter from the Chancellor of the Exchequer on the subject  of the Term Funding Scheme.

I am therefore willing to authorise an increase
in the total size of the APF used to finance the TFS from £100 billion to £115 billion, in line with the current profile of TFS drawings and based on a drawdown window that will close at the end of February 2018.

So we see two things here. Firstly we get a clue as to how house price growth has carried on in 2017 as we note that draw down of this bank subsidy has been faster than expected leading to the potential increase. I also wonder if this announcement was a sot of “come and get it the waters’ lovely” to the banks? If we move on to the letter from Governor Carney we see that beneath all the rhetoric and hot air about business lending that reality is very different.

New loan rates have declined substantially over the past year and so has the rate charged on the stock of Standard Variable Rate mortgages.

So we have a confession that the Bank of England gave house prices another push and that it put out a “last call” to the banks for cheap funding in August, But as we look ahead the doors close next February so from then the stock will exist but then begin to fade as new flows stop. Is the objective to try to keep some sort of party going until the end of the Governor’s term?

Regional Differences

If we move to the official data series we see that as we disaggregate by country we begin to see wide variations.

 the average price in England now £244,000. Wales saw house prices increase by 3.4% over the last 12 months to stand at £150,000. In Scotland, the average price increased by 3.9% over the year to stand at £146,000. The average price in Northern Ireland currently stands at £129,000, an increase of 4.4% over the year to Quarter 2 (Apr to June) 2017.

The situation in Northern Ireland was particularly different to much of the UK as the previous peak was at £225,000 showing how house prices there hit something of a nuclear winter between the autumn of 2007 and the spring of 2013 when the average price dipped below £100,000. If you switch to Euros then prices in Northern Ireland fell more than in the south.

If we move onto borough or county comparisons it is hard to put these two in the same solar system let alone island.

In August 2017, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.2 million. In contrast, the cheapest area to purchase a property was Blaenau Gwent, where an average house cost £82,000.

Comment

As we look back on 2017 so far we see that the Bank of England until last week was full steam ahead in terms of propping up house prices. Last week was a change albeit a minor one in the grand scheme of things and will be backed up by the end of the Term Funding Scheme next February. However the government seems to be singing to a different beat as this from the 2nd of October makes clear.

The government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder, Theresa May has said.

It is hard not to think of the game snakes and ladders at this point. But I still continue with the view that house price growth should slow and probably go negative on a national level. In some places that is very welcome with London to the fore in others such as Northern Ireland less so but it will be a while anyway before things filter out to there. Meanwhile I am also reminded of this from the 17th of October.

Buyers of a Notting Hill mansion going on sale this month for £17 million will have to pay in Bitcoin, in what is believed to be a first for London.

The owners of the six-storey stucco-fronted home near Portobello Roadwill accept only the digital currency as payment and will not take cash.

At the current exchange rate the price is equivalent to about 5,050 bitcoin,

You see it is more like 3120 Bitcoin now. So have we seen house price disinflation and indeed deflation in Notting Hill Bitcoin style?