What is happening to the UK housing market and house prices?

The last year of two has seen something of a change in the environment for UK house prices. The most major shift of all has come from the Bank of England which for the moment seems to have abandoned its policy where the music was “Pump it up” by Elvis Costello. This meant that when around 2012 it saw that even what was still considered an emergency Bank Rate of 0.5% plus its new adventure into Quantitative Easing was not enough to get house prices rising it introduced the Funding for Lending Scheme. This reduced mortgage rates by around 1% quite quickly and had a total impact that rose towards 2% on this measure according to Bank of England research. This meant that net mortgage lending improved and then went positive and the house price trend turned and then they rose.

The next barrage came in August 2016 with the “Sledgehammer QE” and the cut in Bank Rate to 0.25%. This was accompanied by the Term Funding Scheme (TFS) which was a way of making sure banks could access liquidity at the new lower Bank Rate and it rose to £127 billion. This was something of a dream ticket for the Bank of England as it boosted both the “precious” ( the banks) and house prices in one go,

However that was then as the Bank reversed the Bank Rate cut last November and the TFS ended this February. So whilst the background environment for house prices is favourable they have risen to reflect that and for once there are no new measures to keep the bubble inflated. Also we have seen real wages fall and then struggle in response to higher inflation.

Valuations

This morning has brought news about something which has not happened for a while now but is something which is destabilising for house prices. From the BBC.

There has been a “significant” rise in homes being valued at less than what buyers have agreed to pay, the UK’s largest mortgage advisers have said.

These “down valuations”, by lenders, can mean buyers having to pay thousands of pounds extra, up front, to avoid the sale collapsing.

Estate agents Emoov said it reflected surveyors predicting a financial crash.

UK Finance said lenders, which it represents, were right to ensure property values were realistic.

The organisation said borrowers also benefited from houses having an “independent valuation”.

Emoov are an interesting firm that have recently completed a crowdfunding program and perhaps want some publicity but for obvious reasons estate agents usually stay clear of this sort of thing. If we step back for a moment we note that whilst they are mostly in the background surveyors do play a role in price swings via their role in providing a base for mortgage valuations. They should know the local market and therefore have knowledge about relative valuations but absolute ones is a different kettle of fish. If they get nervous and start to be stricter with valuations then the situation can snowball though mortgage chains. As to the numbers the BBC had more.

Emoov, one of the UK’s largest digital estate agents, said one in five of its sales now resulted in a down valuation.

Two years ago, it was fewer than one in 20, it added.

This is the highest rate since the UK’s financial crash in 2008, according to agents from 10 mortgage adviser groups contacted by the Victoria Derbyshire programme.

There is a specific example quoted by the BBC.

Phil Broodbank, from Wirral, bought his house for £180,000 a few years ago and spent up to £25,000 renovating it.

When the time came to remortgage, a surveyor valued his house at £200,000 without visiting it in person – in what is known as a “drive by”.

This valuation was £20,000 lower than a local estate agent had valued the property.

One bonus is that “drive by” in the Wirral does not quite have the same menace as in Los Angeles. Also these have been taking place for quite some time now but there were fewer complaints when the bias was upwards. The response from UK Finance is fascinating.

“Although the valuation is carried out for the lender, borrowers also benefit from a realistic independent valuation as it could help them avoid paying over the odds for the property they are buying.”

How do they know it is “realistic” especially if it was a cursory observation from the road? Also as the valuation is for the lender there are always going to be more interested in downturns that rises as of course the bank is more explicitly vulnerable then. In case you are wonder who UK Finance are they took over the British Bankers Association.

Borrowing Limits

The Guardian pointed out over the weekend that some old “friends” seem to be back.

this week Clydesdale Bank said it will grant first-time buyers mortgages of 5.5 times a borrower’s income and lend up to £600,000 – and the buyer only needs a 5% deposit.

A little care is needed as this is for the moment only available to those classed as professionals by Clydesdale Bank who earn more than £40,000 a year. Also there is a theoretical limit in that according to Bank of England rules mortgage lenders are supposed to keep 85% or more of their business using a 4.5 times times a borrower’s income. But if history is any guide these things seem to spread sometimes like wildfire and this industry has a track record that even a world-class limbo dancer would be envious of in terms of slipping under rules and regulations.

This bit raised a wry smile.

But mortgage brokers said they were relaxed about Clydesdale’s new deal.

As it is a potential new source of business they are no doubt secretly pleased. Also I did smile at this from the replies.

 5.5 times of income is nothing unusual. In Australia this is very common and goes as high as 7 to 9 times. ( GlobalisationISGood )

This Australia?

Rising global interest rates are combining with bank caution on lending, via extreme vetting of loan applications in the wake of financial services Royal Commission revelations, to generate a mini-credit crunch.

That’s putting further pressure on house prices, whose falls are gathering pace. ( Business Insider )

What this really represents if we return to the UK is another sign that houses are unaffordable for the ordinary buyer. Another factor in the list is this.

While 25-year terms were the standard in the 1990s, 30 years is now the norm for new borrowers, with many lenders stretching to 35 years to make monthly payments more affordable. ( Guardian )

 

Comment

We do not know yet how the two forces described today will play out in the UK housing market but down valuations seem to be a stronger force. After all Clydesdale will only do a limited amount of its mortgages and fear is a powerful emotion. Mind you some still seem to be partying like its 2016.

The billionaire founder of Phones4u John Caudwell has claimed his Mayfair property development will be “the world’s most expensive and prestigious apartment block”.

The entrepreneur, who turned to property after selling his mobile phone company for £1.5bn in 2006, plans to convert a 1960s multi-storey car park in the heart of Mayfair into 30 luxurious flats.  ( City-AM).

As to hype well there is this.

“I see London as the epicentre of the world and I see Mayfair as the epicentre of London. Therefore, I see my building site as the epicentre of the world,” Caudwell told City A.M. “I can’t think of anywhere better for people to live.”

Meanwhile I am grateful to Henry Pryor for drawing my attention to this. From the Independent in August 2000.

Roger Bootle, who predicted the death of inflation five years ago, says Britain has seen the last of extreme gyrations in house prices…………Nationwide, Britain’s largest building society, reported yesterday that the price of the average home fell 0.2 per cent, or £319, to £81,133 between June and July.

As of this June it was £215,844.

 

 

 

36 thoughts on “What is happening to the UK housing market and house prices?

  1. so lets see if the housing drop gets incorporated into CPI index……

    well it is the Creative Price Index after all 😉

    Forbin

    • Hi Forbin

      I have been looking into the situation for the CPI for some other work and therefore have this ready and waiting from the current Technical Manual.

      ” The CPI coverage excludes housing costs such as council tax, mortgage interest payments, house depreciation, buildings insurance, ground rent and other house purchase costs such as estate agents’ and conveyancing fees. ”

      Fascinating that they define it in terms of house depreciation a la the RPI. I thought it was supposed to be all wrong.

      The swerve would be to decide we should copy Europe which plans to put house prices in although of course politically there would be no end of steam out of that kettle.

    • Anteos, I agree. They have £500k debts of which £337,500 was to buy a house (plus fees etc), £58k was existing debt, there’s the payment holiday and also, probably, some debt incurred when ill health affected their income. On the plus side, they have a house that has probably risen significantly in value and may be enough to pay off the loan, which was their intended repayment method in any event.

      So the real issues are (a) spending more than they earn and (b) ill-health – nothing to do with an inappropriate mortgage. I’m not criticising them for incurring additional living cost debts (especially given the illnesses) but I don’t think it is right to divert the blame to their IFA.

      Their flaw was to hope they could buy a home, only pay the interest and then sell it for enough money to pay off the debt and buy a smaller dwelling. Not an unreasonable plan given historic inflation in the UK but quite risky without a more reliable source of income.

    • This would have been cleared out had the central banks not tried to stop recessions and governments not leaned on lenders not to repossess in the aftermath of the crisis. In the early 90s, that is what happened and normality began to return by 1995. We are bogged in this housing mire and have been for ten years now.

    • It is also the case that the couple are lying: interest only mortgages were ALWAYS accompanied by advice to get a repayment vehicle.

      It is not mathematically possible for an increase in equity due to price inflation to pay ONE PENNY of the original loan unless the house is sold.
      They bought a house far bigger than their needs, in order that the equity would pay for a smaller one when the loan matured
      They wanted a house for nothing, it went tits up, and now they are whining.

      Their problem was not illness, it was greed.

    • but but , why should those other people make lots of free money and we don’t ?

      it’s so unfair !! mommy mommy , its so unfair !!!

      there, there children , didn’t mommy tell you the Universe is perverse ? *

      Forbin,

      * there is to date only one place that’s molly coddles mankind …. everywhere else is hostile to the extreme

      • You can almost feel the indignation on the face of Paul, who reckoned he was going to make loads of free cash from his £180k purchase plus 25k expenditure. How dare a surveyor say it was worth less – we’ll, Paul, it is driven by the value of land, not your skill with a paintbrush.

        It is like my mother’s former neighbour, who said in 2006 that he was “entitled” to “improve” his house and sell it on. This was a time when the BBC prog “Homes under the hammer” was pushing the same line. Post-crisis most of those featured in the programme were told they would be better off renting out than selling. The key thing they always forgot to mention in the pre-07 “you have made £30k by painting the place a bit” was that the underlying property had moved up in price too.

        The neighbour recently sold his house after asking silly prices for nearly a decade. However, he moved out and rented in October 2011, so I just mentioned this to HMRC and suggested they checked his income tax at the same time.

        • this is problem too, the culture ( kulture ? ) of endless profits from houses

          its a home and my kids would like to buy one of their own.

          but friends with portfolios of houses for rent are aghast at the prospect of any housing price falls – even if I point out that :-

          1, they’ve still made lots of money over purchase price
          2, they still get good rent which they spend on a lavish lifestyle
          3, they still have the houses – which they can sell and in point 1, still have enough equity if houses fell by 33% ( or more in some cases )
          4, what about my kids need to buy ? ( heated discussion follows )

          Forbin

  2. I appreciate there are regional variations in house price increases, but for the West Midlands where I live, the market is absolutely on fire.

    • Hi Kevin

      If we stay with the Nationwide numbers they say that the West Midlands saw an annual growth rate of 4.3% in the latest quarter down from 4.9%. In fact the Midlands in general is leading the pack right now.

  3. I think it’s London money escaping whilst they still can. There’s a lot of 30 and 40 somethings who moved to London after Uni, and are now cashing in their London property to move out.

    • If you follow that BBC prog, Escape to the Country, you will note that the West Country and Yorkshire Dales are too spenny now, so it’s Shropshire or Norfolk.

  4. I thought Shaun would feature this when I saw the surveyor report on the BBC this morning. They are just covering themselves against claims for negligence, because they know that whatever the unreliable boyfriend might do, taxes rises are coming in November and the economy is grinding to a halt under Jacob Rees- Mogg.

    Speaking of the Minister for the 18th century, I see that he has also launched a £50k prize from the IEA for the best essay solution for the housing market. Well, Shaun should have it for his blogs and he is welcome to cut and paste some of our comments. Not sure the IEA would want to face reality however.

    We have reached the inevitable end – having ramped up prices and sucked the life out of consumption in the process, buyers simply cannot afford to maintain the house price growth due to sluggish wages and the ridiculous multiples. We are in exactly the same place as 1989, when lawyers could get 7x multiples and there were suggestions of longer repayment terms, which even crossed the generations in Japanese style. Of course, none of it lasted as rates started to move up across the world after some years of loose monetary and fiscal policy (exactly the point I made to the Trump loving American banker recently). The orange one has also tweeted criticism of the Fed for raising rates – yet it is his own Reaganomics, which are causing it! Add in a trade war and increasing levels of corporate default in China (especially in property) and it is all lining up for a repeat of previous housing and asset downturns.

    No doubt, the unreliable boyfriend will try to avoid reality in August! Speaking of which, the CISI meeting with the local BoE agent was cancelled last week due to a lack of bookings – of course, they said it was down to the holidays (which start earlier up here in Scotland) but it could just be that no-one takes the BoE seriously any more.

    • David, your reaganommics is an interesting reference. I has it explained to me somewhere that the tariffs are ncessary to maintain parity pricing. The feedback loop with interest rates and Tbond yields is drawing so much demand for dollar that the other world currencies are depreciating in relative terms.

      The only way to stop the ROW products under-cutting USA manufacture in these times is to slap 7% import to make up for the 7% depreciation.

      I don’t disagree that Trump is not the most coherent of leaders however at least they are trying to get back to normal monetary standards whereas ROW want to live in QE make believe. The USA approach is definately a challenge for the rest.

      PaulC.

    • Hi David

      I like to be even handed so let us compliment Roger on getting the inflation trend right although of course he has been helped by shifts in the way it is measured. House price inflation trends were a fair way short of a triumph though.

  5. Hi Shaun
    So we now have mark to market showing it’s sensible
    face again, how long before TPTB do something evermore stupid
    to negate it ?
    JRH

    • Hi JRH

      In some ways I am surprised it has not already happened. Is Governor Carney too busy planning for his next job? Deputy-Governor Broadbent is doing his best to live up/down to my description of him as the absent-minder professor

  6. A luxuxry block of flats from an old multi-storey car park? That is wrong on so many levels.

    I’ll get my coat….

    I’d love to know where all these people who can afford all the luxury flats being built in London are supposed to come from as all the renters I know don’t have anywhere near enough income to buy one.

      • Interesting story on BBC News about a Slovak journalist, who was killed by an Italian mafia for looking into their connections with the Slovak govt. Turns out this lot do a lot of money laundering through London property too. The U.K. govt turns a blind eye to money laundering in property precisely to keep the prices up, while cracking down hard on any other failings in AML and Bribery Act work.

  7. When real wages are losing pace because real inflation is higher than reported, and when it is remembered that house prices are limited to what people can afford to borrow, it necessarily becomes the case that either of two things must happen:

    1) lending criteria must be loosened.

    2) house prices must fall.

    • 1) lending criteria must be loosened.

      yup , 100% and even 105% mortgages

      got a payslip ? here’s 15 x multiple, or 20%

      not enough ? shared equity and 50 year loan… let yer gran kids pay it off ( as if they’re have any money left ….)

      10% deposits paid by HMG on new builds of course – gotta protect yer friends ( and yer next job too )

      UBI – yup that’s the ticket – all taken up with mortgage payments….

      Forbin

      PS: anyone else got ideas? apart from letting the Banks get hurt ….

      • Nice list Forbin, how about loans on property yet to be built. That would be the ultimate easing stance, avoids the concreting of the greenbelt because its for property not yet in existence, .i.e. not yet got the explicit planning permission….

          • isn’t that an idea from HMG inland revenue ?

            extra tax on couples with unborn children ( and un-conceived too , gotta include those LGTT to be fair )

            we can go to the point that HMG buys the houses and then just rents them to the people ….. ummmm

            Forbin

    • That of course is the other side of the demand by the US banking guy and increasing over here that capital reserve requirements are reduced and governance rules done away with (call it light touch perhaps) to fuel all this lending.

  8. “I see London as the epicentre of the world and I see Mayfair as the epicentre of London. Therefore, I see my building site as the epicentre of the world,” Caudwell told City A.M. “I can’t think of anywhere better for people to live.” Hmm. I wonder if Caudwell has any idea what the words he is using actually mean. “Epicentre” (OED) is “the point on the earth’s surface directly above the focus of an earthquake”, so if he knows what he’s saying, so much for London’s future, and his flats (or car park) get it first. More likely he is spouting a common bit of garbage, supposing ‘epicentre’ to some mean soemthing like ‘really, really, everso’ the centre. OED notes this usage as refering to ‘something unpleasant’. Heigh ho. I expect he runs a chain of schools too, these illiterate millionaires seem to get a kick out of that.

  9. “As of this June it was £215,844.”
    What is the average if you take London out of the equation? Obviously still a lot higher than Bootle’s figure.
    House price inflation on the scale of the last 30 years has a political, rather than economic, cause. Governments have deliberately let banks inflate house prices to stoke the domestic economy and make people feel wealthier and re-elect them.
    But the political landscape has changed. Debt is one thing, but inequality is now the major political issue – the Tories will be unelectable unless they address the housing crisis. They can build more houses, but ultimately they have to regulate bank lending to bring prices down and make into the range of affordability (historically around 4 x earnings).
    Otherwise Corbyn will be elected and housing will inevitably crash as the hot-money pours out of the capital.
    Either way, the party is winding down, and rightly so. The smart international money has realised this and is getting out.

  10. The culture of home ownership is easily defined: is it an asset or a liability?

    Just need Joe Public to catch up.

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