This week has opened in what by recent standards is a relatively calm fashion. Well unless you are involved in the crude oil market as prices have taken another dive. That does link to the chaos in the airline industry where Easyjet has just grounded all its fleet. Although that is partly symbolic as the lack of aircraft noise over South West London in the morning now gives a clear handle on how many were probably flying anyway. So let us take a dip in the Bank of England’s favourite swimming pool which is UK house prices.
Bank of England
It has acted in emergency fashion twice this month and the state of play is as shown below.
Over recent weeks, the MPC has reduced Bank Rate by 65 basis points, from 0.75% to 0.1%, and introduced a Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME). It has also announced an increase in the stock of asset purchases, financed by the issuance of central bank reserves, by £200 billion to a total of £645 billion.
If we look for potential effects then the opening salvo of an interest-rate cut has much less impact than it used to as whilst there are of course variable-rate mortgages out there the new mortgage market has been dominated by fixed-rates for a while now. The next item the TFSME is more significant as both its fore-runners did lead to lower mortgage-rates. Also the original TFS and its predecessor the Funding for Lending Scheme or FLS lead to more money being made available to the mortgage market. This helped net UK mortgage lending to go from being negative to being of the order of £4 billion a month in recent times. The details are below.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 10% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).
We have seen this sort of hype about lending to smaller businesses before so let me give you this morning;s numbers.
In net terms, UK businesses borrowed no extra funds from banks in February, and the annual growth rate of bank lending to UK businesses remained at 0.8%. Within this, the growth rate of borrowing from SMEs picked up to 0.7%, whilst borrowing from large businesses remained at 0.9%.
It is quite unusual for it to be that good and has often been in the other direction.
In theory the extra bond purchases (QE) should boost the market although it is not that simple because if the original ones had worked as intended we would not have seen the FLS in the summer of 2012.
Today’s Data
It is hard not to have a wry smile at this.
Mortgage approvals for house purchase (an indicator for future lending) had continued to rise in February, reaching 73,500 . This took the series to its highest since January 2014, significantly stronger than in recent years. Approvals for remortgage also rose on the month to 53,400. Net mortgage borrowing by households – which lags approvals – was £4.0 billion in February, close to the £4.1 billion average seen over the past six months. The annual growth rate for mortgage borrowing picked up to 3.5%.
As you can see the previous measures to boost smaller business lending have had far more effect on mortgage approvals and lending. Also there is another perspective as we note the market apparently picking up into where we are now.
In terms of mortgage rates in February the Bank of England told us this.
Effective rates on new secured loans to individuals decreased 4bps to 1.81%.
So mortgages were getting slightly cheaper and the effective rate for the whole stock is now 2.36%.
The Banks
There is a two-way swing here. Help was offered in terms of a three-month payment holiday which buys time for those unable to pay although in the end they will still have to pay but for new loans we have quite a different situation. From The Guardian on Thursday.
Halifax, the UK’s biggest mortgage lender, has withdrawn the majority of the mortgages it sells through brokers, including all first-time buyer loans, citing a lack of “processing resource”.
In a message sent to mortgage brokers this morning, Halifax said it would no longer offer any mortgages with a “loan-to-value” (LTV) of more than 60%. In other words, only buyers able to put down a 40% deposit will qualify for a loan.
Other lenders have followed and as Mortgage Strategy points out below there are other issues for them and prospective buyers.
Mortgage lenders are in talks with ministers over putting the housing market in lockdown and transactions on hold, according to reports.
Lenders have been withdrawing products and restricting loan-to-values as they are unable to get valuers to do face-to-face inspections.
Property transactions are failing because some home owners in the chain are in isolation and unable to move house or complete on purchases.
Removals firms have been advised by their trade body not to operate, leaving movers in limbo.
So in fact even if the banks were keen to lend there are plenty of issues with the practicalities.
Comment
The next issue for the market is that frankly a lot of people are now short of this.
Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh ( The Adventures of Stevie V )
I have been contacted by various people over the past few days with different stories but a common theme which is that previously viable and successful businesses are either over or in a lot of trouble. They will hardly be buying. Even more so are those who rent a property as I have been told about rent reductions too if the tenant has been reliable just to keep a stream of income. Now this is personal experience and to some extent anecdote but it paints a picture I think. Those doing well making medical equipment for example are unlikely to have any time to themselves let alone think about property.
Thus we are looking at a deep freeze.
Ice ice baby
Ice ice baby
All right stop ( Vanilla Ice)
Whereas for house prices I can only see this for now.
Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall
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Where next for house prices? Lower, much lower, the fallout from this virus is going to take months to recover from, the entire country is shutdown, I think millions will lose their jobs as many small businesses will go to the wall and never re-open. These are mostly businesses that were created and maintained by the false bubble economy surrounding the housing market, but many will have been viable and not connected to the housing market however the duration of the shutdown will be so long they will simply run out of money.
All this is going to be catastrophic for house prices as the cooling period will extend to longer times on sale for many houses, potential buyers will be unwilling to borrow the ludicrous sums required to buy due to uncertainty and possible job loss.
But the real shock from lower prices will be to the debt zombies who think houses can never go down, their unshakable belief in the security of house prices will be destroyed as the prices go lower and lower their profit evaporates and for many their losses mount.
If only interest rates could go up as well, the the falls would be massive, but of course, as I have said on here on numerous occasions, the Bank of England will never raise rates, even if there is a run on the £(when not if IMHO), they would rather see the currency destroyed than the housing market.
Best case scenario 50% fall, but I think interest rates would have to go up to achieve that, so easily 20-30% IMHO.
I had already reported a 10% before the Lemonade bug hit home
another 20-30% ?
yah I think so too but it will take time for the panic to set in , slowly at first , then all at once .
no worries , BoE will buy these “investment grade ” assets …….
think about it , what would they NOT do ? 😉
Forbin
PS: eventually they will have so much crap on their books they will be wound up and a new money regime put into place – probably finance by gold “donated” by all those gold-bugs who thought they were safe …… ( the nice boys in uniform will be knocking on their door, for the greater public good , of course . )
Forbin
Kevin,
You are unemployment is bound to rise and even if the UK have less deaths than many parts of the world, the world economic shock will ripple for months if not years to come, many businesses large and small will fail.
Many new small businesses will have second thoughts on carrying on as the general population will be much poorer, and the Chancellor indicated he will take away some of the tax incentives the self employed receive to reduce their tax.
All this will add to the pressure on lowering house prices bear in mind most mortgages on fixed rates, so they will, be hit further by a declining income.
That is why the banks have already pulled many mortgage products from the market and want a 40% deposit to protect themselves should houses fall to that level.
Houses have risen far beyond inflation the last few years and everyone was saying they were way overvalued, there has to be some correlation between earnings, inflation and unemployment and its all out of sinc at the moment.
Quite when houses will start to fall is another thing as the market is at a standstill at the moment.
There is no way everything is going to bounce back as it was before, the extra borrowings going to have to be paid for we are going to become poorer in this country than before.Many large business will go bust and debts written off. Brigjhthouse and a Carluccio’s restaurant the latest to go into administration today.
More large retail shops will probably hit the wall due to the closure people will change the way they shop.This is worse than the last financial crisis in 2008 imo because its affects all economies globally and its unknown as yet how long it will continue.
The governments will probably try and downplay the damage however they can to prevent people tightening up what money some have left.
The truth it governments are probably bankrupt all over the world but they wont admit it, assets were never worth what they were estimated to be at.
There could now be another 10 years of austerity when this is all over, i just hope some high worth individuals have to take some of the pain.
Hi Shaun
Obviously TPTB are going to struggle immensely
to protect the precious.
Could it be like 1988-1977 but on hyper steroids?
If I were renting offices but currently have staff
working at home why do I need the offices post
corona, the implications for large swathes of
commercial property is gigantic.
Stay safe everybody.
JRH
Meant 1988-!997
Any need for HS2 now?
yes, along with other big projects
why ?
because no one with private investment money will not be wanting to spend it , if they have any left .
for sometime now they have been buying bonds and such with negative rates , not for a return on their money but to get some back !
1930’s here we come ….
forbin
jrh
I to take the view many people will get used to working from home and many lawyers font need offices they can have interviews by skype.
Not enough is being done at the moment to free up shops and convert to flats there should not be a housing crisis in the UK.
If they county can build a 4,000 bed hospital in a week in London they can build flats at the same rate if they wanted to,
All the government has been doing in reality is keeping the builders sweet in the UK with incentives for the buyer but allowing builders to be making circa 30% profits and in turn making management rich. This is a problem with capitalism.
These things haven’ been thought through properly just like they were not with the right to buy, which allowed flats to be sold at less than they could be re-built for.
Unfortunately a lot of people in power in government not really got any sense when it comes to various policies.
Common sense is a misnoma.
I think it’s fair to say that most
local councillors still resent any
suggestion of retail converted to
residential they are still insistent
things will revert to the old way.
That is corporate socialism you are describing, or crony capitalism as its often called. We’ve not had capitalism in this nation for many a year.
Great article as always Shaun.
But will houseprices go down? If very few houses are selling the indicies could be massively skewed by a few sales. Also I heard (can’t find the link at the moment), that they’re possibly going to stop publishing their indicies.
I can imagine a lot of stock building up throughout the summer and as soon as things return to normal (september?) it will be a buyers market. But I’m sure the government will move heaven and earth to prevent price discovery.
But not to worry, in todays society no-one is responsible for anything any more. Can’t pay your mortgage, don’t worry its optional. And I can’t imagine the banks repo’ing on a massive scale.
hope everyone is well. take care.
Hi anteos and thank you
Surely the fact they want to suspend the property indices is proof of where the market is expected to go. Only price falls get people calling for suspensions just like in equity markets.
Your point about repossessions is interesting and I agree that the last thing the establishment wants if plenty of them. So we await the next move….
It will be a repeat of 2011. The govt will require banks just to pressure people into selling up quietly – so the repo stats don’t rise. This is a folk memory from the early 90s when many people with cash went “ looking for repos” to get them on the cheap, because the former owners still had a debt to the bank. Bizarrely, a lot of repoed owners felt they should be allowed to just walk away, but then the banks took the damage. That of course was the system in the USA and was a major contributor to 2008.
Well, Day 1 of official furlough and Sally Knyvette is looking rather natty in leather today. Contrary to my manager’s expectations, I am still alive. Trouble is, I cannot put off starting on a big German translation now. Imperial is saying the infection level is levelling off, so this is looking like about a month under the current panic. Usual old nonsense being spoken – after “their finest hour”, we now have everyone caring for one another (seem to remember that after Diana died, but obviously didn’t last). Sky and BBC both deliberately misquoting Thatcher on society. I just model myself on Avon, who got all the best lines in Blake’s 7.
The thing about economics is that every so often there is some sudden event, which makes people and businesses reassess many things. Its suddenness after a long period of complacency produces quite dramatic change. Small businesses are changing their business models and bigger companies are going to shed a lot of labour in the near future. Demand will be interesting – those restaurant dinners are gone, but you will still need a new washing machine if the current one is old, so there could well be a quick bounce back in many sectors.
So, we come to housing and all the desperate measures required. About 20 years ago, there was a very amusing Yank called Alvin Hall (big eyes, infectious laugh, bow tie), who was the first TV personal finance adviser in the wake of the early 90s downturn. He would visit people and sort their finances out. He always used to say that you should keep three months’ money easily available and for many people, that would now be about £3k, so as to survive a calamity. Seems many people have not taken his advice and hence the problems we are currently having from a severe flu outbreak. Ultra low rates have been the main deterrent to saving, but I suspect the Marginal propensity to save will rise now, sucking more demand from the economy.
Housing relies on credit, so there are three factors at work – price (interest rate), availability (income multiples, deposits & LTV, government schemes), confidence ( mostly 3-5 years out, not 25 as we might expect with mortgage terms, factoring in job pay/security, other demands on income, rising prices). It is easy to see why we get booms, but falls are less easy to predict, due to stickiness – people can stay put and hope for better times. So, job nervousness, rising taxes and a loss of confidence about rising prices will be key this time – 92 was much more about rising rates. It looks like a repeat of 87, when oil prices collapsed to USD10 and shares fell, followed a year later by the first cracks in housing (in between Lawson’s M3 money supply hit 25% pa). There wasn’t the dedication to inflated asset prices in those days, but the equivalent is now that CBs have nowhere left to go and govts will be broken by the virus costs. However, there will be an initial bounce in demand as much of it will still be there, but the job effects will take while to come through. Once prices start to fall, confidence will go and banks will get nervous, reducing availability (we were all moaning about how quickly the banks tighten up on Friday). Again, govts will not have the money for Help to Inflate Prices etc.
As yes Blakes 7 , still can catch it on you tube , Avon was my favorite character too .
” CBs have nowhere left to go and govts will be broken by the virus costs. ”
oh I don’t think so , if they get a big enough carpet to bush this dead elephant under it they will do so ………..
” govts will not have the money for Help to Inflate Prices etc. ”
they will be, if not already, running the market ,etc for the TBTF Banks. So they will certainly be fiddling the figures – why not ? it will be you civic duty comrade , to ignore reality , the Party is always right.
Forbin
PS: police shocked at “massive” party ……. 20 people is a massive party now ? Really ?
maybe they shouldn’t have been there but 20 is not massive …… several hundred maybe . Still we will be getting more “inflated ” news as the party machine swings into full motion ……
So the B of E has seen all this personal unsecured debt build up, at 6% to 10% per annum, over the last few years. What have they done about it, sweet FA!
How are people going to pay the interest, never mind the capital, with reduced or no income?
They just let it happen and did nothing about it, when the had the chance.
So much for the Rock Star Chancellor!
Foxy,
They were prepared to “look through it”, just like they will “look through” the collapse of sterling rather than raise rates and the hyperinflation that will result as they will justify it by saying they don’t want to hurt businesses and the economy, but we on here know its all about protecting the housing market and the “precious”
But of course all the experts and talking heads will be on TV saying no one could have predicted this or seen it coming(apart from everyone on this blog and every other so called doom porn/conspiracy website), it was all down to the virus doncha know……….
Depends on the hype created by the media. If they are frothing at the mouth looking for the next ‘crisis’ they will drive panic through the housing market. Its all about confidence, because the interest rates and credit availability will be pitched to maintain the status quo for as long as possible. But if a profound lack of confidence hits the few sales to be made, and this gets magnified to ridiculous extent by the media, people will panic. After cv-19 it won’t take a lot to create that panic, and price falls previously felt impossible could occur.
Personally, with police numbers hit by sickies, I see a prolongued lockdown will create civil unrest and the only govt reaction will be to bring in the troops. The army with guns on the streets of the UK’s ( and probably those in France ) cities will set the tone. It doesn’t require a lot for real panic to set in.
We are on the brink of the unimaginable. Unless brains are engaged before its too late.
Hi JimW
To be fair to the Met Police I have seen them around the last few days as ordinarily they are around less. But as you say with likely sickness they will not be able to keep this up. I doubt the army would be especially keen on being on the streets as it would eat up numbers just dealing with Jack Grealish,
As for now on terms of the housing market we are in the equivalent of the Phoney War waiting to see what the price drops will be when the band starts up again.
hello Shaun,
“South Korea will make emergency cash payments to all but the richest families ”
where one goes , others will follow…..
Forbin
Hi Forbin
There was no sign of it here today as I have not spotted any RAF Chinooks over Battersea. Mind you one came over rather late a week or so ago which means there is still hope.
“Unless brains are engaged before its too late.” To quote Corporal Frazer “We’re all doomed!”
With Boris & Trump “leading the Western World”? Any seats left on that Martian flight? 😦
Hi Colin
There are various versions of this doing the rounds but enjoy.
“Donald Trump, Boris Johnson, Angela Merkel, Pope Francis and a ten-year-old schoolboy are on a plane, that is going down. There are only four parachutes.
Trump declares, “I’m the smartest person in the U.S.A., the country needs me.” He grabs one and jumps.
Johnson declares, “Britain can’t survive Brexit without me,” as he grabs one and jumps.
The Pope declares, “More than a billion Catholics needs me,” as he grabs one and jumps.
Merkel looks at the boy and says, “You take the last one, you have a whole life ahead of you.”
The boys replies, “It’s OK, there’s two parachutes left, the smartest man in the U.S.A. took my backpack.”
Correct my ignorance, but a house(part) owner in UK looks like a medium sized business with a cash flow problem and no business plan. Discuss?
Why do you think one of the first moves by banks at the behest of the govt was the three month mortgage holiday?
This is going to last a lot longer than three months.
I moved from crowded NW England to empty SW Scotland just before Christmas, & for my wife’s sake, I’m very glad I did.
My home has always been seen by me as a commodity, rather than an asset, but it seems I have done very well out of my move.
Really, the best that I could wish you all would be to get the coronavirus, get it mildly & recover quickly, but I wouldn’t dice with your death any more than my wife’s or mine, so I’ll just wish everyone good luck.