This morning has brought another example that to quote Todd Terry “there’s something going on” in the UK housing market. Of course there is an enormous amount of government and Bank of England support but even so we are seeing a curious development.
House prices rebound further to reach record
high, challenging affordability.
That is from the Halifax earlier who are the latest to report on this trend where the initial effect of the Covid-19 pandemic has been not only to raise recorded house prices, but to give the rate of growth quite a shove. Indeed prices rose by nearly as much this August on its own as in the year to last August.
“House prices continued to beat expectations in August, with prices again rising sharply, up by 1.6% on a
monthly basis. Annual growth now stands at 5.2%, its strongest level since late 2016, with the average
price of a property tipping over £245,000 for the first time on record.”
I would not spend to much time on the average price per see as each house price index has its own way of calculating that. But the push higher in prices is unmistakable as we look for the causes.
“A surge in market activity has driven up house prices through the post-lockdown summer period, fuelled
by the release of pent-up demand, a strong desire amongst some buyers to move to bigger properties, and
of course the temporary cut to stamp duty.”
I think maybe the stamp duty cut should come first, but the desire for larger properties is intriguing. That may well b a euphemism for wanting a garden which after the lock down is no surprise, but at these prices how is it being afforded? Wanting if one thing, be able to afford it is another.
Bank of England
It’s combination of interest-rate cuts. QE bond buying, and credit easing has led to this.
The mortgage market showed more signs of recovery in July, but remained weak in comparison to pre-Covid. On net, households borrowed an additional £2.7 billion secured on their homes. This was higher than the £2.4 billion in June but below the average of £4.2 billion in the six months to February 2020. The increase on the month reflected a slight increase in gross borrowing to £17.4 billion in July, below the pre-Covid February level of £23.7 billion and consistent with the recent weakness in mortgage approvals.
As you can see it has got things on the move but both gross and net levels of activity are lower and especially the gross one. That may well be a lock down feature as there are lags in the process. But if the approvals numbers are any guide they are on their way
The number of mortgages approvals for house purchase continued recovering in July, reaching 66,300, up from 39,900 in June. Approvals are now 10% below the February level of 73,700 (Chart 3), but more than seven times higher than the trough of 9,300 in May.
Michael Saunders
It seems that the Monetary Policy Committee may have further plans for the housing market.
Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two
and a longer period of excess supply than the forecast in the August MPR. If these risks develop,
then some further monetary loosening may be needed in order to support the economy and prevent
a persistent undershoot of the 2% inflation target. ( MPR = Monetary Policy Report )
Seeing as interest-rates are already at their Lower Bound and we are seeing QE bond buying as for example there will be another £1.473 billion today. it does make you wonder what more he intends? Although in a more off the cuff moment he did say this.
Review of negative rates is not finished: Not theologically oppsed to neg rates. ( ForexFlow)
He seems genuinely confused and frankly if he and his colleagues were wrong in August they are likely to be wrong in September as well! Oh and is this an official denial?
But I wouldn’t get too carried away by this prospect of money-fuelled inflation pressures.
He did however get one thing right about the money supply.
In other words, the crisis has lifted the demand for money
– the amount of deposits that households and businesses would like to hold – as well as the rise in the
supply of money described above.
That is a mention of money demand which is more of an influence on broad money than supply a lot of the time. Sadly though he fumbled the ball here.
All this has been backed up by the BoE’s asset purchase programme, which (to the extent that bonds have
been bought from the non-bank private sector) acts directly to boost broad money growth.
It acts directly on narrow money growth and affects broad money growth via that.
Another credit crunch
Poor old Michael Saunders needs to get out a bit more as this shows.
And, thanks to the marked rise in their capital ratios during the last decade, banks have been much better
placed than previously to meet that demand for credit.
Meanwhile back in the real world there is this.
Barclays has lowered its loan to income multiples to a maximum of 4.49 times income.
This applies to all LTVs, loan sizes and income scenarios except for where an LTV is greater than 90 per cent and joint income of the household is equal to or below £50,000, and where the debt to income ratio is equal to or above 20 per cent.
In these two cases the income multiple has been lowered to 4 times salary. ( Mortgage Strategy)
There has been a reduction in supply of higher risk mortgages and such is it that one bank is making an offer for only 2 days to avoid being swamped with demand.
Accord Mortgages is relaunching it’s 90 per cent deals for first-time buyers for two days only next week. ( Mortgage Strategy)
Also according to Mortgage Strategy some mortgage rates saw a large weekly rise.
At 90 per cent LTV the rate flew upward by 32 basis points, taking the average rate from 3.22 per cent to 3.54 per cent…….Despite the overall average rate dropping for three-year fixes there was one large movement upwards within – at 90 per cent LTV the average rate grew from 3.26 per cent to 3.55 per cent.
Comment
If we start with the last section which is something of a credit crunch for low equity or if you prefer high risk mortgages then that is something which can turn the house price trend. I would imagine there will be some strongly worded letters being sent from the Governor of the Bank of England Andrew Bailey to the heads of the banks over this. But on present trends this and its likely accompaniment which is surveyors reducing estimated values will turn the market. Indeed even the Halifax is btacing itself for falls.
“Rising house prices contrast with the adverse impact of the pandemic on household earnings and with
most economic commentators believing that unemployment will continue to rise, we do expect greater
downward pressure on house prices in the medium-term.”
What can the Bank of England do? Short of actually buying houses for people there is really only one more thing. Cut interest-rates into negative territory and offer even more than the current £113 billion from the Term Funding Scheme ( to save the banks the inconvenience of needing those pesky depositors and savers). Then look on in “shock” as the money misses smaller businesses as it floods the mortgage market. But these days the extra push gets smaller because it keeps pulling the same lever.
Also can HM Treasury now put stamp duty back up without torpedoing the market?
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Hello Shaun,
The impact of the pandemic has yet to fully seen.
I may be wrong but the market here is in a funny state – people put up high prices but houses that sell are on the lower end.
Basically like before the lock down ( which may come back any time if HMG is to be believed)
Frankly its a ‘mare to decide which way , that is from stagnent to down ( I ‘d suggest down like you and other readers )
Forbin
Hi Forbin
Where I live those letting are able to get tenants as i learnt of another flat in my block having a new set only yesterday. A friend works for a company that lets places across the South East and they have had payment trouble with less than 3%.
As to actual sales that is harder as several have come on the market but none have sold yet. That is not that unusual for here as sometimes there is no action for a while then if 3/4 flats are on offer and one goes they can all go in a week.
Agents of fortune, or hostages?
The irony that if they leave SDLT where it is, though with excluding BTL and foreign money launderers; that they will have to raise income tax/NI to pay for it.
Sunak really is one for levelling things up.
Seems we currently have people paying an extra £10k on a £250k house to save a few grand SDLT.
These deposits have to be from £30 billion the govt have been handing out in bounce back loans, where most have seemingly been for the full £50,000 or at least very near.
yah, its amazing but I guess expected . no SDLT means the price went up and not cheaper for the buyer……
must be a win for the BoE but not the people ( unless yer BLT 😉 )
Forbin
Footfall is 50% down in London as more people work from home and it maybe the case where more and more people move away from cities. So the demographics may change somewhat going forwards and price differences vary widely i.e. more falls in cities less falls in suburbs .
The reduction in stamp duty has given the marker a boost particularly on lower house prices but as unemployment rises I would expect downward pressure on prices later on in the year.
As the comments by Saunders which you have highlighted below:
Shaun
“Seeing as interest-rates are already at their Lower Bound and we are seeing QE bond buying as for example there will be another £1.473 billion today. it does make you wonder what more he intends? Although in a more off the cuff moment he did say this.”
Saunders:
“Review of negative rates is not finished: Not theologically oppsed to neg rates. ( ForexFlow)”
Divine intervention looks like its on the agenda !
Natwest also joins Barclays in reducing income multiples
https://www.thesun.co.uk/money/12602990/barclays-natwest-cut-borrow-mortgage/
Both evidently believe that rising unemployment is going to affect affordability imo
bear in mind they will have seen unions accepting pay cuts in the aviation sector.
The further reduction in wage affordability is a fairly clear indicator to me of a fall to come in house prices.
Whether negative interest rates will make any difference is questionable as even buy to lets are at risk of defaults on rents.
The GOV may be in a rock and hard place with the present situation they want more flats and conversions from shops to flats and could encourage builders to convert more but on the other hand don’t want house prices to fall.
Something will have to give otherwise we will see riots and crime rise. I suspect there is enough surplus property to house most people in the UK and more besides, but it requires common sense and pressure on builders to do the right thing.
The first sign of a falling market is a collapse in flat prices, because everyone is focused on gating a two-bed semi. That in itself distorts the figures as the flats simply don’t sell.
Working on finding beneficiaries of deceased accounts, I was prompted to write to the Housing Ministry to suggest they ask local authorities about what they have standing empty and set up a team to find the real owners. I had one involving a £450k semi in Ilford, which had stood empty for twelve years. The beneficiaries live in Canada and New Zealand!
Shaun, you are controversial as ever. I remember the 1990 crash, now that was a real one and we never had anything to compare ever since. That one (1990) was however following a short-lived mania in the preceding 2 years and afterwards… folk looked back and reflected, oh yes that was crazy. I think the nearest we ever got to again was around 2011-12, property was distinct shaky even 5 years after the GFC but within 2 years the then chancellor had started the ball rolling again.
I geniunely do think that since 1990 was well before the memory of many participants then folk and Govt believe house prices can never really go down, indeed they should never be allowed to go down since every other aspect of living and credit is tied to them.
Your comment about torpedo was a good one, when you reduce tax or interest rates then logically putting them back up will cause a disincentive. So its like a one-way street., no reversing allowed. We don’t seem to have entered any real flattening whatsover, although you could call the March-June period of lockdown an enforced price freeze. I still don’t think we are at the 1990 precipice or even the 2011 dip yet.
House prices are a people led belief and the COVID is the nearest thing we have had to a “wake up and smell the coffee” incident since the 2007 GFC. For prices to go down you need a recession and a series of shocks. A credit shock could come through lenders tightening criteria, which they are. We do aso have a partisan and degenerative US election. We also have an end to Furlough, but I detect some rolling-back there, maybe a new acronym for paying people to stay at home? Then of course there is no deal Brexit.
A definate trigger for real falls in house prices would be a run on Sterling in January and interest rate rises to protect the currency. I believe we are running a significant current account deficit, will johnny foreigner be happy if we just given them freshly minted sterling?
Paul C.
Im 45 and can remember that crash, the irony is its predominantly people older than myself who created the 2007/8 housing bubble, and have gone balls deep into this bubble on top of a bubble.
The priced out young who know little or nothing about that crash are seemingly the savvy ones by not buying into this market.
Agree with what you say about 2012 ish, prices were about to implode then FFL and HTB came along!
So the baby boomers are to blame again, nothing to do with demand, lack of new housing, mortgage providers desperate to increase market share or government policies?
Well to state the obvious you can’t really blame the priced out who didn’t buy into the bubble for the bubble..
As for lack of housing at one point recently BTL had bought circa 50% of all new builds in the last 20 years. Funny kind of shortage where we have more people than ever owning 2 or more houses.
But yes clearly govt policy is responsible as they could have started taxing BTL income the exact same way the tax owner occupiers income or by ending BTL mortgages or by making it easy for people like myself to buy plots at a similar price to corporate builders.
Correlation does not prove causation.
All house prices have been done solely for the benefit of banks & builders. Any enrichment of owner-occupiers is mere happenstance.
2 points:
1) When baby boomers were buying their homes, many lost the lot:
Compare how many people’s homes were repossessed approx 30 years ago compared to now:
https://www.ticfinance.co.uk/stats/
Baby boomers had it easy!
Utter bollocks. It was harder to get a loan, the amount you could borrow was less & you stood a decent chance of losing the lot, what with high interest rates & high unemployment.
I didnt say boomers had it easy, but you had capitalism back then hence why the financial illiterates got evicted. How i would love for that capitalism in my life when i’ve a kid and a load of savings.
I said they are the ones who created the housing bubble that peaked in 2008 and are for the most behind the 2020 mega bubble.
There is a parasitic cancer in that generation, that is not to say all are responsible … but millions of liar loans prior to 2008 and the BTL insanity ever since which is liar loans with a deposit … not to mention the 2015 election was won by the Tories after they created a nice little housing boom (Gidiots words) with Help to Buy and FFL.
Nope. I still think you’re wrong.
People like myself had no voting option on this (just as there are so few real options in our utter sham of a democracy).
Find a party outside the fringes who wanted to limit house prices & put it in their manifesto, then come back & argue the case against baby boomers.
Mr Buzzin
When out with a group of people your age, state it will be good if house prices drop 50% so they’re of a similar affordability to when you were young. (i know interest rates were higher but just humour me)
I’d hazard a guess you’d get a better reaction if you told them you were sleeping with their wives!
I have no doubt people your age worked hard for their homes (my dad just retired at 75), but not for their house price inflation.
We’ve just moved house; the last time we moved was December 1989…
Great blog and podcast as usual, Shaun.
Saunders’s speech concludes: “as the Committee noted in August, we do not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” The 2% target is part of the Bank of England’s remit from the Chancellor of the Exchequer, but surely a big-brain like Saunders should be open to considering the impact of a lower inflation target. The current CPI inflation rate is 1.0%, a long way from the 2% target. If, as you say, the UK is headed towards a big drop in housing prices, it would be even farther from 2% if the target inflation indicator was changed to a timelier version of the ONS’s CPIH(NA) monthly series, which should happen as soon as possible.
Surely, it is time for Chancellor of the Exchequer Sunak to drop the inflation target rate to 1.5%. With a target rate of 1.5%, Governor Bailey would only have to write a letter to Mr. Sunak when the inflation rate fell below 0.5%, which would be in the neighbourhood of the true zero target rate of inflation. He would also have to write a letter to Mr. Sunak if the inflation rate went above 2.5%. It is a long way from that now. Has there been any polling by the Bank of England on what target rate of inflation the UK public would prefer? If not, when can we expect to see such a poll?
Jack Mintz, arguably Canada’s top tax economist after Kevin Milligan, recently wrote (“We don’t need higher inflation to grow the economy”, 2 September 2020), commenting on US Fed Chairman Jerome Powell’s announced move to average inflation targeting: “So why not accept a lower inflation target such as 1.5 per cent? Why are central bankers looking to raise their inflation targets? It is not at all clear that raising inflationary expectations is the way to grow the economy. What’s really required is smarter fiscal policy.”
Happy Labour Day!
Hi Andrew and thank you for the Huey Lewis and the News link as we do not hear them much over here on playlists these days.
As to the central bankers they have become inflationaholics. The Bank of England went that way in 2010/11 when it tolerated inflation which went above 5% for a while as also post the EU Leave vote. The truth is that these days central bankers make government debt cheap and try to boost the economy and they do not want higher inflation getting in the way of that.
As to your suggestion of a 1.5% target I completely agree.
I wonder if the stats are to hoodwink people into thinking the market isn’t as bad as it really is – a bit like tractor production figures in the old soviet union?Well we’re about as close to a centrally planned economy as we can be without calling it communism.
Well I’m sure the Bank of England is standing by and ready to help first time buyers by buying bonds in Apple and Maersk, I just hope those first time buyers can understand the logic in that because I can’t.
I bet Boris wishes he could turn back the clock! What a first year, the covid hoax to administer, BREXIT trade negotiations outstanding, and a housing market teetering on the edge of a cliff, as the old Chinese saying goes “be careful what you wish for………….”.
Hi Kevin
We have learnt from arrbee that the Halifax is not averse to a little sleight of hand with its house price series. But monthly rises of this size and backed by other surveys seems genuine if based on low volumes.
The person who probably most wants to turn back the clock to the start of 2020 is Novak Djokovic I would suspect.
People want out of cities, for a number of reasons, racial/cultural/religious tensions, covid 19, & the possibility of successors, etc.
I got out in December; just in time.
Have yer social justice wars, yer climate change wars, yer gender wars, any other pseudo-Liberal nonsense wars. I’m well out of it.
Hi therrawbuzzin
You may enjoy this as it is hard to filter the fake from the true these days.
https://twitter.com/RumbaRebel13/status/1303062332944404482
There is a joke there, but it involves the “C” word, following “What a load of stupid…”
This comes back to the central equation – that house prices depend on both the price of credit and its availability. In 1990, rates had already been rising for two years, but the availability taps harder turned on by Big Bang in 1987 – I can remember posters offering 5x salary and lawyers were even being offered 7x on expectations of rising pay ( quite a few of my colleagues lost their jobs in 92-3 and then had to sell up in a depressed market).
It is different this time, because we have not had rising inflation leading to a jacking up of rates, as we did in 1990 and 2009. Indeed, much like the arguments over company liquidations, there should be plenty of equity to cover most loans if repos start this time – previously, it was negative equity in the 90s with people thinking somehow they didn’t owe on a loan after the repo, then in 09-12, the govt lent on lenders to ask defaulters to quietly sell up, so as not to give the impression of collapsing prices.
As I said the other day, as we repeat the nonsense of the 1992 SD holiday, we will see slight of hand. First, people will think the purchase price is a bargain, because they don’t have to pay SD, when in reality they are just paying more, so effectively SD is on the mortgage in 300 easy instalments plus some more for the vendor. Then when it comes off, prices will be reported, but conveniently forgetting that they now include “SD paid by the vendor” (a good argument for a flat rate sales tax), to maintain the illusion of at least flat price levels. Then we will go off and do it all again in the 18 year property supercycle.
Sunak cannot raise income tax, otherwise he will just damage consumption, so capital taxes are all he has, but the collapse in the values of the shares of big Tory donors (like Land Securities down 45%) limits his room for manoeuvre.
Hi Dave
These phases have their components. Pre credit crunch I was working for the small business part of Lloyds Bank and used to go to the Camberwell branch. There were stickers all over the lamp posts around there for self-employed mortgages no proof of income needed. What could go wrong?
These days government’s struggle to raise higher taxes of any form. so that phase will be interesting.