This morning will have brought sounds of high excitement and smiles to the Bank of England. It would have been too early to raid its excellent wine cellar but a liveried flunkey will have brought its best coffee to Governor Andrew Bailey as he peruses the latest news from the Halifax on UK house prices.
The average UK house price now tops a quarter of a million pounds (£250,547) for the first time in history, as annual
house price inflation rose to 7.5% in October, its highest rate since mid-2016. Underlying the pace of recent price
growth in the market is the 5.3% gain over the past four months, the strongest since 2006.
Governor Bailey will no doubt issue a satisfied smile and may mimic the end of the television series Frasier which had an “I did that” at the end. He may even be pleased that he has helped to do this without getting a mention from the Halifax.
This level of price inflation is underpinned by unusually high levels of demand, with latest industry figures showing
home-buyer mortgage approvals at their highest level since 2007, as transaction levels continue to be supercharged
by pent-up demand as a result of the spring/summer lockdown, as well as the Chancellor’s waiver on stamp duty for properties up to £500,000.
I find the “pent-up demand” bit curious as surely there will also have been pent-up supply? Bur we do see signs of a an active market.
HMRC Monthly property transactions data shows a fifth consecutive monthly rise in UK home sales
in September. UK seasonally adjusted residential transactions in September 2020 were 98,010 – up by
21.3% from August. The latest quarterly transactions (July-September 2020) were approximately 63.6%
higher than the preceding three months (April-June 2020). Year on year, transactions were 0.7% lower than
September 2019 (2.4% higher on a non seasonally adjusted basis). (Source: HMRC, seasonally-adjusted
figures)
Although I do note that whilst we have seen high rates of monthly growth it only brings us back to around what were last years levels. The picture on mortgage approvals is more clear-cut.
Mortgage approvals rose in September to the highest level seen in 13 years. The latest Bank of England figures show the number of mortgages approved to finance house purchases, rose by 7% from August to 91,454, down from a rise of 27% reported in August. Year-on-year, the September figure was 39% above September 2019.
Monetary Policy
We can now switch to what I call the Talking Heads question. From Once In A Lifetime.
And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well… how did I get here?”
The Bank of England’s role in us getting here started with the interest-rate cuts in response to the credit crunch. Then as they realised how interest-rates actually worked they added on bond buying in the form of what is called QE to reduce longer-term interest-rates too. It is easy to forget now but this did not do the trick for house prices so in the summer of 2012 we got what the then Chancellor George Osborne called credit easing. This was the Funding for Lending Scheme where the Bank of England channeled cheap cash ( Bank Rate was 0.5%) to the banks so that they did not have to indulge in the no doubt tiresome business of competing for depositors.
This was a crucial change in 2 respects. The first is access to funds at Bank Rate but in many ways more crucial is the access to large amounts of funds. So a quantity issue. This allowed banks to reduce mortgage-rates and I recall pointing out that mortgage-rates fell by 0.9% quite quickly and the Bank of England later claimed they fell by up to 2%.
Bringing this up to now we have the Term Funding Scheme operating that role and in its original form it has supplied £70.6 billion and the new pandemic era version has supplied some £49.6 billion. So as you can see the Bank of England keeps the banks supplied with cash and these days it can get it as cheap as the present Bank Rate of 0.1%. On this road we see that the cut in Bank Rate is not especially significant in itself these days but comes more into play via the Term Funding Scheme.
Next as more people moved to mortgages with fixed interest-rates ( around 92% of new mortgages last time I checked) QE also came back into play as an influence on mortgage rates via its impact on UK bond or Gilt yields. So this part of yesterday’s announcement matters.
The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.
There are issues with the stock but for our purposes today in looking at the mortgage market it is the flow ( presently £4.4 billion a week) that matters. It has helped keep my proxy for fixed-rates, which is the five-year bond yield negative since mid June now apart from one brief flicker. As I type this it is -0.06%.
Comment
So the theme starts singing along with Steve Winwood for house prices.
I’ll be back in the high life again
All the doors I closed one time will open up again
However all the government and Bank of England pumping has the problem that it means that they are ever more socially distanced from wages and earnings. So many are on 80% wages from the furlough scheme and real wages have been falling. There has to be some sort of reckoning here in the end. As well there are signs that the pumping system is creaking.
As you can see mortgage rates for those with lower amounts of equity or if you prefer high loan to value numbers have risen quite sharply. So the heat is on especially for those with only 5% equity where they have gone above 4% which really rather contradicts all the official rhetoric of low interest-rates. So I see trouble ahead which to be frank I welcome. I do not wish anyone ill in financial terms but we do need lower house prices to help first-time buyers.
Meanwhile something I have long warned about looks to have come true this week.
The Bank of England is investigating a potential leak of Thursday’s QE announcement ( @fergalob)
I do like the description of it being in The Sun as a “potential leak”……
Notayesmanseconomics's Blog 
Hello Shaun,
pfft! comparisons with 2019 is a low bar for Surrey, houses dropped in price aronf here …..
yes I know others reported Manchester , etc went well.
I guess all the pensions pots will now be cashed in to buy housing as there’s nothing left to invest in .
the Pensions industry will be planning massive layoffs I reckon . might as well pack up now and get a job in betting *
Forbin,
* Nationwide offer a bond in which you get the chance to win 10K…… so yup savings is now betting ( perhaps it always was? )
Hi Forbin
There was an era of structured products where you got a higher interest-rate if you also invested in an equity linked vehicle that usually subtracted what extra interest you were given plus charges. They were often like betting but with one arm behind your back.
ITV had a 30 minutes slot last night on the recent housing boom which actually interested me as I live not too far from Formby where houses are going very fast indeed and in the higher price bracket as well.
The cut in stamp duty is encouraging more house sales.
What was also interesting is there was a suggestion that house prices could fall between 5% and 10% next year, many would say house prices were overpriced but at least 25% or even more prior to the recent rise and I think they are just plucking figures out of the air.
Low interest rates, help to buy has clearly had an effect on house price growth, however I think many people have forgotten when house prices crashed in the 80s with a caveat that interest rates were sky high in those days and we don’t see that now.
What may cause the house of cards to collapse this time however is higher unemployment and people not getting the same amount of pay by having to change jobs due to the current financial situation which the UK now finds itself in.
I agree with the reason why prices will be under pressure but suspect that they will flatline rather than fall with the exception of the unfortunate folk who have to sell for one reason or another. I base this on what happened in 2008 when house availability dried up and around here at least prices just stuck. Properties were on sale for a long time and many were taken off the market eventually but prices didn’t fall.
Unfortunately, with a large increase in unemployment, when these job retention schemes, the mortgage holidays and reduced stamp duty end, some house owners will be forced to sell, at almost any price. How can house prices keep at current levels?
Unless there was massive government intervention – not unheard of to save “the Precious”
People fleeing the city.
Apparently, with a little input from me, my house “value” has almost doubled, from £150k to £280k.
Crazy!
Hi therrawbuzzin
I agree that the concept of value is much less clear than the marginal price. But as its the weekend let me leave you with a song that covers some of it, from someone who used to play football in Battersea Park back in the day.
Many thanks for Bob; fancy some Edith?
Btw, if it sounds like bragging about house price I’d say two things:
1) I did not move house with any intention of “making a profit”, this is where I’d like to see out my days.
2) I’d rather my house price had halved, as I have no mortgage, so no personal interest in price, only what I believe is best for society in general & young people in particular.
The only thing I would say, is that I was just lucky enough that my (English) wife asked to move to SW Scotland when she did. (I’m Franco-Scottish, with the emphasis very much on Scottish.)
Great blog as usual, Shaun. One aspect which intrigues me in all this is how such incredible things happen so often now and are so under reported that it’s almost as though they are normal. To take a few things which would have defied belief fifteen years ago:
1. Negative interest rates
2. QE. The concept of a CB actually printing money to buy government debt was shocking to start with
3. The sheer scale of everything. A £1billion is a mere bagatelle. £100 bn is the minimum figure for anything it seems.
4. The almost total breaking of the link between tax receipts and government spending
5. The destruction of pensions
6. The almost complete disappearance of the concept of building businesses as a way to national wealth
I believe that the CBs are interested in two things only
1. The banks, as they are obsessed with the systemic risk posed by bank runs or bankruptcies
2. House prices, as a crash here would make people feel poorer
I don’t see any way out except for a crash of epic proportions, probably starting with something out of left field (Lehman’s, Madoff, IKB, Italian banks were all unforeseeable), against which there will be no more ammunition as it’s all been used up.
well modern theory tells us that they will never run out of ammunition if you mean money ……
for the life of me I thought that would be a problem but I cant think why at the mo …… 😉
Forbin
There comes a point at which investors become so pissed off at govts. devaluing their currency that they don’t buy any more.
Hi James
I’m glad that you and your lists are back, like
you I find it difficult to use logic in an illogical
world.
Just a few examples of gigantic government
funding in the last few weeks.
1 180bn for London transport just until march!
2 Rail franchisers initially 3.5 bn to god knows
what currently.
3 If we knew what funding was available to the
new potentially ponzi companies such as
Rolls royce, BAE, BA, and a myriad of
shipping, leisure, insurance and commercial
property it would be a staggering figure.
I question whether a property price crash is
likely as TPTB hold the pack but to me if
a large property is worth £1 then a terrace will
be 25p, providing you own it does it matter?
JRH
It’s not an illogical World.
It’s an intensively logical World.
It’s just that the logic fits an agenda other than the stated one.
Strange comments from BOE Ramsden today.
He says unemployment is probably higher than official figures but doesn’t expect a sudden rush of job losses when furlough ends!
https://www.fxstreet.com/news/boes-ramsden-labour-market-will-be-key-determinant-of-policy-thinking-going-forward-202011061344
With 80% of wages being pain until Spring may workers will be worse off than before the pandemic and that will clearly have a knock on in the economy and I find it hard to believe in those circumstances that job losses will not increase when furlough ends.
Ramsden seems to be assuming the minute furlough ends everything is going to return to normal and that will not be the case.
Notwithstanding the above there will have to be tax rises for the better off and that is bound to have a negative effect on consumption.
Just about all out leader, bankers appear to be behind the curve imo.
Ramsden also talks about a negative effect to real estate which isn’t surprising but his comments relate to office space and no mention of house prices. There is however a surplus supply of commercial property where as a shortage of private housing, there lies the difference.
No one knows where this will go from here so far as house prices yet imo and I suspect we could even see house prices head a little higher in some places due to ultra low interest rates for some time to come yet.
I wouldn’t like to say what will happen in six months time, all will depend on what happens to the UK economy, and how many people are unemployed.
Workers on 80% of wages without all the expenses related to work, & remembering that it’s the top 20% of wages, the highest taxed part that goes, along with reduced options for leisure spending means that very many people will be far better off under furlough.
Better off only financially!