When the Covid-19 pandemic struck the UK one of my first thoughts was that we would finally see some house price falls. A sharp economic decline accompanied by lower employment and real wages seemed set to drive that. This is how I summarised the state of play on March 30th.
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.
At the time the only way looked down to misquote Yazz, and yet this morning we find The Halifax reporting this.
House price growth on strongest run since 2004
I guess that comes under unexpected headlines of 2020 which has turned out to be a very contrary year, to say the least, The detail of The Halifax report is below.
House prices rose by more than 1% in November, adding almost £3,000 to the cost of a typical UK home.
At just over £253,000, the average property price has risen by more than £15,000 since June. In percentage terms that equates to 6.5% – the strongest five-monthly gain since 2004.
They are cherry-picking their measure as a five-monthly gain is hardly a metric but nonetheless it is quite a surge in the circumstances. Also the picture remains the same if we return to more conventional metrics.
On a monthly basis, house prices in November were 1.2% higher than in October
In the latest quarter (September to November) house prices were 3.8% higher than in the
preceding three months (June to August)
House prices in November were 7.6% higher than in the same month a year earlier – the
strongest growth since June 2016
So we have the strongest growth since the Leave vote which itself was supposed to bring house prices lower. Remember the official forecast?
House prices could take an 18% hit over the next two years and there will be an “economic shock” that will increase the cost of mortgages if the UK votes to leave the EU,George Osborne has warned.
The chancellor said he would publish an official analysis next week saying house prices would be lower by at least 10% and up to 18% compared with what is expected if Britain remains in the EU ( The Guardian)
If we look at the official series house prices were on average just under £213,000 in June 2016 and as of September were £244,513. So he must have been expecting quite a boom on top of that! No doubt the official excuse will be the counterfactual although they may struggle to find someone to say it without laughing aloud.
Looking ahead the picture looks bright too.
Mortgage approvals rose in October 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 6% to 97,532. Year-on-year, the October figure was 51% above October 2019.
We had looked at those numbers on the 30th of November.
What has caused this?
Let me open with a different factor which gets underplayed and it is the furlough scheme. Back in January there had been announcements but it was not expected to be as large nor lasting so long.
The Job Retention Scheme launched on 20 April. By midnight on 15 November there were a total of:
9.6m jobs furloughed
1.2m employers furloughing
Total claimed £43bn
The Self-Employment Income Support Scheme opened on 17 August. By midnight on 15 November there were a total of:
2.4m claims
£5.9bn claimed
Much of it will have gone to people who badly need it but some have been able to save ( partly because more than a few opportunities to spend money have been unavailable) and we have seen the consequence in both the GDP numbers and the money supply ones. From November 30th.
Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.
This is a leakage if you can call it that which has also flowed into the housing market.
Next up is the Stamp Duty cut although if we look at it in isolation buyers are in fact worse off.
It is interesting to note that the stamp duty saving of £2,500 on a home costing £250,000 is now far outweighed by the average increase in property prices since July.
We have seen before that such changes are used as a way to borrow more so that the house price change becomes a multiple of the tax cut.
Last but not least has been the role of the Bank of England which has changed since I posted this on the 30th March.
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.
Whereas as of the end of last week the £645 billion had become £716 billion and rising ( there will be another £1.473 billion today,tomorrow and Wednesday). The new planned total is £895 billion or £875 billion of UK government bonds or Gilts plus the completed £20 billion of Corporate Bonds. I say planned because so far the Bank of England attitude has been to sing along to Luther Vandross.
Oh, my love
A million days in your arms is never too much
I just don’t wanna stop
Too much, never too much, never too much, never too much
You may note the Term Funding Scheme got a boost and surprise, surprise it was badged as being for smaller businesses. Readers have asked me in the past if even this goes into the housing market. Well of £211.1 billion as of the end of October some £78.1 billion is in the Real Estate, professional services and support activities category.
Comment
In addition to this being quite extraordinary there is another context. This comes from the fact we are using marginal prices for an average at a time of lower volumes. One group as I have been reminded today will be excluded from this because they cannot sell as at reasonable price and sometimes at any price.
I wonder how they’re accounting for the mostly below average cladding affected flats that are now out of the equation as they cannot be sold. ( @BCLMacro )
The Bank of England view was expressed by its Chief Economist Andy Haldane in the summer of 2016. Note how what is inflation for first-time buters and those trading up is described as a wealth increase.
Finally, let’s look at household wealth. As with employment, the headline gains here have been impressive,
with aggregate net wealth increasing by almost £3 trillion since 2009. Chart 9 breaks down these wealth
gains by asset type – pensions, property, financial, physical. This suggests these gains have come
principally from rises in property and pension wealth. In other words, the gains have been skewed towards
those in society who own their own home or who have sizable pension pots.
That theme has continued with the plan to gerrymander the Retail Prices Index by excluding from 2030 its use of house prices and mortgage interest-rates and replacing them with fantasy rents. They assume if you own your own home you pay rent to yourself and this adds to the issue of the fact they have struggled to measure rents which are paid accurately.
So far they have kept this house of cards going but there are hints of trouble and they come from something I noted at the end of last month. This is that mortgage rates have begun to rise. Not by much if you have a large deposit but if you have a small one you have seen quite a change. If we look at the 2-year fixed-rate data from the Bank of England this morning we see that a 5% deposit will get you a mortgage rate of 4.1% rather than the 3% of a year ago. So for all the hype about lower interest-rates we see yet another example of a higher one.
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Hi Shaun, thanks for reminding us of this perverse indicator… in what are somewhat bizarre times. I read on ZeroHedge today about North Yorkshire Police deploying ANPR resources against “COVID dissidents”, road-using citizens playing the tier system to get to a Pub for a pint of beer and meal.
I guess it is bubble everything in a kind of un-reality created by over-governance. When they have mis-managed every moral aspect fairness/equality measure possible, all in protection of the status quo then there is no other course of action left than to simply …..double down.
We should see higher and acelerating prices in Stocks, Bonds and Assets because its a ponzi system. Its the rate of increase that gives away the ultimate concluding outcome. I am no mathematician but someone on this blog may be able to compute if we are in a steady state tp acelerating to oblivion.
I think that the COVID Stazi state is a mis-judgement. It seems that the vaccine deployment is a interstitial milestone rather than an end in itself. I don’t think they can re-engineer the financial system quick enough to stop the whole lot un-ravelling but at leas they can blame that on the “virus”.
“I don’t think they can re-engineer the financial system quick enough to stop the whole lot un-ravelling but at leas they can blame that on the “virus”.”
Instead of the banks, which is the whole idea.
Not meaning to aggravate all those that want house prices to fall but interest rates could stay go negative yet and the latest comments from Saunders indicated more cuts to come.
https://www.msn.com/en-gb/money/other/bank-of-england-s-saunders-says-floor-for-rates-might-be-just-below-zero/ar-BB1bCIje?fbclid=IwAR3aYJFFubFoSotLXuY_r2OspILRvP638gfUS5Osk9UvzriJr4wkDxoJLlQ
More bleak news on Brexit the next week could push the BOE to cut to zero at the next meeting next week then further cuts at -010% increments thereafter.
The Natwest Chairman is already getting jittery however and being quite vocal at that in a recent article indicting that such a move is a desperate matter!
https://www.telegraph.co.uk/business/2020/12/06/negative-rates-desperate-measure/
But are we not in desperate times with unemployment set to spike to over 7% next year and a prospect of a no deal notwithstanding there could be a further lockdown after Christmas.
If BOE rates do fall further and stamp duty extended the UK may not see significant house price falls imo but the caveat is how far unemployment rises.
In my area in the north west moderate priced house prices are selling fast despite the jump in house prices the last 6 months.
Well I don’t know where they’re looking but where I live property prices are more or less flat and have been for a year or more. I’ve also been looking at prices in Maidenhead as a family member is looking to buy there and for the past two years there has been a steady fall in property prices which has meant it’s at present cheaper to rent. As far as I can see much of the rest of the SE is similarly falling albeit gently for the moment.
With a lot of unemployment in the pipeline I can see further falls into next year for most of the UK and as you say higher interest rates will likely further curb price rises.
Jan,
I live in the North West and properties near the shore in Formby and Southport going quite quickly and I suspect at above 8% rise in the last 12 months in some areas.
Part of this is fueled by stamp duty and also the desire to live nearer the suburbs with good transport and schools.
The Guardian also mentions Joe Public savings are probably also having an impact, and Andy Haldane thinks the outlook may not be as bad as some think due to a spending spree with pent up demand:
https://www.theguardian.com/business/2020/dec/07/uk-covid-savings-haldane-bank-of-england
There is also talk of negative interest rates as well lately by both Tenereyro and Saunders the latter suggesting a cut could come in small increments:
https://www.bnnbloomberg.ca/boe-officials-signal-openness-to-negative-rates-as-stimulus-tool-1.1531821
If the BOE did cut interest rates further I can see property prices still climbing from here in the short term.
Hi Jan
That is interesting and I know Forbin has been reporting the same for the sale of his father’s house ( Surrey I think). Aren’t people supposed to be leaving London for the country and singing along with Blur?
Thank you, Shaun, for making me smile by requoting George Osborne’s and the Treasury’s “analysis” of the effect of Brexit on house prices. I still think that the great majority of the population, whether a good thing or a bad thing, still sees getting on and climbing the property ladder as something that is vital to their lives and, given the history of house prices in this country, they have been right in believing to date that houses will only ever get more expensive.
When you consider that house prices seem to be immune to the coronavirus, Brexit and all the other uncertainties in the economy, I think that there is a large psychological impetus to keep on buying the most expensive property you can.
For what it is worth, I think that this is also fuelled by a combination of:
1. low interest rates; and
2. Fear of other investments. When I look at alternatives to housing, I see:
A) no return on deposits;
B) Gold pretty flat;
C) Bitcoin doing well, but still scary;
D) Bond markets at crazy values and no yield;
E) Stock markets apparently floating away from reality.
I am no expert, but suspect that everything will be done to keep house prices up, as a steep fall in their value could have a major psychological effect on people at a time when there is a lot of uncertainty. In addition, of course, it would affect the banks and, as you keep pointing out, we cannot have that, can we?
James, your comment on the psychology of buyers desperate to buy the most expensive property i.e chase prices and over extend themselves is all part of the ingredients of a classic bubble.
Everyone keeps watching prices go higher but their natural instinct and common sense tells them to avoid buying since the prices have clearly gone ahead of the fundamentals and affordability criteria, but prices then go higher again, some will then take the plunge, some will hold out but then the relentless media coverage and stories from work colleagues and friends of how much prices are going up or how much money they have made on x/y/z properties or the income from letting them out becomes so painful to their ego that they can no longer delay and they also buy. If there is a pullback in prices, the bears and predictors of a crash call it the top, and there is another pause as further buyers wait, but then prices lurch upwards again and take out the previous highs, confirming to all those who are already in how “clever” and “shrewd” they are and how wrong anyone is who thinks house prices can ever go down. To those waiting for further confirmation or first time buyers it is yet another signal not to delay any further as if they do they will have to pay even more as time goes on.
So the greed impulse wins every time, as this is what drives markets – fear and greed, but in a bubble the fear that is normally associated with falls in price and causes sellers to sell out to avoid further losses is replaced by “FOMO” fear of missing out on future gains) and so fear AND greed keep pushing prices higher.
The main driver of bubbles is the availability of credit and in this country it is also government policy over decades that has convinced the public that house prices can never go down.
The current state of the economy with the loss of businesses and jobs that would have previously caused a massive fall in asset prices, has, thanks to central bank policies, given all those doubters the proof they need that shares and house prices never EVER go down, because if they were ever going to crash surely they would have now wouldn’t they? They think we are in a new paradigm where central banks will always guarantee asset prices, a bit like being allowed to go into a casino where the house ensures no matter what game you play you can never lose, if someone stopped you in the street and offered you entrance and membership to such a club you would be extremely wary and skeptical and rightly so, you would think there was a catch, and so there is to the current new “paradigm”.
The problem is there is going to be a terrible price to pay for all that free money and those guarantees, the freedoms people once had are being removed quietly under the cover of the responses to covid, green policies and political correctness, and as the policies become more restrictive and draconian, more and more people will become dependent on the state for their living due to the deflationary effects of QE and ZIRP, together with the loss of massive numbers of small businesses as a result of covid and the BREXIT fiasco, then inflation will do the rest, as more and more money is printed to keep the welfare state and house prices elevated(add in share prices later), prices will rise in anticipation of this new money and its reduced buying power that will in turn lead to calls for more money to be created to give to those dependent on it to preserve its purchasing power, that will lead to further price increases and this vicious circle will accelerate.
Pretty soon those people who thought they were well off and their house was going to make them wealthy and maybe even be their “pension” in retirement will find that their money is now virtually worthless and their house, although maybe it has increased in price over the years, is now falling behind prices as the number of potential buyers keeps falling every year as more and more people are unemployed and have to rent.
So let them rejoice at higher house prices, but don’t ever argue with them because no one will ever convince them they are wrong, I will finish by quoting Mark Twain:
““Never argue with an idiot. They will drag you down to their level and beat you with experience.”
I completely agree that you put it more succinctly in talking about a bubble. I wasn’t endorsing house prices at all.
The difficulty, as I see it, is that governments seem to do everything they can to stop the bubble bursting on their watch. I count the BoE as part of the government in this respect.
This makes it very hard to predict the turn in the market, as it is distorted by every means in the book.
My daughter has just bought a 4 bed detached house which are in short supply in this part of Gloucestershire. Her mortgage payments are the same as renting a 3 bed house which are even harder to find. She thought it sensible to at least be paying off her own place as fattening someone else’s bank account.
My niece in Nottinghamshire sold a 750k house within 4 days because there’s very little like it on sale in that area. She has bought a 3 bed detached (getting divorced) which was also on the market for 4 days.
Any amount of two bed flats around but houses in a ‘nice’ area or ones that are different are snapped up. And increase in value. Then there’s houses that are on the market for ages and don’t go up in value very much – and you can usually see why.
The problem is we think of one housing market when there are many subtlety different markets all lumped together. If you have a really nice house that is unique in some way and in a desirable area then there’s always a buyer willing to out bid someone else.
Then there are the mass estates of identical boxes or blocks of flats in less salubrious quarters where prices stagnate and buyers are few.
The fallout from Covid / furlough will effect these different markets in different ways.
“we think of one housing market when there are many subtlety different markets all lumped together.”
I discovered this when selling my London flat; over three years several sales fell through before finally getting out in 2016. Not exactly a difference of owner-occupier v. buy-to-let, more like amateur v. professional investor, or perhaps personal v. business. Those buying a place to live or hoping for a golden nest egg will offer 2–3% more but then quibble over details and not proceed.
Hi Shaun
Great article as always. This data truly saddens me. We face one of the worst economic depressions in history and house prices are rising. Incredible.
To comment on the local market in South manchester. It has now got to the point where the stalwart 3 bed semi is now bordering on 350k. Any decent 3 bed semi seems to sell pretty quickly. However, anything above that appears to be on the market for a while possibly years.
Housing stock is quite low at the moment, with around a 1/4 of the stock being large expensive houses which few people can trade up to. A lot of ‘new build’ houses are now being built in large gardens and spare plots. These tend to be the town house types, which are on for silly amounts of money.
For example you can spend 550k on a decent four bed detached (still overpriced) or a 625k for a smaller semi detached town house ‘new build’ which has been on the market for over a year now.
In a functioning market, leaving a house empty for a year would be disasterous for a builder. But in a ZIRP environment, incompetance is rewarded.
I dread to think what spring will bring.
Hi anteos and thank you
It seems a bit mad that smaller semi-detached houses are more expensive than proper detached ones. I guess they must be nearer to the centre of the town.
If we compare them to average wages how does that work even if both are at work?
“Median weekly pay for full-time employees was £586 in April 2020, up 0.1% on a year earlier; pay fell in the private sector (negative 0.6%) but not in the public sector (positive 2.4%), following four years of higher pay growth in the private sector; ( ONS)
So they are approximately ten times joint earnings.
I can’t reconcile these increasing numbers with actual outcomes. Of course there are many ‘housing markets’ , some are being inflated because of young families moving out of cities to urban or rural areas, trading price for size. But there must a glut of 2-bed flats everywhere, and the looming 2025 MEES impact on rentals must be putting some landlords off investment into exactly this sort of property.
I suspect the ( very) long awaited price correction might just be round the ‘end of furlough’.
As I suspect the recent GBP blip upwards after the full ramifications of TransEnd are realised , deal or no deal.
Hi JimW
It is hard to figure out. From my point of view it is very difficult locally as there has been so much building in Nine Elms and Battersea generally. Can they sell it all and at what price? Of course much of this is for an international rather than a domestic market but there are knock-on effects.
I agree that next year will be rough for house prices as furlough ends and we can add in the end of the Stamp Duty cut. Actually the establishment must be wondering how to deal with the end of the cut.
Three, four? generations who have put their faith in ‘safe as houses’, it will take a lot to break the habit.
I thought it might have broke in the 90s. But the repossessed still needed a roof over their heads, so a rise in renting, and plenty of people taking ‘early retirement’ redundancy in the late 80s had cash at hand and interest rates falling, hence a boom in buy-to-let, and builders happy to meet a market demand by building for a but-to-let market (no need for a garden the tenants will never look after it). So the ladder kept on, ever upward. Another chance to burst this bubble of expectation circa 2008, but no, just keep going, don’t look down, no we have not run over the precipice.
What now? Either there has been a real reduction in economic output, people are poorer, someone somewhere can’t pay, won’t pay. Or. life goes on much the same in which case we are about to find out how few people are really productive in a modern economy. Of how many on furlough could we say ‘none of them would be missed’ .
Hi djc
I think we might be living one of those cartoons where the character goes over the edge of a cliff but hovers for a while before falling. Somehow via furlough money and tax and interest-rate cuts the market has dodged a bullet. But it is hard to see how this can last.
Next year is packed with uncertainty and house prices start from such a high level and apparently getting higher.
Great blog as usual, Shaun.
We will have to wait until December 16, with the ONS release of “Index of Private Housing Rental Prices, UK: November 2020”, to see what the CPIH(NA) monthly series look like for 2020Q3, the first publication of these numbers that incorporate the July drop in stamp duty. This will be the second quarterly update to be published as part of the release of the experimental rent series, rather than, as previously, in the quarterly publication “Measures of owner occupiers’ housing costs”. It’s not a good change, as it implies that these experimental owner-occupied housing series are just like a footnote to the experimental rent series. Everything you really need to know about owner-occupied housing costs can supposedly be found in the rent data.
Since the CPIH(NA) series is a monthly series there is really no reason why, even with the current lag in producing quarterly estimates, there should be a such a long wait for July estimates. These could have been, and probably should have been, published, on October 21 in the release: “Index of Private Housing Rental Prices, UK: September 2020”.
To my mind, if the Banak of England were to make the CPIH(NA) series its target inflation indicator, it should have a constant-tax CPIH(NA) along the same lines as the constant-tax CPI, which would guide its interest rate decisions. This would abstract from changes in stamp duty due to changes in the rate structure itself but would take account of changes due to house price changes that put homes in higher tax brackets.
Hi Andrew and thank you.
I was in an ONS hosted webinar on Friday and after that your “It’s not a good change, as it implies that these experimental owner-occupied housing series are just like a footnote to the experimental rent series.” echoes.
Their plan is to have CPIH and the version of CPIH which from 2030 will be called the RPI as an inflation version of Tolkein’s “one ring to rule them all and in the darkness bind them”
As to CPI (NA) there is an additional problem that the weights for house prices are too low. But even if uncorrected it is still a better measure than CPIH.
Hello Shaun,
well I’ve pointed out before that sunny Surrey is in variable but not fly ways , or stagnant.
oh well
but ref “kewed towards those in society who own their own home or who have sizable pension pots.”
just no , really thats a no , I’ve seen my pension pot destroyed by BoE . But I guess they anf HMG are all doing well so what do they care? nice jobs afterwards in certain companies, pfft! .
Talk about swamps……. ( all three parties are up to this in case you think I’m partizan)
Still early days for the Great Covidian Recession though .
Forbin
Hi Forbin
Your view on South-East property has been backed up by Jan above. As to pensions the Andy Haldane view on them hit trouble a few years back.
“Over-complex pensions are harming the UK economy and reinforcing mistrust of the financial sector, the Bank of England’s chief economist has warned, as he admitted even he was unable to make the “remotest sense” of them.” ( Press Association May 2016)
I think they started to plug the pension line in 2012 so they have been consistently wrong.