Today I am reminded of the sequence in one of The Matrix series of films when the Frenchman tells us about cause and effect. That is because as I wait for another signal of the cause we have seen the effect already.
May saw a further acceleration in annual house price
growth to 10.9%, the highest level recorded since August
2014. In month-on-month terms, house prices rose by 1.8%
in May, after taking account of seasonal effects, following a
2.3% rise in April. ( Nationwide )
As DJ Jazzy Jeff and the Fresh Prince put it.
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
In case you did not think that the next bit rams it home.
New record average price of £242,832, up
£23,930 over the past twelve months.
That means that the average UK house earned more than its owner over the last 12 months because in general ( for a first house or flat) gains are tax-free. So it needs to be compared to net rather than gross income.
We also know that the low level of transactions seen last year has also been replaced by a boom.
The market has seen a complete turnaround over the past
twelve months. A year ago, activity collapsed in the wake of
the first lockdown with housing transactions falling to a
record low of 42,000 in April 2020. But activity surged
towards the end of last year and into 2021, reaching a record high of 183,000 in March,
The Nationwide thinks that there is much more to it than the Stamp Duty holiday.
Amongst homeowners surveyed at the end of April
that were either moving home or considering a move, three
quarters (68%) said this would have been the case even if
the stamp duty holiday had not been extended. It is shifting
housing preferences which is continuing to drive activity,
with people reassessing their needs in the wake of the
pandemic.
The so-called race for space seems to also be in play. Also the pandemic seems to have given many the equivalent of itchy feet.
At the end of April, 25% of homeowners surveyed said they
were either in the process of moving or considering a move
as a result of the pandemic, only modestly below the 28%
recorded in September last year. Given that only around 5%
of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.
Inflation
It looks as though all the activity has had a consequence here.
The UK’s biggest builders’ merchant has warned customers of “considerable” cost increases to raw materials amid an industry-wide shortage.
As first reported by the Times, Travis Perkins says the price of bagged cement will rise by 15%, chipboard by 10% and paint by 5% from Tuesday.It comes as industry groups warn electrical components, timber and steel are also in short supply.
They blame surging demand as lockdown eases, as well as supply chain issues. ( BBC)
Much of the explanation will be familiar to regular readers.
The supply problems stem from a number of factors. Construction industry projects have surged since lockdown began easing which has led to skyrocketing demand for already scarce materials.
There are also issues hitting specific products, such as the warmer winter affecting timber production in Scandinavia while the cold winter weather in Texas affected the production of chemicals, plastics and polymer.
There has also been a sharp rise in shipping costs amid the pandemic.
Mortgage Rates and Credit
This gets a minor mention from the Nationwide.
especially given continued low
borrowing costs, improving credit availability.
In terms of credit availability I presume they mean this change highlighted by Moneyfacts.
May 2021 has seen a surge in the number of 95% loan-to-value (LTV) mortgages available. Our latest data (to May 25 2021) shows 174 mortgages are now available at 95% LTV. The growth of product availability followed the launch of the new Mortgage Guarantee Scheme (MGS) and there are now 49 mortgages available under the scheme.
Remember the days post credit crunch when politicians queued up on the media to say never again to this sort of thing? I guess we are not quite back to what had happened but we are back on that road. Still the banks will be pleased that the taxpayer is assuming a fair bit of the extra risk.
There is a lot going on.
The availability of mortgage deals at 95% LTV is changing daily as lenders launch and close new products due to high levels of borrower demand.
But the best deals as of the end of last week were 3.49% variable and 3.59% fixed-rate.
For those with higher equity ( 40%) May has seen offers of less than 1%.
TSB offers 0.99% (3.2% APRC) on a two year fixed deal, which is available at a 60% loan-to-value (LTV) and charges £1,495 in product fees. Hinckley & Rugby Building Society offers 0.99% (4.5% APRC) as a two year discounted variable, which is also available at a 65% LTV and requires a minimum loan of £100,000. It charges £699 in product fees.
That still feels rather extraordinary even in these times of zero interest-rate policy or ZIRP. Although the numbers are flattered by the fees involved.
Moneyfacts also suggest that there is something going on in the price of credit for buy-to-let.
Landlords looking to lock into a fixed
Our research into the BTL mortgage market has found that since the start of this month, the average two year fixed BTL rate has fallen by 0.04%, down from 2.99% on the 1 May to 2.95% on the 21 May. Meanwhile, the average five year fixed BTL rate
has fallen by 0.05% during this same period, down from 3.35% to 3.30%.
A sign of what Nelly would call “its getting hot in here” would be borrowing spreading into other types of finance.
Data from the Association of Short-Term Lenders (ASTL) shows the demand from consumers and businesses to get a bridging loan in the UK has increased at the start of 2021. Applications have exceeded pre pandemic levels by just over a quarter and the value of these was up 18% comparing Q1 2021 to the same period in 2020.
Affordability
The record on the Nationwide series for this was 6.4 back in late 2007 and the first quarter of this year showed 6.3 so with the increases we look to be back to the highs. Frankly if we look at what has happened to wages I think there must be some heroic assumptions here to keep it at that.
There is a similar situation for first-time buyers except the numbers are 5.4 and 5.3 respectively.
Comment
We will find out more tomorrow about a major driver of this which is the credit easing and monetary expansionism of the Bank of England. I note that they are increasingly deploying open mouth operations on the subject. Today’s effort comes from Sir David Ramsden in the Guardian who is apparently monitoring things.
The Bank of England is carefully monitoring Britain’s booming housing market as it weighs up the possibility that a rapid recovery from the Covid-19 pandemic will lead to a sustained period of inflation, one of its deputy governors has said.
A career as a civil servant is an odd way to become the expert on financial markets you might think.
Ramsden, the deputy governor responsible for markets and banking, said: “There is a risk that demand gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”
Those looking at the rise in house prices might think that Dave ( as he prefers to be called) is not much of a guard dog. I wonder if he thinks anyone will be convinced by this?
Ramsden said the Bank would not be complacent about inflation. “If it is not temporary we know what to do about that. We can push bank rate up from its historically low level [0.1%] and we know what that will do to demand.”
Meanwhile we have learned over time that the road to ever easier monetary policy and lower interest-rates comes pre-loaded with denials of any such intention. It is a form off PR for central bankers.
From August the Bank’s monetary policy committee will have the ability to push bank rate below zero but Ramsden hinted strongly that he would be wary about such a groundbreaking step.
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hello Shaun
“The Bank of England is carefully monitoring Britain’s booming housing market ”
yes quite
https://images.immediate.co.uk/production/volatile/sites/7/2015/02/70.-GettyImages-463986695-f36f7af.jpg?webp=true&quality=90&resize=620%2C413
forbin
Last years forecasts:
Bank of England: Fall of 16%
Cebr: Fall of 13%
Savills: 10% drop
Liberum: Fall of 7% in real prices
Lloyds Banking Group: 5 to 10% fall
EY’s Howard Archer: Fall of 5%
Knight Frank: Fall of 7%
JLL: 8% fall
How wrong they all where !
Will they crash in 2026 ?
https://www.dailymail.co.uk/money/mortgageshome/article-9601221/The-18-year-property-cycle-tips-house-price-boom-crash-2026.html
Hello Shaun
re “but Ramsden hinted strongly that he would be wary about such a groundbreaking step.”
Tally ho ! don’t spare the hourses !
Forbin
PS: as we go into another lock down and the economy goes down the pan ……
Hi Forbin
Yep next recession it looks as though interest-rates will go negative in the UK. Even with all the talk from Governor Carney the last peak was 0.75%. Will they even go that high this time?
On that road the ECB could be first with the CBDC as otherwise it will struggle to take interest-rates even more negative.
Just think what would happen if BOE rates did go below zero?
One report I read suggested timber could rise 50% and even double this year, bear in mind most new builds now are timber framed and less brick on internal strructures, all will add to new build costs.
Another report I read was a 600k house hade 20 interest parties, demand is outstripping supply throughout most price ranges.
A lot of this must be down to changing behaviour people value the place they are living in, the pandemic has made people think what they need out of life, they need roomier homes and more home comforts rather than those expensive holidays where once the money has been spent it has gone.
With a large deposit as your blog said there are mortgages available at 1% bear in mind I suspect the APR will be higher taking account of fees, but with such low rates, it will fuel house price rises.
I have to say I expeted house prices to boom ahead and with building materials going through the roof, demand still ouit there and Joe Public improving their homes, I see the market continuing to rise throughout all the Summer and into the Autumn.
In fact a third lockdown could add to house price inflation.
As for interest rates, the BOE will just ignore short term inflation and as time passes it will fall out of the index imo.
if money is to become worthless , then buy assets
We saw the Greek do it ….
Forbin
I dont suppose the ‘move to space’ will have any impact on the ever-shrinking house sizes the building companies have been adopting over the last 15+ years ?
I see the government are planning to take direct control of (most of) the housing market by making mortgage availability dependent on a property’s energy efficiency – i.e. how much it costs to heat, as far as I can tell. They can then move the minimum level up and down as the mood takes them.
( I foresee a boom market for creative energy efficiency consultants/surveyors ).
Whatever form of heating you have, don’t turn it on
and compulsory wearing of onesies with nose warmers.
Hello Shaun,
just seen the extra boost the house market soorly needed ( sarc) . Sturgy has announce Scotish delay to lifting lock down. As she always get the info first I’d predict we’re in for a rush to buy episode !
Oh that extra month , well that lies close to the school summer break. So inference is that we’ll lockdown until September – in time for the winter return and booster jabs ………
So yah, we’ll have BIRP /NIRP , what’s the betting on -1% first . When that predictably does bu@@er all , then just jump to -3% ? or -5% ?
Forbin .
Scottish schools have broken up for summer holidays in late June since I was a kid, at least.
The problem with the economic situation today(and for the last twelve years) is that the average Joe just has no idea how precarious the worlds economic system has become and that we are literally on a knife edge where it could tip into the abyss of a deflationary collapse at any moment.The kids at work are all in a frenzy talking about how much they have made buying the various bitcoins on their smartphones over the last couple of months, when I pointed out hey were in all probability going to lose all their money(£20-500 range of “investments”) they looked at me as if I was mad.
The reason is our current debt money system is reaching the absolute limits of sustainability and can no longer sustain the current government debt spending and consumer debt fuelled spending. The methods applied by central bankers to prevent the inevitable collapse ensure hyperinflation to eradicate the debt built up by consumers and governments that is now unpayable and unsustainable. Thus ensuring new debt can be then taken on to ensure future economic growth.
Hence the bare faced lies about inflation being only 1.4% when it is closer to being ten times that. The analogy I always use is that of a house owner after calling the fire brigade to his house fire questions why the fire is getting worse when the hose is deployed(containing petrol) and the fireman says it is only “transitory” and the fire will be soon be out.
As I have said before on this blog, we are facing two scenarios, the first is hyperinflation caused by central bank money printing and government welfare to counteract the inevitable recession or a deflationary collapse that would make the depression of the 1930’s look like a boom(based on the principal of the hangover being proportional to the excesses of the party – and considering the financial excesses and speculation and pure financial insanity of the last twenty or so years hat in my book makes a hanger sizes hangover).My money is on the hyperinflation option since that is what governments and central banks want, pity the unions negotiating pay deals haven’t worked that one out yet, I have given up telling my union rep to give up negotiating around RPI we have just settled on 1.4% – February’s rate according the the government) but he said his hands were tied by the higher officials who refused to look at anything else.
have warned those massively in debt(that is most of them) that in 5-10 ears that the money they used to have left over in their account at the end of the month for luxuries/emergencies will be all gone, and that they will literally be living hand to mouth, I of course got the same mad look as I got from the Bitcoiners, so bring it on. Those people really deserve what is coming in my opinion.The trouble is those who haven’t participated in the above excesses will take the same punishment.
Couldn’t find a video on YouTube for the Zimbabwe/Weimar that we are facing so what better prelude could there be to the second scenario than the 1981 classic:
Hi Kevin and thanks for the link as Ghost Town still sounds fresh.
One particular problem is that the things which are supposed to be temporary never are. We have had a 0.5% Bank Rate which has ended up even lower and QE where we have had several rounds. This replicates Japan where I stopped counting when we were on the 19th version of QE. They solved that problem by changing the name to QQE.
This never gets addressed a bit like house prices in the official inflation measure.
More lower mortgages at 0.99% on the way from the Nationwide this Wednesday but the true cost higher due to charges
https://www.msn.com/en-gb/money/other/new-0-99-mortgage-deals-launched-as-competition-in-market-heats-up/ar-AAKBenY?ocid=msedgntp
In fact according to the same report the average SVR is 4.4%
However you can see why any properties below circa 200k are being snapped up as they are cheaper to buy than rent.
Having seen most reports today on house prices the concensus seems to suggest house prices will not collapse as they have done historically.
Lets face it if people change their behaviour, and there are less smokers now than in the 80s and redirect their expenditure it could prevent a crash from happening particularly if unemployment doesn’t get out of hand.
Hi Peter
The rent comparison to buying was explained to me by a friend. She and her husband were going for a shared appreciation scheme because they would pay less monthly than what they were paying in rent and one day own some of the flat.
As to SVRs those stuck on them have had a rough ride. As there are always plenty of better deals and sometimes much better deals around.