The UK is now heading into an economic zone that poses a real challenge for economy policy. The credit crunch era has seen an extraordinary effort to first get house prices rising and then maintain it. As time passes it is easy to forget that the Bank Rate cut to 0.5% and the initial waves of QE bond buying were not enough. So we added the Funding for Lending Scheme (yet another bank subsidy) and Help to Buy to the mix which turned net mortgage lending and house prices positive. More recently the pandemic era saw something of a turbocharger added to the house price engine with Bank Rate cut to 0.1%, a wave of QE bond buying and another bank subsidy via an enhanced Term Funding Scheme. So house prices surged again.
This morning has brought rather different news and let me first say that my heart goes out to the research student presenting the Bank of England morning meeting. It was simply awful luck that the rota meant that they had to inform Governor Andrew Bailey of this.
Average house prices fell in November as the rate of annual growth slowed further to +4.7% (from +8.2%), with
the typical UK property price now sitting at £285,579. The monthly drop of -2.3% is the largest seen since
October 2008 and the third consecutive fall. ( Halifax )
There is no way of sugaring such a monthly fall from the perspective of a central banker. As visions of being banned from using the afternoon cake trolley occur our research student should try pointing out that it would all be worse without the Governor’s masterful intervention in the UK bond market, which is yielding a tidy profit as sales begin.
But a fall in the annual rate of house price growth to 4.7% would have set a bad tone on its own and a 2.3% monthly drop will make the room feel like the windows are open on what is a cold wintry day. A little warmth may be created by reminding everyone of this.
“When thinking about the future for house prices, it is important to remember the context of the last few years,
when we witnessed some of the biggest house price increases the market has ever seen. Property prices are
up more than £12,000 compared to this time last year, and well above pre-pandemic levels (+£46,403 vs March
2020).
The problem with reminding everyone about the wealth effects is that in the words of Paul Simon they are now slip-sliding away. Plus the factors mentioned by the Halifax below suggest more falls are on their way.
The market may now be going through a process of normalisation. While some important factors like the limited supply of properties for sale will remain, the trajectory of mortgage rates, the robustness of household finances in the face of the rising cost of living, and how the economy – and more specifically the labour market –
performs will be key in determining house prices changes in 2023.
The Nationwide
Today’s Halifax release backs up what we were told by The Nationwide at the start of the month.
The fallout from the mini-Budget continued to impact the market, with November seeing a sharp slowdown in annual house price growth to 4.4%, from 7.2% in October. Prices fell by 1.4% month-on-month, after taking account of seasonal effects, the largest fall since June 2020.
The different measures are far from always the same but this time around they are more similar as the numbers above have been declining for 3 months now.
Economic Factors
Mortgage Costs
The situation here was summed up by a tweet from Henry Pryor.
Average 2yr fixed mortgage rate according to @Moneyfacts_co.uk Last Dec – 2.34%
Oct – 6.65%
Today?
5.99%
So things have improved but the overall situation has deteriorated over 2022. The recent problems were back up in the latest Bank of England Money and Credit release.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% in October. The rate on the outstanding stock of mortgages increased by 5 basis points, to 2.29%.
I am not sure how they get to a mortgage rate of 3.09% but we can stay with a rising trend and returning to Henry’s tweet I noticed that banks have widened margins. The UK two-year bond yield has declined by around 1.5% so more than twice the fall in mortgage rates seen so far.
According to Moneyfacts some better deals have emerged.
While first-time buyers with smaller deposits may continue to keep their plans on ice until conditions stabilise further, the options around and below the 5.00% mark are increasing if you’re looking to remortgage or move home.
But taking a look they require equity of at least 25% and also are for bigger mortgages as otherwise a product fee of £1499 makes the effective rate a fair bit higher.
Wages
We know that the economic situation is struggling but the metric for house prices is wages growth. At first that looks good.
Growth in average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.7% among employees in July to September 2022; this is the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic period. ( Office for National Statistics )
The problem is that once you try to go and buy anything you realise that prices have risen faster. Even the flawed UK real wages numbers have spotted that.
In July to September 2022 growth in total and regular pay fell in real terms (adjusted for inflation) by 2.6% on the year for total pay and by 2.7% on the year for regular pay; this is slightly smaller than the record fall in real regular pay we saw April to June 2022 (3.0%) but still remains among the largest falls in growth since comparable records began in 2001.
My estimate of real wages falls is more like 5% per annum. My estimate is based on two realities ignored by the official data. Any actual cost of owner-occupied housing involves a combination of a lump sum and/or mortgage costs which have risen, the latter by amounts we look at earlier. Secondly the official rental series used in the recommended CPIH inflation measure is a mess. The use of a “stock” concept means we get last years numbers ( somewhere in the summer of 2021) which is a big deal in a fast changing world. Next up is whether using a “stock” misses some rises? Even worse Imputed Rents are used for owner-occupiers so a measurement problem becomes three times larger.
Comment
The first point is that everything here points to lower house prices. The main driver is higher mortgage rates backed up by a weaker economy with lower real wages. We have not had a period like this for quite some time. Also in their efforts to avoid house price falls ( my view on the “temporary” and “transitory” claims about inflation were because they hoped they could avoid reducing house prices) now mean that the main squeeze is on just as the economy is at its weakest trajectory. A move that technocratic central banks were supposed to prevent.
From that comes my view that the central banks and in this case the Bank of England will weaken on interest-rates. We looked at Australia yesterday and saw how the RBA has dropped back to 0.25% increases ( 3 in a row now) and wonder when it will stop and then reverse course? The Bank of England is not as advanced as that but after next week’s increase which I still expect to be 0.5% how many more will there be? So house price falls can be expected for the early part of 2023 but they will in themselves put pressure on central banks to reverse course on interest-rates.
Notayesmanseconomics's Blog 
Hi Shaun
Great article as always. As of 11.30 the bbc has still not reported on the halifax figures 😉
As for supply, there is a lot of supply in my area. Although most are not affordable. Starting to see 10% cuts for motivated sellers. But most are not at the moment. I still think we’re in the phoney war at the moment. Very few forced sellers.
Also it looks like the gment is starting to get worried:
https://www.theguardian.com/business/2022/dec/06/hunt-to-urge-banks-to-aid-mortgage-borrowers-amid-cost-of-living-crisis
A lot of people (myself included) will be coming off low fixes in the next few months, coupled with increased energy bills it cant look good for consumer spending. Although I suspect we may have one last credit card binge at xmas and worry about it next year.
Also when I’ve been out lots of people eating out and buying things. Although this is skewed towards the older age group.
Interesting times ahead.
around my area the more up market joints are struggling to fill seats and offering money off vouchers ( just before christmas?? very odd ).
The normal chains ( boofeater ) are also offering discounts but when visiting them it seems most people are buying off the day saver menus not the main one.
Super markets seem busy and my favorate cheese has now been discounted from over £9.00 per kg to £6.82 , still higher though as the base line has increased , I guess I’ll never see £5.60 per kg ever again – and no that’s not 10 years ago price either !
It appears its taking a little while for the energy shock to have impact but then again why should it? Rate rises and energy along with food are softened by the use of credit , I guess we need to look at the next three months credit card debts to get a picture.
But by then the BoE would have missed the boat …… again.
Forbin
Hello Shaun,
re “I am not sure how they get to a mortgage rate of 3.09%”
I don’t think anyone knows how they get such figures , I suggest they’re playing some kind of fantasy “football” type of thing , or just plain making up as they go along.
Fobin
forbin,
Im agree and Shaun scpetical with those figures but as Shaun says what you tend to find is the rates are offered stat at the percentage of where people have the biggest deposits and when you struggle to put up a decent amount the mortgage offered is at a higher perventage rate or a higher product cost
“But taking a look they require equity of at least 25% and also are for bigger mortgages as otherwise a product fee of £1499 makes the effective rate a fair bit higher.”
It is surprising also how few people understand the APR which takes into account the product cost over the length of the mortgage and can increase the true rate of interest considerably.
If you had a survey in the street and ask people what the APR meant few people will answer correcty.
As for the market well prices are going to contine to fall and they may even fall lower than the predicted 9% because thigs are changing quite rapidly, inflation isn’t going to ease in Europe fast and the BOE will have to increase rates again imo this month meaning more pressure on bond yields and higher mortgages despite them easing slighty the last few weeks.
APR was brought in to get a standardized measure as we had all sorts of shenannigans before hand.
if people can’t get there heads around that then what? what would be better to judge the cost of a loan or credit card ?
The APR was one of the first things I understood when I first started to get interested in economics but it is suprrising nonetheless how poor the UK population seems to be with maths.
With people so reliant also on spending on plastic they just wit while the money just runs out each week not able to try and plan some kind of budget with their money.
This is part of the housing problem so many people been fixing the rates but on a short time span and because we have had almost zero rates for over a decade no one thought we would see the rises as we have seen and there will be more to go.
The bank of Canado raised again 50bp and hinting that they may be near the end but still could go up further yet as they are seeing tight labour still…
https://www.investing.com/news/economy/bank-of-canada-increases-rates-by-50-bps-says-hikes-may-be-over-2959277
“is suprrising nonetheless how poor the UK population seems to be with maths.”
aye , probably explains a lot about HMG as they are “supposed” to be representative of the UK population(!!)
oh deary me !
Forbin
Reading of the appalling levels of poverty in our major cities the other day, food banks running out, people on benefits unable to eat when their money is reduced or stopped for some reason(everything is online now of course – you can’t get to speak to a person, and what if you can’t afford to pay for your phone or internet connection – how do you appeal or get the problem sorted then? people unable to afford to heat their homes, children going to school hungry, I was trying to think of a time in the past when the country faced similar levels of poverty or the prospects for the economy and public services were as bad if not worse – and I simply couldn’t, the worst time for the working class was probably between the wars – 1918- 1939, when a combination of the depression and Churchill returning us to the gold standard caused the money supply to collapse, eventually leading to a national strike. But even that doesn’t compare to now.
And from where I am sitting, with another 0.5% increase in rates looking likely shortly, the pain is going to get worse – much worse for the poor and the JAMS – just about managing – you don’t hear that expression used much anymore do you?
I don’t know how much more those at or near the bottom of our society can take of this but, unfortunately for them, next year is going to be unimaginably worse.
As we have all predicted on here over the years, the cost of worshipping at the temple of the false god of house prices is now being shown to have a price attached, and it is going to be very expensive. And to make matters worse, the error of this policy, far from being acknowledged by the authorities, is going to be doubled down on when the Bank of England pivots as Shaun has predicted.
The Fed is aiming at getting rates to 5%+ so that it can then cut them 5% to recover the US economy from the coming recession, the Bank of England will be hoping the housing market clings on until then, not falling too much as it will then be falling over itself to cut rates and stimulate the housing market, that is if everything else holds together until then, but what if inflation is still really high(we all know how sticky high inflation is in this country) will gilt yields still be too high as a result to allow mortgage rates to fall to where they allow house prices to recover and keep going up???
I think this is what will be keeping Bailey awake at night next year.
keeping Bailey awake at night?
counting out the money he has in his pension pot ? oh so much ! he must spend hours counting it and re-checking …….;-)
Great blog as usual, Shaun.
You and your readers may be interested in knowing that the Bank of Canada increased its overnight rate by 50 basis points today, taking the overnight rate to 4.25%. This is the highest the rate has been since December 2007, prior to Canada’s 2008-09 recession. While news commentary has centred on this, it has ignored that the increase in the overnight rate from just 0.25% in February 2022 to 4.25% today is unprecedented over such a short period since the Bank of Canada became an inflation targeting central bank. (From February 1994 to February 1995 the overnight rate rose from 3.64% to 8.02%, but as of December 1994 it was only 5.54%.)
The C.D. Howe Institute Monetary Policy Council on December 1 was evenly split in advising for a 4.00% or a 4.25% overnight rate for today. Its group recommendation was for 4.00% based on a convention that with a split vote, the recommendation would be for the interest rate closest to the recommendation for the previous round. Actually, 4.25% was the majority recommendation of the CDHI MPC for the January 25 2023 interest rate announcement by the Bank of Canada, and after that they see the overnight rate staying where it is throughout 2023. Whatever its merits as a recommendation, this would seem a little implausible as a forecast since, as you have noted, so far the Bank of Canada seems to be trying to guess in advance what the US Fed will be doing and doing the same, and the US Fed will probably keep moving the federal funds rate in the direction of 5%.
The latest real GDP data from Statistics Canada on November 30 sent mixed messages. There was a September increase of 0.1% as opposed to a preliminary estimate of 0.0%, but the October 2022 preliminary estimate is 0.0%. Taking the October estimate as accurate, real GDP per capita (based on the LFS working age population) in October 2022 was still more than 0.3% lower than it was in February 2020, its peak month before the pandemic recession struck, which is somewhat unsettling since the consensus is that we are headed for stagnant growth ahead if not for a recession.
You note that house price decreases “will in themselves put pressure on central banks to reverse course on interest-rates.” This could certainly be true for the Bank of Canada, as much, if not more, than it is for the Bank of England. In Canada, the house price decreases have already started, and many large markets are in danger of having their bubbles burst. The Bank of England has not recently been given a more inflationary remit, whereas in December 2021, the new renewal of the inflation-control agreement committed the Bank of Canada to inflation overshooting at the effective lower bound. Of course, the Bank of Canada is a long way from its effective lower bound now, but it was at its effective lower bound as recently as February, the month that the Russo-Ukrainian War
Hi Andrew and thank you
I was going to reply by asking how long it would be before we saw Bank of Canada meetings without an interest-rate rise? But I see that Canada’s version of the shadow MPC thinks we may be there. I would not rule out a 0.25% in January.
As to matching the US Fed that rule of thumb has worked nicely this year and I agree with the Bank of Canada conclusion that we will see a 0.5% rise from it next week. If it also does a 0.25% in the New Year that may be it for this round of rises. Anyway let’s wait and see what it says and does next week.
If the 0% GDP growth rate persists beyond October in Canada or gets worse and house prices continue to fall I think that it would not be too low before people start speculating about interest-rate cuts.
Nationwide ‘fall out from the mini budget’ should be ‘fall out from Bailey’s panic moves to save his pension’! ( and incidentally bringing down a UK government).
I still think the Fed may surprise the markets again this month, but even if they don’t they will be holding the rates higher for longer. The US consumer is still spending as if tomorrow doesn’t exist. With so many over 55yrs leaving the employment market permanently , the job market is still very tight. The US commercial banks aren’t exposed to mortgage risk, and most are 30 yr fixes anyway. Energy costs are and will increase, but nothing like in Europe/UK. The US recession is going to be shallow and short.
That is why I still think the pressure will resume on sterling. This will be inflationary. Yet as Shaun describes the risk of a house price collapse and effect on banks will result in rates being reduced which will add to sterling woes and increase inflation etc etc.
And the UK government as well as most in Europe is not taking into account next year’s energy price movements and energy disruptions. You couldn’t invent a more disruptive move than the Russian oil price cap if you tried. Diesel will become scarce quite quickly in Europe, no Venezuelan deal for heavy oil here.
China finally getting over its ‘covid madness’ will increase demand for LNG from the far east , there is not enough for Europe as well, and at what prices?
And its getting colder with still air across northern Europe.
Escape to Latin America? Trying out Panama for extended stay in January.
Hi JW
If I switch to the energy issue the UK has some wind and so has been a net exporter of electricity over the past 24 hours. However Friday evening looks tougher as the wind will reduce. Also we are going to open a new coal mine which seems sensible. If only we scrapped the oil and gas windfall taxes so we could boost future production there too. If we need taxes we can put them on the wind farms after all if they are as cheap as they claim they must be making a fortune at these prices.
After reading your message I am glad I got rid of my diesel Astra. What a disaster the official push to get us into diesels became. I was polluting London severely and now the price is much higher than petrol….