What happens now to UK house prices?

It was only on Friday that I looked at something potentially beneficial for UK house prices which is a Bank of England interest-rate cut. That could come as soon as this week and later in the day markets adjusted to this as the Gilt market rallied and a ten-year yield of 0.86% has been replaced by one of 0.77% this morning. So maybe some cheaper mortgage rates are on their way.

London

This morning the Financial Times has moved onto one of its favourite topics and here it comes.

Agents for high-end London property have reported a bounce in multi-million-pound home sales after Boris Johnson’s election victory. Buying and selling agents said purchasers were committing to buy homes worth up to £50m after the decisive Conservative win provided political clarity. Overseas buyers also want to pre-empt a stamp duty surcharge planned by Mr Johnson’s government.

So even if we allow for some estate agent hype the new government and the prospect of some Brexit certainty does seem to have had a impact. We also got some more specific details.

Camilla Dell, founder of the buying agency Black Brick, said many of her clients had waited to exchange contracts until after the vote, including one buying a £3.8m newly built apartment in St John’s Wood. She said most of her company’s pipeline of £50m in home purchases would now proceed quickly. “They all want to get on and exchange, and not just because of potential stamp duty changes. A more confident market will make sellers more bullish on price,” she said.

Actually when we look at the next quote £50 million can go quite quickly.

Trevor Abrahmsohn, managing director of Glentree International — which specialises in super-prime north London homes — said an Asian buyer had committed on Friday to buying a £28m home and another purchaser to spending £5m on a property. “This is a shot of adrenalin in a market that was comatose,” he said.

So far you may note that these are commitments relying on estate agent’s word rather than actual purchases. To be fair it is so soon after the election that actual purchases are unlikely. But there does seem to be something going on as the often reliable Henry Pryor has tweeted this.

I’ve got a dozen clients looking for new homes with £25m between them bit.ly/35scLtK plus a group of others with a pot of £50m for post-Election, pre-Brexit, pre-Budget opportunities.

If we ask the Carly Simon question which is Why? We see that there are some factors at play. The settled election result is one although I note that Henry Pryor seems dubious about this concept.

 I even heard of deals going through with a ‘Corbyn clause’ where the contracts could be rescinded if Labour got in . .

Also there is this.

In November the Conservatives pledged to charge overseas buyers an additional 3 per cent of the purchase price in stamp duty when they buy homes in England. This would add to an existing 3 per cent surcharge for buyers of second and additional homes.

The Asian buyer above should he/she exist would have to pay an extra £840,000 which feels eye-watering.

Context

Whilst there is no doubt some hype in the above there is probably something going on. However there is a catch as it faces quite a lot of extra supply in central London. For example I went for a run yesterday and passed through the Battersea Power Station site where there is a large advert for Battersea Roof Garden with 600 flats being built. The roof garden is a nice touch but the description of “much needed green space” raises a smile once you know it is about 100 years from Battersea Park.

Added to this is the rest of the Nine Elms development and the Qatari development on Chelsea Bridge Road. Of course there is bias here as the main developments are in my area but the scale of them is significant and will require what are at those prices a significant number of purchasers as time passes.

Builders Share Prices

It would seem that investors on Friday were mulling a new version of Help To Buy.

In early trading, Taylor Wimpey shares rose 15% to 200p, while Barratt Developments and Berkeley Homes both registered rises of 13%, taking their share prices to 755p and 5,084p respectively.

Persimmon and Bellway were up 11%, to 2,784p and 3,086p, while Bovis and Redrow saw their stocks rise by 9% to 1,363p and 746p respectively. ( Building Magazine)

So there may be some support from that looking ahead. Whilst many developments in central London are too expensive to qualify some studio flats are priced within its range.

Rightmove

They have also joined the fray today.

LONDON (Reuters) – Asking prices for British houses fell this month by the smallest amount for any December since 2006, a survey showed on Monday, pointing to some upside for a housing market subdued by Brexit and election uncertainty.

Rightmove said asking prices, which are not seasonally adjusted, fell by 0.9% on a monthly basis after a bigger-than-normal 1.3% drop in November.

Indeed they go further with this.

Rightmove forecasts a 2% rise in asking prices in 2020.

That is a fascinating conclusion for an organisation which thinks this!

“With much of the political uncertainty removed, we expect that the number of properties for sale will recover as more new sellers come to market, making up some of this year’s lost ground,” Rightmove director Miles Shipside said.

So more sellers will lead to higher prices. Really?

Comment

The media seem to be starting something of a campaign on this front as even the i newspaper was on the case on Friday.

Property experts now expect those who have been holding off to go back to doing deals potentially driving house prices up.

“Expect a sharp uplift in transaction levels starting early in 2020, as buyers and sellers who have played it safe put their plans into motion,“ said Andrew Montlake, managing director of mortgage broker Coreco, adding that a ”huge amount“ of pent-up demand out there looks set to be unleashed on the market next year.

They should introduce Mr.Montlake to Rightmove as his “huge amount” of buyers could meet all their sellers.

However some factors have been in play all along. For example if you trusted the polls and bought UK property when the UK Pound £ was at US $1.19 and various FT journalists were saying on social media it was going lower you now have a solid return ( US $1.33. It will vary between foreign buyers as to how strong the exchange rate influence is but for some it will be major. Asian buyers may note that against the Japanese Yen there has been a rally from 127 to 146 already.

Thus my conclusion is that any rally in UK house prices will require more government and Bank of England intervention/ Otherwise we are on a road to nowhere with possible falls. I welcome that as with real wages rising finally affordability is heading in the right direction.

Podcast

What are the prospects for UK house prices?

It is hard to avoid the consequences of the London housing boom if you live in my part of town. Sometimes I go to the Tesco store in Vauxhall ( other supermarkets are available) but yesterday when I went it is a shadow of its former self. This is because it is being redeveloped and you get an idea from the marketing blurb.

When built in 1847, the Oval Gasholders were the largest of their kind in the world – a magnificent feat of Victorian engineering and working monument to the great pioneers of British power.

Now, the historic site’s redevelopment (and restoration) heralds a new phase in its history: that of a towering symbol of a different kind of progress, where old blends with new to build a proud and tight-knit community fit for the 21st century.

Cricket fans will know exactly where this is by the mention of the Gasholders next to the Oval cricket ground. This adds 571 residential dwellings to the nearby development that is Nine Elms and as this is beyond even late cycle for the recent boom,boom,boom phase I guess the developers are hoping a new cycle will have begun by 2022/3. Perhaps by then all the other developments in the area will have been sold.

If we widen our journey from places which are within a mile of where I grew up we see that the house price boom is not what it was. Last week LSL/Acadata told us this.

The house price recovery that began in the spring has been sustained.

Have we stepped back in time? No, it is a recovery from a few months of falls. Anyway let us look at the details.

. In July, the average of all prices paid for homes
in England & Wales has seen further growth, with the annual rate increase of 0.7% edging towards 1%, but still falling in real terms. This is the fourth month in a row in which the annual rate has gained ground, having fallen to -0.6% in March 2019 – the low point in the recent trough.

“Edging towards 1%” seems a bit desperate doesn’t it? Anyway I for one am pleased that house prices are falling relative to wages. If we allow for sampling errors we are pretty much flatlining here. However there may be a shift in the regional pattern.

Although in June all the northern and midland regions in England & Wales experienced a slowdown in their rates of price growth, there has been a turnaround in the southern regions, with London in particular once again returning to a positive nominal movement in its house prices.

Readers have previously reported about a bit of a mini-boom in the Midlands which seems to be over with annual house price growth 0.6% in the West and 1.2% in the East. Although at 3.9% Nottingham is the fastest growing City. Meanwhile the turnaround in London is mostly to do with this.

The month saw some exceptionally high house price sales in
each of these boroughs, including a £10 million flat in Camden overlooking Regents Park; a £15 million detached home in Barnet close to Hampstead Heath; and in Kensington and Chelsea a £13.4 million flat close to Holland Park, a £20 million semi-detached property close to Chelsea Football Club and a £26 million terrace in Ladbroke Grove.

So it would appear that the London property market needs the rumour about Taylor Swift buying something of a mansion to be true. Otherwise well.

Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

Of course even if there are more large purchases there is the risk that the market will shake it off. But if we move on there is some basic finance economics under this. If we stay with Taylor she will have earnings from all over the world and could buy in almost any currency, but in her home one US $1.22 or so may make things look a bit cheaper. Actually the currency where this particularly works is the Japanese Yen. This is because at times of market fear the Yen is marked higher. For example as markets opened yesterday the Yen went to higher levels than the “flash rally” ones I noted on the 3rd of January and at 130 Yen London property looks a fair bit cheaper. You could say the same about 1.20 versus the Swiss Franc.

What about the ordinary person?

Such things are not for the likes of the rest of us as the trickling down seems to be the sort of thing experienced by away fans at Stamford Bridge rather than the much more pleasant version in economics text books. There was another signal this morning about the lack of affordability. From the BBC.

Parents spend so much money to get their children onto the housing ladder that they are now among the biggest lenders in the UK, a survey suggests.

The average parental contribution for homebuyers this year is £24,100, up by more than £6,000 compared to last year, according to Legal & General (L&G).

Collectively parents have given £6.3bn, high enough to rank the bank of mum and dad 10th if it was a mortgage lender.

Actually whoever is writing this for the BBC does not recall last year as I do so I looked it up. The impression of there being more is not quite true.

While a quarter of a million homes purchased through
BoMaD is a huge number, it is still a decline from last
year. The money given by BoMaD is up 10%, from
£5.7 billion in 2018, but the number of properties
bought is down, from 316,600 purchases. ( Legal and General)

As you can see there are fewer mums and dads able to help but those that can are helping with larger amounts. Also both numbers are below the £6.5 billion peak of 2017.

Latest Data

Maybe there is some sort of response to things getting a little bit more affordable. From UK Finance this morning.

Gross mortgage lending across the residential market in July 2019 was £26.1 billion, 2.9 per cent higher than the same month in 2018 and the highest since March 2016.

Not only that but if we look at the pipeline it looks as though there has been a shift.

There were 95,126 mortgages approved by the main high street banks in July 2019, the highest monthly total since July 2009 when the figure stood at 99,970. Mortgage approvals for home purchase were 16.4 per cent higher, remortgage approvals were 19.4 per cent higher and approvals for other secured borrowing were 12.7 per cent higher than the same month a year earlier.

Economic Outlook

Bank of England Governor Mark Carney offered this view on Friday.

The UK economy contracted slightly last quarter and surveys point to stagnation in this one. Looking
through Brexit-related volatility, it is likely that underlying growth is positive but muted.

At least for once he did not fly across the word to lecture us on climate change. But the data this morning has not been kind to his past “This is not a debt-fueled recovery ” claims.

Personal borrowing through loans in July 2019 was 9.3 per cent higher than the same month a year earlier (see chart 5), but remains lower than the levels seen during 2015 to 2017.

Comment

We find ourselves in a very complicated place so let us pick our way through it. The economic cycle has changed and we are in a period of low and at times no growth. This stretches way beyond the UK as this week’s data from Germany has highlighted. However for larger properties in London and maybe smaller ones the lower UK Pound £ will attract buyers. That was one of the oddities of the original HM Treasury report on a Leave vote that its view of house prices (down) did not acknowledge the likely impact of a lower £. Whether that is enough to stabilise things I do not know. If I may return to the Oval development it seems to be set on this as it is way beyond the £600.000 Help To Buy limit.

Switching to the domestic market we see that real wages are rising and mortgage costs are very low. The lowest ever recorded by the Bank of England was 1.92% on October 2017 and we are now at 2.02% for new borrowing. That shows you how little effect Bank Rate has these days as it is 0.5% higher now, mostly because in essence we borrow for at fixed-rates now. So the lower Gilt yields and in particular the five-year yield ( 0.36%) will be pulling the number down and if it stays around here I would expect more falls and maybe an all-time low. So it is now favourable but the catch is that the prices are so high.

Podcast

 

Relax we just got wealthier and better off in the UK

From time to time our official statisticians give us some extra insight into where we stand and yesterday that happened in the UK.

The total package of current price GDP changes increases the size of the economy in 2016 by approximately £26.0 billion, around 1.3% of GDP.

Average growth of real GDP over the period from 1998 to 2016 has been revised up 0.1 percentage point to 2.1% per year.

I hope that readers in the UK feel suitably better off! Some have suggested that it makes our economy larger again than that of France but if a change of that size does make a difference the truth is we are very close and within the margin of error.

One factor I do welcome is the effort to improve the deflators which are the inflation estimates used in the national accounts.

the expenditure approach has traditionally been the determinant of annual benchmarked volume GDP estimates; research has been undertaken to identify the best deflator at a product level for each transaction in the UK National Accounts from those deflators that are currently available, therefore improving the volume estimate of GDP.

Now I do not know about you but I would think we should have been trying to use the best deflator all along. Also there has been an effort to record more accurately what is happening in out services sector something which regular readers will know I have been pressing for.

Blue Book 2019 has benefitted from the new Annual Survey of Goods and Services and the Annual Purchases Survey. These surveys have improved the quality of the current price estimates, providing new insights on the diversification of the services economy and the costs incurred by businesses in their production processes.

Some of you may be having a wry smile at the way that these moves always seem to raise GDP. Funny that as an ex-colleague of mine used to say. Perhaps that is what they mean by the use of the word “improvements” when revisions would be more accurate, as we note a potential Freudian slip. Sadly though even though it is Glastonbury season I can find no mention of rock and roll being added to the sex and drugs that were added on the previous improvement.

Tucked away in the numbers was something which reminded me of the description of the pre-credit crunch period as the NICE ( No Inflation Constant Expansion) decade.

Average nominal GDP growth for the period 1998 to 2007 remains unchanged at 5.0%,

So as it turns out we were targeting nominal GDP growth all along. Of course supporters of that policy have to then face a rather inconvenient truth that rather than a nirvana the economy then collapsed.

Today’s Numbers

The final revision of the first quarter held no surprises.

UK gross domestic product (GDP) increased by 0.5% in Quarter 1 (Jan to Mar) 2019, following a slowing in growth in the previous quarter. In comparison with the same quarter a year ago, UK GDP increased by 1.8%, its fastest rate since Quarter 3 (July to Sept) 2017.

We should enjoy that annual rate of growth as that is as good as it will get for a while as we know the UK economy had a difficult April and May causing the Bank of England to reduce its estimate of GDP growth this quarter from 0.2% to 0%.

Those wondering about what the influence of stockbuilding was on these numbers got a little more insight.

The underlying data show a substantial increase of £6.6 billion in stocks being held by UK companies in the most recent quarter.

Trade Problems

Another way of potentially looking at the issue of stockbuilding comes from the trade data.

The UK total trade deficit more than doubled to a record £20.3 billion in Quarter 1 (Jan to Mar) 2019, or 3.7% of GDP, and was the main contributor to the UK’s widening current account deficit……..The widening of the total trade deficit was due to a worsening trade in goods deficit (of £10.1 billion) and a narrowing trade in services surplus (of £0.7 billion)

That looks a signal of stockbuilding, however the UK’s status as a centre for trading in gold muddies the waters quite a bit so we learn less than one might initially think.

due largely to increased imports of unspecified goods (including non-monetary gold), which rose £6.0 billion.

But we can record some specific indicators.

Chemical imports increased £1.8 billion in the three months to March 2019, due largely to a £1.3 billion increase in imports of medicinal and pharmaceutical products.

Fans of the song Lily The Pink will appreciate the use of the word medicinal albeit with some disappointment that it was not followed by the word compounds.

How do we finance this?

I have no great faith in the official data for what are called the primary and secondary accounts because they rely a great deal on estimates of returns rather than reality. But we do know that selling assets abroad is one way of financing trade deficits. The Financial Times provided a glimpse of this yesterday.

Viewed from Bangalore, the purchase of a newly built three-bedroom apartment in London for more than £1.4m seemed like a safe investment bet.The top-floor three-bedroom home under construction in Keybridge House south of the Thames boasted views of the City of London and the Shard skyscraper. As Shonu Bhandari considered the purchase two years ago, agents told him he could expect the value to rise 15 per cent before the property had even been finished. The Indian entrepreneur, who runs a medical products company, happily signed up to buy.

Sadly for Mr.Bhandari things did not go well.

But his purchase soured quickly. When Bhandari approached a mortgage lender, it valued the property not at 15 per cent more than he had agreed to pay — but at 20 per cent less. With completion of the building looming, he signed over the property to a new buyer in March this year for £1.2m, losing more than £200,000 of his deposit.

That is one version of it which has been in full flow for quite a few years. But prospects for the Shard, Chelsea Barracks and Nine Elms to name just a few are not what they were.

But there are other types of asset sale if we move to Sky News.

Madame Tussauds owner Merlin Entertainments has accepted a £5.9bn takeover offer from the family owners of Lego and the private equity firm Blackstone.

Merlin, which also owns the Alton Towers and Legoland attractions, accepted the bid from Kirkbi, the investment vehicle of Lego’s Danish founding family, Blackstone and Canadian pension fund CPPIB.

Are we borrowing?

We have become used to Governor Carney and the Bank of England telling us that this has not been a debt fuelled recovery in the UK. They were at the same game in front of Parliament on Wednesday.

BoE’s Cunliffe: Low UK Interest Rates Haven’t Led To Explosion In House Prices Or Consumer Borrowing ( @LiveSquawk )

Meanwhile this morning’s national accounts tell us this.

Quarter 1 2019 was an unprecedented 10th consecutive quarter of households being net borrowers; households saw their net borrowing increase to 1.3% of GDP from 0.8% in the previous quarter………The households’ saving ratio remained historically low and was the joint fourth-lowest quarterly saving ratio since records began in 1963.

Comment

As we continue out journey through the post credit crunch era we see more and more consequences of the policies enacted. Sometimes it is the little details which are the most revealing as this story from Nobby in the Financial Times of how a flat he sold was converted into two.

However, it had been split into a 2 bed plus studio, total asking price more than doubled. Looking at the pictures, I couldn’t work out how the heck they had fitted a 2 bed into 700 sq feet and how big the pictures made it look. I realised they had put furniture in that was 3/4 normal size – tiny chairs and beds that can’t have been more than 5 feet long. Nothing illegal, but only someone who didn’t actually visit would fall for it.

We have a word for that which is innovative ( for newer readers that described the Irish banks, which then collapsed). Oh what a tangled web and all that.

Are UK house prices finally falling? It is very good news if so

One of the reasons that inflation measurement matters was highlighted yesterday mostly unwittingly I think, If we look at the subject of real wages in the UK we were told this.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

Whereas Andrew Baldwin kindly crunched the numbers using other inflation measures for us.

Using any other deflator one gets lower real wage growth: 1.3% with the CPI, 1.2% with the RPIJ, 0.6% with the RPI

So we have growth but there is a lot of debate about how much? As it happens CPI and RPIJ have moved more in line with the official CPIH measure but we have seen spells where it has been much wider. This issue does change how you see the credit crunch which I can illustrate with a tweet from former Bank of England policymaker Danny Blanchflower.

and still real wage growth 5% below feb 2008 levels….

That is from the official data series which has been switched to CPIH which makes real wage growth look better than it really is. Intriguingly as I pointed out the way the influence of Imputed Rents the former Bank of England policymaker replied with this.

Ok but doesn’t the harmonized E.U. measure do what you want?

To which I replied.

Nope as the inflation measure you used to target ignores owner occupied housing entirely. They are usually just around the corner from putting it in…..

Perhaps he had forgotten. But it does reveal how this importance of this matter gets overlooked. Also Danny was keen to emphasise the role of hedonics which reminded me of this report from the annual review of US consumer inflation.

From February 2018 to February 2019, the price of lettuce increased 14.5 percent while television prices decreased 16.8 percent. This compared to an increase of 1.5 percent for all consumer items over that period.

Anybody else reminded of this famous phrase.?

I cannot eat an I-Pad

 

Inflation Trends

If we look back a year the UK trade weighted index for the Pound £ is little changed however that hides a fall followed by a rally. Thus from the low of mid-December at 76 it has risen to 79.5 putting a brake on the economy equivalent to more than a 0.75% Bank Rate rise. Makes you think doesn’t it about all the hand wringing from the Bank of England over any 0.25% rise. However if we switch to the US Dollar whilst we have been rallying over a similar time frame we are nearly 9 cents lower than the US $1.41 of this time last year.

We find also that the oil price is not far from where it was a year ago with the current US $ 66/67 for Brent Crude being a couple of dollars lower than a year ago. However we did see a fall followed by a rise from just over fifty dollars on Christmas Eve so there will be some upwards pressure as this is reflected first in producer and next in consumer prices.

Today’s Data

Let me change my usual pattern and start with something I have been hoping for and doing so for a while.

Average house prices in the UK increased by 1.7% in the year to January 2019, down from 2.2% in December 2018 . This is the lowest annual rate since June 2013 when it was 1.5%. Over the past two and a half years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Maybe it’s because I’m Londoner that I especially welcome this bit.

The lowest annual growth was in London, where prices fell by 1.6% over the year to January 2019, down from a decrease of 0.7% in December 2018. This was followed by the East of England where prices fell 0.2% over the year.

I have some friends trying to buy at the moment and wish then well. It is symbolic of the times that a couple who both have professional jobs can only afford a shared appreciation property ( for readers from abroad they only “own” say 2/3rds). Switching back to the national numbers we see that with wage growth in January at 3.7% then over the past year there has been real wage growth of 2% in this area. This is a welcome move after many years of losses.

Also the more up to date numbers from LSL Acadata hint at more good news to come.

Prices edged up for the third consecutive month in February, rising 0.5% to take the average value of a home in England and Wales to £302,435. A spike in prices early last year, however, means prices are down 0.5% compared to this time last year.

 

Producer Prices

These numbers are beginning to pick-up the higher oil price.

The growth rate of prices for materials and fuels used in the manufacturing process increased to 3.7% on the year to February 2019, up from 2.6% in January 2019…..Crude oil provided the largest upward contribution to the change in the annual rate of input inflation.

Over the next month or too this will also give the output number a push albeit a smaller one.

The headline rate of output inflation for goods leaving the factory gate was 2.2% on the year to February 2019, up from 2.1% in January 2019.

 

Consumer Inflation

This was a mixed month for our measures as shown below.

The all items CPI annual rate is 1.9%, up from 1.8% in January…….The all items RPI annual rate is 2.5%, unchanged from last month……The all items CPIH annual rate is 1.8%, unchanged from last month.

The drivers were an upwards pull from apparel and transport offset by rises in recreation and culture mostly computer games and food and drink. Intriguingly one of the falls came from an area which has proved very difficult to measure.

The effect came from a
range of products but most noticeably from footwear, particularly women’s footwear.

Have any readers noticed this?

As to why CPIH continues to be the lowest measure it is because of the impact of Imputed Rents via the use of Rental Equivalence.

The OOH component annual rate is 1.1%, unchanged from last month.

This is very different to the United States where the official inflation measure shows that it is such matters ( they call it OER) which has pulled the inflation numbers higher.

Comment

It is genuinely pleasing to be able to report that real wages are outpacing house prices by a decent amount and even more so that this may increase, if we move from slower house price inflation to actual falls. I have been hoping for a long time that first-time buyers might get some actual help from this route rather than being helped to borrow ever more.

Of course this will not be welcome in Threadneedle Street where at the emergency COBRA meeting Bank of England Governor Mark Carney will be ruing the negative wealth effects and chewing his fingernails. I would not want to be the underling bringing him these numbers. But returning to happier news we may for once be seeing the beginning of an actual positive rebalancing of the UK economy as real wages make house prices ( a little) more affordable.

 

 

 

 

 

London house price crashes are not what they used to be

This morning has brought unsettling news for Bank of England Governor Mark Carney on the subject of UK house prices from the Nationwide Building Society.

Prices decline 0.5% month-on-month,
biggest monthly fall since July 2012

That date will resonate because it was back on the 13th of July 2012 that the Bank of England started the Funding for Lending Scheme which was described back in the day as follows.

The FLS is a direct policy response to that threat to the UK economy posed by elevated bank funding costs. Funding costs are a key determinant of the interest rate banks charge on loans. By reducing them, the FLS should lead to more and cheaper credit flowing into the economy than otherwise. ( 2012 Quarterly Bulletin).

We know now how this claim about the FLS worked out!

In the longer term, if tight credit conditions have been holding back productivity growth, then the FLS could increase the supply potential of the economy.

Only yesterday we looked at one of the areas where the FLS was supposed to impact which was on lending to smaller businesses.

The twelve-month growth rate of lending to SMEs was -0.2% in July; this growth rate has been at or below zero for the past four months

It is easy to forget now that the original version did not allow for the fact that lending to smaller businesses requires more bank capital than many other forms of lending. A pretty basic error although frankly even when the rules were modified to try to allow for this the picture was as above. Occasionally we have seen a little flicker of growth but the overall picture has been has seen as many if not more declines. The official view clings to what they call the “counterfactual” which is that otherwise things would have been even worse.

Moving to mortgage lending the word counterfactual was not required as the estimated boost given to bank funding went straight to the mortgage lending bottom line.

Based on these estimates, at the time the FLS was
announced on 14 June 2012 it would have been around
200 basis points cheaper than using other sources of secured wholesale funding, such as RMBS or covered bonds.

The Bank of England did not know the full picture back then but I noted for myself that mortgage rates fell fairly quickly by around 1% and later the Bank itself estimated that the total impact was of the order of 2%. So rather neatly 2% of cheaper funding led to 2% lower mortgage interest-rates or a 100% follow through.Revealingly I do not recall any such numbers for the cost of small business lending.

Mortgage Lending

Back in 2012 the Bank of England was very worried about this as if we look at net lending it had gone from the £9.7 billion of September 2007 to usually less than a billion with some months recording declines.Indeed if we switch to gross lending it had fallen to £10.6 billion in December 2010 so not a lot more than what net lending had been. Gross lending was down from over £30 billion a month at the peak.

If we jump forwards we see that net mortgage lending was rescued as yesterday we noted this.

Households borrowed an extra £3.2 billion secured against their homes in July. Net lending has been relatively stable over the past year or so,

Gross lending picked up too and is now usually circa £22 billion per month.

House Prices

They responded as follows according to the Nationwide. The average house price was £164,389 when FLS started and is now £214,745. We will never know what they would have done otherwise but we do know that for the previous two years they had been drifting gently lower and that the annual rate of fall reached its peak or nadir at 2.6% in July 2012.

What about now?

Let us return to the Nationwide report.

“August saw a slight softening in annual house price growth to 2.0%, from 2.5% in July. Nonetheless, annual house price growth remains within the fairly narrow range of c2-3% which has prevailed over the past 12 months, suggesting little change in the balance between demand and supply in the market.”

Actually this is still higher than that reported by Acadata earlier this month.

On a monthly basis, prices fell again in July, for the fifth month in succession: down 0.2%, leaving the average house price at £302,251. The figure is still up on an annual basis, however, with prices increasing 1.6% and all regions in England and Wales recording modest, but positive growth.

They claim to be comprehensive and if we take the broad sweep we see that house price growth is now below both inflation and wage growth. You may also note the difference between average house prices as reported by the two bodies.Some of the gap will be caused by the fact that the Nationwide is biased via its customer base but it is also true that even so the gap is problematic or if you prefer something of a chasm.

A London House Price Crash?

The Guardian produced this yesterday.

One-in-three chance of London house price crash, says expert poll.International buyers put off by Brexit uncertainty could drive prices down 1.6% next year.

It seems that crashes aren’t what they used to be! Well apart from England’s top order at cricket. But there were some other gems.

“Central London is tanking because the traditional international buyers are staying away – and the quantum of buyers is falling. A disorderly Brexit will exacerbate this trend,” said Tony Williams at property consultancy Building Value.

A 1.6% fall is “tanking” now? At the level of prices recorded it would be a very minor blip compared to the rise.

The average asking price for a home in London was £609,205 in August according to the property website Rightmove, more than double the national average of £301,973.

Also the answer to the question below had to be 10 I think for London and some might wish to go full Spinal Tap and say 11.

When asked to rate the level of London house prices on a scale of one to 10, where one is extremely cheap and 10 is extremely expensive, the median response in the Reuters poll was nine. On a national level, prices were rated seven.

Anyway even such a minor fall seemed to seriously upset Phillip Inman.

The warning that property values in London will fall this year and next will bring a smile to many who believe house prices have run out of control in the last 30 years

Believe? Anyway he does list the potential gains.

A crash would make homes more affordable to those on lower incomes and the young. Profit-hungry housebuilders would see their revenues collapse and the much-reviled estate agency industry would shrink.

But suddenly and I am skipping the political content the above is presented as being bad.

They care little about the after-effects of a house price crash

If a 1.6% fall is going to be so bad I fear for his disposition going forwards. Perhaps his colleagues might check in on him from time to time.

 

Comment

The issues in this area are both complex and simple. If we start with the simple then back in 2012 it appeared to the UK establishment that in spite of the slashing of Bank Rate to 0.5% and the advent of QE the economy was flatlining. Actually the worst fears were wrong but that atmosphere of fear led to a response involving credit easing as described above from the Bank of England ( as well as an easing of government austerity). For the Bank the operations had two benefits one is that there would have been fears over the “precious” which would be alleviated and the economy would be boosted especially if house price gains can be claimed as a boost to wealth rather than inflation.

Now the flow of such policies is over as the next effort the Term Funding Scheme ended in February. That is why I expected house price growth to fade away and perhaps fall this year. The national picture is more complicated as London got a further boost from foreign safe haven buying but if we take a broad sweep prices should have fallen and they were not allowed to.

If we move to the complicated no policy helps everyone sadly and even something which is a gain hurts some. For example let me give you both sides of the London coin. I have a neighbour who rents because in spite of the fact that he and his wife both work their affordability has never caught up with the house price rises so they might finally be able to buy. On the other side of the coin I have friends who have just bought and would face losses but whilst I wish them all the best the truth is that this song has been playing for much too long now.

The only way is up, baby
For you and me, baby
The only way is up
For you and me