Where next for UK house prices?

This week has opened in what by recent standards is a relatively calm fashion. Well unless you are involved in the crude oil market as prices have taken another dive. That does link to the chaos in the airline industry where Easyjet has just grounded all its fleet. Although that is partly symbolic as the lack of aircraft noise over South West London in the morning now gives a clear handle on how many were probably flying anyway. So let us take a dip in the Bank of England’s favourite swimming pool which is UK house prices.

Bank of England

It has acted in emergency fashion twice this month and the state of play is as shown below.

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.

If we look for potential effects then the opening salvo of an interest-rate cut has much less impact than it used to as whilst there are of course variable-rate mortgages out there the new mortgage market has been dominated by fixed-rates for a while now. The next item the TFSME is more significant as both its fore-runners did lead to lower mortgage-rates. Also the original TFS and its predecessor the Funding for Lending Scheme or FLS lead to more money being made available to the mortgage market. This helped net UK mortgage lending to go from being negative to being of the order of £4 billion a month in recent times. The details are below.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 10% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).

We have seen this sort of hype about lending to smaller businesses before so let me give you this morning;s numbers.

In net terms, UK businesses borrowed no extra funds from banks in February, and the annual growth rate of bank lending to UK businesses remained at 0.8%. Within this, the growth rate of borrowing from SMEs picked up to 0.7%, whilst borrowing from large businesses remained at 0.9%.

It is quite unusual for it to be that good and has often been in the other direction.

In theory the extra bond purchases (QE) should boost the market although it is not that simple because if the original ones had worked as intended we would not have seen the FLS in the summer of 2012.

Today’s Data

It is hard not to have a wry smile at this.

Mortgage approvals for house purchase (an indicator for future lending) had continued to rise in February, reaching 73,500 . This took the series to its highest since January 2014, significantly stronger than in recent years. Approvals for remortgage also rose on the month to 53,400. Net mortgage borrowing by households – which lags approvals – was £4.0 billion in February, close to the £4.1 billion average seen over the past six months. The annual growth rate for mortgage borrowing picked up to 3.5%.

As you can see the previous measures to boost smaller business lending have had far more effect on mortgage approvals and lending. Also there is another perspective as we note the market apparently picking up into where we are now.

In terms of mortgage rates in February the Bank of England told us this.

Effective rates on new secured loans to individuals decreased 4bps to 1.81%.

So mortgages were getting slightly cheaper and the effective rate for the whole stock is now 2.36%.

The Banks

There is a two-way swing here. Help was offered in terms of a three-month payment holiday which buys time for those unable to pay although in the end they will still have to pay but for new loans we have quite a different situation. From The Guardian on Thursday.

Halifax, the UK’s biggest mortgage lender, has withdrawn the majority of the mortgages it sells through brokers, including all first-time buyer loans, citing a lack of “processing resource”.

In a message sent to mortgage brokers this morning, Halifax said it would no longer offer any mortgages with a “loan-to-value” (LTV) of more than 60%. In other words, only buyers able to put down a 40% deposit will qualify for a loan.

Other lenders have followed and as Mortgage Strategy points out below there are other issues for them and prospective buyers.

Mortgage lenders are in talks with ministers over putting the housing market in lockdown and transactions on hold, according to reports.

Lenders have been withdrawing products and restricting loan-to-values as they are unable to get valuers to do face-to-face inspections.

Property transactions are failing because some home owners in the chain are in isolation and unable to move house or complete on purchases.

Removals firms have been advised by their trade body not to operate, leaving movers in limbo.

So in fact even if the banks were keen to lend there are plenty of issues with the practicalities.

Comment

The next issue for the market is that frankly a lot of people are now short of this.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh ( The Adventures of Stevie V )

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.

Thus we are looking at a deep freeze.

Ice ice baby
Ice ice baby
All right stop ( Vanilla Ice)

Whereas for house prices I can only see this for now.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Podcast

What policy action can we expect from the Bank of England?

As to world faces up to the economic effects of the Corona Virus pandemic there is a lot to think about for the Bank of England. Yesterday it put out an emergency statement in an attempt to calm markets and today it will already have noted that other central banks have pulled the interest-rate trigger.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. ( Reserve Bank of Australia).

There are various perspectives on this of which the first is that it has been quite some time since the official interest-rate that has been lower than in the UK. Next comes the fact that the RBA has been cutting interest-rates on something of a tear as there were 3 others last year. As we see so often, the attempt at a pause or delay did not last long, and we end up with yet another record low for interest-rates. Indeed the monetary policy pedal is being pressed ever closer to the metal.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years.

Also in the queue was a neighbour of Australia.

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.75 percent and 2.25 percent, respectively.

So there were two interest-rate cuts overnight meaning that there have now been 744 in the credit crunch era and I have to add so far as we could see more later today. The problem of course is that in the current situation the words of Newt in the film Aliens come to mind.

It wont make any difference

It seems that those two central banks were unwilling to wait for the G7 statement later and frankly looking at it I can see why.

– G7 Now Drafting Statement On Coronavirus Response For Finance Leaders To Issue Tuesday Or Wednesday – Statement As Of Now Does Not Include Specific Language Calling For Fresh Fiscal Spending Or Coordinated Interest Rate Cuts By Central Banks – RTRS Citing G7 Source ( @LiveSquawk )

The truth is G7 are no doubt flying a cut to see how little they can get away with as monetary ammunition is low and fiscal policy takes quite some time to work. A point many seem to have forgotten in the melee.

The UK Economy

The irony of the present situation is that the UK economy was recovering before this phase.

Manufacturing output increased at the fastest pace since
April 2019, as growth strengthened in both the consumer
and intermediate goods sectors. In contrast, the downturn
at investment goods producers continued. The main factor
underlying output growth was improved intakes of new
work. Business optimism also strengthened, hitting a nine month high, reflecting planned new investment, product
launches, improved market conditions and a more settled
political outlook. ( IHS Markit )

This morning that was added to by this.

UK construction companies signalled a return to business
activity growth during February, following a nine-month
period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a postelection improvement in business confidence and pent-up demand for new projects. ( IHS Markit)

If there is a catch it is that we have seen the Markit PMI methodology hit trouble recently in the German manufacturing sector so the importance of these numbers needs to be downgraded again.

Monetary Conditions

As you can see the situation looks strong here too as this from the Bank of England yesterday shows.

Mortgage approvals for house purchase rose to 70,900, the highest since February 2016.

The annual growth rate of consumer credit remained at 6.1% in January, stabilising after the downward trend seen over past three years.

UK businesses made net repayments of £0.4 billion of finance in January, driven by net repayments of loans.

Please make note of that as I will return to it later. Now let us take a look starting with the central banking priority.

Mortgage approvals for house purchase (an indicator for future lending) rose to 70,900 in January, 4.4% higher than in December, and the highest since February 2016. This takes the series above the very narrow range seen over past few years.

Actual net mortgage lending at £4 billion is a lagging indicator so the Bank of England will be expecting this to pick up especially if we note current conditions. This is because the five-year Gilt yield has fallen to 0.3%. Now conditions are volatile right now but if it stays down here we can expect even lower mortgage rates providing yet another boost for the housing market.

Next we move to the fastest growing area of the economy.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

As you can see the slowing has stopped and been replaced by this.

These growth rates represent a £1.2 billion flow of consumer credit in January, in line with the £1.1 billion average seen since July 2018.

Broad money growth has been picking up too since later last spring and is now at 4.3%.

Total money holdings in January rose by £9.4 billion, primarily driven by a £4.2 billion increase in NIOFC’s money holding.

The amount of money held by households rose by £2.8 billion in January, compared to £3.3 billion in December. The amount of money held by PNFCs also rose by £2.3 billion.

Comment

The numbers above link with this new plan from the ECB.

Measures being considered by the ECB include a targeted longer-term refinancing operation directed at small and medium-sized firms, which could be hardest hit by a virus-related downturn, sources familiar with the discussion told Reuters. ( City-AM)

You see when the Bank of England did this back in 2012 with the Funding for Lending Scheme it boosted mortgage lending and house prices. Where business lending did this.

UK businesses repaid £4.1 billion of bank loans in January. This predominantly reflected higher repayments. These weaker flows resulted in a fall in the annual growth rate of bank lending to 0.8%, the weakest since July 2018. Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

I think that over 7 years is enough time to judge a policy and we can see that like elsewhere ( Japan) such schemes end up boosting the housing market.

It also true that the Bank of England has a Governor Mark Carney with a fortnight left. But he has been speaking in Parliament today.

BANK OF ENGLAND’S CARNEY SAYS SHOULD EXPECT A RESPONSE THAT HAS A MIX OF FISCAL AND CENTRAL BANK ELEMENTS

BANK OF ENGLAND’S CARNEY SAYS EXPECT POWERFUL AND TIMELY GLOBAL ECONOMIC RESPONSE TO CORONAVIRUS ( @PrispusIQ)

That sounds like a lot of hot air which of course is an irony as he moves onto the climate change issue. I would imagine that he cannot wait to get away and leave his successor to face the problems created by him and his central planning cohorts and colleagues.

His successor is no doubt hoping to reward those who appointed him with an interest-rate cut just like in Yes Prime Minister.

 

 

UK house price growth continues to slow

Yesterday we looked at a house price bubble which is still being inflated whereas today we have a chance to look at one where much of the air has been taken out of the ball. Can a market return to some sort of stability or will it be a slower version of the rise and fall in one football match demonstrated by Maradona last night? Here is the view from the Nationwide Building Society.

Annual house price growth fell to its slowest pace for five
years in June. However, at 2% this was only modestly below the 2.4% recorded the previous month.

As you can see the air continues to seep out of the ball as we see another measure decline to around 2% reaching one of out thresholds on here. Or to put it another way finally house price growth is below wage growth. Of course that means that there is a long way to go to regain the lost ground but at least we are no longer losing it.

The Nationwide at first suggests it is expecting more of the same.

Indeed, annual house price growth has been confined to a
fairly narrow range of c2-3% over the past 12 months,
suggesting little change in the balance between demand and supply in the market over that period.
“There are few signs of an imminent change. Surveyors
continue to report subdued levels of new buyer enquiries,
while the supply of properties on the market remains more of a trickle than a torrent.

Although I note that later 1% is the new 2%

Overall, we continue to expect house prices to rise by
around 1% over the course of 2018.

Every measure of house prices has its strengths and weaknesses and the Nationwide one is limited to its customers and tends to have a bias towards the south but it is reasonably timely. Also there is always the issue of how you calculate an average price which varies considerably so really the best we can hope for is that the methodology is consistent. According to the Nationwide it was £215,444 in June.

The Land Registry is much more complete but is much further behind the times as what is put as April was probably from the turn of the year..

As of April 2018 the average house price in the UK is £226,906, and the index stands at 119.01. Property prices have risen by 1.2% compared to the previous month, and risen by 3.9% compared to the previous year.

As you can see the average price is rather different too.

Bank of England

It will be mulling this bit this morning.

Annual house price growth slows to a five-year low in June

This is because that covers the period in which its Funding for Lending Scheme ( replaced by the even more friendly Term Funding Scheme) was fully operative. When it started it reduced mortgage rates by around 1% and according to the Bank of England some mortgage rates fell by 2%. I think you can all figure out what impact that had on UK house prices!

Or to put it another way the house price falls of 2012 and early 2013 were quickly replaced by an annual rate of house price growth of 11.8% in June 2014 according to the Nationwide. So panic at the Bank of England changed to singing along with Jeff Lynne and ELO.

Sun is shinin’ in the sky
There ain’t a cloud in sight
It’s stopped rainin’ everybody’s in a play
And don’t you know
It’s a beautiful new day, hey hey

Some of them even stopped voting for more QE as it has mostly been forgotten that nearly a quorum wanted more of it as the economy was kicking through the gears.

Although some at the Bank of England will no doubt have their minds on other matters.

Simon Clarke MP said the figures had “disturbing echoes” of the MPs’ expenses scandal. “One of the most important aspects of the culture of any public institution is of course that it provides value for money to the taxpayer,” he added.

“In the last two-and-a-half years two members of the FPC, Mr Kohn and Mr Kashyap, have incurred £390,000 in travel expenses, which is simply a staggering sum.”  ( The Guardian).

Regular readers will recall I did question a similar situation regarding Kristin Forbes on the Monetary Policy Committee who commuted back and forth from the US. I do not know if she benefitted from the sort of largesse and excess demonstrated below though.

The pair are based in the US and Clarke said the £11,084.89 flight for Kashyap from Chicago to London would leave his constituents “gobsmacked”.

Kohn spent £8,000 on a flight from Washington to London and £469 on taxis as part of expenses for a single meeting.

As ever a sort of Sir Frank ( h/t Yes Prime Minister ) was brought forward to play a forward defensive stroke.

“Having seen these committees in action, and seen the contributions they’ve made, as high as their expenses have been, also staggering has been their contribution,”

I was hoping for some enlightenment as the their “staggering contribution” as I do not recall ever hearing of them. The man who thinks this also submitted this about his role as a bank CEO so I guess he might also believe in fairies and the earth being flat.

The key, I always found, was to begin the process by
considering life from the customer’s perspective and then to build products and services that responded to real needs – whilst taking utmost care to build the TCF principles into every operational step in the firm’s business model.

Oh and I have promoted Bradley Fried the chair of the Court to a knighthood although of course those of you reading this in a couple of years or so are likely to be observing his K.

Looking ahead

Yesterday’s mortgage data from UK Finance had a two-way swing. Let us start with the positive.

Estimated gross mortgage lending for the total market in May is £22.2bn, 8.8 per cent higher than a year earlier. The number of mortgage approvals by the main high street banks in May has also risen, increasing by 3 per cent compared to the same month a year earlier.

Except that the latter sentence was not so positive when broken down.

 As in April, increased approval numbers were driven by remortgaging, some 18 per cent more than a year earlier.  In contrast, approvals for house purchase were 3.8 per cent lower than the same period a year earlier.

In case you are wondering about who or what UK Finance represents it is the new name for the BBA. The title of British Bankers Association became so toxic that they decided to move on.

Comment

So the winds of change are blowing and not only at the O2 where the Scorpions played the weekend before last. The era of Bank of England policy moves to push asset price higher is over at least for now although of course the stock as opposed to the flow remains. If it stays like that we could see house prices for once grow at a similar rate to rents and wages but I doubt it because the Bank of England is a serial offender on this front.

And when the electricity
Starts to flow
The fuse that’s on my sanity
Got to blow
System addict
I never can get enough
System addict
Never can give it up ( Five Star and I mean the pop combo not Beppe Grillo)
In the shorter-term will Mark Carney fire things up again or spend his last year here thinking about his legacy and some Queen?
Because I’m easy come, easy go
A little high, little low
Anyway the wind blows, doesn’t really matter to me, to me