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.
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%.
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.
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.
I, I, I, I’m fallin’
I, I, I, I’m fallin’