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

Unsecured credit and mortgage lending market will be the winners after the Bank of England move

Today has arrived with an event we have been expecting but the timing was a few days early. Those walking past the Bank of England building in Threadneedle Street early this morning may have got a warning from the opening of Stingray being played on the wi-fi stream.

Stand by for action!

Anything can happen in the next 30 minutes

Before the equity and Gilt markets opened it announced this.

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. …..The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.

So we see that yesterday morning’s equity market falls put the Bank of England into a state of panic. We also see why the UK Pound £ was weak on the foreign exchanges late yesterday as the news seems to have leaked giving some an early wire. The “improvement” announced by Governor Carney of voting the night before should be scrapped. But as we look at the statement the “help to” suggests a lack of conviction and was followed by this.

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 5% 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). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Okay the first sentence covers a lot of ground. Firstly it implicitly agrees with our theme that banks struggle to reduce interest-rates for ordinary depositors as we approach 0%, we have seen this in places with negative interest-rates. That also means that there is an opportunity to give the banks known under the code phrase “The Precious! The Precious!” at the Bank of England yet another subsidy estimated at the order of £100 billion.

Term Funding Scheme

We have had one of these before as it was initially introduced the last time the Bank of England panicked back in August 2016. It too like its predecessor the Funding for Lending Scheme was badged as being for small and medium-sized businesses but the change of name to the acronym TFSME gives us the clearest clue as to its success. after all successes like Coca-Cola keep the same name whereas leaky nuclear reprocessing plants like Windscale get called Sellafield.

So let me go through the scheme firstly with the Bank of England rhetoric and secondly with what happened last time.

help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;

Mortgage rates fell to record lows providing yet another boost to house prices, building companies and estate agents.

provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;

Unsecured lending went through the roof going on a surge that has continued as can you think of anything else in the economy growing at 6% per annum? You do not need to take my word for it as the Bank of England cake trolley will not be going near whoever wrote this in the latest Money and Credit report.

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.

Let me now give you the numbers for business borrowing. Now the FLS and the first TFS are now flowing anymore but the numbers are in fact better than hat we sometimes saw when they were.

Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

Oh and in line with the dictum that old soldiers never die they just fade away if you look at the Bank of England balance sheet the Term Funding Scheme still amounts to £107 billion.

Numbers bingo!

We can see this from two perspectives as a rather furious soon to be Governor of the Bank of England Andrew Bailey was given this to announce.

The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Once I had stopped laughing at the ridiculousness of this number I had two main thoughts. Firstly I guess he had to announce something as he had been robbed of rewarding the government with an interest-rate cut later this month. But next remember how we keep being told how we have more secure and indeed “resilient” banks? That seems to have morphed into this.

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020.

So yet another disaster for Forward Guidance! It actively misleads…

Comment

After all the Forward Guidance from Bank of England Governor Mark Carney about higher interest-rates he is going to leave them lower ( 0.25%) than when he started ( 0.5%). That about sums up his term in office as those like the Financial Times who called him a “rock star” Governor hope we have shirt memories. Also I have had many debates on social media with supporters of the claims that the Bank of England is politically independent. After an interest-rate cut to record lows on UK Budget Day I suspect they will be very quiet today. After all even Yes Prime Minister did not go quite that far! Indeed the Governor confirmed it in his press conference.

“We have coordinated our moves with the Chancellor in the Budget”

Actually there was also a Dr.Who style vibe going on as we had two Governors at one press conference.

More fundamentally there is the issue that interest-rate cuts at these levels may even make things worse. I am afraid our central planners have little nous and imagination and go for grand public gestures rather than real action. After all if you are short on staff because they are quarantined due to the Corona Virus what use is 0.5% off your borrowing costs? The latter of course assumes the banks pass it on.

As to ammunition left well the present Governor has established the lower bound for them at 0.1% ( hoping we will forget he previously claimed it was 0.5% before cutting below it). Will that survive him? It is hard to say because the real issue here is not you or I ot even business it is “The Precious” who they fear cannot take lower rates. That is the real reason for all the Term Funding Schemes and the like. However Monday did bring a curiosity as the Bank of England bought a Gilt with a yield of -0.025% so maybe it is considering plunging below zero.

Meanwhile there was something else curious today and the PR office of the Bank of England in an unusual turn may be grateful to me for pointing it out, But this was the sort of thing that used to make it cut interest-rates.

Gross domestic product (GDP) showed no growth in January 2020……The economy continued to show no growth overall in the latest three months.

No-one but the most credulous ( Professors of economics and those hoping to or previously having worked at the Bank of England) will believe that was the cause but it is a curious turn of events.

Meanwhile let us look at the term of Mark Carney via some music. Remember when he mentioned Jake Bugg? Well he would hope we would think of today’s move as this.

But that’s what happens
When it’s you who’s standing in the path of a lightning bolt

Whereas most will be humming The Smiths.

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?

What will happen to house prices now?

I thought that I would end this week with a topic that we can look at from many angles. For example the first question asked by the bodies that have dominated this week, central banks, is what will this do to house prices? Well in ordinary times this weeks actions would have quite an impact and I am including in this expectations of future action by the Bank of England and European Central Bank (ECB). For newer readers this is because bond yields and their consequent impact on mortgage rates move these days ahead of policy action and sometimes well ahead. Of course, maybe one day central banks will fail to ease but such beliefs rely on ignoring the history of the credit crunch so far where such events were described rather aptly by Muse with supermassive black hole and monetary tightening was described by Oasis with Definitely Maybe,or perhaps better still by Rod Stewart with I Was Only Joking.

Bond Yields

The world has moved on even since I looked at this yesterday. Perhaps even faster than I suggested it might! Well played to any reader either long bonds or long a bond fund as you have had an excellent 2020. Sadly those on the other side of the balance sheet looking for an annuity are in the reverse situation. Not many places will put it like this but the US Federal Reserve has completely lost control of events this week and has learnt nothing from the mistakes of the Bank of Japan and ECB.

What I mean by this is that the US ten-year yield is now 0.78%. It was only this week that they went below 1% for the first time ever and last week we were looking at it hitting new lows like 1.3%. It started the year at 1.9%. This has been added to by the US Long Bond which has soared overnight reducing the thirty-year yield to 1.36% or 0.21% lower. What this means is that the already much lower US mortgage rates are going much lower still and I would quote some but I am afraid they simply cannot keep up with the bond market surge. Although I do note that Mortgage Daily News is wondering if things will be juiced even more?!

One of them suggested mortgage rates have more room to move lower if the Fed decides to start reinvesting its first $20bln a month of MBS proceeds again (which it currently allows to “roll off” the balance sheet). ( MBS = Mortgage Backed Securities )

As I am typing this events are getting even more extraordinary so let me hand you over to Bloomberg.

U.S. 10-year Treasury yield drops below 0.7%

I have experienced these sort of moves with bond markets falling but cannot recall them ever rallying like this so it is a once in a lifetime move.

You may ask yourself
What is that beautiful house?
You may ask yourself
Where does that highway go to?
And you may ask yourself
Am I right? Am I wrong?
And you may say yourself
“My God! What have I done?” ( Talking Heads )

So I now expect another sharp move lower in US mortgage rates and I expect this to be followed by much of the world. For example in my home country the UK mortgages are mostly fixed-rate these days ( in fact over 90%) so the five-year Gilt yield gives us a marker on what is likely to happen next. It has fallen to 0.14% this morning and so UK mortgages will be seeing more of this from Mortgage Strategy.

Vida Homeloans has announced a series of rate cuts to its residential and buy-to-let mortgage ranges……

Still in the residential range, Vida’s 75 per cent LTV five-year fix has gone down from 5.39 per cent to 4.99 per cent, and its 65 per cent LTV five-year fix from 5.49 per cent to 5.04 per cent.

In the BTL range, the 75 per cent LTV five-year fix has been cut from 4.64 per cent to 4.04 per cent.

I have picked them out because they are specialist lenders for non standard credit. You know the sort of thing we were promised would never happen again. Also we read about turning Japanese but we seem to be turning Italian as payment holidays appear.

Lenders are “ready and able” to offer help to borrowers affected by the Coronavirus outbreak, UK Finance has pledged.

The trade body says this may come in the form of repayment relief to customers whose earnings have been hit or costs increased as a result of contracting the virus or  because of the measures imposed to stop it spreading.

It comes after a number of lenders including TSB, Natwest and Saffron Building Society offered payment holidays to borrowers who had been severely affected by recent flooding.

So we can see that this particular tap is as wide open as it has ever been and as we look around the world we can expect similar moves in many places. In terms of exceptions there is one maybe because Germany is returning to previous bond yield lows ( -0.74% for the benchmark ten-year) and via its policy of yield curve control the Bank of Japan is stopping much of this happening. The latter is another in quite a long list of events from the lost decade era in Japan and I am pointing it out for three reasons.The first is that it is raising rather than reducing bond yields as intended. The second is that therefore we will not see a housing market boost. The third is that I am alone in pointing such things out as the “think tanks” continue to laud yield curve control. After all copying Japan has worked so well hasn’t it?

Mortgage Lending

We can also expect a boost from here. There are plenty of rumours of credit easing especially from the ECB as frankly it has few other options. I would expect much trumpeting of this going to smaller businesses but by some unexplained and unexpected event ( except by some financial terrorist writers) it will go straight into the mortgage market. My home country had an example of this with the Funding for Lending Scheme where the counterfactual needed to be applied to business lending bit was not required for mortgage lending. Japan also had a scheme for smaller businesses where large companies immediately set up subsidiaries and claimed.

Comment

So far I have given these for those expecting a house price rally.

Reasons to be cheerful, part three
1, 2, 3 ( Ian Dury)

For newer readers this is not something I welcome as it is inflation for first-time buyers.

Now let me look at the other side of the coin and there are two main factors. The first is what John Maynard Keynes called “animal spirits” or the film Return to the Forbidden Planet called “monsters of the id”. With worries about jobs and quarantine will people be willing to buy? That may lead to a lagged effect as people refinance now and buy at a later date.

The next is mortgage supply. Whilst the official taps are opening and they are building new pipes as I type there will be some banks and financial institutions that will be under pressure here and thus will not be able to lend. Some we can figure out but other are unpredictable and let me give you a symbol of a big stress factor right now, Yesterday’s 14 day Repo saw around US $70 billion of demand and only US $20 billion was supplied. So dollars are in short supply somewhere and frankly the US Federal Reserve policy of reducing Repo sizes looks pretty stupid.

 

 

 

Is this the beginning of the end for yield?

This week has seen some extraordinary events and it is time to take stock. The truth is that something I have both feared and expected is on motion again. It has come with a familiar refrain that it cant happen here until it does! On this road to nowhere the Corona Virus pandemic is in fact just another brick in the wall. It concerns us now and let me express my sympathy for those affected and afflicted but the world economic system was so rigid after all the central banking intervention that something was always going to turn up.

The point is that each so-called Black Swan event has the same consequence and let me give you the main events this week so far.

 the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent.

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)

This was followed yesterday afternoon by this.

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to 1 ¼ percent. The Bank Rate is correspondingly 1 ½ percent and the deposit rate is 1 percent.

Also there have been the central banks of Malaysia and Moldova. But that is not it as we now expect cuts from the Bank of England and ECB amongst others. Actually before the next Bank of England meeting the US Federal Reserve will probably have cut again as once you are a slave to equity markets that is what you are.

But this is merely a staging post in today’s story because when this party started central banks learnt that their Ivory Tower assumptions were wrong. They assumed that other interest-rates such as mortgage-rates and bond yields would slavishly follow, but they had minds of their own. So we got QE bond buying and then credit easing to deal with that.

Then as the credit crunch developed we saw bond yields fall substantially after various wrong turns. For example the Euro area crisis saw bond yields in double-digits before we entered the “whatever it take” era begun by Mario Draghi.

What about now?

Let me now jump forwards in time Dr. Who style and bring this up to date.

Ten-year US Treasury yields—the benchmark for global financing—got a shove below 1% after the Federal Reserve made an emergency cut to its target rate yesterday. It’s the lowest rate ever, according to records going back to 1871. ( @Ray_O_Johnson  )

It was only a week ago it seemed remarkable it had gone through 1.3% and it opened the year at more like 1.9%. So we learnt that as we expected the US was not as different as so many “experts” have tried to claim as when the going got tough its central bank unveiled the playbook which has been so unsuccessful elsewhere.

Canada is in a similar position with a ten-year yield of 1.02% although there are two subplots. It has been here before in the credit crunch era and it has seen some wild swings since its official interest-rate move with the yield going as low as 0.88%. Australia is at 0.77% some one and half percent lower than a year ago.

The economic consequences

Let me illustrate for the United States via CNBC.

The average contract interest rate for 30-year fixed-rate mortgages fell to 3.57% from 3.73% last week. That drop caused a 26% surge in weekly refinance applications, the Mortgage Bankers Association said. Compared with one year ago, refinance volume was nearly 224% higher.

And the beat goes on.

Detroit-based Quicken Loans saw record-setting volume on Monday and Tuesday, as rates fell to a record low. CEO Jay Farner said the new ways of processing loans are making it easier to handle even tremendous volume spikes.

Even the numbers above are behind events as Mortgage News Daily is reporting that the 30-year fixed rate mortgage is now at 3.16% and the 15-year at 2.88%. Actually the trend is clear but it matters who you call.

Some are offering conventional 30yr fixed rates that are as high as 3.5%–even for top tier qualifications.  On the other side of the spectrum, more than a few lenders are quoting 2.875% for the same scenarios.  The average lender is somewhere in between, but that average is nonetheless an all-time low.

So here we have an immediate consequence which central bankers seem to forget in their press releases. This is that the housing market will receive yet another heroin injection. This will be true in Canada and Australia as well and in Australia’s case will add to last year’s 3 interest-rate cuts.

Economics 101 argues that lower costs for business borrowing increase investment. However when the US Federal Reserve looked at the numbers it was much less clear.  I doubt it will stop people claiming that though.

Fiscal Policy

This has just got a lot cheaper pretty much everywhere. This does not get a lot of attention because it is a slow burner as for example the UK issues a new Gilt this week which will be at a yield at least 4% lower than before, But it will be a while before the next one and so on. On the other side of the coin yields have been falling throughout the credit crunch era as a trend so governments have been able to spend more for the same situation. This is another reason why this does not get much attention as governments of whatever hue want to take the credit for this.

On this road you can see why governments are so keen on “independent” central banks in a you scratch my back and I will scratch yours sort of way.

Comment

There are various lessons to be had here. The most basic is that interest-rates and yields continue to sing along with Alicia Keys.

I keep on fallin’
In and out of love
With you
Sometimes I love ya
Sometimes you make me blue
Sometimes I feel good
At times I feel used
Lovin’ you darlin’
Makes me so confused.

We get occassional rises but the trend is down which means that there has been a change because QE only started because official interest-rates got disconnected to bond yields and mortgage rates. Now we see the link is back. But I think that is just an illusion because some QE is still happening in Japan and the Euro area and more is expected elsewhere. Remember responses to QE now take place before it happens. Other interest-rates sometimes go their own not very merry way as the rise to 40% for unsecured overdrafts in the UK shows

This is really bad news for supporters of the UK Office for Budget Responsibility and the US Congressional Budget Office as their numbers will need large revisions yet again! The mainstream media and “experts” will of course have a case of collective amnesia about this next week for the UK Budget. But the point is seemingly too subtle for them that in the dynamic world in which we now exist such steady-state analysis is in fact misleading.

I think that this is counterproductive for three main reasons.

  1. If pumping up the housing market worked we would have been saved long ago.
  2. The evidence from countries with negative interest-rates and yields is that contrary to economic theory people look to save more which depresses the economy.
  3. Similarly if we look at Germany,Sweden and Switzerland countries with negative yields often look to reduce their debt rather than spend more.

Thus we find that the magic bullet has no magic at all and instead causes pain.

The Investing Channel

 

 

 

UK housing market policy is becoming an even bigger mess

Today has opened with a flurry of news on the UK housing market. So let us start with the latest from the Halifax Building Society.

House prices kicked off the year with a modest monthly increase, rising by 0.4% in January following the
stronger gains of 1.8% and 1.2% seen in December and November respectively. As a result, annual growth
remained relatively stable at 4.1%, up just a fraction from the end of 2019.

If we stay with the annual growth number we see that it has been falling last year as the 2.8% of March was replaced with the 0.9% of October. However it then picked up driven by the latest three months.

In the latest quarter (November to January) house prices were 2.3% higher than in the preceding
three months (August to October)

Those of you who follow this situation will see the irony here as the Halifax made some methodological improvements to its series because it was producing an annual number of 4-5% when the other house price indicators were much lower. Now it finds it is back at a similar number! However whilst it is again the highest some of the others have shown a similar pattern this time around.

A concerning part from my point of view is that such house price growth is above wage growth and we are losing ground at a rate of around 1% per annum here, after a period of gains, which now seem all too short.

The Halifax has a go at being upbeat.

A number of important market indicators continue to show signs of improvement. We have seen a pick-up
in transactions with more buyer and seller activity consistent with a reduction in uncertainty in the UK
economy. However, it’s too early to say if a corner has been turned.

Although they worry that it may just be a function of a Boris or if you prefer Brexit Bounce.

The recent positive figures may actually represent activity that would ordinarily have been expected to take place last year, but was delayed by economic uncertainty. So while housing market activity has undoubtedly increased over recent months, the extent to which this persists will be driven by housing policy, the wider political environment
and trends in the economy.

I see they perhaps continue to hold out hope for an interest-rate cut from the Bank of England.

The environment for mortgage affordability should
stay largely favourable.

Although there may be some self praise here because if we go to Moneyfacts we see this.

 Halifax also continued to top the five year fixed chart this week, offering a rate of 1.46% (3.2% APRC) fixed until 31 May 2025, reverting to 4.24% variable thereafter.

You need 40% equity for this and there is a fee of £995 so it particularly benefits larger mortgages. The best 5-year fix for first time buyers ( 5% equity ) is 2.75% from Barclays and has no fee.

There is an interesting swerve at the end of the Halifax piece.

However with the growth in rental costs accelerating, many first-time buyers will continue to face a significant challenge in raising necessary deposits.

Somebody needs to tell the UK Office for National Statistics who have picked up nothing of the sort.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2019, unchanged since November 2019.

I have written before about concerns that it is of the order of 1% per annum too low and thus is another reason to ignore the lead indicator called CPIH. That has not deterred the Chair of the UK Statistics Authority David Norgrove who wants to replace house prices in the RPI with imputed rents in spite of this from the Economic Affairs Committee of the House of Lords.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Still if he gets this through I guess he will be in the House of Lords himself!

First Homes

According to the Financial Times the government has a new plan.

Developers would have to fund the construction of more discounted homes for first-time buyers at the expense of other forms of new-build social housing under plans floated by the government on Friday. Robert Jenrick, the housing secretary, will announce a consultation on a new programme called “First Homes” today under which first-time buyers will be able to purchase new-build properties at a discount of £100,000 on average.  Military veterans and key workers such as nurses, police officers and firefighters will get priority access to the scheme.

Huey Lewis and the News sang about something like this.

I want a new drug, one that won’t spill
One that don’t cost too much
Or come in a pill
I want a new drug, one that won’t go away
One that won’t keep me up all night
One that won’t make me sleep all day
One that won’t make me nervous
Wonderin’ what to do

It is hard not to laugh at the next bit, after all what could go wrong?

The proposed scheme would lock the discount in for perpetuity. The government said this would require the owner to get a valuation from a surveyor and sell the property at 70 per cent of that figure to another first-time buyer.

I can just see some surveyors being more popular than others. Indeed other parts of this seem rather magical.

Mr Jenrick said that the initiative would mean people could buy new homes with a lower deposit and mortgage without having to move to cheaper areas.

It is a bit like the adverts for the travel company Trivago where someone has paid £150 for a hotel room whereas the rather delightful woman from Trivago has paid £100. Except in the advert they show the original customer as being unhappy with this. I can see the equivalent happening here. Other travel companies are available.

“I know that many who are seeking to buy their own home in their local areas have been forced out due to rising prices,” he said. “A proportion of new homes will be made available at a 30 per cent market discount rate, turning the dial on the dream of home ownership.”

This area is, however, ridden with what we might call slips between cut and lip.

The National Audit Office report ‘Investigation into Starter Homes’ released in November 2019, found that — despite the Conservatives’ promise to build 200,000 starter homes for first-time buyers in 2015 — not a single starter home had yet been built.

Comment

We see a situation a bit like an old fashioned railway signal box where the signaller keeps pulling another lever. We started with interest-rate cuts, then QE, then the Funding for Lending Scheme, Help To Buy,Term Funding Scheme and now this. They have reduced the price then raised the quantity of money around and these days seem to have moved onto in effect giving out “free money”. Will it be too long before some are gifted houses?

In some ways this reply to the FT article sums it up.

How does transferring wealth to a random set of a few individuals solve the housing crisis? ( MarkCats)

Also that each move makes the position even worse overall.

The average Help to Buy first-time buyer price has risen 50% since 2013 (outside of London).   As usual Government introduces a policy, and then introduces another to counter the effects of the former.

But the plan to remove house prices from the one UK inflation measure that includes them is a clear hint at the long-term establishment plan. Inflate them and then claim it as wealth effects because with wage growth struggling rents especially using the flawed official measure will likely miss it.

 

Slow house price growth and a fall in credit card borrowing will worry the Bank of England

2020 has only just begun to borrow a phrase from The Carpenters but already the pace has picked up. Should the oil price remain above US $68 for a barrel of Brent Crude there will be consequences and impacts. But also we can look back on the Bank of England’s priority indicator in 2019 and on the subject here is the Nationwide.

Annual UK house price growth edged up as 2019 drew to a
close, with prices 1.4% higher than December 2018, the first
time it been above 1% for 12 months.

I have put in the format that would be most sensible for whoever is presenting the Bank of England Governor’s morning meeting. That is because pointing out the rise was only 0.1% in December does not seem as good and noting that unadjusted average prices fell by £452 may rewarded with an office that neither the wifi nor the cake trolley reach.

Continuing with that theme perhaps looking north of the border will help.

Scotland was the strongest performing home nation in
2019, with prices up 2.8% over the year.

Might be best to avoid this though.

London ended the year as the weakest performing region,
with an annual price decline of 1.8%.

If you are forced into looking at London then the Nationwide has done some PR spinning of the numbers.

While this marks the tenth quarter in row that prices have fallen in the capital, they are still only around 5% below the all-time highs recorded in Q1 2017 and c50% above their 2007 levels (UK prices are only around 17% higher than their 2007 peak).

Best to avoid the fact that London is usually a leader of the pack for the rest of the country.

Affordability

Should our poor graduate find themselves in this area then perhaps a new career might be advisable as even the Nationwide cannot avoid this.

“Even in the North and Scotland, where property appears
most affordable, it would still take someone earning the
average wage and saving 15% of their take home pay each
month more than five years to save a 20% deposit. In Wales
and Northern Ireland, it would take prospective buyers nearly seven years, and almost eight years for people living in the West Midlands.
“Reflecting the trend in overall house prices, the deposit
challenge is most daunting in the South of England, where it would take an average earner almost a decade to amass a 20% deposit. Again, the pressures are most acute in the
capital, where someone earning an average income would
need around 15 years to save a 20% deposit on the typical
London property (this is even longer than was the case
before the financial crisis, when it would have taken around
ten and a half years).”

So houses are very expensive and in many cases effectively unaffordable which contradicts the official measures of inflation which somehow ( somehow of course means deliberately) miss this out. So officially you are richer it is just unfortunate that you cannot afford housing….

Consumer Credit

Our unfortunate trainee cannot catch a break today as we note this.

The net flow of consumer credit was £0.6 billion in November, the smallest flow since November 2013.

Within it was something to send a chill down the spine of a modern central banker. The emphasis is mine and it will also have stood out in capitals to the Bank of England.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.6 billion in November. This is the weakest since November 2013, and below the £1.1 billion average seen since July 2018. Within this, there was a net repayment of credit cards for the first time since July 2013, of £0.1 billion. Net borrowing for other loans and advances also weakened, to £0.7 billion.

Actually the stock of credit card borrowing fell by a larger amount from £72.4 billion to £72.1 billion. However whilst the drop stands out a little care is needed as the October flow was more than has become usual ( +£400 million) so the drop may be a bit of an aberration.

We learn more from the next bit.

These weak flows mean the annual growth rate of consumer credit fell to 5.7% in November, compared to 6.1% in October. It has now fallen 3.7 percentage points since July 2018, when it was 9.4%.

Whilst that may be true ( we recently had some large upwards revisions which reduced confidence in the accuracy of the data series) it dodges some important points. For example 5.7% is still much faster than anything else in the economy and because of the previous high rate of growth had to slow to some extent due to the size of the amount of consumer credit now ( £225.3 billion in case you were wondering). Also the other loans and advances section continues to grow at an annual rate of 6.6% which has not only been stable but seems to be resisting the impact of a weaker car market as car loans are a component of it.

Mortgage Lending

This morning’s release was a case of steady as she goes.

Lending in the mortgage market continued to be steady in November, and in line with levels seen over the past three years. Net mortgage borrowing fell marginally to £4.1 billion, and mortgage approvals for house purchase remained unchanged at 65,000.

The catch is that the push which began with the interest-rate cuts and QE bond buying after the credit crunch and was turbo-charged by the Funding for Lending Scheme in the summer of 2012 is losing its impact on house prices.

For those of you wondering what the typical mortgage rate now is another release today gave us a pointer.

Effective rates on new secured loans to individuals decreased 9bps to 1.87%.

For more general lending they seem a little reticent below so let me help out by saying it is 6.88%.

Effective rates on outstanding other unsecured loans to individuals decreased 4bps

That is another world from a Bank Rate of 0.75%. Meanwhile on that theme I would like to point out that the quoted interest-rate for credit cards is 20.3%. I have followed it throughout the credit crunch era and it is up by 2.5%. Yes I do mean up so relatively it has risen more as official interest-rates declined. This is something that has received a bit of an airing in the United States and some attention but not so here.

Comment

Let me open with two developments in the credit crunch era. The first is that even high interest-rates ( 20%) above do not seem to discourage credit card borrowing these days. I will also throw in that numbers from Sweden and Germany suggest that a combination of zero interest-rates for many and negative ones for some seem to encourage saving. That is a poke in not one but both eyes for the Ivory Towers.

Moving to our trainee at the Bank of England then I suggest as a short-term measure as the Governor is only around until March suggesting a man of international distinction is required to deal with issues like this.

Meteorologists say a climate system in the Indian Ocean, known as the dipole, is the main driver behind the extreme heat in Australia.

However, many parts of Australia have been in drought conditions, some for years, which has made it easier for the fires to spread and grow.

Returning to the economy then there was some better news from the broad money figures as November was a stronger month raising the annual rate of M4 growth to 4%. The catch is that it takes a while to impact and so is something for around the middle of 2021.

Me on The Investing Channel

 

 

Where next for UK house prices?

Today has brought a flurry of information on the state of play in the UK housing market as we wait to see how the slow sown in house price growth is developing. We start by noting that according to the official series things may have changed a little.

Average house prices in the UK increased by 1.3% in the year to August 2019, up from 0.8% in July 2019 (Figure 1) but remain below the increases seen this time last year. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

As someone who welcomes the fact that UK wage growth is now well above house price growth it is a shame that house price growth picked up. But we do at least have wages growth around 2% higher than house prices. That will take quite some time to fix the imbalances bit at least they are not still growing.Indeed the place where things are worst on the affordability front is improving faster than that.

he lowest annual growth was in London, where prices fell by 1.4% over the year to August 2019, followed by the South East where prices fell by 0.6% over the year.

This weekend has seen a swing in both directions from the Financial Times. First there is a switch to Paris.

Why London’s bankers cannot resist Paris property

Then er perhaps not.

David Livingstone, the new head of Citigroup in Europe, said the City of London will remain the region’s top financial centre regardless of the outcome of Brexit.

For balance here is the other side of the coin.

House price growth in Wales increased by 4.5% in the year to August 2019, up from 3.8% in July 2019, with the average house price at £168,000.

Rightmove

They have joined the fray this morning via Reuters.

Asking prices for British houses put on sale in October showed the smallest seasonal increase since the financial crisis, as all but the most determined sellers waited for greater certainty over Brexit, industry figures showed on Monday.

Rightmove said that the average asking price for homes sold via its website was 0.6% higher in October than in September, well below the average 1.6% rise seen for the time of year and the smallest increase since October 2008.

Reuters seemed a little less keen on this bit.

Average asking prices in October were 0.2% lower than in October 2018, compared with an annual rise of 0.2% in September.

Views differ on the 2016 referendum but personally I welcome this consequence.

Britain’s housing market has slowed since June 2016’s referendum on leaving the European Union, and official data last week – based on completed sales – showed annual house price growth of 1.3% in the year to August, up from a near seven-year low of 0.8% in July.

LSL Acadata

LSL operate rather a different system to the asking price driven Rightmove and in fact Rightmove’s methodology seems to have taken a further downgrade according to Henry Pryor.

“..average asking price for UK homes sold..” I think it’s for homes listed, it includes the 50% of homes that don’t sell.

LSL however use this.

The LSL/Acadata house price index provides the “average of all prices paid for houses”, including those made
with cash.

As to the detail there is this.

Although average house prices in England and Wales climbed by a marginal £113 in the month of September, this was not a sufficiently large increase to avert a further decline in prices over the last twelve months, with the average annual price over this period falling by some -£1,100, or -0.4%. This was the eighth month in this calendar year in which the annual rate of growth has been negative.

In terms of a trend their accompanying chart shows that UK house price growth was of the order of 9% as 2016 began and has been heading lower ever since. So it was heading lower before the Brexit vote partly because if I recall correctly some tax changes for landlords which inflated things then deflated them.

As to the situation regarding real movements I am afraid that LSL then dig a hole for themselves. You can ( and I often do..) argue that the imputed rent driven CPIH is a woeful measure anyway but surely one should use wage growth here.

if we exclude London and the South East from our national statistics, price growth in England & Wales has remained positive over the last twelve months, albeit at a diminishing rate, such that by the end of September the rate of growth was a flat 0.0%……..It is currently only Wales where house price growth is ahead of CPIH. So we have marginal nominal gains alongside real terms falls, although of course the picture varies by type and area.

They have a go are torturing the numbers in a way that makes me wonder if they want a career at the Bank of England but they end up with all areas seeing real wage gains. Even Wales has some real wage growth relative to house prices.

London

As a Londoner I have to confess I am intrigued by the intra-London swings although the explanation below is a worrying one for the methodology used by LSL.

Unsurprisingly, it is East London where the largest rise in average prices in August for both the month itself and the
previous twelve months has been recorded, with Hackney up by 5.1% and 13.4% respectively. The reason for this gain
in prices is the launch of a new-build apartment block, known as the Atlas Building, comprising some 302 flats at 145 City Road, Hackney, close to Old Street Station. 67 of these apartments have been recorded by the Land Registry as having been sold in June and July to date, with prices ranging from £500k to £1.7 million. Given that this project
involves 302 new-build flats, we can anticipate that Hackney will continue to be at the top of the price-growth tables for several more months to come.

I would have hoped to have some quality measure or at least some form of allowing for the fact the new build sales are different to sales of existing houses or flats. Those selling an existing property in Hackney seem set to get a shock if they base their calculations on the LSL series.

Meanwhile on the other side of the coin.

At the other end of the scale, the borough with the largest fall in average values over the last twelve months is the
City of London, at -28.6%, but because few transactions take place there, its price movements are always quite
volatile, especially when expressed in percentage terms.

Also whilst we are looking at methodology we see that the average price overall has just dipped below £300k as opposed to the £235k of the official series.

Comment

It is easy to forget that there is much in the UK economy that is still house price growth friendly. For example mortgage rates remain very low driven by a 0.75% Bank Rate and a 0.53% five-year UK Gilt yield helping to keep fixed-rate mortgages at a low level. It seems the TSB wanted to join the party as of Friday.

TSB has made a series of changes to its mortgage range, featuring cuts of up to 1.30 per cent.

The biggest cuts can be found in the lender’s remortgage 10-year fix suite, with the 85 – 90 per cent LTV rate being chopped from 4.29 per cent to 2.99 per cent. This also asks for no fees and comes with free legals. ( Mortgage Strategy )

To this we can add the positive situation regarding real wages we noted above.

Foreign buyers may have been dipping into the market to take advantage of the lower value of the UK Pound. However things have changed there recently as 141 Yen and 1.28 versus the Swiss Franc replace the levels I noted on the 27th of August.

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.

Help To Buy shared ownership is still in play and has helped one of my friends and conveyancing delays permitting is about to help another.

The problem for house price bulls is that the measures above ( with the exception of real wage growth) were what was required to get UK house prices up to these levels, not to drive them higher. Real wage growth will take another year or two to have a significant impact. So unless we see a new move by the Bank of England or the UK government we seem set for real falls in house prices ( versus wages) and maybe nominal ones too.

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