Is the Bank of England’s support for the housing market firing blanks?

Back on January 3rd I discussed the UK housing market and the fact that the Bank of England was stating that conditions were ripe for an improvement. From its survey of credit conditions and the emphasis is mine.

The availability of secured credit to households was reported to have increased significantly in the three months to mid-December 2012,driven in part by the Funding for Lending Scheme. A further significant increase was expected over the next three months.

As I pointed out at the time there is a clear moral hazard in the Bank of England slapping itself on the back here! However it has persisted with this theme as later in the month its Agents Report told us this.

There had been a number of recent reports of mortgage supply improving and interest rates falling, with competition increasing between banks and building societies.

However not everything was rosy even in the Bank of England’s mortgage garden as a familiar post credit crunch theme appeared.

But increasing competitiveness had been focused on the lower loan to value (LTV) part of the market and those buyers without a significant deposit still struggled to purchase.

So the situation is one of haves and have-nots with some getting competitive deals and others not or if you like banks are taking the FLS money and cherry-picking who they pass it on to.

Are mortgage rates actually falling?

There is plenty of media activity telling us this and if we look there is some evidence to back it up. If we take a prime borrower (25% or more deposit) they could get a 2 year fixed rate averaging 3.1% in January. If one compares this to last summer where the rate peaked at 3.74% then there has been a genuine improvement. However if we make a nuisance of ourselves by looking further back we see that the lowest rates were offered in the summer/autumn of 2011 and that 2.92% was the calculation in that September. That has us shuffling a little uncomfortably in our seats as we know since then that savings rates have been cut and that our banks have the carrot of very cheap money in front of them but somehow we have not made the gains we might have expected.

If we look at the variable rates offered we see a similar pattern to the above.

Ironically considering its own statements above, some clear cut gains can be found for less prime borrowers. The 2 year fixed rate for those with a 10% deposit did hit a series low of 4.73% in January. Indeed virtually all the improvement came in January as this series dropped from 5.33% then making it 0.8% lower than a year before.

Meanwhile some remain unloved. The standard variable rate which has become something of a growing section of the market due to tougher credit criteria has continued the rise I have documented before. It rose to 4.38% in January and if we look at the database we see that it was last at such a level in February 2009. Yes when the last of the base rate cuts were being fed into that market! The low for the series was 3.82% in April 2009 since when interest rates have risen. You would think that the banks thought these people are a captive market or something and ripe for a bit of profiteering. Surely not! However you look at it those on an SVR may well be wondering what is happening to them as cheaper borrowing rates pass them by?

What is happening in the housing market?

So as we move forwards we do so in an Oasis style as we see that mortgage rate falls have a Definitely Maybe tinge to them. The media tells us they have definitely but for some they rose first and for others they have in fact continued to rise.


Today’s report for February has a somewhat nuanced title to it.

Sprightly start to 2013 but ‘old hands’ support the market

Indeed they chose not to hype the 1.1% annual rise and 2.8% month on month rise and carry on with a similar nuanced theme.

Sprightly start to 2013 with new seller average asking price at £235,741, the highest in February since 2008

So we note that we have not quite returned to the levels of five years ago as we are  shy of the £237,856 then.

We can look at this in other ways as if we use the official consumer inflation level in the UK we see that it has risen by 18% over this period. So using it as an indicator of real movements then we have seen quite a decline.

However in the complex credit crunch era this is not quite the full picture. We have inflation at varying rates across the economy and indeed some price falls in an inflationary environment. It was only a week ago I was referring to the fact that real wages in the UK have fallen by 7% over this five year time span. So we have slightly cheaper prices which are definitely cheaper in real or inflation adjusted terms but affordability versus real wages will have improved much less. Indeed  we see that the rising cost of essential  items may mean that in the typical budget there may be less room for mortgage costs leaving the affordability picture very unclear.

What else do we learn?

There is a changing property market.

Rightmove has recorded its busiest ever month in January

But we know that the online world is growing in many directions so this filters again the optimistic sheen. Also we spot a familiar theme present.

though it must be noted that the national average can mask the divide in the market between those with access to equity and finance and those without.

What has the Funding for Lending Scheme actually done?

If we look at the report then the Bank of England spin machine is in danger of being straight driven for six.

While the scheme was intended to make loans more readily available to those struggling to raise finance in the business and housing sectors, it would appear that many risk-averse lenders are subsidising the better-off who could fund a move anyway

So they think it is not achieving its stated objective and even worse there is a shark in the water which it is feeding.

It appears this cheap money frenzy is mostly prompting more transactions among the equity blessed, some of whom will be purchasing buy-to-let investments.

Ah! So a boom that is unwelcome?

As ever some context is required as we do need some buy to let lending to help provide rental properties for those who require/need them. But we also know that the past boom was fed by people “taking a punt” and hoping to make capital gains in a tax-friendly environment. Accordingly the actual renting was secondary. We also know that too much activity in the UK went on in this area as opposed to more productive sectors.

A revealing nugget

This part was hardly bullish for the housing market.

In every region bar London the most common reason given by prospective sellers for moving was their desire to ‘downsize’.

Speaking of London

The central London property bubble seems to be inflating as fast as ever. We  get Greater London prices which will have a dampening effect as it is a wider area but even so they are up 8.4% on a year ago and 1.1% on a monthly basis. However we also get a glimpse into the heart of the beast as prices in Kensington and Chelsea rose by 15.5% to £2.18 million over the past year.

Care is needed

This Rightmove series like any other has both strengths and weaknesses. The strengths are the amount of data,its wide coverage and the promptness of it and the weakness is we get asking prices rather than sale prices.


So we see that if we unpick the spin that there are quite a few surprises to be found in the UK housing and mortgage markets. There is no surprise that via its FLS policy the Bank of England is supporting it and frankly these days maybe even less surprise that the main beneficiary looks  like being the banks rather than the housing market.

Also when we look for some perspective we see that rather than mortgage rates falling to new lows they are in fact falling but in many cases they were raised first! So yes there has been an improvement in many cases since last summer but if we go back to the preceding summer then there has not.

On that basis it may not be a surprise that Rightmove is very guarded in its comments today on its latest report. The boost provided by the Bank of England seems to be leaking away in more than a few areas and if we look at the wider economy we have to wonder if it has punished savers and rather than helping borrowers has in fact helped the banks one more time.

This entry was posted in Banking Reform, Banks, General Economics, House Prices, Inflation, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • Anonymous

    If you wished to set off more inflationary expectations then that is the way to do it!

    Yes, if it walks like a duck…

  • Justathought

    Hi Shaun,
    Does it mean that hyperinflation might be just around the corner?? if it’s the case when do you expect the full blow?? before of after 2015??

  • ernie

    I have (probably like several others) been wrong in estimating the current levels of stocks and bonds as the central banks/govts have managed to keep things going longer than I thought they could. However, it has always been my view that talk of more or less permanent zirp is reckless. Those of my age witnessed central planning throughout the communist world and saw how it always comes to grief. The current economic policies of the BofE are more or less the same – a kind of central planning of money. That such a thing could succeed is in my opinion even more ludicrous an idea than a 5-year economic plan was in the old USSR. The problem I see is that once the tightly-held interest band snaps, it could rebound back very very quickly. If events do go in this direction, the faith people seem to have is that the central bank will just print more. I wonder if the failure of this policy( which would then be obvious) might change the political landscape on that?

  • Rods

    Hi Shaun,

    An excellent piece of analysis and good food for thought.

    I see Lord King is now saying that the BOE has reached the limits on what it can do to stimulate the economy and it is now over to the Chancellor to do something.

    The rise in gilt interest rates and a few comments I seen from bond companies in their lack of interest in UK bonds could well be the start of the drift by the UK into a full blown Sterling crisis. When UK bond prices rise significantly, which I think will start happening in the second half of 2013, unless their is a significant improvement in growth in the next few months, or the BOE / Chancellor have some rabbits in their UK economy hats, which I can’t see, then your scenario of more QE to fund the UK’s massive deficit and bond interest rates still rising does not bode well for the UK economy.

    Is part of the reduction in food being bought due to people wasting less food? I know I’m considerably more careful than I used to be and very little goes to waste. No doubt the big four supermarkets are / will be increasing margins to offset any falls in volumes. Expensive fuel and road tax bands has certainly has a considerable effect on the amount of fuel used by UK motorists with it 1.1bn gallons lower in the first 9 months of 2012 compared to the same period in 2008! About 7% is due to people giving up driving and another 40%+ due to motorists planning journeys more carefully.

    We have consistently had above average inflationary rises in the absolute necessities of life: Food, fuel, rent, transport and water, which is bad for poorer sections in society.

    The 3.5% rise in water bills is a particular disgrace as it shows the regulator at their worst, where the monopoly suppliers make typically between 15 and 25% profits. If it was me I would make the water companies invest in a UK water grid, which would stop water shortages and open the market so any company can obtain a licence to source and supply water including the incumbents. With the incumbents controlling infrastructure, make all water metered and the leak losses would have to be paid for by the infrastructure owner. This would not guarantee cheaper water, but would at least leave the consumer with a fighting chance.

  • forbin

    no no its an Argentinian Racing pidgeon!!!

    yoo toob alert

    remember this is economics!

    and dont forget not to buy any black moon rock from that guy down the pub – you know – the coalman!


  • forbin

    theres also the effect of lower interest rates paid on savings

    just this week I received a letter stating my ISA is dropping from 3.00% to 2.50% , and thats including the bonus rate that expires after 12 months

    1/6 drop – wages dropped due to lack of overtime, plus what you said on fuel and food.

    popcorn is not getting any cheaper!!


  • Anonymous

    An excellent idea to supply water in a competitive market like electric and gas.

  • forbin

    sorry but I find even the gas and the electricity markets disfunctional. and as for all the foreign ownership ( when we can’t own theirs as I beleive is still the case …)

    Well ,we will have to meter everything if we are going to supply 70 odd million or more souls – this is the only source of GDP growth i can see with the current set up

    about Merv the Swerve – can we have a vote on him changing his name to Wayne ? ( oops sorry!! )

  • James

    I think that you will find everything perfect again in 2015 when Labour gets in. A mansion tax to give a 10p tax rate is just the start of the Elysian field coming our way.
    I often wonder when politicians “match” some new tax with a tax cut whether they think that the deficit level is just fine so all they have to do is match the new stuff. Do they realise that the mansion tax, if fully impleemented, would still laeve us in a hole without any tax cuts

  • Anonymous

    Maybe the UK electric & gas regulators are asleep, but any UK electric supplier is much better than CEZ Bulgaria who make “mistakes” more often than not and charge extortionate fees for everything from meter reading to grid usage. EON were miles better.

  • forbin

    ah well theres a word for that kind of speaking

    verbiage verbal garbage !

    when or if he gets in this promise , like Cameroons one on the euro , will all be forgotten

    still wtg for my vote on the pound or Euro as promised by Blair – see what I mean


  • Anonymous

    Hi Shaun,

    A theory proposing central bank omnipotence ? There are plenty of counter examples – Zimbabwe comes to mind. Just because the bond markets have been dormant for over 20 years does not mean they are dead.

  • DaveS

    The deficit isn’t going away, what is it £125bn and rising – this will only increase when the two Eds get the keys to Downing Street.

    If the BoE don’t monetise the deficit then its game over. Gilt yields would spiral upwards helped by inflation and we would be firmly on the path to hard default – perhaps quite quickly. The BoE, our government, the wealthy, Bernanke and rest of world do not want a sovereign/banking default on the scale of the UK – the dominoes would fall around the world.

    I think its just a game being played. The BoE want some fiscal loosening – in particular they want people’s after tax incomes inflated. If this isn’t coming via wage increases then it must come through tax cuts or tax subsidies (tax credits). I think they are just putting a bit of pressure on George. They are slowing QE but will resume when they have to – Gilt yields have to be kept at a level that won’t break the government or the housing market.

    Increasingly I am thinking that we are going to see an expansion of tax credit system when Labour wins power. Essentially the government will subsidise UK companies to employ more & more people on below cost of living wages – their incomes will be made up by the government, paid for by BoE printing.

    I believe in many ways this is happening now. Tax credits (working & child) are distorting employment stats.

    Firstly employers are hiring more people part-time on wages they can’t live on – but tax credits make up the difference i.e. stops them from striking/rioting. The tax payer (haha – I mean the BoE) are subsidising their profits.

    Secondly I believe there is a lot of fake self-employment – people on Job Seekers Allowance are being persuaded to go self employed and instead claim tax credits – they lose maybe £20 a week in benefits, but if they work 4 hours a week then they can make up the difference. Its a risk if they can’t get 4 hours work but the big advantage is they don’t have to sign on and face the bullying tactics increasingly being used at the Job Centre and by the private job finding firms. The trick is they have to lie to HMRC that they are actually working 30 hours a week to get the tax credits – hence number of recorded hours worked is rising and ironically productivity apparently falling. I’ve read that the private job seeking firms are quietly telling people to go self-employed and lie to HMRC otherwise they will be forced to “clean toilets” or lose their JSA. Of course the job seeker firm gets their commission payment when the person enters “self employment”.

    This is what we call a modern economy………….

  • forbin

    indeed DaveS

    haven’t the courts squashed one of the current schemes as “slavery” ?

    If read rightly the woman in question whilst working at Poundland was not allowed to seek a job ( more perminant or real one ) whilst getting Job seekers allowance – what ?? So I think they’ll re-write that and as you say we’ll have more jobs paid for by the tax payer – eventually we will all be working for HMG …..Orwellian dystopia here we come …


  • DaveS

    Yeah the slave labour experience scheme – stack shelves for free or lose your dole.

    I couldn’t understand why employment was rising and also hours worked rising. I realised more people are working part-time and there were more self employed. I couldn’t really understand what all these self-employed people were doing – can’t be that many entrepreneurs,.

    I finally figured out it was mostly fake self-employment – tell HMRC you work 30 hours a week self-employed, claim tax credits and scrape a few hours work a week down the local Tesco (or Poundland) or perhaps a bit of cash-in-hand work. Its not much of a living but works out same as Job Seekers Allowance and you don’t have to go to the job centre and sign-on – apparently they have made this a very unpleasant experience. Really we have just replaced an unemployment benefit with working benefit for fake self-employed work.

    In a way we have millions working for Mervyn as he is paying for it all.

    These politicians are clever people – I really believed employment was growing.

  • Justathought

    Hi Dave S,
    I doubt politicians are clever, the only “advantage” their have is they are more cynical than the plebs (US)… In the good time they allowed themselves with adequate salaries and perks, of course no one would strike or stop the country working in order to bring down their emoluments…well in “hard” time they have to be a bit cautious…that’s all! We are utterly complice of the system…please don’t shoot the messenger…

  • JW

    Hi Shaun
    Excellent blog and accompanying comments today.
    There are no ‘markets’ anymore, their is attempt at central control by all the CBs. QE infinity is the only game in town.

    Will it work? Normally I would say, no chance, because everything sooner or later fails usually as a result of unintended consequencies. However I just have this nagging horrific fear of technology being used to control all ( 99%) of our lives to such an extent that ‘they’ pull it off. I sincerely hope I have been reading to much SciFi.

  • David Lilley

    I think the answer to the paradox of rising employment whilst GDP is flat is quite simply explained by deleveraging.

    In my estimation we leveraged to the tune of three years GDP in the period 1997-2007. We brought forward three years of income and included it in this decade as if it had been earned in this decade. We, personally, corporately and governmentally, took a combined sub equal to three years income.

    We are now all deleverging. One example is more money paid to the mortgager than paid out by the mortgager in new mortgages. Spare money is not being spent at Comet/Jessops/HMV etc where it would contribute to GDP but is used to reduce debt which doesn’t contribute to GDP.

  • nickrl

    Shaun the 6.6B of gilts being redeemed next month were bought at 1.07 so thats a nice loss for the taxpayer. Looking into 2014 12B were bought at an average 1.12 so an even bigger loss. No problem for Merv though he will just print a few more billion to cover the losses as well spend a few million on commsion with the bankers buying up the gilts from market makers.

  • HarryA


    An excellent point and potential reason for why QE will need to have an effect for longer than we think i.e. rates staying lower.

  • Anonymous

    Hi James

    The word hyperinflation has many possible uses and meanings! I have on this blog had a theme that in the first round of the credit crunch it was extremely unlikely but whilst still unlikely the possibility would rise in the second phase or exit strategies.

    My argument is that ordinary inflation is dangerous enough if it is allowed to persist as it has been in the UK. The longer it goes on the more damage it does as even 3/4% per annum builds up on a compound basis. For example via its impact on real wages it has had a contractionary influence on the UK economy and indeed a similar contractionary impact on those who disputed my arguments.

    What happens next depends a lot on what the Bank of England decided to do next. They look likely to ease more but when and how?

  • Anonymous

    Hi Ernie

    There is nothing wrong with a little humility from time to time on markets! So let me join in. I expected Gilts to rally but thought that levels like a 2% yield rather than 1.5% for the ten-year would be the yield bottom price top. Indeed a 2% yield seemed extraordinary.

    This had consequences as this benefited my pension fund index-linked Gilt holdings! So I made money out be being right (inflation not only persisting but rising) but also a conventional Gilt rally that I thought the inflation would stop so also partly wrong!

    It is thinking that you know everything that is dangerous……

  • Anonymous

    Hi Rods

    “Is part of the reduction in food being bought due to people wasting less food?” Let’s hope so as that is a lot more hopeful answer than I was thinking of…

    As the markets the pseudo state or Quango driven ones all need reform and yet when push comes to shove our political class usually just expand them.

  • Anonymous

    Hi ExpatInBG

    It never ceases to amaze me how individuals can hold dear theories which are quite plainly wrong by the evidence in front of their noses. Central banks have been very fallible over the the credit crunch and yet in some theories they go into a phone box like Clark Kent and come out as an economic Superman.

  • Anonymous

    Hi JW

    The best SciFi challenges and questions human nature and weaknesses which will probably not be much different in 500 years time. But the good developments are usually unexpected and I mean that in the proper sense of the word not today’s version!

    As the G7 debacle demonstrated this week- for those who did not follow this the communique on currencies needed to be “clarified” only a few hours later meaning the Japanese Yen shot one way then the other- the central banks cant even agree amongst themselves.

  • Anonymous

    Hi nickrl

    An interesting point but there is a deeper can of worms from it. If we look at the purchases we see why. The Bank of England bought £775 million on the 4/09/09 of 4.5% treasury stock 7th of March 2013 for example. So there has been 3 1/2 years of interest (-0.5% charge). But the Treasury has grabbed now (as of the £35 billion QE “profit”) that so it is not available to offset the capital losses. I await to see where that will turn up and it may be some time!

    Oh what a tangled web and all that…

  • Drf

    Hi DaveS,

    Your point concerning people becoming self-employed and claiming Tax Credits is clearly a valid one. However, your claim that they can avoid the ignominy of signing on and having to face unpaid “job-experience work” etc. without side effects is not quite true; I understand that HMRC Tax Credits are now abusing the blanket powers given to HMRC and using them to carry out witch-hunts on self-employed people they suspect, accusing them of fraud! So anyone who did do as you suggest here could be in great trouble if they get caught registering for Tax Credits without actually running an emergent real business, including jail. If they are selected for analysis by these abusing armies of do-nothing civil servants they will also incur signifcant costs and inconvenience, as with all branches of HMRC now indulging in these abuses of their powers to keep ever greater armies of civil-servants employed.

    However there is no doubt that the whole tax credit scheme was just another typical Brown make-work scheme to employ lots more civil servants, and it should have since been scrapped. It should have been replaced by an increased tax threshold for the low paid. That would enable sacking the vast increasing number of Tax Credit workers and the saving of all the associated fatuous resultant costs to the Public Purse.