Today has seen new data on the state of play in the UK housing market. Back on December 13th when I last analysed it I noted that even the Governor of the Bank of England Mark Carney was warning about the potential danger here.
What then of the risks of unbalanced growth? This is more delicate. Despite admirable progress by British households in recent years, aggregate debt levels remain high at 140% of incomes. In addition, housing activity is picking up and price growth appears to be gaining momentum.
This morning’s release from the Nationwide Building Society certainly backs up the view that price growth continues to gain momentum.
UK house prices increased by 1.4% in December and were 8.4% higher than December 2012
This represents an acceleration for this measure as the numbers for November were for 0.7% monthly and 6.5% annual growth in house prices. Added to the price acceleration was the fact that more price growth is being seen in places other than London and the South East.
The upturn also became increasingly broad based over the course of 2013. For the second successive quarter, all thirteen UK regions saw positive annual house price growth in Q4,
So if you were Mark Carney you would be more concerned now that you were before. 2013 saw a journey from an annual rate of house price growth of zero to one of 8.4% and rising at its end.
What about affordability?
Such reports come with a Matrix blue pill style analysis which assures us everything is okay on the affordability front.
Affordability is being supported by the ultra-low level of interest rates. A typical mortgage payment for a first time buyer is currently equal to around 29% of take home pay, close to the long term average.
I do not know about you but I often wonder when advertisements and pieces like this use the word “typical” how typical they are!? Also long-term average is less reassuring sounding when we consider that in the last decade we saw quite a boom in house prices. But let me give you an alternative piece of analysis which is that earnings in the UK are growing at an annual rate of 0.9% and that if we use out two main inflation indices real wages are falling at either 1.2% or 1.7% respectively. Now how affordable does an annual rate of increase of house prices of 8.4% look?
Also if we look at the ultra-low level of interest-rates there are new challenges there. It was only yesterday that I was discussing rising Gilt yields in the UK. The most relevant of these is the five-year yield -for fixed-rate mortages particularly- and it has risen from between 0.6% to 0.7% in late spring to 1.84% as I type this. For a while the Bank of England was resisting this with its Funding for (Mortgage) Lending Scheme but this was announced as ending next month back in late November. Although I do not think that I am alone in suspecting that some buy-to-let investors will sneak into the small business category which is the new priority. Although some may be thinking this about business lending being a priority.
Meet the new boss,same as the old boss
The Bank of England has released today today which shows that mortgage approvals at £11.1 billion in November are 41% up on the £7.85 billion of November 2012. This continues the rise seen previously in 2013. Total actual mortage lending at £16.08 billion was up some 35% on the £11.94 billion of November 2012. Thus it is clear that mortgage lending has been rising strongly for a while and that looks set to continue for the immediate future.
There is a caveat to this however and it illustrates something that is rather familiar in the credit crunch era. If we look at net mortgage lending we see that at £1.12 billion in November it is virtually exactly the same as in November 2012. This emphasises a point clear in the figures which is that whilst net lending is up over the year it has done so by much less than overall or gross lending. So as we get official and central bank encouragement for new mortgage lending to one group of people it is plain that a separate group are repaying debt to offset a lot of this. So the tap is on but the plug in the plughole is leaky one more time as both regular repayments and repayments on redemption have risen.
Some are indeed more equal than others here as the numbers for November show that interest-rates for new borrowers continued ther fall. This was true for most credit and as an example a two year mortgage with 25% equity had fallen by 1% to 2.44% over the previous year. A factor in the rushed announcement to begin Help To Buy may be that the same type of mortgage for a 10% deposit was still some 2% per annum more expensive.
However whilst new buyers got cheaper rates many existing mortgage holders did not. I have written in the past about lenders raising standard variable rates – the numbers on these type of mortgages rose because of tighter credit criteria- and it seems to have slipped lenders minds to cut these along with other mortgage rates. Indeed they actually edged higher! If we go back to the spring of 2011 an average SVR was 4.1% and it was 4.41% in November.
This of course is a common business tactic especially in the banking sector. You reward and incentivise new customers with a 2.4% mortgage rate and punish existing ones with one some 2% higher. On that road we get a reinforcement of the view that one group is borrowing more whilst another is repaying it debt in another example of Sir Walter Scott’s prescience.
Oh what a tangled web we weave when first we practice to deceive
If I may be permitted a slight diversion today’s figures show that the financial repression of savers continues. Let me give you an example to demonstrate this which is that the cash-ISA rate was estimated at 2.03% in November 2012 fell to 1.17% a year later. There has been quite a drop since the recent peak of 2.84% in April 2012.
The London Bubble
The Nationwide report tells us that prices in London are some 14.9% higher than a year ago leading to this.
Prices climbed to a new record high of £345,186, 14% above their 2007 peak.
Prices in Hammersmith and Fulham rose by an astonishing 25% in 2013. Some caution is required as London is seeing a lot of cash purchases which by definition will not be noted by a mortgage lender but the numbers remain extraordinary.
There is something of a “city-state” theme in this as I notice that the Financial Times is reporting this about New York.
Sales of Manhattan apartments have hit a fourth-quarter record, with wealthy international buyers competing with New Yorkers to get a foot in the door as prices soar….
Limited supply has led to buyers often making immediate all-cash offers, participating in bidding wars and making decisions based on floor plans alone, in an echo of the previous property boom.
Perhaps there is some hype and PR at play here but it does sound rather familiar…..
Help To Buy
So far this has had relatively little actual impact although of course it has affected sentiment and expectations. There have been 6,000 applications approved but only 750 have completed. But with an election approaching any dip in the housing market is likely to be responded too with a ramp-up of Help To Buy.
The situation is much more complex than a perusal of the headlines might make you think. Overall house prices are now rising across the UK. But I would challenge those who argue that this is a good thing as if we look at wages where very low growth turns negative if we allow for inflation it is hard to see any case at all for an 8.4% rise in house prices.
To my mind we have two problems right now. The first is the way that London prices have gone bubblicious like many city nation states. Short of it secceeding for independence there is very little that can be done about that as any move would have repercussions across the rest of the country that are worse than the gains in London. Once more we see a downside of globalisation and inequality. However to my mind until we see rising wages it would be better if house prices stood still elsewhere or drifted gently lower as that would make them more affordable. If I was on the Financial Policy Committee of the Bank of England I would make this case,however if we look at the make-up of it they are much more likely to declare.
see no evil, hear no evil, speak no evil
If we return to the concept of unbalanced growth as mentioned by Bank of England Governor Mark Carney let me highlight an example of it. Mortgage lending is rising as is unsecured consumer credit -inspite of interest-rates of 19.54% on overdrafts for example which is some 19% above the increasingly irrelevant base rate- so the old problem of borrowing for consumption is around. What about investment?
Loans (including overdrafts) to non-financial businesses decreased by £4.7 billion in November, compared to the average monthly decrease of £1.0 billion over the previous six months. The twelve-month growth rate was -3.9%.
At least for once net lending to smaller businesses did not fall. But the overall pattern is somewhat familiar to students of UK economic history.