UK house price growth as well as mortgage lending and approvals accelerates

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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

Looking Forwards

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.

Mortgage rates

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

Savers

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.

Comment

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.

 

 

This entry was posted in Bank of England, General Economics, Gilts, House Prices, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • forbin

    Hello Shaun,

    I guess the take away message is buy a house before its too late……

    What could go wrong ?

    Are houses our new Tulips ??

    Forbin

  • forbin

    ooops forgot to ask

    with currently failing wages in real terms when does the current house price rises become unaffordable with the current interest rates ?

    ( I too am wary of averages after all what is the average number of legs on people ? less than 2 , so anyone with 2 legs is above average !! )

    Forbin

    PS: and if rates do have to rise what is the minimum level of rise allowed before the current house prices become unaffordable ?

    ie by .05% dangerous , but 0.25% scary but ok ?

    Forbin

  • Anonymous

    Great column, Shaun.

    I notice that you refer to a lot of different housing price series in your articles. What, in your view, is the best one for measuring new house price changes? Existing house price changes? House price changes in general? I don’t believe that the ONS uses the Nationwide estimates in compiling the components of the RPI that use housing price data. Does this series have any advantages over the series that the ONS does use?

    Andrew Badwin

  • mike

    ”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”

    Surely the London property ‘investment’ scene is now more about the £ being cheap for wealthy foreigners? If the BoE would discontinue faking the £s value by supressing every tiny rise, then a £ at 1.35 euros might begin to reduce the profit margins for newcomers and indeed some existing ‘investors’ would no doubt take profits?

    None of this would affect the real UK housing market, but the thought of it is obviously frightening to the likes of Carney, Osbourne and his cronies. To a decent economist like Andrew Sentence though it makes sense.
    http://www.telegraph.co.uk/finance/economics/10545042/We-have-reached-the-end-of-the-beginning-in-the-new-normal-economy.html

  • Anonymous

    Or perhaps Danny Blanchflower?

    ‘“Another boom headed to a housing bust,” said David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, in response to the FT poll.

    “Idiocy,” he added. ‘

  • Anonymous

    I will take a truck load of red tulips before the price increases again…..tvm

  • Anonymous

    Shaun – do you have any numbers on what % of SME lending might be BTL?

    Also just to add: this is really nuts now. The establishment must be in double down or die mode to push housing this hard.

  • Anonymous

    Hi Forbin

    This question of earnings to house price seems to have the Nationwide dissembling a little. If you look at its chart the ratio is approximately 5.5 but if you go to its data download it gives you the numbers for first time buyers which it has at 4.6! This poses the question why are they getting cheaper houses or having higher incomes?

    The interest-rate issue intrigues me as we had towards 5% of cuts but now 0.25% is presented as crippling. Those saying this forget that mortgages move with other factors apart from the base rate after all they fell 1% over the past year with base rate unchanged. In there is your answer because if we keep using monetary policy in this fashion we will never be able to raise interest-rates at all and have let ourselves be endgamed.

    Oh and before all this began the same arguments were in place which confirms my view of it.

  • Anonymous

    Hi Andrew

    The ultimate source has to be the Land Registry which should capture every transaction but we have to wait for its numbers. The Nationwide and the Halifax measures only cover their own customers and by definition miss cash buyers (which are high in London particularly) but are more timely. There is an LSL index which I now follow and referred to on the 13th of December which “The LSL/Acad house price index incorporates all transactions including cash. ” It’s flaw is that it lacks the same back history of the others.”

    So plenty of choice with each having its own weaknesses and strengths.

    As to the ONS one of the readers of this blog (Shire) chased them up on the issue of the house price indices they used in their wealth calculations and the replies did not inspire confidence. As you have reminded me I have just asked him again about that….

  • Anonymous

    Hi Mike and welcome to my part of the blogosphere

    The question of a cheap currency always has the issue of when you compare with but only on Thursday I had pointed this out

    “Lest we forget it was not so long ago that the value of the pound was much higher. The beginning of 2007 saw the pound at US $1.97, Euro 1.49 and 234 Yen and the doomsayers in the media right now about the current rise might like to consider how little good the fall from those levels actually did us.”

    So to US and Euro area buyers looking on that time perspective prices are lower now in their currency. A £ rise would erode that but there is a second order effect at a time like that which we saw in the “carry trade” for the Yen and Swissy in that people were encouraged into a rising market by the apparent profits others had made.

    If there was a magic wand then one could have a higher London interest-rate and a higher London pound which makes it look rather like Germany and the Euro does it not?

  • Anonymous

    Hi Progrock

    Sadly not as we get some details in the figures but not everything. I suspect that it would be hidden in a fog anyway! As it happens lending to SME’s was for once a little higher (although the Bank of England said £100 million in one place and £200 million in another). Imagine the stir if that represented buy to let lending in another form….

  • Anonymous

    Hi mike,

    I’d suggest that London property is not cheap for anyone. In a slump, property becomes illiquid. So why might foreigners buy it ?

    I might compare the fortunes of Mikhail Khorodofsky vs the fortunes of Roman Abromovitch. One invested wealth and tried to create a modern well managed transparent company, which was exposed to the Russian legal system and the other bought assets in the UK, which are protected by the British system.

  • Anonymous

    Thanks, shame this sort of information isn’t transparent. Agreed if it represented even a small part of SME lending (say more than 10%) then this would be confirmation the UK is basically an estate agents and a bank!

  • Anonymous

    I believe until recently the LR excluded repos as they were “not representative”!

  • Anonymous

    Shaun I’m replying to this so you see it but it’s not relating to the thread.

    Would you consider ever doing a post on a lay-person’s reading list for some topics like “understanding economics”, “understanding the 2008 crisis” and “understanding our modern monetary system” or of course other subgroups of your choosing! Just an idea if you are stuck for a post one day. You could use referral links to amazon and pocket the small change!

    I ask as though your blogs are informative one can only glean so much from blog posts whereas books really underpin comprehension. Just an idea, make of it what you will and thanks for the posts.

  • Eric

    I second that. Great idea pogrock. For example; I’d love to know how we’ve entered 2014 surrounded by economic data which makes a Base Rate of 0.5% look crazy. I sometimes think my comments are poor because I have an out-of-date understanding; obviously things have changed since my 1965 L.U. Econ. course. Hope you can find the time Shaun. Any help would be appreciated. Eric.

  • Anonymous

    Shaun, thank you very much for your detailed reply and for the comment from progrock as well. I can better understand now why there are so many different indexes. If I am not mistaken, the ONS HPI also looks only at houses that are mortgage financed, like the Halifax and Nationwide indexes. The ONS HPI is based on mortgage completions, which would seem to me to be more reasonable than basing it on mortgage approvals. However, I can see the argument for an index based on mortgage approvals, which would be like an advance indicator for the index based on mortgage completions. Maybe sometime in the future, the ONS could calculate a second index based on mortgage approvals.

  • Jan

    The LR although slow with the numbers is the one with actual sold details. I believe Halifax and Nationwide indeces are derived from asking prices which are somewhat different from the sold data.

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