What is the state of the UK’s housing market and monetary system?

One of the staple topics of conversation in the UK is the state of the housing market. It is not at the top of the list which is invariably the weather but it is not far off. The credit crunch era has fed this on several levels. Firstly whilst there have been price falls overall they have been much less than you might have expected considering the fact that the economy has performed so weakly. The UK Land Registry (the official record of sales for England and Wales) showed a peak index price of 292 in early 2008 which quickly fell to 243 in May 2009 as you might expect but has since rallied overall with some ebbs and flows to 258.4. This represented a monthly rise of 0.4% and an annual rise of 1.7%.

Why is this so?

Monetary Policy

Here has been a major factor as one of the first moves of the Bank of England was to slash base rates to 0.5% which will have benefited tracker mortgages heavily. There was one example under the Lloyds Banking Group banner where a tracker existed which offered 0.51% below the base rate and so it has ended up paying the borrower for the rest of  its term.

The Bank of England began it Quantitative Easing experiment on the 11th of March 2009 and in its various stages it has now mounted to some £375 billion so far. According to the Bank of England it does the following.

That lowers longer-term borrowing costs

So on that basis there has been an effort to lower fixed rate as well as variable rate mortgages. As some £375 billion has been applied we see that quite an effort has been made. Whilst the mortgage market is not the only beneficiary it is a major one.

Funding for Lending Scheme (FLS)

On the 13th of July 2012 the UK got yet another monetary boost from the Bank of England and I will let it explain its purpose.

The FLS is designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies.

As we review another boost to the housing market we may wonder exactly how this will happen.

The Scheme is designed to reduce funding costs for banks and building societies so that they can make loans cheaper and more easily available……In turn that will allow banks to increase lending to UK households and firms, both by lowering interest rates and increasing credit availability. Easier access to cheaper bank borrowing should boost spending in the economy, for example by allowing families to purchase homes,


You may note as ever that these schemes benefit the banks first and rely on them to pass the benefits on. I have observed in the past that they can be somewhat forgetful at this and in some parts do the reverse. For example what has become the staple product for existing homeowners the Standard Variable Mortgage saw rises in mortgage rates in 2012. Also today has seen the release of the figures for mortgage rates in 2012 and the average rate for new business was 3.65% which compares with 3.46% in December 2011. Is up yet again the new down?

As we muse over the effectiveness or otherwise of the Bank of England’s efforts we see something similar to Spain’s situation which I reviewed yesterday. Official hype and promises of help which are transformed by the banking sector into mortgage rate rises! How many times do we find economic measures which bail out our banks under the guise of being something else?

The Central London property bubble

This has influenced the overall numbers and therefore hidden price falls elsewhere. And just when you think that it has to end take a look at this.

The region in England and Wales which experienced the greatest increase in its average property value over the last 12 months is London with a movement of 8.4 per cent.

London also experienced the greatest monthly rise with an increase of 3.1 per cent

It is a bit like Premiership football where you think that salaries and transfer fees have to be hitting a peak and something always turns up! In its case, Abramovitch at Chelsea, sales of overseas television rights, Arab Sheikhs at Manchester City and so on. For London the falls in the value of the pound may tempt (yet more) overseas buyers in as for example an exchange rate of 1.164 versus the Euro is much lower than last summers 1.28 peak.

Real house prices

Care is needed here as over the period the UK has had inflation and so rises in the house price index may not match inflation. The overall increase of 6.3% since May 2009 is behind the 13% increase in the Consumer Price Index since then leading to a real fall in house prices of around 7%.

If we go back to the peak of early 2008 we see that overall house prices have fallen by just under 13% but to see the real fall we need to add in Consumer Price Inflation of 14% since then too.

Any discussion of affordability also needs to involve the behaviour of wages in the UK as whilst they have risen in nominal terms they have been falling in real terms for a while now.

Today’s data

Mortgage approvals and lending

Mortgage lending did rise in December as £6.6 billion of new loans were taken out which was up by £600 million on both November 2012 and a year before. There was also net lending of £1 billion which was better than the zero of November. However an annual growth rate of 0.6% is not a lot to write home about! For perspective monthly net lending was £9 billion in 2007.

Also whilst the media is already getting carried away with the rise in new mortgage approvals in December for house purchase to 55,785 some caution is required. This is way below what one might regard as normal. Also these are the numbers for house purchases which are up by over three thousand on a year ago. But if we look at overall approvals which include remortgages and others we see that there were 98,621 in December 2012 but 104,909 in December 2011. I do hope that the numbers are not being manipulated…

New borrowers may get some cheaper mortgages

The Nationwide has cut some of its mortgage rates today and it is being leaked that the Woolwich will do so tomorrow so new buyers may be able to take advantage of some better rates.

Unfortunately however growth in the money supply is slowing

The wider pattern for UK monetary conditions still appears troubled however. Our widest lending measure called M4 lending did grow by 1.6% in December but that still left it some 2.7% lower than a year before. The Bank of England prefers to exclude the impact of offshore financial corporations from these numbers but we saw monthly growth here of 0.2% and annual growth of -0.3%,so different numbers but a similar message.


If we look at the level of official support in this area it may not quite be at the “turn up to eleven (out of ten)” scale pioneered by Spinal Tap but it is not far off. Measure has followed measure and whilst much of this has been yet another disguised aid package for our banking sector some has flowed also into the housing market. New buyers have the prospect of some lower mortgage rates although existing ones have seen higher and not lower rates.

Frankly this looks an utter mess to me. After all if we tempt people into the housing market and hold it up by any means what happens next? They will not thank us if we then see house prices fall as the stimulus measures are withdrawn. This poses the question how will they be withdrawn which quickly morphs into an if they are?! So we seem to remain set to see a weak economy clash withn ever more stimulus and for house prices to ebb and flow as the two forces battle it out.

There are casualties


I will let these numbers speak for themselves. According to the Bank of England the effective savings rate for new time deposits was 2.75% in September 2012 and in December 2012 it was 2.11%.


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

    The housing market, except for the London bubble (buoyed up by foreign money as you say) is effectively static.
    There are some sales and purchases but the criteria for mortgage suitability have been tightened up horrifically by the FSA. Whilst self-certs were called “liar loans”, that was not necessarily the case. Many self-employed people were only able to get mortgages by the self cert route because they couldn’t show three years accounts at the relevant income. This was due to tax avoidance-not because they didn’t have the income. They could always pay the mortgage and fully intended to do so-and probably still are. That sector cannot now get owner occupation mortgages.
    It always amazed me that having a job for a period was fine, but being self-employed wasn’t-as if a “job” is in anyway secure. Bizarre thinking of the highest order!

  • antoes

    Hi Shaun

    another great article

    Dont forget the SMI mortgage payment scheme. Which under labour very generously paid above the the actual mortgage rate.This has now been extended to 2015. So you have people who rent paying taxes to make owning a property more unaffordable.

    I’ve come to realise that the uk has effectively only one economy, rising houses prices. during the boom years around 50bn was mewed and spent in the economy. This finished in 2007 and the economy went into recession.

    Every policy decision the government has made, low interest rates, SLS, SMI, FLS has been to maintain high house prices.

  • forbin

    but why ?

    not for the people – its the banks!! look close and you’ll see they’re bust or atleast will need a substantial bail out if we had a house price correction

    everything done since has been done to protect the banks – as the bank are the economy ( or at least that what they think ) .

    Politicos move into lucrative bank jobs – not just Tony Blair you know.

    Scandal – yes ? but as the banks run this country to their own benefit …


  • Anonymous

    The amount paid for mortgage interest was adjusted downwards from about 6% to 3.63%. Apparently that is the average amount paid by borrowers, whereas before you could make a large profit.. You don’t get anything until the 13th week, it’s limited to the interest (not capital repayments) on £200k and some unlucky claimants will find it time limited to 2 years, though for most it will be indefinite. You can even get a limited amount as a pensioner – indefinitely! The reason why housing is such a key part of the economy is that gains on first houses are not taxed at all, and old and new houses bear no VAT, though improvements do. Most EU countries tax housing gains (though the tax is often deferred until the final sale) and some even charge VAT on houses. That results in big numbers! Spain, to take an especially crazy example, is starting to charge 10% VAT on new builds. At the same time as it has 1m unsold new houses. Oh, dear.

  • max


    Absolutely. They needed to allow the market to correct. They did not as they feared bankruptcy for the banks (not the mortgage holders).
    So they propped up the system and allowed the system in London to reach new highs.
    What is next?
    A small (and not that great) house on the outskirts of London costs 700k. Who can afford this in the next generation unless we have a massive hike in wages which seems implausible unless all over the world everyone gets massive pay rises as we cannot compete with other nations if they don’t.

    This can only end badly.

  • Anonymous

    Spot on about tax avoidance. It’s standard in the self-employed sector.

  • Alex

    Agree with your comments as I was an IT contractor and suffered this apparent ‘self employed’ issue, save that I was the director of my own Ltd company and was paye with a minimal income, trading time less than three years.

    I think the reason they like the ‘employed status with job’ was because your then ripe for added value sales like Personal Protection Income policies and other ‘useful’ things the bank could offer you.

    Anyhow I decided against buying a house in the end, 2005, and bought a yacht in the Caribbean and spent 4 years out there sleeping on deck under the stars each night. I got bored of it in the end.

  • Patrick

    Gradually knacker multiple BTL ownership. Those who get into it are looking for high (in some cases tax payer funded) returns with the minimum of effort. Yes there’s maintenance, and empty periods, but the goal is surely money for nothing, which adds nothing to the output of the UK.

    Yes, we’re over-populated. Yes, we don’t have enough housing stock in areas where work can be found. Yes, building restrictions and planning permission make self build a nightmare. How does multiple BTL help?

    If you want to knock prices down without hitting Home owners (as opposed to ‘portfolio’ holders, just knacker BTL, and this country will start moving again, albeit in a sick, crippled way, as the World has changed too much for us to ever compete again.

  • MickC

    Well, for a start it helps the people who can’t buy a house because they can’t get a mortgage!
    In fact there’s nothing wrong with BTL -its a good investment providing a service people want to buy. The real problem is that there are few alternative investments people trust. Investment managers take a whopping fee whether they make money for you or not. Until that is addressed there will continue to be “misallocation” of capital into housing.

  • Anonymous

    Hi MickC
    In essence there were two parts to the self-employed mortgage market where there was a bona fide section and one which got the name “liar loans”. Surely it is not beyond the wit of (wo)man to find a system which continues the position for the former and blocks the latter?
    However sadly I have little faith in the FSA actually achieving this…

  • Anonymous

    Hi Guys
    The banks and the housing market are of course entwined. The only way we would have a proper scientific test of our leaders view on the housing market on its own would be to somehow get the banks out of it! That is extremely unlikely to say the least so whilst they prop up the banks they also prop up the housing market…

  • Patrick

    Wouldn’t state owned housing be better for this with appropriate rent controls and living standards? I think currently there’s a real distinction between those who want to rent, versus those who have to rent, and I suspect while the number of both are constantly growing, the bias towards those who ‘have’ to rent is increasing.
    I strongly feel that curbing the numbers of homes owned(or mortgaged) by individuals or businesses would genuinely help improve the situation in the UK.
    While i take your point that Investment managers take their fee whatever the outcome, there are operators out there, who will ONLY take payment (Albeit at a much higher percentage) out of the profit that your investments make.
    Multiple BTL ownership is exploitation of British society as a whole, and event the fairest, attentive, most reliable landlords in the country must still have a sense of this, even if it is right at the very back of their minds.
    My own financial situation is suffering due to my decision to stick to my beliefs in this regard.

  • http://twitter.com/Britain_Loans Britain Loans

    It is sad that so many fell for the hype of taking out mortgages and loans and persuaded into thinking that it was to their own benefit. In actual fact their debt and misery was, and always will be, for the creation of wealth and prosperity for the bankers. A slow drip feed from your pay packet that redistributes wealth from the bottom to the top. Even if you have managed to pay off that debt millstone from around your neck your “investment” is worth no more than before because of inflation. More info at http://britainloans.co.uk/