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?
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.
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%.