2nd October 2012
Even before the credit crunch hit the UK the state of the housing market was supposed to be a regular dinner party subject of conversation. Of course then it was of the "mines risen faster than yours" variety which the consequences of the credit crunch ended in all areas apart from the property bubble which has taken residence in central London. You could consider the property bubble as an example of Paul Krugman's Space Aliens or more colloquially as an episode of Doctor Who. Sadly, so far, there is no sign of the good Doctor and his TARDIS appearing to help us with this problem.
However whilst we have seen price falls in many areas in the UK we have seen an extraordinary resistance to it from our political class and establishment who seem unwilling to even countenance a fall in prices. The Bank of England has cut base rates to 0.5% and has undertaken some £361 billion of asset purchases designed to lower longer-term interest-rates and hence fixed-rate mortgages. We have seen also stamp duty (for foreign readers you pay stamp duty as a percentage of the value of a property when you purchase it) holiday for first time buyers for a period by the Coalition government. On this concept there seems to be some sort of political consensus as the Labour opposition has proposed a two-year holiday from stamp duty for first time buyers. We also now have the Funding for Lending Scheme from the Bank of England which is designed to help reduce mortgage costs and if you think about it represents quite a critique of its Quantitative Easing operation as otherwise why is it necessary to do the same job? All this comes before the peak of the insanity represented by the "idea" that pension lump sums could guarantee house purchases for offspring.
The catch with all this is that if you argue that house prices in the UK have been in quite a boom it is hard to deny that they are now relatively expensive. So our political class seems to want to make the transaction costs involved with purchasing overpriced houses lower. I fear that they are encouraging first-time buyers to overpay for houses.Would it not be better to let house prices drift lower to allow them to become genuinely more affordable? Then they would become genuinely "affordable" rather than meriting that description from officials and politicians who of course have no intention of ever living there. It seems that the more policy failure we see the more convinced our political class is that in the words of Gerry Rafferty.
Cause if you get it wrong you?ll get it right next time (next time).
In spite of all the meddling mortgage rates for many have been rising
As I have been reporting for some months now we have been seeing a succession of mortgage rate rises for many borrowers. An example of this comes tomorrow as Santander raises its standard variable rate (SVR) for around 400,000 customers by 0.5% from 4.24% to 4.74%. So in yet another example of the gap between official theory and claims and practice many borrowers are seeing rises in mortgage rates.
Also as many borrowers these days are in effect trapped on SVRs -which are a default rate- due to the tigthening of loan criteria and the associated reduction in loan availability we are seeing a two-level mortgage market and the advent of "mortgage prisoners". Not perhaps the 1% and the 99% this time but as rates for low loan to equity values are much lower we clearly have some borrowers being much more equal than others to coin a famous phrase. Or to put it another way there looks like plenty of scope for an FSA investigation into a cross-subsidy from one section of borrowers to another. It would of course make a clear change for them to do something whilst it is current and relevant,they may be along in ten years or so.
Also I have questioned before why we in the UK let Santander take over so many of our mortgage lenders and to my mind we are reaping a grim harvest from this as she raises her SVR way above many others. If we move over to Friday's Spanish bank stress tests it would appear that they were assuming fairly substantial profits from overseas subsidiaries?!
I will leave this section with a disturbing thought. Has Santander shown us the future and will other mortgage lenders punish their captive borrowers by raising their SVRs to her level? If they do we will have to consider the supposed ZIRP -Zero Interest Rate Policy- era as I do not know about you but 4.74% looks quite a long way from zero to me!
What is currently happening to UK house prices
The Nationwide has published its latest report and from it we get this:
UK house prices declined by 0.4% in September……… with prices
1.4% lower than September 2011.
So we see a slight drift lower in nominal terms which seems to be continuing. Interestingly the Nationwide which you would think has an obvious upward bias in its house price views is not optimistic going forwards:
with house prices remaining relatively flat or declining only modestly over the same period ( the next year).
So if we now add in inflation too we see that in real terms there have been falls in UK house prices which in real or inflation adjusted terms are a little more substantial over the past year. A little care is needed in saying that this makes them more affordable as we know that wages have not kept up with inflation.
A Two/Three Speed Housing Market
If we look at the regional picture we see that outside of London there is a similar and much less optimistic pattern. Whilst there are falls in some area the data for England is affected by it so let us look at Scotland, Wales and Northern Ireland.
Scotland saw a 1.6% seasonally adjusted fall in the third quarter, resulting in the annual rate of change deteriorating from -2.3% to -4.0%.
Wales saw a 0.3% seasonally adjusted price rise in Q3, following three quarters of falls. However, prices were down 4.7% year-on-year
Here we have seen more substantial falls on a year on year basis and this is before we get to the problems in Northern Ireland where prices are now 53% below their peak values.
Northern Ireland saw a fifth consecutive quarter of house price falls, with a 2.3% seasonally adjusted fall in Q3. On an annual basis, prices were down 9.3%. The average house price in the province is now £107,719, similar to the level prevailing in 2004.
It is not my contention to say that there are no falls in England just that the pattern is clearer outside of it. The most marked is Northern Ireland where substantial house price falls are continuing.
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