London house price crashes are not what they used to be

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by Shaun Richards

This morning has brought unsettling news for Bank of England Governor Mark Carney on the subject of UK house prices from the Nationwide Building Society.

Prices decline 0.5% month-on-month,
biggest monthly fall since July 2012

That date will resonate because it was back on the 13th of July 2012 that the Bank of England started the Funding for Lending Scheme which was described back in the day as follows.

The FLS is a direct policy response to that threat to the UK economy posed by elevated bank funding costs. Funding costs are a key determinant of the interest rate banks charge on loans. By reducing them, the FLS should lead to more and cheaper credit flowing into the economy than otherwise. ( 2012 Quarterly Bulletin).

We know now how this claim about the FLS worked out!

In the longer term, if tight credit conditions have been holding back productivity growth, then the FLS could increase the supply potential of the economy.

Only yesterday we looked at one of the areas where the FLS was supposed to impact which was on lending to smaller businesses.

The twelve-month growth rate of lending to SMEs was -0.2% in July; this growth rate has been at or below zero for the past four months

It is easy to forget now that the original version did not allow for the fact that lending to smaller businesses requires more bank capital than many other forms of lending. A pretty basic error although frankly even when the rules were modified to try to allow for this the picture was as above. Occasionally we have seen a little flicker of growth but the overall picture has been has seen as many if not more declines. The official view clings to what they call the “counterfactual” which is that otherwise things would have been even worse.

Moving to mortgage lending the word counterfactual was not required as the estimated boost given to bank funding went straight to the mortgage lending bottom line.

Based on these estimates, at the time the FLS was
announced on 14 June 2012 it would have been around
200 basis points cheaper than using other sources of secured wholesale funding, such as RMBS or covered bonds.

The Bank of England did not know the full picture back then but I noted for myself that mortgage rates fell fairly quickly by around 1% and later the Bank itself estimated that the total impact was of the order of 2%. So rather neatly 2% of cheaper funding led to 2% lower mortgage interest-rates or a 100% follow through.Revealingly I do not recall any such numbers for the cost of small business lending.

Mortgage Lending

Back in 2012 the Bank of England was very worried about this as if we look at net lending it had gone from the £9.7 billion of September 2007 to usually less than a billion with some months recording declines.Indeed if we switch to gross lending it had fallen to £10.6 billion in December 2010 so not a lot more than what net lending had been. Gross lending was down from over £30 billion a month at the peak.

If we jump forwards we see that net mortgage lending was rescued as yesterday we noted this.

Households borrowed an extra £3.2 billion secured against their homes in July. Net lending has been relatively stable over the past year or so,

Gross lending picked up too and is now usually circa £22 billion per month.

House Prices

They responded as follows according to the Nationwide. The average house price was £164,389 when FLS started and is now £214,745. We will never know what they would have done otherwise but we do know that for the previous two years they had been drifting gently lower and that the annual rate of fall reached its peak or nadir at 2.6% in July 2012.

What about now?

Let us return to the Nationwide report.

“August saw a slight softening in annual house price growth to 2.0%, from 2.5% in July. Nonetheless, annual house price growth remains within the fairly narrow range of c2-3% which has prevailed over the past 12 months, suggesting little change in the balance between demand and supply in the market.”

Actually this is still higher than that reported by Acadata earlier this month.

On a monthly basis, prices fell again in July, for the fifth month in succession: down 0.2%, leaving the average house price at £302,251. The figure is still up on an annual basis, however, with prices increasing 1.6% and all regions in England and Wales recording modest, but positive growth.

They claim to be comprehensive and if we take the broad sweep we see that house price growth is now below both inflation and wage growth. You may also note the difference between average house prices as reported by the two bodies.Some of the gap will be caused by the fact that the Nationwide is biased via its customer base but it is also true that even so the gap is problematic or if you prefer something of a chasm.

A London House Price Crash?

The Guardian produced this yesterday.

One-in-three chance of London house price crash, says expert poll.International buyers put off by Brexit uncertainty could drive prices down 1.6% next year.

It seems that crashes aren’t what they used to be! Well apart from England’s top order at cricket. But there were some other gems.

“Central London is tanking because the traditional international buyers are staying away – and the quantum of buyers is falling. A disorderly Brexit will exacerbate this trend,” said Tony Williams at property consultancy Building Value.

A 1.6% fall is “tanking” now? At the level of prices recorded it would be a very minor blip compared to the rise.

The average asking price for a home in London was £609,205 in August according to the property website Rightmove, more than double the national average of £301,973.

Also the answer to the question below had to be 10 I think for London and some might wish to go full Spinal Tap and say 11.

When asked to rate the level of London house prices on a scale of one to 10, where one is extremely cheap and 10 is extremely expensive, the median response in the Reuters poll was nine. On a national level, prices were rated seven.

Anyway even such a minor fall seemed to seriously upset Phillip Inman.

The warning that property values in London will fall this year and next will bring a smile to many who believe house prices have run out of control in the last 30 years

Believe? Anyway he does list the potential gains.

A crash would make homes more affordable to those on lower incomes and the young. Profit-hungry housebuilders would see their revenues collapse and the much-reviled estate agency industry would shrink.

But suddenly and I am skipping the political content the above is presented as being bad.

They care little about the after-effects of a house price crash

If a 1.6% fall is going to be so bad I fear for his disposition going forwards. Perhaps his colleagues might check in on him from time to time.



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The issues in this area are both complex and simple. If we start with the simple then back in 2012 it appeared to the UK establishment that in spite of the slashing of Bank Rate to 0.5% and the advent of QE the economy was flatlining. Actually the worst fears were wrong but that atmosphere of fear led to a response involving credit easing as described above from the Bank of England ( as well as an easing of government austerity). For the Bank the operations had two benefits one is that there would have been fears over the “precious” which would be alleviated and the economy would be boosted especially if house price gains can be claimed as a boost to wealth rather than inflation.

Now the flow of such policies is over as the next effort the Term Funding Scheme ended in February. That is why I expected house price growth to fade away and perhaps fall this year. The national picture is more complicated as London got a further boost from foreign safe haven buying but if we take a broad sweep prices should have fallen and they were not allowed to.

If we move to the complicated no policy helps everyone sadly and even something which is a gain hurts some. For example let me give you both sides of the London coin. I have a neighbour who rents because in spite of the fact that he and his wife both work their affordability has never caught up with the house price rises so they might finally be able to buy. On the other side of the coin I have friends who have just bought and would face losses but whilst I wish them all the best the truth is that this song has been playing for much too long now.

The only way is up, baby
For you and me, baby
The only way is up
For you and me



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