The events of 2022 so far are beginning to place us in a situation we have worried about for some time. This is because for the first time in ages we are seeing central banks raise interest-rates and hence mortgage-rates. Actually it is more complicated than that because people have in general behaved wisely and shifted towards fixed-rate mortgages. For example in the UK they represent more than 90% of new mortgages these days.
So we get a better idea of the trend from bond markets and they have moved by much more than interest-rates. An extreme case will be in the news today as the ECB meeting gets reported. This is because the ECB has done nothing to interest-rates and thus still has a deposit rate of -0.5%. But all the rhetoric and open mouth operations have led to this via Reuters.
“The likelihood of a 50-basis-point hike is rising by the day,” Moody’s Analytics senior economist Kamil Kovar said.
“We currently view a 50-basis-point hike in July as possible but unlikely. In contrast, a 50-basis-point hike in September is as likely as it is unlikely at this point.”
“It is even possible that the bank will resort to multiple 50-basis-point hikes,” he said.
In essence the markets are singing along with Elvis Presley.
A little less conversation, a little more action, please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark
A little less fight and a little more spark
There are all sorts of issues here for the ECB as I pointed out on Monday but for our purposes today there is the one that all this talk is squeezing the market they want to talk up. They thought they were being clever by getting a reaction by not doing anything but talk in the extreme case of the ECB but now they have come to a crunch. We can see this from Italy where in March the Bank of Italy saw the typical mortgage rate as 1.65% so up around 0.25% this year. But that is before much of the bond yield rises as for much of March the ten-year yield was less than half of now.
This is the extreme case of a central bank which has not acted on interest-rates and we have the most exposed economy which is Italy. But we have a crucial point because the strategy has been to get house prices higher pretty much across the world for the claimed “Weath Effects”. This ignores the inflation created for those entering the housing market whether to buy for the first time or to trade up. This is accompanied by keeping house prices out of inflation measures to help preserve the illusion. People are told they are “affordable” through calculations showing the monthly costs which have been depressed by low and occasionally negative mortgage-rates.
If we venture to a land down under we see a place that has just had an interest-rate rise with abc.com reporting this.
All three banks said they would raise home-loan variable interest rates by half a percentage point from June 17.
The new standard variable interest rate for owner-occupiers paying principal and interest will be 5.30 per cent for the CBA customers.
As ever standard variable rates are expensive but looking around if you want a fixed-rate mortgage now (2 years or more) you will be paying more than 4% so the squeeze is beginning and we have a change on the past with this impacting as previous fixed-rates roll off.
There has been an impact already.
Australia’s housing markets continue to lose more steam in May, likely driven by three factors that paved the way for the first ever monthly decline in median prices since September 2020.
According to CoreLogic’s latest Home Value Index, the median dwelling price in Australia declined by 0.1% in May, driven by the falls in Sydney (1.0%) and Melbourne (0.7%).
Over the month, Canberra also reported a decline in median house prices at 0.1%, its first monthly decline since 2019. ( yourmortgage.com)
A 0.1% fall is symbolic even though it must be within the margin of error and leads to thoughts of larger sustained falls.
“With the housing debt to household income ratio at record highs, household balance sheets are likely to be more sensitive to rising interest rates.”
Not so good for house prices.
Even the FT is starting to get a little nervous.
A series of continuing increases in the interest rates of many of the world’s central banks has hit the stop switch on a pump that had been rapidly inflating global house prices. Experts expect the rises to end the rapid, two-year surge in house prices and price growth to slow down sharply.
Although apparently the market which affects FT Journalists as its headquarters is just off Blackfriars Bridge is apparently just fine.
Yet the pandemic-induced housing boom has not ended quite yet. Property viewings in London are still attracting crowds of prospective buyers. Houses are still going for sums that far exceed their asking prices.
The point here is that the FT reporting in this manner is another sign that the establishment is starting to get very nervous. A bit like a confidence trickster worried he or she will be found out.
The UK Response
Overnight the UK Prime Minister Boris Johnson has been leaking this.
Boris Johnson will set out ideas to boost home ownership – including allowing benefits to cover mortgage payments – in a speech aimed at re-launching his leadership. ( BBC News )
It is revealing that amongst all the current issues he is starting with this and this was previously popular.
He will restate the government’s commitment to extending the “right to buy” to housing association tenants.
There is a catch though which is in the pilot in the Midlands the properties were sold at well below both market value and the replacement cost. Quite a bit below. So whilst this will understandably be popular amongst those who buy ( a rare literal example of what economic theory calls a free lunch) it will be expensive for the housing association to replace the houses. Who will pay for this?
Next up is something which we have forecast as we get ever nearer to the government actually buying the house or flat for you.
And he will suggest that housing benefit could count to towards mortgage payments, although no details of how such a policy would work have been released
This does in total cover a lot of money.
Housing benefits, which help low-income or unemployed people pay their rent, cost the government around £30bn a year, a large proportion of which goes to private landlords. A person is not usually eligible for housing benefit if they have a mortgage.
The problem is that in round numbers it may get you a £25,000 mortgage when the average UK property is more than ten times that. So it may help a few at the margins at best.
Also due to the rules it would create more low equity mortgages.
have £16,000 or less in money, savings and investments ( Universal Credit)
So we would have to return to days of high relative loan values that we were promised would never return.
We see a situation where the establishment are afraid that some of their illusions are going to be seen through. That is why we are seeing what looks like a silly policy initiative in the UK today. Will it even make the weekend? The issue can go deeper because after a 2016 vote that implied less immigration we seem to have had even more recently creating housing demand.
We can flip that over because the establishment tried to scare voters by suggesting that house prices would fall by 18% should we vote for Brexit. It did not occur to them that many would think this would be a good thing! Since then things have got worse as prices have risen further.
Finally we have the issue of the banks and their mortgage books which soon may not be looking so good. What will they do about “The Precious! The Precious!”. They are reverse indicators on their own fortunes so this has caught my eye.
NatWest CEO Alison Rose says she is seeing strong demand for mortgages and no signs of stress in the bank’s home loan book. She is also open to acquisitions, pointing to the credit card market and wealth management ( @EmDunks )