This morning will have brought sounds of high excitement and smiles to the Bank of England. It would have been too early to raid its excellent wine cellar but a liveried flunkey will have brought its best coffee to Governor Andrew Bailey as he peruses the latest news from the Halifax on UK house prices.
The average UK house price now tops a quarter of a million pounds (£250,547) for the first time in history, as annual
house price inflation rose to 7.5% in October, its highest rate since mid-2016. Underlying the pace of recent price
growth in the market is the 5.3% gain over the past four months, the strongest since 2006.
Governor Bailey will no doubt issue a satisfied smile and may mimic the end of the television series Frasier which had an “I did that” at the end. He may even be pleased that he has helped to do this without getting a mention from the Halifax.
This level of price inflation is underpinned by unusually high levels of demand, with latest industry figures showing
home-buyer mortgage approvals at their highest level since 2007, as transaction levels continue to be supercharged
by pent-up demand as a result of the spring/summer lockdown, as well as the Chancellor’s waiver on stamp duty for properties up to £500,000.
I find the “pent-up demand” bit curious as surely there will also have been pent-up supply? Bur we do see signs of a an active market.
HMRC Monthly property transactions data shows a fifth consecutive monthly rise in UK home sales
in September. UK seasonally adjusted residential transactions in September 2020 were 98,010 – up by
21.3% from August. The latest quarterly transactions (July-September 2020) were approximately 63.6%
higher than the preceding three months (April-June 2020). Year on year, transactions were 0.7% lower than
September 2019 (2.4% higher on a non seasonally adjusted basis). (Source: HMRC, seasonally-adjusted
Although I do note that whilst we have seen high rates of monthly growth it only brings us back to around what were last years levels. The picture on mortgage approvals is more clear-cut.
Mortgage approvals rose in September to the highest level seen in 13 years. The latest Bank of England figures show the number of mortgages approved to finance house purchases, rose by 7% from August to 91,454, down from a rise of 27% reported in August. Year-on-year, the September figure was 39% above September 2019.
We can now switch to what I call the Talking Heads question. From Once In A Lifetime.
And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well… how did I get here?”
The Bank of England’s role in us getting here started with the interest-rate cuts in response to the credit crunch. Then as they realised how interest-rates actually worked they added on bond buying in the form of what is called QE to reduce longer-term interest-rates too. It is easy to forget now but this did not do the trick for house prices so in the summer of 2012 we got what the then Chancellor George Osborne called credit easing. This was the Funding for Lending Scheme where the Bank of England channeled cheap cash ( Bank Rate was 0.5%) to the banks so that they did not have to indulge in the no doubt tiresome business of competing for depositors.
This was a crucial change in 2 respects. The first is access to funds at Bank Rate but in many ways more crucial is the access to large amounts of funds. So a quantity issue. This allowed banks to reduce mortgage-rates and I recall pointing out that mortgage-rates fell by 0.9% quite quickly and the Bank of England later claimed they fell by up to 2%.
Bringing this up to now we have the Term Funding Scheme operating that role and in its original form it has supplied £70.6 billion and the new pandemic era version has supplied some £49.6 billion. So as you can see the Bank of England keeps the banks supplied with cash and these days it can get it as cheap as the present Bank Rate of 0.1%. On this road we see that the cut in Bank Rate is not especially significant in itself these days but comes more into play via the Term Funding Scheme.
Next as more people moved to mortgages with fixed interest-rates ( around 92% of new mortgages last time I checked) QE also came back into play as an influence on mortgage rates via its impact on UK bond or Gilt yields. So this part of yesterday’s announcement matters.
The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.
There are issues with the stock but for our purposes today in looking at the mortgage market it is the flow ( presently £4.4 billion a week) that matters. It has helped keep my proxy for fixed-rates, which is the five-year bond yield negative since mid June now apart from one brief flicker. As I type this it is -0.06%.
So the theme starts singing along with Steve Winwood for house prices.
I’ll be back in the high life again
All the doors I closed one time will open up again
However all the government and Bank of England pumping has the problem that it means that they are ever more socially distanced from wages and earnings. So many are on 80% wages from the furlough scheme and real wages have been falling. There has to be some sort of reckoning here in the end. As well there are signs that the pumping system is creaking.
— BuiltPlace (@BuiltPlace) November 6, 2020
As you can see mortgage rates for those with lower amounts of equity or if you prefer high loan to value numbers have risen quite sharply. So the heat is on especially for those with only 5% equity where they have gone above 4% which really rather contradicts all the official rhetoric of low interest-rates. So I see trouble ahead which to be frank I welcome. I do not wish anyone ill in financial terms but we do need lower house prices to help first-time buyers.
Meanwhile something I have long warned about looks to have come true this week.
The Bank of England is investigating a potential leak of Thursday’s QE announcement ( @fergalob)
I do like the description of it being in The Sun as a “potential leak”……