Today’s headline may well be the one I have used the most over the years. In gardening terms it is something of a hardy perennial. It can bloom in all seasons too a bit like the plastic flowers my grandmother us to have outside her house. Below is the latest missive on the subject from the Halifax.
Average UK house prices rose again in March for the ninth month in a row. The increase of 1.4%, or £3,860 in cash terms, was the biggest jump since last September. With 2021’s strong momentum continuing into the beginning of this year, the annual rate of house price inflation (+11.0%) continues to track around its highest level since mid-2007.
It is hard to emphasise enough how wrong a monthly rise of 1.4% is after the economic crisis we have been through. But it is the direct result of the economic policies deployed as is the 11% annual rise. It is symbolic that the annual rate is the same since the boom that helped cause the credit crunch. Remember when we were assured that this would not be allowed to happen again?
Bank of England
This has been there with a can of petrol and some matches but if we return to the assurance point it has a Financial Planning Committee which is supposedly for that. On the 24th of March it gave us its view on things.
While UK house price inflation has continued to be strong, there is little evidence so far of a deterioration in lending standards or a material increase in the number of highly indebted households. Aggregate household debt relative to income has remained broadly flat, following slight increases earlier in the pandemic.
I wonder if “broadly flat” is doing some heavy lifting here in the way that former Governor Mark Carney used to tell us “this is not a debt-fueled recovery”? Also they cling to a metric that looks as if it is about to go wrong.
And the share of households with a mortgage debt-servicing ratio at or above 40% – a level beyond which households are typically much more likely to experience repayment difficulties – remains broadly in line with 2017–19 averages and significantly below levels seen just prior to the global financial crisis.
That of course would be typical of them. Also the cost of living crisis will be no big deal.
Although these price rises are unlikely to significantly affect the ability of mortgagors to make debt repayments, they will increase the pressure on household balance sheets, particularly if there is a larger than expected impact on growth.
So they are singing along with Bobby McFerrin.
Don’t worry, be happy
Ain’t got no cash, ain’t got no style
Ain’t got no gal to make you smile
Don’t worry, be happy
Your house earns as much as you
The Halifax point out that your house has made as much money as you have over the past year.
The new record price of £282,753 is up some £28,113 on a year ago, not far off average UK earnings over the same period (£28,860*).
That is symbolic and as in capital gains terms it is usually free on a first residence you could argue the property is ahead. Although, of course, liquidity is much lower and it is hard to get at. But we have a situation which directly challenges the complacency of the FPC above. If house prices have risen by the equivalent of a year’s earnings then the only way that affordability could be the same is if mortgage rates have fallen.
There is a problem here for the FPC as we remind ourselves of something we have already noted this week.
The average rate on the popular 30-year fixed mortgage just crossed 5%, now standing at 5.02%, according to Mortgage News Daily. This is the first time it has crossed that threshold since 2011, save two days in 2018. It stood at 3.38% one year ago today. ( CNBC)
These are moves after the FPC statement but as regular readers will now bond yields have been rising for a while now. Also whilst these are for the US moves there tend to ripple around the world and often that day.
So far in the UK we seem to be getting away with it at least according to Bank of England data.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages rose by 1 basis point to 1.59% in February. The rate on the outstanding stock of mortgages also ticked up 1 basis point to 2.02% in February.
Moneyfacts updated their numbers yesterday.
Average mortgage rates continue to increase across all fixed term periods, according to our data. However, this movement is not as volatile compared to what we have seen in previous weeks.
Three-year fixed mortgage rates saw the biggest increase, from 2.86% to 2.92% over the past seven days. Otherwise, two-year fixed rates jumped 0.03% to 2.88% while five and ten-year fixes jumped 0.02% over the same period.
Perhaps the Bank of England data will catch up when they do the update for March as there is quite a gap between the numbers. Back then Moneyfacts were reporting multi-year highs.
In the fixed-rate segment of the mortgage market, rates are climbing across all LTV brackets. At 2.65%, the average rate on a two-year fixed deal is the highest Moneyfacts has recorded in seven years. Meanwhile, at 2.88%, the overall average on a five-year fix is at a three-year high.
This is my main beef with bodies like the FPC. Their role is to explain why nothing needs to be done about house prices rather than looking ahead to see dangers. That is why I have argued in the past that we should scrap it and save the money.
There are two basic issues here. The first is the pumping up of house prices in an economic crisis. We are assured by the FPC that this is all fine but it must increase risk. Although I guess from their perspective ( The Precious! The Precious!) it does reduce them as the mortgage books of the banks get a boost. But now as we experience the worst stagflation for years and indeed decades the risks mount. Even The Halifax is troubled as it tries to look ahead.
“However, in the long-term we know the performance of the housing market remains inextricably linked to the health of the wider economy. There is no doubt that households face a significant squeeze on real earnings,,,,,,,Buyers are therefore dealing with the prospect of higher interest rates and a higher cost of living.
The Halifax does not seem entirely convinced by the FPC view on affordability.
With affordability metrics already extremely stretched, these factors should lead to a slowdown in house price inflation over the next year.
Along the way I think I have spotted yet another example of support for house prices as I queried heavy falls in mortgage rates for low equity mortgages.
Since then mortgage guarantee scheme has narrowed the spread between higher and normal LTVs.
The support just keeps appearing doesn’t it?
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