UK mortgage supply surges as consumer credit collapses

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by Shaun Richards

Today the economic focus switches to the UK as we consider its share in the pumping up of the world money supply. Although as I type this the central bankers may be rather jealous of the Reddit and Wall Street Bets crew.

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A more prosaic view on a direct impact of the loose monetary policy in the UK is provided by house prices. Last week Hometrack offered their perspective on this.

The annual rate of UK house price growth is 4.3%, the highest since April 2017. The impetus for growth is coming from Wales, northern England and Scotland where strong demand and attractive affordability allow headroom for above average growth rates.

The rate of annual price inflation is highest in Wales and the North West at +5.4%.

At a city level, Liverpool has jumped to the top of the growth rankings with house prices rising by 6.3% over the last 12 months – this is the highest annual growth rate for 15 years.

Manchester is close behind with a growth rate of +6.0%, back to levels of inflation last seen 2 years ago.

So Liverpool is leading the way as the house price market follows the performance its football team, or at least the red version. Next comes Manchester which may be seeing the benefit of all the plugging of its house prices by the Salford based BBC. Care is needed though because at £127,200 prices in Liverpool are a long way short of the average for this index which is £233,700 and less than half of the twenty city index at £260.500.

This time around things are being led by the North it would seem.

House price growth is at a decade high across three regions – North East, North West, Yorkshire and the Humber – in fact growth is running at the highest since before the global financial crisis.

Although looking ahead they expect all areas to continue this trend.

Despite the new lockdown, demand for homes has posted the usual seasonal rebound which has been stronger than last year. Demand for homes is up 13% on this time last year, with new sales agreed also up 8%.

This rebound is broadly uniform across all regions and countries. It is a continuation of above average demand and market activity from 2020 H2.

You may not be surprised to read that they seem to be keen on an extension to the Stamp Duty holiday. They say it will be short but we know what that invariably means!

Meanwhile something slightly different is happening in London.

The one area where supply is growing is London with flats accounting for much of this increase.

We believe this is a combination of 1) more owners looking to trade up from flats to houses motivated by a desire for space and more flexible working patterns; 2) investors looking to sell homes in the face of falling rents and expectations of an increase in capital gains tax rates in 2021.

Those of you who follow the debate might think that for once the official obsession with using Imputed Rents might show something useful here.They might if they did not use last year’s.So next year they will be useful for telling us what is happening now!

Mortgage Supply

It was on a bit of a tear in December.

Net mortgage borrowing remained strong at £5.6 billion in December.

2020 was a year of not far off the football image of two halves with a strong ending.

Net borrowing continued to be significantly higher than the average of £3.9 billion seen in the six months to February 2020. Strength since September in net mortgage borrowing has, however, only partially offset weakness earlier in the year: total borrowing in 2020 (£43.3 billion) was below 2019 (£48.1 billion).

If we look further up the chain we can expect more of the same.

The strength in mortgage borrowing follows a large number of approvals for house purchase over the second half of 2020. In December, the number of these approvals – an indicator for future lending – was 103,400 (Chart 1). This was slightly lower than in November (105,300) but well above the February level (73,400). Recent strength in approvals has more than offset the significant weakness earlier in the year

The next statement is not for the nervous as what happened after 2007?

House purchase approvals – having troughed at a record low of 9,400 in May – totaled 818,500 in 2020, the largest number in one year since 2007.

These are extraordinary numbers in a pandemic which has ravaged more than a few bits of the UK economy. For example there was more woe being reported for the retail sector earlier via Arcadia. This is a clear function of the way the Bank of England stepped in.

However there is an area where it is now beginning to struggle.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 7 basis points to 1.90% in December. That is slightly above the rate at the start of the year (1.85% in January) and the highest since October 2019. The rate on the outstanding stock of mortgages was little changed at 2.12% in December.

The fact that mortgage rates are not higher than pre pandemic confirms my theme that Bank Rate is essentially now irrelevant for them. After all it was cut from 0.75% to 0.1% and now mortgage rates are in general higher. Indeed it has had little lasting effect even on the shrinking number of variable rate mortgages as their interest is 0.11% lower than a tear ago or around one sixth of the Bank Rate cut.

Consumer Credit

This had a simply wretched 2020 and I do envy the individual who had to announce these numbers at the Bank of England morning meeting.

Households’ consumer credit remained weak in December with net repayments of £1.0 billion. This follows a net repayment of £1.5 billion in November (Chart 2). Total net repayments were £16.6 billion in 2020, the weakest in one year on record. As a result, the annual growth rate fell further to -7.5% in December, a new series low since it began in 1994.

It has essentially been driven by credit cards.

Within consumer credit, the weakness in December reflected net repayments on both credit cards (£0.8 billion) and other forms of consumer credit (£0.1 billion). As a result, the annual growth rates of both components fell further, to -16.2% and -3.4%, respectively. For credit cards, this represents a new series low.

I would say this was due to the cost of borrowing on a credit card but in fact that has pretty much ignored all the Bank Rate cuts of the credit crunch era.

The cost of credit card borrowing bounced back to 17.76% in December, following the series low at 17.49% in November.

Comment

There are some extraordinary numbers here as we see the impact of the £128 billion or so of the various Term Funding Schemes on mortgage supply. Next comes the impact of the extra QE bond buying in driving mortgage interest-rates lower although even a current weekly purchasing rate of just over £4.4 billion has not stopped a bounce back.

Switching to the wider money supply we see changes as mortgage finance fires up again but consumer credit shrinks. On the other side of the coin we have seen an extraordinary rise in savings.

Households’ flows in to deposit-like accounts rose in December. The net flow of deposits was £20.9 billion in December, up from £18.4 billion in November (Chart 3).

There is an irony here as the TFS was to avoid the banks having to compete for deposits which have poured in anyone. I am also sure some bright spark PhD is writing a piece saying that lower savings rates create a higher demand for savings.

The effective interest rate paid on individuals’ new time deposits with banks fell by 8 basis points in December, to 0.42%, a new series low since it began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.51%, respectively. The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in January.

With mortgage rates rising and savings rates falling The Precious! The Precious! Will be making some money and is no doubt a factor in why bank share prices have been doing better.

Adding it all up gives us money supply growth of 14.1%.

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