A feature of the credit crunch era has been the way that central banks have concentrated so much firepower on the housing market so that they can get house prices rising again. Of course they mostly hide under the euphemism of asset prices on this particular road. For them it is a win-win as it provides wealth effects and supports the banking sector via raising the value of its mortgage book. The increasingly poor first time buyer finds him or herself facing inflation via higher prices rather than wealth effects as we note the consumer inflation indices are constructed to avoid the whole issue.
This moves onto the issue of Forward Guidance which exists mostly in a fantasy world too. Let me give you an example from the Bank (of England) Underground Blog.
It is reasonable to suppose that the more someone knows about a central bank and how it conducts policy, the more confidence they will have that the central bank will act to bring inflation back to target.
Really? To do so you have to ignore the two main periods in the credit crunch era when the Bank of England “looked through” inflation above target as real wages were hit hard. Yet they continue to churn out this sort of thing.
And Haldane and McMahon, using the institutional knowledge score discussed above, show that for the UK, higher knowledge corresponds to greater satisfaction with the Bank, and inflation expectations closer to 2% at all horizons.
So according to the Bank of England you are none to bright if you disagree with them! I think it would have been better if Andy Haldane stuck to being a nosy parker about others Spotify play lists.
The area where the general public has I think grasped the nettle as regards central banking forward guidance is in the area of house prices. The Bank of England loudspeakers have been blaring out Yazz’s one hit.
The only way is up, baby
For you and me now
The only way is up, baby
For you and me now
Indeed even if things go wrong then we can apparently party on.
But if we should be evicted
Huh, from our homes
We’ll just move somewhere else
And still carry on
Where are we now?
If we switch to the current state of play we are in a situation where the new supply of moves to boost house prices have dried up. For example the Term Funding Scheme ended in February and after over four years of dithering the Bank of England raised Bank Rate to 0.75% in August. Combining this with the fall in real wages after the EU leave vote led to me expecting house prices to begin to fall but so far only in London has this happened. One factor in this has led to a blog from the National Institute of Economic and Social Research or NIESR last week.
The key point is that although the political turmoil was of great concern, the impact on bond prices followed a pattern we have seen before in which risk rises but expectations of a policy response militate against the risk.
The politics may be of great concern to the NIESR but the UK Gilt market has been driven by the intervention of the Bank of England. Not only has it already bought some £435 billion of it but its behaviour with the Sledgehammer QE of August 2016 has led to expectations of more of it in any setback. The irony is that good news may make the Gilt market fall because it makes extra QE less likely. The impact of this has been heightened by the way the Bank of England was apparently willing to pay pretty much any price for Gilts in the late summer of 2016. For the first time ever one section of the market saw negative yields as the market picked off the Bank of England’s buyers.
Mortgage Rates
This is where the Gilt yield meets an economic impact. If we think about mortgage rates then they are most driven by the five-year yield. On the day of the August Bank Rate it was 1.1% and of course according to the Bank of England the intelligent observer would be expecting further “limited and gradual rises” along the lines of its forward guidance. Yet it is 0.96% as I type this and the latest mortgage news seems to be following this. From Mortgage Strategy.
TSB has reduced interest rates by up to 0.35 per cent on mortgages for residential, home purchase and remortgage borrowers.
Changes applied include reductions of up to 0.35 per cent on five-year fixed deals up to 95 per cent LTV in its house purchase range; reductions of up to 0.25 per cent on two-year fixes up to 90 per cent LTV; and up to 0.30 per cent on five-year fixes up to 90 per cent LTV for remortgage borrowers.
That was from Friday and this was from Thursday.
Investec Private Bank has announced cuts to a series of its fixed and tracker mortgages.
Reductions total up to 0.50 per cent, and all within the 80 per cent – 85 per cent owner-occupier category.
Specifically, the variable rate mortgage has been cut by 0.50 per cent, the three-year fixed rate product by 0.10 per cent, the four-year by 0.15 per cent, and the five-year fixed rate by 0.20 per cent.
So the mortgage rates which had overall risen are in some cases on the way back down again. We will have to see how this plays out as Moneyfacts are still recording higher 2 year mortgage rates ( 2.51% now versus the low of 2.33% in January). I am placing an emphasis on fixed-rate mortgages because of the recent state of play.
The vast majority of new mortgage loans – 96% – are on fixed interest rates, typically for two or five years.
Currently half of all outstanding loans are on fixed rates, equating to about 4.7 million households. ( BBC in August).
Lending
According to UK Finance which was the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield this is the state of play.
Gross mortgage lending across the residential market in October was £25.5bn, some 5.6 per cent higher than last October. The number of mortgages approved by the main high street banks in October was 4.1 per cent lower than last October; although approvals for house purchase were 3.6 per cent higher, remortgage approvals were 13.5 per cent lower and approvals for other secured borrowing were 1.3 per cent lower.
If they are right this seems to be a case of steady as she goes.
Comment
The situation so far is one of partial success for my view if the monthly update from Acadata is any guide.
House prices rebounded in October, up 0.4% – the first increase since February. The annual rate of price increases
continued to slow, however, dropping to just 1.0%.
Despite this, most regions continue to show growth, the exceptions being both the South East and North East, which show modest falls on an annual basis. The average price of a home in England and Wales is now £304,433, up from £301,367 last October.
So no national fall as hoped ( lower house prices would help first time buyers) but at east a slowing of the rise to below the rate of growth of both inflation and wages. There is also plenty of noise around as one official measure is still showing over 3% growth whilst the Rightmove asking prices survey shows falls. As ever the numbers are not easy to wade through as for example I have my doubts about this.
In London annual price growth has slowed substantially in the last month, falling to just 1.8%, yet there has still been an increase of £10,889 in the last twelve months with the average price in London now standing at £620,571.
The noose around house prices is complex as for example we have seen today in the trajectory of mortgage rates and reporting requires number-crunching as this from Politics Live in the Guardian shows.
GDP per head would fall by 3% a year, amounting to an average cost per person a year of £1,090 at today’s prices.
I would like to see an explanation of why it would fall 3% a year wouldn’t you? Much more likely the NIESR suggests a 3% fall in total and just for clarity it is against a rising trend. Of course if we saw falls as reported in the Guardian we would see the 18% drop in house prices suggested by some before the EU referendum whereas so far we have seen a slowing of the rises. But the outlook still looks cloudy for house prices and I still hope that first time buyers get some hope in terms of lower prices rather than help to borrow more.
Podcast