This morning has brought another example that to quote Todd Terry “there’s something going on” in the UK housing market. Of course there is an enormous amount of government and Bank of England support but even so we are seeing a curious development.
House prices rebound further to reach record
high, challenging affordability.
That is from the Halifax earlier who are the latest to report on this trend where the initial effect of the Covid-19 pandemic has been not only to raise recorded house prices, but to give the rate of growth quite a shove. Indeed prices rose by nearly as much this August on its own as in the year to last August.
“House prices continued to beat expectations in August, with prices again rising sharply, up by 1.6% on a
monthly basis. Annual growth now stands at 5.2%, its strongest level since late 2016, with the average
price of a property tipping over £245,000 for the first time on record.”
I would not spend to much time on the average price per see as each house price index has its own way of calculating that. But the push higher in prices is unmistakable as we look for the causes.
“A surge in market activity has driven up house prices through the post-lockdown summer period, fuelled
by the release of pent-up demand, a strong desire amongst some buyers to move to bigger properties, and
of course the temporary cut to stamp duty.”
I think maybe the stamp duty cut should come first, but the desire for larger properties is intriguing. That may well b a euphemism for wanting a garden which after the lock down is no surprise, but at these prices how is it being afforded? Wanting if one thing, be able to afford it is another.
Bank of England
It’s combination of interest-rate cuts. QE bond buying, and credit easing has led to this.
The mortgage market showed more signs of recovery in July, but remained weak in comparison to pre-Covid. On net, households borrowed an additional £2.7 billion secured on their homes. This was higher than the £2.4 billion in June but below the average of £4.2 billion in the six months to February 2020. The increase on the month reflected a slight increase in gross borrowing to £17.4 billion in July, below the pre-Covid February level of £23.7 billion and consistent with the recent weakness in mortgage approvals.
As you can see it has got things on the move but both gross and net levels of activity are lower and especially the gross one. That may well be a lock down feature as there are lags in the process. But if the approvals numbers are any guide they are on their way
The number of mortgages approvals for house purchase continued recovering in July, reaching 66,300, up from 39,900 in June. Approvals are now 10% below the February level of 73,700 (Chart 3), but more than seven times higher than the trough of 9,300 in May.
It seems that the Monetary Policy Committee may have further plans for the housing market.
Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two
and a longer period of excess supply than the forecast in the August MPR. If these risks develop,
then some further monetary loosening may be needed in order to support the economy and prevent
a persistent undershoot of the 2% inflation target. ( MPR = Monetary Policy Report )
Seeing as interest-rates are already at their Lower Bound and we are seeing QE bond buying as for example there will be another £1.473 billion today. it does make you wonder what more he intends? Although in a more off the cuff moment he did say this.
Review of negative rates is not finished: Not theologically oppsed to neg rates. ( ForexFlow)
He seems genuinely confused and frankly if he and his colleagues were wrong in August they are likely to be wrong in September as well! Oh and is this an official denial?
But I wouldn’t get too carried away by this prospect of money-fuelled inflation pressures.
He did however get one thing right about the money supply.
In other words, the crisis has lifted the demand for money
– the amount of deposits that households and businesses would like to hold – as well as the rise in the
supply of money described above.
That is a mention of money demand which is more of an influence on broad money than supply a lot of the time. Sadly though he fumbled the ball here.
All this has been backed up by the BoE’s asset purchase programme, which (to the extent that bonds have
been bought from the non-bank private sector) acts directly to boost broad money growth.
It acts directly on narrow money growth and affects broad money growth via that.
Another credit crunch
Poor old Michael Saunders needs to get out a bit more as this shows.
And, thanks to the marked rise in their capital ratios during the last decade, banks have been much better
placed than previously to meet that demand for credit.
Meanwhile back in the real world there is this.
Barclays has lowered its loan to income multiples to a maximum of 4.49 times income.
This applies to all LTVs, loan sizes and income scenarios except for where an LTV is greater than 90 per cent and joint income of the household is equal to or below £50,000, and where the debt to income ratio is equal to or above 20 per cent.
In these two cases the income multiple has been lowered to 4 times salary. ( Mortgage Strategy)
There has been a reduction in supply of higher risk mortgages and such is it that one bank is making an offer for only 2 days to avoid being swamped with demand.
Accord Mortgages is relaunching it’s 90 per cent deals for first-time buyers for two days only next week. ( Mortgage Strategy)
Also according to Mortgage Strategy some mortgage rates saw a large weekly rise.
At 90 per cent LTV the rate flew upward by 32 basis points, taking the average rate from 3.22 per cent to 3.54 per cent…….Despite the overall average rate dropping for three-year fixes there was one large movement upwards within – at 90 per cent LTV the average rate grew from 3.26 per cent to 3.55 per cent.
If we start with the last section which is something of a credit crunch for low equity or if you prefer high risk mortgages then that is something which can turn the house price trend. I would imagine there will be some strongly worded letters being sent from the Governor of the Bank of England Andrew Bailey to the heads of the banks over this. But on present trends this and its likely accompaniment which is surveyors reducing estimated values will turn the market. Indeed even the Halifax is btacing itself for falls.
“Rising house prices contrast with the adverse impact of the pandemic on household earnings and with
most economic commentators believing that unemployment will continue to rise, we do expect greater
downward pressure on house prices in the medium-term.”
What can the Bank of England do? Short of actually buying houses for people there is really only one more thing. Cut interest-rates into negative territory and offer even more than the current £113 billion from the Term Funding Scheme ( to save the banks the inconvenience of needing those pesky depositors and savers). Then look on in “shock” as the money misses smaller businesses as it floods the mortgage market. But these days the extra push gets smaller because it keeps pulling the same lever.
Also can HM Treasury now put stamp duty back up without torpedoing the market?