The UK is now heading into an economic zone that poses a real challenge for economy policy. The credit crunch era has seen an extraordinary effort to first get house prices rising and then maintain it. As time passes it is easy to forget that the Bank Rate cut to 0.5% and the initial waves of QE bond buying were not enough. So we added the Funding for Lending Scheme (yet another bank subsidy) and Help to Buy to the mix which turned net mortgage lending and house prices positive. More recently the pandemic era saw something of a turbocharger added to the house price engine with Bank Rate cut to 0.1%, a wave of QE bond buying and another bank subsidy via an enhanced Term Funding Scheme. So house prices surged again.
This morning has brought rather different news and let me first say that my heart goes out to the research student presenting the Bank of England morning meeting. It was simply awful luck that the rota meant that they had to inform Governor Andrew Bailey of this.
Average house prices fell in November as the rate of annual growth slowed further to +4.7% (from +8.2%), with
the typical UK property price now sitting at £285,579. The monthly drop of -2.3% is the largest seen since
October 2008 and the third consecutive fall. ( Halifax )
There is no way of sugaring such a monthly fall from the perspective of a central banker. As visions of being banned from using the afternoon cake trolley occur our research student should try pointing out that it would all be worse without the Governor’s masterful intervention in the UK bond market, which is yielding a tidy profit as sales begin.
But a fall in the annual rate of house price growth to 4.7% would have set a bad tone on its own and a 2.3% monthly drop will make the room feel like the windows are open on what is a cold wintry day. A little warmth may be created by reminding everyone of this.
“When thinking about the future for house prices, it is important to remember the context of the last few years,
when we witnessed some of the biggest house price increases the market has ever seen. Property prices are
up more than £12,000 compared to this time last year, and well above pre-pandemic levels (+£46,403 vs March
2020).
The problem with reminding everyone about the wealth effects is that in the words of Paul Simon they are now slip-sliding away. Plus the factors mentioned by the Halifax below suggest more falls are on their way.
The market may now be going through a process of normalisation. While some important factors like the limited supply of properties for sale will remain, the trajectory of mortgage rates, the robustness of household finances in the face of the rising cost of living, and how the economy – and more specifically the labour market –
performs will be key in determining house prices changes in 2023.
The Nationwide
Today’s Halifax release backs up what we were told by The Nationwide at the start of the month.
The fallout from the mini-Budget continued to impact the market, with November seeing a sharp slowdown in annual house price growth to 4.4%, from 7.2% in October. Prices fell by 1.4% month-on-month, after taking account of seasonal effects, the largest fall since June 2020.
The different measures are far from always the same but this time around they are more similar as the numbers above have been declining for 3 months now.
Economic Factors
Mortgage Costs
The situation here was summed up by a tweet from Henry Pryor.
Average 2yr fixed mortgage rate according to @Moneyfacts_co.uk Last Dec – 2.34%
Oct – 6.65%
Today?
5.99%
So things have improved but the overall situation has deteriorated over 2022. The recent problems were back up in the latest Bank of England Money and Credit release.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% in October. The rate on the outstanding stock of mortgages increased by 5 basis points, to 2.29%.
I am not sure how they get to a mortgage rate of 3.09% but we can stay with a rising trend and returning to Henry’s tweet I noticed that banks have widened margins. The UK two-year bond yield has declined by around 1.5% so more than twice the fall in mortgage rates seen so far.
According to Moneyfacts some better deals have emerged.
While first-time buyers with smaller deposits may continue to keep their plans on ice until conditions stabilise further, the options around and below the 5.00% mark are increasing if you’re looking to remortgage or move home.
But taking a look they require equity of at least 25% and also are for bigger mortgages as otherwise a product fee of £1499 makes the effective rate a fair bit higher.
Wages
We know that the economic situation is struggling but the metric for house prices is wages growth. At first that looks good.
Growth in average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.7% among employees in July to September 2022; this is the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic period. ( Office for National Statistics )
The problem is that once you try to go and buy anything you realise that prices have risen faster. Even the flawed UK real wages numbers have spotted that.
In July to September 2022 growth in total and regular pay fell in real terms (adjusted for inflation) by 2.6% on the year for total pay and by 2.7% on the year for regular pay; this is slightly smaller than the record fall in real regular pay we saw April to June 2022 (3.0%) but still remains among the largest falls in growth since comparable records began in 2001.
My estimate of real wages falls is more like 5% per annum. My estimate is based on two realities ignored by the official data. Any actual cost of owner-occupied housing involves a combination of a lump sum and/or mortgage costs which have risen, the latter by amounts we look at earlier. Secondly the official rental series used in the recommended CPIH inflation measure is a mess. The use of a “stock” concept means we get last years numbers ( somewhere in the summer of 2021) which is a big deal in a fast changing world. Next up is whether using a “stock” misses some rises? Even worse Imputed Rents are used for owner-occupiers so a measurement problem becomes three times larger.
Comment
The first point is that everything here points to lower house prices. The main driver is higher mortgage rates backed up by a weaker economy with lower real wages. We have not had a period like this for quite some time. Also in their efforts to avoid house price falls ( my view on the “temporary” and “transitory” claims about inflation were because they hoped they could avoid reducing house prices) now mean that the main squeeze is on just as the economy is at its weakest trajectory. A move that technocratic central banks were supposed to prevent.
From that comes my view that the central banks and in this case the Bank of England will weaken on interest-rates. We looked at Australia yesterday and saw how the RBA has dropped back to 0.25% increases ( 3 in a row now) and wonder when it will stop and then reverse course? The Bank of England is not as advanced as that but after next week’s increase which I still expect to be 0.5% how many more will there be? So house price falls can be expected for the early part of 2023 but they will in themselves put pressure on central banks to reverse course on interest-rates.