According to the latest survey from the Nationwide, UK house prices rose by 0.9% in June, the third rise in the past four months, and shrank the annual rate of decline to just 9.3%, from 11.3% in May. The increase in prices during the past month means the average home now costs £156,442, which is £15,973 less than a year ago.
The Nationwide said the stabilisation of prices was a "welcome surprise". Since their recent low point in February, of £147,746, average UK house prices as measured by the Nationwide have now risen by £8,696. They also said the best measure of short-term trends was to compare the average price for the past three months with that for the previous three. On that basis, prices were now 0.9% higher, the first time they have been on an upward trend since December 2007. They added that that if this pattern continued then this year would end with prices down by only "small single digits". "This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008," it said. Although there has been no let up in rationing of loans by mortgage lenders, the building society said potential sellers, and builders, were putting very few properties up for sale, which was bringing some equilibrium to prices. But it warned against interpreting its latest data as the beginning of a sustained recovery in prices, as the abnormally low supply levels would not last for ever. The National Association of Estate Agents (NAEA) says the increase in agent sale boards shows optimism in the housing market. The group revealed that a third of estate agents said they've seen around a 10% increase in properties coming onto the market, compared to six months ago. Furthermore, one in six agents said they'd experienced up to a 20% increase, adding further optimism in a recovery in the housing market. Gary Smith, president of the NAEA, said: "Since the beginning of the year NAEA members have seen a significant increase in demand. There are clearly plenty of buyers out there. Last month the NAEA registered an average of four buyers for every available property." The UK housing market is over the worst, added. Half of all home sales are going through without the Home Information Pack demanded by the Government, it has been claimed. The controversial requirement for sellers to buy and complete a HIP costing £300 or more is simply being dodged or ignored, according to research. This mass disobedience of the law has been highlighted by the Conservatives, who have pledged to scrap the 'pointless and expensive' system. Sellers have been required since April to have a full HIP in place before marketing their home. However, a survey by Spicerhaart, the country's biggest independent estate agency firm, in the following five weeks found a HIP was available and completed in only 48 per cent of cases. According to the latest figures from the Bank of England, the value of purchase loans taken out by homeowners swelled from £5.1bn in April to £5.4bn in May.
In real terms this equated to 223 more purchase loans taken out in May, rising from 43,191 in April to 43,414 in May.
Remortgages taken out in dipped in terms of the number, falling from 31,701 in April to 30,984, but the value of the loans was consistent over both months at £3.9bn.
Overall, some £10.2bn worth of loans secured on homes were taken out over May, up from £10bn in April.
Latest John Charcol Monthly Mortgage Index shows purchases now represent over half of all new mortgage applications
According to the CML, the number of loans handed out for house purchases in the UK rose by 16% in April compared with the previous month. However the figure remains 28% down on the same month the previous year. The data is bound to add further evidence to indications of a spring bounce in the housing market.• In April, the average amount borrowed by first-time buyers for a home loan rose slightly to £96,000 - the first rise since May 2008.The data is the final set of figures relating to the state of the mortgage market in April, and effectively echoes lending data from earlier surveys. The figures confirmed a rebound in the popularity of fixed-rate mortgages, with many predicting that interest rates are unlikely to fall further. • In January, 48% of new home loans were fixed-rate deals but this proportion rose to 69% in April. • The average rate charged on those deals in April - of 4.83% - was the lowest paid since January 2004. • The number of loans for house purchases stood at 35,500 in April. • The number of people remortgaging dropped to 31,000 - down 22% compared with the previous months and a fall of 65% compared with a year earlier.Unfortunately this comes at a time when many lenders will be increasing their fixed rate offerings following the sharp increases in Swap rates over recent weeks.The Bank of England has said negative equity among home owners might have exaggerated the speed with which the UK economy fell into recession. Its Quarterly Bulletin says negative equity can undermine the solvency of lenders as well as depressing borrowing and spending by home owners. • Negative equity affects between 700,000 and 1.1m households, the Bank says, though they admit that there is no exact measure of the size of the problem.The Bank's main concern is about the effect of bad home loans on the stability of the banking system itself. "Large losses on mortgage loans and associated securities can erode banks' capital positions, affecting both lenders' willingness and ability to lend and, in extreme cases, their solvency," the Bank says. The bulletin suggests that negative equity may have amplified the speed and scale of the economy's fall into recession during the past year as banks, worried about potential losses, reined in their lending to both individuals and companies.Its bulletin points out that the amount of money the UK's biggest banks have lent in the form of home loans, is five times the value of their shareholders' capital and reserves, known as Core Tier 1 capital. And in turn, 40% of all mortgage debt has been packaged up and sold to raise even more loans from the banking system, thus spreading the risk of losses around the banking system far beyond the original lenders. However the bulletin avoids making any prediction about how much worse negative equity, and its effect on the banking system, will become, but it does point out that the scale of negative equity is similar to that of the early 1990's.The problem has emerged much more quickly, because of the very sudden fall in house prices from their peak in the middle of 2007 to the first quarter of 2009. • Between the middle of '07 to 1st Quarter '09 UK house prices fell by about 20%, whereas it took six years for them to fall by 15% between 1989 and 1995.The Bank acknowledges that negative equity can pose a myriad of problems for households in that position if they are in financial difficulties, as it makes it harder for them to sell up and move, or to borrow against the value of their homes to pay off other debts, or to finance normal household spending during a period of unemployment. There is a slight ray of hope this time around though in that so far the level of mortgage arrears and repossessions has been far lower than that of the early 1990's, partly due to the very low level of interest rates now prevailing, which have slashed many homeowners' monthly repayments.According to the ONS, new construction orders for April have provided further tentative evidence that the worst of the downturn in the economy may have passed.• Total orders rose for the second consecutive month to stand 26% above the February low, although in the three months to April, orders were still 8.7% lower than in the previous three month period.Meanwhile, in the housing sector alone, orders in private housing have jumped 57% over the past couple of months. "Although in terms of actual numbers this still represents a low level of activity, the improving picture is consistent with reports from house builders that they have seen inventory levels being run down of late," said RICS chief economist Simon Rubinsohn.
Following my blog a couple of days ago warning of imminent fixed rate mortgage increases Yorkshire Building Society yesterday announced increases of between 0.2% and 0.5% and today Nationwide has announced some massive increases from Friday. All its fixed rates are increasing, but the biggest increase is a stunning 0.86% on one of its 5 year fixes. A rate increase of this size on a £200,000 interest only mortgage will increase its total cost over 5 years by £8,600, or £143.33 per month!
The maximum and minimum increases are as follows:
2 year fixes between 0.16% and 0.61% 3 year fixes between 0.20% and 0.26% 5 year fixes between 0.20% and 0.86%
There is no obvious pattern to which rates are going up most. For example on 2 years it is the rates for the higher loan to values, whereas on for 5 years the biggest increases are on the rates to 60% LTV and the smallest on the rates to 85% LTV.
Such large and varied increases indicate that either Nationwide wants to rebalance its mix of business or it has reassessed the relative risks of different types of business, or perhaps both. It may also indicate that it wants to reduce the overall amount it lends.
If the latter is true yesterday's speech by Paul Tucker, Deputy Governor of The Bank of England, at The Association of British Insurers’ Biennial conference in London is prescient. He said, “For the moment it is unclear – as, I must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery”. He warned against the risks from banks simultaneously deleveraging by cutting back on the availability of credit, pointing out that “not lending would be a counterproductive business and financial strategy.”
Nationwide is one of only 6 lender groups currently doing serious volume in the mortgage market and these rate increases will push more business to other lenders, most of whom will not want the extra volume and even if they do will in many cases not have staffed their new business departments to a level to enable them to cope with the extra demand.
I have no doubt that this, plus the increased costs of funds affecting every lender as a result of recent sharp rises in swap rates, will result in most other lenders announcing increases in the cost of their fixed rate mortgages in the very near future. The corollary is that, albeit probably after a little time lag, better rates are likely to be offered to savers prepared to tie their money up for at least 2 years.
Interest rates and equities appear to be rising because the market is coming round to the view that the economy is going to bounce back from the recession more quickly than was expected until recently. However, if rates rise too far too quickly there is a very real danger that whatever green shoots may be appearing will be strangled at birth.
Today saw another sharp rise in gilt yields at the short end of the market, although there was a marginal fall in yields at the long end. The yield on 2 – 4 year gilts rose by around 0.15%, with the obvious knock on effect on swap rates, some of which rose even more. 2 year swaps were up by 0.22% to 2.48%, 3 year by 0.21% to 3.11% and 5 years by 0.14% to 3.76%. The 10 year rate was only 0.02% up at 4.24%.
The recent lows for swap rates were on May 14, the day after the publication of the Bank of England’s Quarterly Inflation Report, when 2 year swaps closed at 1.98%, 3 years at 2.49%, 5 years at 3.14% and 10 years at 3.80%.
Thus in just 3½ weeks 2, 3, 5 and 10 year swap rates have risen by a massive 0.50%, 0.62%, 0.62% and 0.44% respectively and this at a time when the Bank of England’s Quantitative Easing programme is meant to be driving down yields. This presents the Prime Minister, who is rapidly losing what little authority he has left, and the Bank of England with a major problem. Having pushed Bank Rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the Government is impotent in this area and has lost control of interest rates except at the very short term end.
This situation has some parallels with the US. The yield on the US benchmark 10 year Treasury Bond bottomed out on 15 January this year at 2.14% but closed a whopping 1.69% higher last week at 3.83%, after rising 0.37% on the week. As a consequence rates on a US 30 year fixed rate mortgage, the most common type of mortgage in the US, have risen by 0.45% in the last month alone to around 5.45%.
Following such a sharp rise in swap rates here in the UK I expect several lenders to increase their rates for fixed rate mortgages over the next few days, but there is no reason to expect tracker rates to increase as 3 month Libor is still slowly edging lower and at 1.25% the margin of 0.75% over Bank Rate is the lowest it has been for several months.
With most borrowers (around 80% of our clients) currently choosing a fixed rate mortgage, if interest rates continue to rise the current recovery in the housing market, which is based primarily on much improved affordability as a result of the combination of lower house prices and lower interest rates, is in danger of being snuffed out.
Today’s decision by the MPC to leave Bank Rate and the Quantitative Easing programme unchanged was widely expected but next month the committee will have to consider whether to utilise the final £25bn The Chancellor has authorised for Quantitative Easing. If the MPC feel the need to either consult with The Chancellor on this or ask for authorisation to exceed the £150bn already authorised it looks very probable they will have to deal with a different Chancellor. However, as the Prime Minister was no doubt actively involved in the original decision to go down the Quantitative Easing route no doubt, assuming he has not been ousted by this time next month, his influence will mean that the basic policy won’t change.
Although a few lenders increased the maximum loan to value at which their best rates are offered during the last month, others have either increased the rates on their fixed deals, particularly those lasting longer than 2 years, or withdrawn some of their deals completely and some have in fact done both. This partly reflects a small increase in swap rates but a more important factor for lenders appears to be a need to restrict the volume of new business.
Maintaining service standards is the often reason given for this, and everyone agrees this is very important. However, there is no shortage of experienced mortgage personnel in the market at the moment and so lenders will have had no trouble staffing their back offices at the levels necessary for the amount of lending they want to do. Therefore, the basic reason for rates increasing or disappearing completely is to avoid exceeding the amount of lending the lender is willing and able to do, taking account of, among other things, commitments given to the Government and capital constraints.
Despite the Bank of England having used £80bn of the funds it has agreed to commit under its Quantitative Easing programme it is hard to see any visible impact of this so far in terms of any real increase in mortgage availability. It may be that with the housing market performing better than virtually all the forecasts at the end of last year, albeit with activity still at a historically low level, the modest extra mortgage demand this has generated is enough to be the straw that breaks the camel’s back.
With no slack in the amount of mortgage funding available and lenders currently having no ability to easily increase the amount of money they have available to lend, the only ways they can restrict demand are the time honoured methods of putting up their rates or withdrawing products. The former has the bonus side effect of increasing their margins and until the Residential Mortgage Backed Securities market reopens it is difficult to see where any significant additional funding is going to come from, apart from The Government.
What is making matters worse is that the FSA now requires building societies to stress test their balance sheets for, among other criteria, a fall of a further 50% from today’s levels of residential property prices. Such an Armageddon type test might have been appropriate at the beginning of the credit crunch but this is a classic example of a regulator on the back foot because of earlier failures and now overreacting, just as some confidence is returning to the residential property market. Such an onerous stress test reduces lenders’ ability to lend and thus compounds the supply-demand imbalance in the mortgage market.
The campaign by The Association of Independent Financial Advisers (AIFA) and the Association of Mortgage Advisers (AMI) against the swingeing increase in regulatory fees originally proposed by FSA on its members was a major factor in the huge number of responses - 533 - to the consultation. Such a response was impossible to ignore and resulted in a major rethink by the FSA on how the fee increases should be apportioned to the different sectors of the market.
The FSA will still increase its total fee income for 2009/10 by an outrageous 35.8% but even more of this increase will now fall on banks, insurers and principle dealers. The average regulatory fee charged to banks and other deposit takers will increase by a massive 109.4% from last year, compared to an only slightly less massive 94.9% in the FSA’s original proposals.
For mortgage advisers the original proposed total levy of £13.7m (£11.3m in 2008/9) has been reduced to £11.6m, an increase of 2.7% compared with the original proposed increase of 21.2%. For firms with general insurance exposure the proposed total levy of £41.2m (£34.4m in 2008/9) has been reduced to £37.6m, an increase of 9% compared to the originally proposed increase of 19.8%
The total reduction from the FSA’s original proposals in the regulatory fees payable in 2009/10 by firms represented by AIFA and AMI, i.e. mortgage brokers, general insurance brokers and IFAs, is £11.7m. Many firms will nevertheless still see their fees increased, but now by a far smaller amount than the FSA originally proposed. The minimum FSA fees, the basic fee which all firms must pay regardless of size, will be frozen at the 2008/09 level.
The FSA commented that: "The FSA works hard to ensure that fees are allocated as fairly as possible, with the largest fee increases being allocated to the firms that require the most use of the extra supervisory resource."
Chris Cummings, director general of AIFA, said: "This is an appropriate and welcome measure in difficult economic times. AIFA and AMI strongly believe that regulatory resources, and therefore costs, should be focused on those firms that require increased supervision and not those in the IFA and mortgage advice professions."
Note. In the interests of transparency I should add that I am an AMI Board Member.
When Evan Davis interviewed Gordon Brown on the Today programme this morning Evan, as expected, didn’t give him such as easy ride as Andrew Marr did yesterday on BBC1. A couple of questions in particular produced an answer I thought worth highlighting:
When asked about Damian McBride Brown said “If people make a mistake they go. ”The Prime Minister’s application of that doctrine has clearly been very selective but in particular the fact that he himself hasn’t gone implies he still doesn’t recognise his own failings, particularly while he was Chancellor.
Answering a question about whether he would resign if the results of the Euro election were very bad for Labour he said “I am not arrogant. I listen to people.” Any comment on that reply would be superfluous!
