Nationwide’s “Real” House price Index recorded an increase of 1.6% in July, the same as June, compared to the seasonally adjusted figure of + 1.3% for July and an upwards revised + 1.0% for June. This is the sixth consecutive month that the widely reported seasonally adjusted figures have resulted in lower figures than the real ones, with the cumulative difference between these two figures in the first 7 months of this year now at 2.5% (see table below). This trend is likely to reverse for the rest of the year and as the two figures must agree on an annual basis it is now difficult to see a scenario where either Nationwide index records a fall on the year.
It would be surprising to see price increases every month for the rest of the year, but the real price index has now increased for five consecutive months since the market bottomed out in February and this is very strong evidence that the market has turned. Last year the seasonal adjustment in August resulted in an increase of 0.9% from the real price index (which actually resulted in the seasonally adjusted fall being less than the real fall) and so unless real prices fall by around 1% in August the widely reported seasonally adjusted index will show another increase.
I continue to believe that in a market where the seasons have become a less important influence on house prices than other factors, such as the availability and cost of mortgage finance, it has not only become increasingly difficult to assess what impact the time of year has on prices but also less relevant. Hence my view that it makes more sense to focus on the real figures. It would be helpful if any business producing house price information compared the month on month figure for the current year with the figures for the same two months the previous year at the top of the press release, along with the other statistical comparisons. It would then be very easy for those reading it to make their own judgment of the importance or otherwise of seasonal factors.
It is interesting to note the change of tone in Nationwide’s press release this month, with significantly less focus on reasons why the recent price rises might not be sustained and a recognition that “there is now a reasonable chance that prices could end the year slightly higher than where they started.” A comparison of a headline last month “Price recovery still faces significant risks,” with this month’s comparable headline “House prices resilient despite recessionary economic background,” indicates very well Nationwide’s change of mood. Likewise the tone of the comment from arch bears, Capital Economics, is more subdued.
The following table is self explanatory and I now think that house prices will increase by at least 5% in 2009, rather than falling 5% as I predicted at the end of last year. The recovery will be very sensitive to interest rate changes but as our economy is in such a mess I expect Bank Rate will remain low for 2-3 years, albeit not as low as 0.5% for that whole period. Mortgage availability will probably increase as rates rise and this will mitigate the impact of a higher Bank Rate but the timing and speed of Bank Rate increases will be a critical factor in the future path of house prices.
The Nationwide House Price Index – The Real Figures and the Seasonally Adjusted OnesMonthAverage price (£)Real ChangeSeasonally Adjusted ChangeDifference2008Jan180,473- 0.9%- 0.6%+ 0.3% Feb179,358- 0.6%- 0.9%- 0.3% Mar179,110- 0.1%- 1.2%- 1.1% Apr178,555- 0.3%- 1.2%- 0.9% May173,583- 2.8%- 3.0%+ 0.2% Jun172,415- 0.7%- 1.3%- 0.6% Jul169,316- 1.8%- 2.0%- 0.2% Aug164,654- 2.8%- 1.9%+ 0.9% Sept161,797- 1.7%- 1.6%+ 0.1% Oct158,872- 1.8%- 1.3%+ 0.5% Nov158,442- 0.3%- 0.3%nil Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.2%+ 0.5% Feb147,746- 1.8%- 1.8%nil Mar150,946+ 2.2%+ 1.1%- 1.1% Apr151,861+ 0.6% - 0.3%- 0.9% May154,016+ 1.4%+ 1.3%- 0.1% Jun156,442+ 1.6%+ 1.0%- 0.6%Jul158,871+ 1.6%+ 1.3%- 0.3%
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The BBC is reporting that Barclays' online banking services were unavailable to some UK customers from 9.30. to 14.00. today owing to a hardware glitch.
A spokesman for the bank said “high volume of demand was also to blame for the fault, which followed a similar failure a month ago.”
I don’t think it is very clever for any business to blame its own inadequacies on its customers, particularly when all those customers are trying to do is use a service it actively promotes, and especially when the same problem occurred the previous month. Presumably Barclays takes the view that customers are a necessary evil.
A little bit of humility would be more appropriate!
The FT is reporting that Land Securities is in the process of issuing £360m of Commercial Mortgage Backed Securities (CMBS) with a maximum term of 18 years. The security is a single prime office building in Queen Anne’s Gate, Westminster, tenanted by the Government. It will be a straightforward fixed rate bond with none of the slicing and dicing which was normal prior to the credit crunch.
Apart from confirming it was marketing the bonds Land Securities refused further comment and so, assuming the issue succeeds, a key piece of information to wait for will be the yield at which the bonds are sold.
This follows a similar £430m issue by Tesco last month and one thing both issues have in common is that they were both from very highly rated companies offering absolutely prime assets as security.
Whilst one must be careful not to read across too much from these issues to the residential mortgage backed securities (RMBS) market it is nevertheless very encouraging to see the market for new mortgage backed securities beginning to open up, albeit on a very limited basis. But you have to start somewhere.
There are plenty of potential lenders keen to issue RMBS and banks active in the market such as J P Morgan keen to test the water with investors. As far as I am aware the last issue of RMBS was by HBOS a little over a year ago. This was designed to test the market but HBOS had to concede a yield of around 9.5% to get the issue away. However, the investors will have done very well out of it and assuming the Land Securities issue is successful the day issuing RMBS again become a viable proposition is looking a little closer.
UPDATE. 24.7.09. I am reliably informed that The Land Seurities CMBS was issued on a margin of 1.45% over the 10 year gilt, which today closed at 3.96%. This margin compares with a typical margin of 0.2% for an issue of this quality prior to the credit crunch.
As I commented on 15 July economists were expecting Federal Reserve Chairman Ben Bernanke to show how the Fed will exit the biggest monetary expansion in history in his half yearly report to the House Financial Services Committee today, and he didn’t disappoint.
He said that the economy is showing “tentative signs of stabilisation,” but that the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period.” He added that “the pace of decline appears to have slowed significantly,” but “in light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”
This latter comment highlights a difference between the Fed’s remit and that of the MPC. The overarching remit of the MPC is to keep CPI within 1% of 2% and although the state of the economy clearly impacts on the inflation rate and thus has some influence on the MPC that is very different to focussing on “fostering economic recovery.” We already know the Conservatives plan to give the Bank of England sweeping new powers, assuming they win the General Election. After 12 years without any change in the MPC’s remit, except a technical switch from RPI to CPI as the target, the Tories should also consider whether the MPC should have a broader remit.
The key to when US rates will start to rise appears to be the unemployment numbers. In a report submitted as part of his testimony Mr Bernanke said that policy will be “tightened” when the labour market improves, an economic recovery takes hold and pressures holding down inflation “diminish.”
The report added “we have a number of tools that will enable us to raise market interest rates as needed,” and said that among the five options, the interest rate on banks’ deposits with the Fed is “perhaps the most important.” and that it “will most likely be used in combination” with other methods.
Mr Bernanke’s job today was to assure markets the Fed can wind down the monetary stimulus rapidly if needed to avoid inflation but they must also avoid a premature rate increase which would risk stalling the recovery. He obviously succeeded as at the time of writing (14.30. NY time) longer dated US Treasury yields have fallen by 0.13% on the day.
This all adds to the likelihood that UK rates will also stay low for rather longer than was envisaged until recently. Where changed UK swap rates were marginally lower today and 3m Libor eased back a little further to a new all time low of 0.94%.
I wouldn’t normally comment on each of the new products in a lender’s range but as my previous blogs on Nationwide’s new 1 and 4 year fixes have generated significant interest today, now that I have full details of its new 3 year capped trackers, for the sake of completeness I will also comment on them.
The capped trackers are only available to existing customers not moving home and so the most obvious comparison is with Nationwide’s product transfer 3 year fixed rate and I prefer the existing very competitive 3 year fix to the new capped tracker.
The capped tracker is Bank Rate + 3.49%, capped at 4.99%, with a fee of £699 up to £150,000 and £1,499 above £150,000 up to its maximum loan size of £500,000, whereas the fixed rate is 4.49% with a fee of £995. If Bank Rate averages more than 1% over the 3 years, which it probably will, the fixed rate will work out cheaper. Hence my preference for the fixed rate. Borrowers who are happy with a variable rate and don’t need or want the interest rate protection offered by a fixed or capped rate should stay on Nationwide’s 2.5% SVR rather than move to a tracker at 3.99%, even with a 4.99% cap.
A big plus with both these deals, which are only available to existing customers not moving home, is that they are available at the same rate up all the way up to 95% LTV. The existing 4.49% fixed rate is excellent value at all LTVs and is superb value above 75% LTV.
The 3 year swap rate closed yesterday at 2.88%, with the 4 year rate 0.45% higher at 3.33% and the 5 year rate a further 0.28% higher. However, Nationwide’s cheapest 4 year fix for product transfers, which is only available up to 60% LTV, is 5.58%, which is 1.09% higher than its 3 year rate, with the cheapest 5 year rate another 0.28% higher at 5.84%. Thus whilst the pricing spread between its 4 and 5 year fixed mortgage rates is in line with swap rates the premium payable to get a 4 year fix compared to a 3 year fix jumps so far in excess of the swap rate differential that with current pricing the 3 year fixed rate stands out as offering better value.
For shorter term fixed rates up to 3 years Nationwide offers lower rates for product transfers than it does for purchases or remortgages, and also commendably offers a single rate all the way up to 95% LTV. However, for longer terms the product transfer rates are in line with the remortgage rates, which are higher than the purchase rates, and are tiered, based on LTV. Clearly Nationwide has a very different pricing strategy for product transfers up to 3 years compared to longer periods.
Following yesterday’s post a senior executive from Nationwide has called me to point out that the reason for offering the 1 year fix as an additional product transfer option to existing customers who are not moving is to give them the same choice of fixed rate terms as new customers. Nationwide is launching new 1 year fixed rates for purchasers and new 4 year fixes for both purchases and remortgages tomorrow, resulting in it offering a choice of 1, 2, 3, 4 and 5 year fixed rates for purchases and the same options except for 1 year for remortgages. There is also a new 4 year fixed rate product transfer option but more about this later.
To its credit Nationwide is one of the minority of lenders who offer existing customers with little equity fixed rate product transfer options at competitive rates. However, many of these borrowers will switch without getting independent advice and so it is blogs like this which can highlight some points these borrowers should consider. The key point here is that Nationwide has 2 SVRs with rates currently 1.49% apart and existing customers as well as new customers now revert to the higher rate if they switch to a new deal. This is an important additional factor to consider, especially for existing customers, which does not apply to the other lenders offering good product transfer rates.
The basic choice for the large minority of Nationwide customers who are either currently paying its old SVR (2.5%), or coming to the end of their current deal and reverting to it, is to stay on the SVR if they prefer a variable rate for the time being or switch to a fixed rate for longer than one year if they prefer the security and easier budgeting provided by a fixed rate. The advantage of staying on the SVR is that there are no costs involved, it is the joint cheapest SVR in the market, and there are no ERCs, leaving borrowers free to switch to a fix if and when they consider the time is right.
The advantage of the fix is obviously stability of payments and being able to budget but one year doesn't provide stability for very long, or offer any insurance against rates increasing in the medium term, and I think that to make it worth giving up the right to a very attractive (in the current market) SVR one needs to switch to a fix for much longer than a year.
It is worth noting that although the 3.59% one year fixed rate for product transfers up to 95% LTV is 0.4% cheaper than the best rate Nationwide offers for a 1 year fix for purchases* the situation is reversed with its 4 year fix, where the cheapest rate for movers is 5.28% (up to 60% LTV) but the cheapest product transfer rate is 0.3% higher at 5.58% (up to 60% LTV) and the rate for existing customers switching whose LTV is between 85.01% and 95% is 7.28%.
Nationwide actually offers the same product transfer fixed rates for all LTVs up to 95% on its 1, 2 and 3 year fixes but has 4 tiered rates, depending on LTV, for its 4 and 5 year fixes. This results in a borrower on 95% LTV being able to switch to an excellent 4.49% fixed rate for 3 years but having to pay 7.28% if they want a 4 year fix or 7.48% for 5 years. Such a differential makes it completely pointless for such borrowers to take the 4 year, or indeed the 5 year, fix. For example someone switching to the 4.49% 3 year fix could afford to pay 15.65% in year 4 before they would be worse off than if they had switched to the 7.28% 4 year fix!
Nationwide say that the 2 and 3 year fixed rates are the most popular for switchers and that is why they offer the a single rate for these terms, as well as the new one year fix, all the way up to 95% LTV. However, I think this is a chicken and egg situation. The reason Nationwide’s higher LTV customers have been choosing a 2 or 3 year fix will in many cases have been heavily influenced by the fact that they effectively get the 60% LTV rate, whereas for the 5 year fix, and now also the new 4 year fix, they pay the much higher tiered rate.
If Nationwide want to test my theory it could, of course, offer a single rate for switchers on their 4 and 5 year fixes as well as the shorter terms to make it a level playing field. It will already have suffered from the regulatory requirement to set aside additional capital to support those mortgages now on higher LTVs and so there is no additional cost from a capital adequacy point of view. Furthermore the risk of such clients defaulting will be reduced if they switch to an affordable longer term fixed rate, compared to the risk of either staying on SVR or coming off a shorter term fix when interest rates are rising.
*The 1 year fixed rates for purchases, both for existing Nationwide customers moving home and new customers, are 3.99% up to 60% LTV and 4.39% up to 75% LTV, with the same £495 arrangement fee as the product transfer deal.
NOTE. The term remortgage is often abused, with many people referring to a borrower not moving home but taking a new deal from their lender as remortgaging. This is not helped by some lenders using the term “internal remortgage.” The definition of a remortgage is changing your mortgage provider without changing your property. There is more than one term for people taking a new deal from their lender without moving home and Nationwide use the term “switcher.” A convenient generic term is “product transfer,” which is the term I normally use.
On Wednesday Nationwide are launching a 1 year fixed rate at 3.59% available ONLY to existing customers, i.e. those on its low 2.5% SVR and those about to come to the end of a deal. This is clever marketing but any temptation to switch to this deal should be strenuously resisted.
The 1 year fixed rate of 3.59% is available up to 95% LTV and looks fantastic value for any Nationwide borrower who has little equity in their property, bearing in mind the sky high fixed rates generally offered to borrowers wanting more than 80% LTV. However, there is a very nasty sting in the tail.
Any new customer taking out a mortgage now with Nationwide, and also existing Nationwide customers switching to a new deal, will revert at the end of the deal to Nationwide's new SVR (called Standard Mortgage Rate), which is currently 3.99%, whereas existing customers already on its SVR, and those currently coming to the end of a deal, will benefit from its old SVR (called Base Mortgage Rate), which is capped at 2% above Bank Rate and hence is currently 2.5%.
Therefore the only borrowers who are eligible for the 3.59% 1 year fixed rate are those who would otherwise be paying Nationwide's low SVR, currently 2.5%. It is of course possible that Bank Rate will increase by more than 1% over the next year, taking Nationwide's low SVR above the fixed rate, but even if it does I think it is unlikely it will AVERAGE more than 3.59% over the year, which it would have to make the fixed rate cheaper over the year. Furthermore anyone tempted to take a 1 year fix primarily to help them budget should be looking at a longer term fix.
As mentioned above there is a nasty sting in the tail of this mortgage, which is by far the biggest reason not to succumb to any charms it may have. At the end of the 1 year fix the borrower will revert to Nationwide's new SVR, which at 3.99% is 1.49% higher than its old SVR. As Bank Rate rises I would expect in due course the gap between Nationwide's 2 SVRs to narrow but there is likely to be a differential for several years, and possibly indefinitely.
Therefore anyone on, or reverting to, Nationwide's low 2.5% SVR, needs to think very carefully before switching to any new deal, as this would result in them permanently giving up the right to remain on what is essentially currently a tracker rate, with a permanent cap at 2% above Bank Rate.
Primarily because of the permanent loss of access to Nationwide's low SVR this 1 year fixed rate is poor value for everyone, but it would be madness for anyone whose LTV is above 75% to switch to it, bearing in mind the limited and expensive options likely to be available to them in a year's time when they look for another deal.
As the FSA require all mortgage advice to be "clear, fair and not misleading" no doubt Nationwide will stress the downside of this mortgage, as well as low 1 year fixed rate, to any of its customers who ask it for advice on this deal. However, some customers only ask for information and may decide to switch to this deal without getting advice. They are only likely to realise their expensive mistake in a year's time and maybe at that time they will become strong advocates for getting independent advice on a mortgage.
June saw the cost of fixed rate mortgages rocket, with many lenders increasing their 5 year fixes by around 1%, despite swap rates peaking as long ago as 11 June. The Council of Mortgage Lenders yesterday defended lenders’ decisions to keep rates high, in the face of falling swap rates, saying that there is a complex array of influences on lenders' pricing strategies at present. This is undoubtedly true, but swap rates remain an important benchmark. It is, nevertheless, fair to point out that, contrary to the lack of it in the mortgage market, there is fierce competition for savings and this has been driving up rates for savings fixed rate bonds, which are still rising despite the recent fall in swap rates.
Since the end of last week a few lenders, namely Woolwich, Lloyds TSB/Cheltenham & Gloucester, Halifax and Britannia have announced small reductions of. 0.1% - 0.3% in selected fixed rates, but in general lenders have at best left their fixed rates unchanged and some, including Northern Rock, have further increased their fixed rates, as a result of which many now look expensive.
Over the last month as a result of the combination of higher fixed rate mortgages and lower swap rates the spread between 5 year swap rates and mortgage rates has widened by about 1%, which is a huge movement in such a short time. During the same period 3m Libor has fallen from 1.25% to 0.99% but the rates on most tracker mortgages have not changed. Thus the premium over the initial tracker rate one now has to pay to secure the interest rate protection provided by a fixed rate for 5 years or longer has risen to well over 2%.
Money market rates have fallen over the last month because of a reassessment by the market of how long it will take to climb out of the recession and hence how long interest rates will stay low. It now looks as if Bank Rate will stay low (although not necessarily at 0.5%) for at least 2 – 3 years and the general view is that the risk of inflation returning soon has also diminished, although of course these two factors are closely linked.
On 25 June, at its last rate setting meeting, the US Fed announced that it anticipates keeping the Fed Funds rate at zero to 0.25% for an extended period. Economists are expecting Federal Reserve Chairman Ben Bernanke to show how the Fed will exit the biggest monetary expansion in history when he reports to Congress next week, and this could have a significant impact on the US market.
What happens in the US is also very important to our market and as mentioned above the premium one now has to pay for a fixed rate for 5 years or longer compared to the initial rate on a tracker mortgage has risen to well over 2%, which looks too much with the current outlook for interest rates. Thus many fixed rates are now beginning to look expensive and trackers generally look better value for borrowers who don’t need the security of a fixed rate. Too much of the anticipated rise in interest rates is now factored into fixed rates and as a result buying a fixed rate is no longer a way of beating the expected interest rate rise. In fact if interest rates stay low for 2-3 years a fixed rate mortgage guarantees the borrower will pay a rate reflecting an expected increase which is far from guaranteed to happen within that timeframe.
The trackers offering best value generally are lifetime ones, either those with no early repayment charges (ERC), such as HSBC, or a low ERC, for example Woolwich and Abbey, or alternatively those with a droplock option, which is only offered by Nationwide and RBS. Any of these options will leave borrowers free to switch to a fixed rate without significant costs when fixed rates again start to look attractive. An alternative would be a 2 year tracker as the ERCs will only last for 2 years, but this is a more risky option because if it looks right to switch to a fix within 2 years it would be expensive because of the ERC.
June saw the cost of fixed rate mortgages rocket, with many lenders increasing their 5 year fixes by around 1%, despite swap rates peaking as long ago as 11 June. The Council of Mortgage Lenders yesterday defended lenders’ decisions to keep rates high, in the face of falling swap rates, saying that there is a complex array of influences on lenders' pricing strategies at present. This is undoubtedly true, but swap rates remain an important benchmark. It is, nevertheless, fair to point out that, contrary to the lack of it in the mortgage market, there is fierce competition for savings and this has been driving up rates for savings fixed rate bonds, which are still rising despite the recent fall in swap rates.
Since the end of last week a few lenders, namely Woolwich, Lloyds TSB/Cheltenham & Gloucester, Halifax and Britannia have announced small reductions of. 0.1% - 0.3% in selected fixed rates, but in general lenders have at best left their fixed rates unchanged and some, including Northern Rock, have further increased their fixed rates, as a result of which many now look expensive.
Over the last month as a result of the combination of higher fixed rate mortgages and lower swap rates the spread between 5 year swap rates and mortgage rates has widened by about 1%, which is a huge movement in such a short time. During the same period 3m Libor has fallen from 1.25% to 0.99% but the rates on most tracker mortgages have not changed. Thus the premium over the initial tracker rate one now has to pay to secure the interest rate protection provided by a fixed rate for 5 years or longer has risen to well over 2%.
Money market rates have fallen over the last month because of a reassessment by the market of how long it will take to climb out of the recession and hence how long interest rates will stay low. It now looks as if Bank Rate will stay low (although not necessarily at 0.5%) for at least 2 – 3 years and the general view is that the risk of inflation returning soon has also diminished, although of course these two factors are closely linked.
On 25 June, at its last rate setting meeting, the US Fed announced that it anticipates keeping the Fed Funds rate at zero to 0.25% for an extended period. Economists are expecting Federal Reserve Chairman Ben Bernanke to show how the Fed will exit the biggest monetary expansion in history when he reports to Congress next week, and this could have a significant impact on the US market.
What happens in the US is also very important to our market and as mentioned above the premium one now has to pay for a fixed rate for 5 years or longer compared to the initial rate on a tracker mortgage has risen to well over 2%, which looks too much with the current outlook for interest rates. Thus many fixed rates are now beginning to look expensive and trackers generally look better value for borrowers who don’t need the security of a fixed rate. Too much of the anticipated rise in interest rates is now factored into fixed rates and as a result buying a fixed rate is no longer a way of beating the expected interest rate rise. In fact if interest rates stay low for 2-3 years a fixed rate mortgage guarantees the borrower will pay a rate reflecting an expected increase which is far from guaranteed to happen within that timeframe.
The trackers offering best value generally are lifetime ones, either those with no early repayment charges (ERC), such as HSBC, or a low ERC, for example Woolwich and Abbey, or alternatively those with a droplock option, which is only offered by Nationwide and RBS. Any of these options will leave borrowers free to switch to a fixed rate without significant costs when fixed rates again start to look attractive. An alternative would be a 2 year tracker as the ERCs will only last for 2 years, but this is a more risky option because if it looks right to switch to a fix within 2 years it would be expensive because of the ERC.
The Council of Mortgage Lenders (CML) has today put out a press release expressing its concern that some recent coverage of fixed rate mortgage pricing fails to reflect the complex array of influences on lenders' pricing strategies at present.
It explains that:
Swap rates are commonly cited as "the cost to lenders of fixed rate funds", but the real picture is more complex. The recent decline in swap rates is not necessarily a clear indication that the cost of raising fixed term funding has fallen. A swap rate is the notional cost of exchanging a Libor-level floating income stream for a fixed stream. But simply looking at the swap rate does not account for the fact that not all lenders will be able to raise funds at interbank rates (Libor), especially in the current environment. It is relevant to take account of the cost of the underlying variable rate funding, as well as the swap rate. And some funding is raised directly at a fixed rate (two year commercial bank rate, for example), where recent spreads against a two year fixed mortgage rate have narrowed markedly, telling a very different story to swap rates. In sharp contrast to the early 1990s, lenders have very limited discretion to vary rates on their existing loans or "back book", with half of all mortgage lending on a fixed rate basis, a further significant tranche contractually tied to bank rate, and political pressure to reduce standard variable rates. While lenders need to treat all their customers fairly, both new and existing, there are very real pricing pressures that the lack of discretion on "back book" rates creates for the sustainable pricing of new business. Lenders are facing a range of higher costs, including the costs of showing increasing forbearance to more borrowers, the increased costs of holding more liquid assets and more capital as required by the FSA, the relatively higher funding costs incurred as a result of the competition for savings business, scarce and expensive wholesale funding, the high cost of funds that the authorities made available through the Credit Guarantee Scheme, and the reduced returns to lenders necessarily arising from a very low interest rate environment.
In conclusion, the CML points out:
"As lenders will face increasing costs for some time, upward pressure will remain on mortgage spreads on new products. There is no single measure of lenders' funding costs, which will vary. Spreads on wholesale or retail funds, or against swap rates, are all various pieces of a complex jigsaw. It is misleading to assume that higher fixed rates simply reflect a desire to increase profitability."
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