Nationwide’s “Real” House price Index increased by 0.9% in August, down from the 1.6% recorded in each of the previous two months, but still well into positive territory. The seasonally adjusted figure for August was + 1.6%, compared to the upwardly revised seasonally adjusted figure of + 1.4% for July. This is the first month since January that the more widely reported seasonally adjusted figure has been lower than the real one, as a result of which the cumulative difference between these two figures for the first 8 months of this year has fallen to 1.5% (see table below).
Both figures must come in line at the end of any 12 month period but based on past form it is likely that the seasonally adjusted figure next month will show little change from the real figure. That means that for the last 3 months of the year either the seasonally adjusted figures will have to total 1.5% more than the real figures or the difference will be made up by the persistent retrospective adjustments typical of seasonally adjusted figures and which disguise the monthly movements even more as few people look at the retrospective adjustments. In reality I expect this 1.5% differential to be made up by a mixture of these two factors.
As an indication of the impact of retrospective adjustments to the seasonal figures, last month the difference between the real and seasonally adjusted figures for 2009 to date was 2.5% and this month it is reduced to 1.5%, despite the difference between the two figures for the month being only 0.7%. Unlike the seasonally adjusted figures, the real figures are based on fact and so don’t need to be retrospectively adjusted!
The real house price index has now increased for six consecutive months since the market bottomed out in February and this ought to be evidence enough for even the biggest bears of the housing market to accept it has turned but some still think this is a rally in a bear market. What I think they fail to understand is how important confidence is in the housing market and the longer prices keep rising the more confidence returns.
It is easy to cite reasons why the market shouldn’t be rising – increasing unemployment and the fear of it, lack of mortgage finance and the consequent requirement for big deposits being two of the most common. These are of course serious problems for the market and will be for some time. But the fact is that house prices have risen despite all these issues having been relevant since the market bottomed out in February.
The other argument which usually gets trotted out is that prices are only rising because there is not mush stock on the market and that sellers who have been holding back will rush to sell in the autumn because prices have risen. I don’t buy either of those arguments. There wasn’t much stock on the market last year but prices still fell very rapidly. Why? Because there were even fewer buyers than sellers. Now enough buyers have come in to reverse that position and consequently prices are rising. I am not an economist but I do understand the impact of supply and demand, whereas some of the economists who are still bears seem to prefer to ignore it when it doesn’t suit their argument.
Some people who have been unable to sell, or choose not to, at the lower prices will undoubtedly put their property on the market as prices rise but in my view most of the opportunist sellers the bears seem to think will come out in force in the autumn are more likely to sit on their property until there are signs that prices are beginning to stabilise.
Those who put their property on the market are more likely to be people who want to move but haven’t been able to because there was not enough equity in their property to cover the costs of moving and provide the deposit for their new property. As most of these people will be buying as well as selling the overall impact on prices will be modest and will depend on whether most are trading up or down. The credit crunch means that more than normal are likely to be trading down but the majority are still likely to be trading up.
As prices increase more people will be in a position to move and the efficiency of the market will improve as a result of the additional liquidity resulting from the increased number of transactions. This should make it easier to put chains together.
The table at the end of this post is self explanatory and, based on the Nationwide House Price Index, I now expect house prices to record an increase of 6% in 2009, rather than falling 5% as I predicted at the end of last year.
Interest rates will be a key factor influencing how long house prices keep rising and following the Bank of England’s announcement of a £50bn extension to the Quantitative Easing programme and the Quarterly Inflation Report the market has had to reassess the future path of interest rates. Despite the serious problems which will be caused by the probable slow recovery of the economy the fact that it is likely to result in interest rates staying low for longer is a plus for the housing market.
The main risk to interest rates is that the failure of Gordon Brown to accumulate surpluses following the benign economy he inherited means that the unprecedented deficits which the Government now has to run will cause the overseas investors who finance our deficit to demand higher rates. However, the knowledge that within 9 months we are likely to have a new Government committed to dealing with the huge deficit significantly mitigates this risk.
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%- 2.0%+ 0.8% Sept161,797- 1.7%- 1.8%- 0.1% Oct158,872- 1.8%- 1.4%+ 0.4% Nov158,442- 0.3%- 0.2%+ 0.1% Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.1%+ 0.6% Feb147,746- 1.8%- 1.8%nil Mar150,946+ 2.2%+ 1.1%- 1.1% Apr151,861+ 0.6% - 0.2%- 0.8% May154,016+ 1.4%+ 1.2%- 0.2% Jun156,442+ 1.6%+ 1.0%- 0.6% Jul158,871+ 1.6%+ 1.4%- 0.2%Aug160,224+ 0.9%+ 1.6%+ 0.7%
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After their complete failure prior to the credit crunch to properly do the job they are paid to do (by the issuers of those same mortgage backed securities they were rating) and spot where the risks were in these securities, a report by Moody’s today provides another classic example that they still have a lot to learn about the UK mortgage market.
The report helpfully points out some good news in that arrears levels on loans originated by Northern Rock are lower than the same period in 2008, although it points out they are still performing, along with loans originated by Bank of Scotland, worse than average.
It also says that the dearth of the remortgage market, together with the rise in unemployment, means that prime borrowers will find it increasingly difficult to meet their mortgage payments and that “Before the economic downturn borrowers were able to refinance their way out of arrears problems or sell their property.”
It adds that “The combination of increasing unemployment and lack of financing options if borrowers are experiencing mortgage problems has led to worsening performance as borrowers that are forced to revert to the lender’s SVR may suffer a payment shock.”
Increasing unemployment and the lack of financing options are clearly going to be an ongoing problem for some considerable time. However, Moody’s seems to have overlooked the rather important point that most people coming off fixed rates will revert to an SVR or tracker rate that is lower, and in some cases much lower, than the rate they were paying previously. Moody’s calls this payment shock and I guess there is no reason why a sharp drop in payments after a fixed rate finishes shouldn’t be called a payment shock, just as a sharp increase might be. However, most borrowers would say please give me more shocks like this!
Although it is true that borrowers can no longer refinance their way out of arrears low interest rates mean that many less will actually get into arrears in the first place. Changes in the Government’s ISMI (Income Support for Mortgage Interest) scheme from 1 January this year will also mitigate the arrears problem for many who are made redundant.
It is correct to say that borrowers with a sub prime mortgage, assuming they are still sub prime, will not be able to refinance, but most sub prime mortgages revert to a tracker rate and thus even most sub prime borrowers will be reverting to a rate which is both lower than they were paying previously and low by historical standards for a prime borrower. In this respect they are in a similar position to prime borrowers – their mortgage becomes more affordable when their initial deal finishes.
Another misleading impression given by this report is the implication from the comment that “before the economic downturn borrowers were able to refinance their way out of arrears problems or sell their property” that selling their property is not currently a viable option. Maybe Moody’s are as behind the times in understanding the current state of the UK housing market as they were in realising the problems with some mortgage backed securities!
The latest house price index from Nationwide, out today, reports that after yet another monthly rise the fall in prices from its October 2007 peak is now down to 14.4% and since the market bottomed out in February prices have risen by over 8%. Obviously some properties will have performed worse than average but the number of borrowers who can’t sell their property as a way out of financial difficulties is steadily declining as prices increase.
Furthermore, although activity in the property market is still very low by normal standards it has picked up considerably from its nadir last winter and hence properties are generally selling much quicker than they were. Few sub prime mortgages were available above 85% LTV and so even most sub prime borrowers will now have equity in their property and thus be able to sell if they get into financial difficulties.
In its regular comparison of the price of fixed rate mortgages with swap rates Moneyfacts has today flagged up that the current differential of 3.14% between 2 year swaps at 2.04% and the average 2 year fix at 5.18% is the widest on record. It hasn’t commented on other terms but all will be at or close to record levels.
As it points out, of the few changes in mortgage fixed rates over the last month there have been more increases than decreases and although lenders, especially the building societies, are now relying more on savings than wholesale funds for new funding there have also been few changes in savings rates.
The reason for this is very simple. Broadly unchanged mortgage rates over the last month compare with 2 year swap rates down by 0.21% from 2.25% a month ago (24 July). Longer term swap rates have fallen slightly more. I suspect in a month’s time Moneyfacts will be able to report another record spread. Most lenders are not cutting rates because they are struggling to meet demand for mortgages and have to ration funds somehow.
Up to the 1980s building societies were the dominant force in mortgage lending and prior to Abbey National, as it was then called, breaking the building societies’ cartel in 1983 mortgages were rationed by requiring people to save with their chosen society for a year or more before being considered for a mortgage.
The successful applicants generally were normally charged the same rate whether they borrowed 10% or 90% of the property value, although a one off fee (mortgage indemnity guarantee premium) was charged for mortgages above 75%. Furthermore most borrowers didn’t have a choice of fixed or variable rates. The choice was SVR or SVR and most lenders’ SVRs were the same, the Building Societies Association’s recommended rate. This system also, of course, provided a captive source of savings.
In today’s world rationing is rather more sophisticated and pricing is a key part of it, as is credit scoring, which didn’t exist in the 1980s. Also August is traditionally a month when some lenders want to reduce the amount of business they accept because they have less staff to process applications. Thus with increased mortgage demand as a result of more activity in the housing market, but little in the way of increased supply of funds, pricing power will remain with lenders for the foreseeable future.
The reason swap rates have fallen this month is the Bank of England’s surprise decision to extend its Quantitative Easing programme by £50bn, coupled with its Quarterly Inflation Report the following week, both of which made it clear The Bank expects the economic recovery to be slow, with the consequence that inflation and hence interest rates will remain low for at least another 2-3 years.
Although fixed rates are still the preferred option for the majority of our clients, over the last two months we have seen a substantial increase in the proportion of clients either taking a new variable rate or staying on their existing SVR, as fixed rate pricing looks increasingly uncompetitive with the current outlook for interest rates.
Meanwhile, in another sign of strain Scottish Building Society has just announced an increase of 0.25% in its SVR to 5.29%. It won’t have taken this decision lightly and so this is an indication its net margins are under pressure.
Rates Bank Of England rate - 0.5% - kept on hold (next decision 10th September) ECB rate kept on hold at 1% - (next decision 3rd September) Expectations were growing in the City last night that interest rates could remain at historically low levels for years after the Bank of England gave a strong hint that it might again expand its policy of flooding the economy with money. Markets were taken by surprise yesterday when minutes of the latest meeting of the Bank's monetary policy committee showed that the governor, Mervyn King, had wanted to pump an extra £75bn into the financial system but was outvoted. Gerard Lyons, chief economist at Standard Chartered Bank, said it was now possible that King would not raise interest rates from their current all-time low of 0.5% during his current term as governor, which lasts until mid-2013. Banks Lloyds Banking Group is to review its decision to close its C&G branch network, and admits that the decision may now be reversed. A Lloyds spokeswoman said that in the meantime, the branches would not close in November as planned. The Unite union said it welcomed the announcement, but was angry at the "poor management" at Lloyds. Lloyds said in a brief statement that "customers will continue to use the C&G network as usual. All affected colleagues have been briefed by their line manager today." UK Mortgage / Housing Market According to the latest figures from the CML, mortgage lending continues to rise. Gross lending in July stood at £16bn, 26% higher than in June, though still more than a third lower than in July last year.Mortgage lending, house sales and property prices have all picked up in the past few months after a dramatic slump caused by the banking crisis.But the CML warned the housing market would slow down again later this year, as the CML's economist Paul Samter said, "The CML's July gross lending estimate of £16 billion is the highest level in nine months and consistent with the rise in house purchase approvals," before adding "We anticipate some seasonal slowing in lending volumes and housing transactions over the latter part of the year and the picture of a slow but more stable market to emerge." The improvement in mortgage lending in July was due to the rise in house buying usually seen during the summer, the CML said.
Rates• Bank Of England rate - 0.5% - kept on hold (next decision 10th September) • ECB rate kept on hold at 1% - (next decision 3rd September) Minutes of the MPC meeting on 6 August reveal that the Governor of the Bank of England and 2 others, wanted to pump more money into the UK economy but were outvoted by fellow policymakers. Mr King wanted £75bn rather than the £50bn that was injected.The decision to pump £50bn came as a surprise, and was already twice the £25bn that the market expected. The minutes back up the Bank's statement earlier this month, saying that the UK recession "appears to have been deeper than previously thought".But the 6-3 split on the MPC shows that views within the bank differ on just how deep the recession is, and the outlook for inflation.Analyst Peter Dixon at Commerzbank said, "It was surprising we had three members looking for £75bn. This clearly suggests the bank is leaving the door open for additional measures should they feel need a rise. Quantitative easing is still very much in play."The committee noted that stock markets had "increased considerably", and that Libor, had fallen. It also noted that there were "promising signs" that quantitative easing was "having a positive impact". However against this, the committee said that lending conditions remained tight, economic activity remained weak and the "recovery in global demand remained susceptible to further shocks". These factors would, it said, "most likely lead to a slow recovery in the level of economic activity", which meant further action needed to be taken.While six members of the committee voted for a £50bn expansion in quantitative easing, the governor, along with Tim Besley and David Miles, voted for a £75bn expansion, arguing that too little stimulation would mean inflation remaining below its target of 2% for "a sustained period of time... and might harm public confidence in the recovery, causing it to falter". They added that if £75bn proved to be too much, they could reverse the policy, by selling assets, and increase interest rates.All nine members of the committee voted in favour of keeping interest rates at 0.5%.Banks The KPMG UK Banks Performance Benchmarking Survey has suggested that the retail arms of the UK's High Street banks are likely to see losses in the second half of 2009. The survey also says that despite modest profits in the first half of the year, bad loans would lead to losses, and that these losses from bad loans will not peak "until 2010 or beyond.""Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of the year," says KPMG. They add that competition for savings accounts and the increased cost of lending between banks has impacted retail banking. Looking ahead, KPMG says that continued uncertainty in the mortgage market will make life difficult for retail banks. UK Mortgage / Housing Market According to CML data, six mortgage lenders increased their hold over the market for new UK home loans in 2008.• The top six, led by the Lloyds banking group, accounted for 78% of all new loans, compared to 72% the year before. • After Lloyds, the biggest lenders in 2008 were Santander, the Nationwide, Barclays, RBS and HSBC. • Overall new lending fell by 28% last year, with many specialist lenders being driven out altogether.The CML said the credit crunch, which started in 2007, had dried up the supply of mortgage finance. "The lending community itself has undergone... dramatic changes," the CML said. With so many lenders either merging or ceasing lending, this year's largest lenders' table has changed more than in other years," it added. A key factor was Northern Rock dropping out of the top-ten mortgage lenders as a result of its insolvency in 2007, when it accounted for 8% of all new lending, as opposed to 2008 when it lent just 1.1% of new mortgage funds.The CML said another factor was that specialist lenders - those which did not depend on savers' money to finance their lending - had fallen from a 7% share of new lending to just 2%, and of a much smaller market. Our Guru, Ray Boulger is quoted as saying "borrowers were now receiving the worst of all possible worlds. If you have fewer lenders you have less competition," he said. "Those lenders still in the market have only limited amounts to lend, so they aren't competing hard with each other if borrowers have less than a 25% deposit," he added.Building societies were also badly affected by the drying up of funds from the wholesale banking markets, with the Nationwide taking over the Cheshire and Derbyshire building societies, and mergers between the Scarborough and Skipton, the Catholic and the Chelsea, and the Barnsley and Yorkshire building societies. "We may not have seen the end of the current wave of consolidation," the CML warned. "So, next year's table is likely to look different again, with more new names and an even larger market share in the hands of the largest firms," it added.
As promised in my previous post I will now comment on the second part of the Treasury Select Committee’s brief, i.e. access to mortgage finance, in its report entitled “Mortgage Arrears and Access to Mortgage Finance” it published on Saturday.
The committee has interpreted the second part of the report very narrowly, considering only first time buyers, the sub prime sector and remortgaging. I conclude from this it hasn’t recognised that the problems go well beyond these sectors. For example many people who want to move house are unable to do so.
When most people move they rely on the equity in their property to provide the bulk of the deposit required for their new property, currently a minimum of 10% in most cases, plus moving costs, of which stamp duty land tax is often the biggest. With around 2m households either in negative equity or with equity of less than 10% (recent CML estimate) plus my estimate of another ½m with equity only between 10% and 15% there are about 2½m such households who can’t move (unless they sell up and rent). This is not only a serious problem for the households concerned but a lack of mobility for a substantial number of homeowners also has important macro economic consequences. Fortunately, with house prices now rising the scale of this problem should diminish.
Another group of borrowers not mentioned in the report are those with a self certification mortgage. Like sub prime mortgages this category of mortgage has almost disappeared and this means that most of the ½m households I estimate have a self cert mortgage will also find it very difficult to move. Add to this the ½m households I estimate to have a sub prime mortgage and this means a total of 3½m households out of approximately 10m with a residential mortgage will currently find it very difficult or impossible to move.
In evidence to the committee Lord Myners, Financial Services Secretary, demonstrated a complete failure to understand the state of the market by saying that there is a “very competitive market for mortgages.” One has to wonder what planet he is on. Anyone helping to shape Government policy from a position of such naivety is very dangerous.
A very pertinent point was made in evidence to the committee by Adrian Coles, Director General of the Building Societies Association. He explained how the current incentives created by the credit rating agencies and the FSA actually prevented some lenders from offering higher LTV mortgages because larger exposure to higher LTV lending risked the lender being downgraded by the rating agencies, who in my view have far too much power, particularly as they are completely unregulated.
A serious consequence of such downgrading would be to increase the lender’s cost of borrowing from the wholesale market. It might even result in some investors such as local authorities withdrawing their deposits as they are not allowed by Government to invest in banks or building societies whose credit rating falls below a certain level. Rather ironic when the Government allowed these same local authorities to invest in the Icelandic banks which went bust because the rating agencies were too incompetent to recognise the problems in those banks and so gave them a rating high enough to allow the local authorities to place deposits with them.
Mr Coles also pointed out that having a large proportion of high LTV lending might encourage the FSA to take “severe action” against the lender because the FSA’s stress tests assume a very severe reduction in house prices.
One FSA rule the majority of lenders, albeit with some honourable exceptions, have been riding roughshod over ever since the FSA started regulating mortgages in October 2004 is the requirement not to do anything to inhibit consumers shopping around. Despite some lenders consistently breaking this rule and hence being a serious impediment to access to mortgage finance for some consumers the Committee appears not to be aware of this problem as there is no reference to it in their report.
I am referring to the fact that the only way to be reasonably confident not only whether a lender will lend but how much they will lend is to submit a DIP (Decision n Principle) and the lender quite rightly then normally undertakes a credit check. However, instead of doing a quotation search, which does not leave a footprint on the credit file, most lenders do a full search and hence leave a footprint. Both searches give the lender the same information but one inhibits the consumer’s ability to shop around because their credit score is negatively impacted by too many searches. Now I wonder why lenders would want to inhibit potential customers shopping around?
Avoiding contravening this FSA rule is dead simple - all a lender has to do is refrain from recording a full search unless and until they receive a full mortgage application. That is the only time anything other than a quotation search should be recorded. If lenders complain it needs some IT changes that cuts no ice – they have had over 4¾ years to make any necessary IT changes.
I wonder if the FSA even knows which lenders use a quotation search and which don’t. If they don’t their starting point should be to find out. The committee should have asked the FSA when they intend to start enforcing this rule.
The Treasury Select Committee’s report on “Mortgage Arrears and Access to Mortgage Finance,” published today, pulls no punches. Furthermore the FSA is just as much in the firing line as lenders. I will comment in this post on the first part of the Committee’s brief, i.e. mortgage arrears, and on Monday I will write about access to mortgage finance.
The Committee’s criticism of the FSA and the OFT for taking a “leisurely approach” to lenders who were not treating their customers fairly when they fell into arrears, especially those in the sub prime and second charge (also euphemistically called secured loans) markets, is stinging and the FSA is told to “get a grip.” The OFT is included in the criticism because, completely bizarrely, the Treasury, headed then by Gordon Brown, decided the OFT should regulate second charge mortgages rather than the obvious choice of the FSA, although all the indications are that second charge mortgages will sensibly be included in the same brief as first charge mortgages in the forthcoming regulatory changes, and in fact this will probably be an EU requirement.
The FSA has sharpened up its act since Lord Turner was appointed Chairman but nevertheless the case highlighted by the committee where the FSA took over 18 months until June this year to take to enforcement 4 lenders found to be breaking FSA rules when dealing with arrears cases demonstrates the FSA has a lot more work to do.
The Select Committee’s criticism of excessive fees charged by lenders for sending out arrears letters is reminiscent of the OFT’s action against credit card companies, where as a result the fee has effectively been capped at £12, and also their current action on overdraft fees. The principle on mortgage arrears letters appears to be very similar for the first letter, which is usually computer generated and despatched untouched by human hand and without being individually considered by a human brain.
The committee points out that “in many instances such charges appear to go beyond the recovery of additional administrative costs and are being used instead as an alternative profit stream.” The committee’s suggestion that “lenders should be required to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover” is such an obvious suggestion it is difficult to understand why the FSA and OFT haven’t already done this.
Where arrears extend beyond a month the lender may well incur additional costs in dealing with the matter and so an appropriate solution could be that subsequent letters could be charged at a fee which takes account of other identifiable costs as well as actually producing and sending the letter, but either there should be no charge for the initial letter or only a small nominal charge.
Few things annoy customers more than when after contacting their lender about a problem, which sometimes may even have been caused by the lender’s own error, it is not resolved efficiently. A common problem is the lender claiming to have not received a letter and yet most lenders will not provide an email address for customers to use. Using email would resolve this problem and be more convenient for many customers.
Some banks use secure email for other parts of their business, such as credit cards, and so why not offer the facility as an option for mortgages? Maybe lenders just don’t want to make it easier for customers to call them about matters other than arrears. Maybe also those lenders who still require customers to call them on premium rate numbers such as 0870 and 0844 are so selfish in their quest for profits that they don’t recognise that increasingly as more people have all in phone packages which exclude these numbers the additional cost to their customers of using these numbers is totally disproportionate to the revenue they receive from them.
Like their customers, lenders are not perfect, although clearly some have a much better reputation for efficiency than others. When the lender turns out to be at fault after sending an automated letter, it hardly ever automatically pays its customer a fee for that customer’s time and effort in contacting the lender to resolve the problem. A good discipline would be that in the event of the lender being at fault the FSA should require them to automatically pay their customer at least the same fee they would have charged the customer for sending a letter to them.
The Monetary Policy Committee’s announcement that it was leaving Bank Rate unchanged this month at 0.5% was a foregone conclusion but it surprised the markets by increasing the Quantitative Easing (QE) programme by £50bn, taking it beyond the £150bn limit previously agreed with the Treasury. Increasing the QE programme to this level is a very clear indication that the MPC still has major concerns over the state of our economy and this will no doubt be reflected in next week’s Quarterly Inflation Report. The comment in the MPC’s statement that “In the United Kingdom, the recession appears to have been deeper than previously thought” is very relevant.
Although as far as the mortgage market is concerned there is little evidence that the QE programme has resulted in any additional lending so far it is, of course, entirely possible that without QE the volume of mortgage lending would have been even more dire.
It is very noticeable that the banks which have boosted their lending most so far this year are the ones which didn’t need a bailout. Barclays Woolwich and HSBC both increased their gross and net lending in the first half of this year compared to the same period last year and Abbey/Alliance & Leicester continued to lend at high levels. On the other hand Lloyds Banking Group not only lent less, but its gross market share in a smaller market also fell.
Mortgage pricing has not changed much in the last three weeks but neither has criteria become any easier. Contrary to the impression given by some commentators who have been pointing out that there has been a small increase in the number of mortgages available at higher LTVs, the reality is that because many of these are from small building societies, often only lending in a very limited local area and without much appetite, the impact on the overall availability of funds is minimal. Just counting the number of mortgages available doesn’t always give a good indication of whether or not conditions are easing.
Some good news is that Libor rates have fallen steadily over the last month, with 3 month Libor now down to a record low of 0.87% and 6 month Libor only slightly higher at 1.09%, suggesting the market doesn’t expect to see a Bank Rate increase for at least 6 months. The housing market is continuing to improve, with Nationwide’s real, i.e. non seasonally adjusted index, now showing a rise of 3.8% in the first 7 months of this year. With confidence returning to the housing market, and despite the obvious problems such as more large increases in unemployment to come, lack of mortgage finance and in particular lenders’ lack of appetite for higher LTV lending, I now expect house prices to show an increase of at least 5% this year.
Some of the other economic statistics have also improved over the last month, or perhaps one should say are looking a little less bad, but in some cases, such as new car sales, this was in response to specific short term Government action rather than as a result of any obvious underlying improvement in demand. Despite several bullish newspaper headlines this morning on the state of the economy it is much too early to be confident that a meaningful recovery is under way.
Gilts and swap rates are already discounting a significant increase in Bank Rate and this is naturally reflected in fixed rate mortgage pricing, which is sharply up compared to only a few months ago. On the other hand there has been little change in the cost of tracker mortgages over the last few months and as a result the initial gap between fixed and tracker rate pricing has widened considerably. With significant increases in Bank Rate now reflected in fixed rate pricing, the benefit of a fix in offering protection from rate rises is severely impaired, although of course a fixed rate still provides stability of payments, making budgeting easier, and so will continue to be attractive to many borrowers.
However, there is now a strong argument for considering a tracker mortgage in preference to a fix, but ideally retaining the ability to switch to a fixed rate if and when deemed appropriate. This means either buying a tracker with no, or low, early repayment charges (ERC) or one which offers a droplock option, allowing a switch to a fix without incurring the ERC.
Woolwich has just improved some of its trackers and now offers a very competitive offset lifetime tracker at Bank Rate + 2.47% up to 70% LTV, subject to a minimum loan size of £150,000 and an ERC of 1% for 3 years. HSBC offer a very competitive range of ERC free, but non flexible, lifetime trackers, with rates starting at Bank Rate + 2.24% for LTVs up to 60%. The best examples of a droplock mortgage are from Nationwide, which is the only major lender offering a droplock option on all its trackers.
The gilt market initially reacted positively to the QE announcement with higher prices and hence lower yields, and this was across all maturities in view of the Bank of England announcement that it would be widening the maturity profile of the stocks it buys. If these lower yields are maintained into next week I would expect some lenders reduce the cost of some of their fixed rate mortgages later in the month.
The headline of the lead story in tonight's Evening Standard is “We sell junk says boss of organic stores.”
As an American, Whole Foods Chief Exec, John Mackey, may not be aware of Gerald Ratner’s infamous reference to the jewellery his stores sold as being crap, but I suggest this comment could have a similar impact on his already struggling stores, which only a few days ago reported massive losses. Admitting to selling junk is bad enough but when it is very expensive junk it is a double whammy!
