Nationwide’s “Real” House price Index increased by 0.1% in October, compared to the more widely reported 0.4% seasonally adjusted rise. This is the smallest monthly rise since the market bottomed out in February but nevertheless takes the run of unbroken monthly increases to 8. October marks a sharp slowdown in the rate of increase after the previous 5 months when prices rose between 0.9% and 1.6% every month.
The seasonally adjusted figures for November and December will total about 1% more than the real figures, with most of this adjustment taking place in December.
Although it is always dangerous to read too much into a single month’s figures the slowdown in the rate of increase shown by the October figures is healthy as monthly increases on the scale of those seen since March are clearly unsustainable. The Bank of England in particular will be pleased to see the rate of increase in house prices slowing because if prices were to continue rising at their recent pace the possibility of an earlier than expected increase in Bank Rate would have had to be considered and any such increase would be very harmful for the rest of the economy, which is likely to need support from low interest rates for a considerable time.
Although mortgage supply is still constrained conditions in the mortgage market have continued to improve over the last month, stimulated by some aggressive pricing from Northern Rock, which has pushed several other lenders to respond to protect their market share. This increased competition has even extended to the higher LTVs, with Nationwide in particular improving its proposition in this sector.
I don't expect the recent FSA proposals in the Mortgage Market Review (MMR) to have a significant impact on the market in the short term for two main reasons:
The mortgage market has already tightened up considerably as a result of limited funding and so much of what the FSA is proposing is already a fact of life. The FSA is looking ahead to when more funding is available and lenders might become less restrictive.Some aspects of the FSA's proposals will almost certainly be amended because the MMR is a discussion document and there is no point the FSA consulting on it unless it is prepared to reassess its original proposals to take account of the views expressed. (I recognise that the Government sometimes completely ignores responses to a consultation process, such as with the introduction of HIPs, but the FSA has a much better record on taking account of responses to its consultations)
Nationwide's Chief Economist, Martin Gahbauer, points out that there is a strong correlation between consumers' future house price expectations, as measured by Nationwide's monthly Consumer Confidence Survey, and actual house price movements. The latest figures from this index have continued the recent trend showing more confidence returning to the housing market and twice as many people now expect house prices to rise over the next 6 months compared to those expecting a fall.
This supports my expectation that house prices on a national basis will continue to rise in the short term, but significant regional variations are likely to continue. After a surprisingly strong recovery this year the rate of increase is likely to continue at a slower pace but as long as a majority of people expect prices to rise there is a clear incentive for those people who want to buy to do so sooner rather than later, providing of course they can get adequate finance.
The following table shows the recent trends:
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%- 1.5%+ 0.3% Nov158,442- 0.3%unchanged+ 0.3% Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.1%+ 0.6% Feb147,746- 1.8%- 1.7%+ 0.1% Mar150,946+ 2.2%+ 1.2%- 1.0% Apr151,861+ 0.6% - 0.3%- 0.9% May154,016+ 1.4%+ 1.4%nil Jun156,442+ 1.6%+ 1.0%- 0.6% Jul158,871+ 1.6%+ 1.4%- 0.2% Aug160,224+ 0.9%+ 1.4%+ 0.5% Sept161,816+ 1.0%+ 0.9% - 0.1% Oct162,038+ 0.1%+ 0.4%+ 0.3%
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In a welcome sign that the market is continuing to ease, Nationwide is increasing its loan to value on a number of its tracker products to 85%. This is welcome news for many consumers who have been unable to get on the property ladder due to an insufficient deposit and those who have been unable to move for lack of equity in their current property. The new products include a 2 year deal at 4.93% and a 3 year deal at 5.03%. This is certainly the latest development in the overall improvement in the mortgage market which is good news for the nation's borrowers and would be borrowers.
The announcement this afternoon that Barclays are acquiring Standard Life Bank is sad news for consumers, not because of anything negative about Barclays but because it means that one of the dwindling number of brands still active in the mortgage market will no doubt disappear next year when the sale is concluded, or soon afterwards.
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Following on from my blog post on Monday on the MMR I note that less than 24 hours after post the FSA have amended the figure I queried for the increase in property prices over the 10 years to the onset of the credit crunch from 300% to 200%.
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Mortgage Strategy is reporting a call from Vince Cable for ‘stakeholder’ style mortgages to be introduced. He starts off well by saying: “With such a complex mortgage market already in existence highly prescriptive rules for mortgage affordability are not appropriate.” This is spot on but he then spoils it by saying “It is critical that a simple and safe ‘stakeholder’ style mortgage as the Liberal Democrats have proposed is introduced.”
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The FSA’s Mortgage Market Review (MMR) was published today and although you are not at risk of getting autism from this MMR there will be a significant amount of consumer detriment if the report’s proposals to ban self certification mortgages are adopted.
Out of the UK’s 10m residential mortgages about 1m, or 10%, were arranged on a self cert basis and a large proportion of this sizable minority of borrowers are at serious risk of being denied the opportunity to ever get another mortgage, even when conditions in the mortgage market improve.
Thus they will be condemned by the FSA to stay in their current home when they want to move, unless they are prepared to sell up and rent. They will also be denied the opportunity to remortgage and thus be left to the tender mercies of their current lender.
For many who don’t want to move this will not be a problem in the short term as many will revert to a reasonable variable rate when their initial deal finishes. However, when the time comes that they want to switch to a fixed rate they will only be able to do so if their current lenders is prepared to offer them a product transfer rate. Many self cert borrowers will have their mortgage with a lender which has exited the market and will have no choice but to stay on their revert to rate.
If they are not able to switch to a fixed rate when they want to, purely because of the FSA’s ban on self cert mortgages, this obviously increases the risk that their mortgage will become unaffordable if interest rates increase too steeply. If this results is them going into arrears and, worse still, being repossessed, the FSA will be culpable. One of the FSA’s statutory duties is to protect consumers, not increase the risk that their mortgage becomes unaffordable!
Part of this full frontal attack on self cert mortgages, which is a perfectly valid product for some borrowers, seems to be based on a major misunderstanding by the FSA of “income non-verified” mortgages. In the regular returns the FSA requires lenders to submit there is a requirement to specify the proportion of mortgages they sold which were “income non-verified.”
In asking for the information on this basis, rather than asking for the proportion of self cert mortgages and the proportion of mortgages which were fast tracked, I can only assume that the FSA did not understand the difference between the two. If it did surely it would have asked for two separate figures.
In the spirit of helpfulness I would advise the FSA that self cert is a product where the lender guarantees not to ask for proof of income, whereas fast track is a process where on a mainstream mortgage the lender exercises their right not to ask for the normal paper proofs because they determine that the mortgage is low risk on the basis it has a low LTV, a loan size below a certain level and the applicant’s credit score was good.
Lenders may not (yet) be able to get applicants’ DNA from the credit reference agencies but they can and do get an awful lot of financial and other information. It is on this basis that ID verification can often be done electronically and sufficient information obtained for the lender to safely cut down on the paper proofs required.
If the credit score is not very useful in making this decision why do lenders, the FSA and the rating agencies all regard it as being so important? The FSA really can’t have it both ways – either the credit score is a valid tool in assessing mortgage applications or it is not. If it is but the same paper proofs are required for an applicant with a high score as someone with a low score what purpose is it achieving?
On the Today programme this morning Hector Sants, Chief Executive of the FSA, said: “in the boom times self cert mortgages were around half of those offered.” This claim is complete nonsense and it is very worrying that the FSA is trying to set policy on the basis of such a serious misunderstanding. It is true that about 50% of mortgages were income non verified, but only about 10% were self cert.
The arrears record on fast track mortgages is generally better than average, which is exactly what one would expect if the system is working properly, because they are the mortgages the lender has identified as low risk. This compares with self cert mortgage having an above average arrears record, which again is exactly what one would expect. This extra risk needs to be priced properly, which wasn’t always done in the run up to the credit crunch, but with correct risk based pricing self cert mortgages are a perfectly valid option for borrowers.
More on the MMR tomorrow, but meanwhile I will leave you with this thought. Over 50% of the population don’t understand percentages but I was shocked to discover that this 50% includes the senior management at the FSA. No doubt the MMR will have be checked and double checked before being signed off for release but on p.47, section 4.47, it says that ”property values increased by almost 300% in the decade before the onset of the financial crisis.”
This didn’t look right to me and so I checked it out with the Nationwide house price index. Sure enough from Q3 in 1997 to Q3 in 2007 this reported an increase of 203%. I suspect the wise heads at the FSA thought that a 3 fold rise in property prices was equivalent to a 300% increase. Oh dear!
Nationwide’s “Real” House price Index increased by 0.9% in September, almost the same as August’s 1.0% rise. The seasonally adjusted figure for September was very similar at + 0.9%, leaving the cumulative difference between these two figures for the first 9 months of this year at 1.6% (see table below). Both figures must come in line at the end of any 12 month period and the seasonally adjusted figure next month is likely to be adjusted upwards by 0.3-0.5% from the real figure.
This is the seventh consecutive month the real house price index has increased since bottoming out in February
October tends to be one of the peak months for housing transactions and if that trend is repeated this year it will be a good test for the market to see if the index continues rising on greater activity. The longer prices keep rising the more people who have been unable to sell at the lower prices due to having insufficient equity for the deposit on a new property will be able to move. This will help levels of activity but most of these sellers will also be buyers and so the impact on prices of these extra properties coming on the market is likely be modest.
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 7.5% in 2009, rather than falling 5% as I predicted at the end of last year. I also expect prices to keep rising next year, but at a slower pace. In particular there is an obvious incentive for buyers in the £125,001 - £175,000 range to buy this year in order to avoid paying stamp duty land tax. Although the impact of this is unlikely to be large there will be some purchases this year which otherwise would not have taken place until next year.
Although mortgage supply is still constrained, especially at the higher LTVs, this week we have at last started to see some real competition from lenders, albeit primarily for lower LTV business. Woolwich, Northern Rock, Abbey, Alliance & Leicester, Principality and Coventry have all announced cheaper deals and Northern Rock has today upped its game further with the announcement of 3 and 4 year fixed rate intermediary exclusives up to 70% LTV from Monday. The 4.89% fixed rate to 31/12/13 is market leading and the 4.39% fix to 31/12/12 is extremely competitive. Cheaper mortgage rates should help to sustain the housing market, although if house prices continue rising at the current rate the Bank of England will start to get worried.
This activity in the mortgage market has been encouraged by 3 month Libor stabilising just above Bank Rate at 0.55% and swap rates continuing to fall sharply following the MPC’s decision in August to extend Quantitative Easing by £50bn. 2 year swaps hit a new all time low of 1.75% this week and 5 year swaps closed today at 3.16%, compared to 3.75% the day before the August MPC meeting.
The following table gives a clear picture of the recent trends:
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%- 0.1%+ 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%+ 1.2%- 1.0% 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%+ 1.4%- 0.2% Aug160,224+ 0.9%+ 1.4%+ 0.5%Sept161,816+ 1.0%+ 0.9% - 0.1%
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Today’s no change decision may be a bit of a non event but there is at last some action back in the mortgage market. September saw the usual seasonal upturn and over the last few days we have at last started to see some real competition from lenders, albeit primarily for lower LTV business. Woolwich, Northern Rock, Abbey, Alliance & Leicester, Principality and Coventry have all announced cheaper deals this week which is good news for borrowers.
This activity has been encouraged by 3 month Libor stabilising just above Bank Rate at 0.55% and swap rates continuing to fall sharply following the MPC’s decision in August to extend Quantitative Easing by £50bn. 2 year swaps hit a new all time low of 1.75% this week and 5 year swaps are at 3.10%, 0.65% lower than the rate of 3.75% the day before the August MPC meeting.What should borrowers do now?Although the cost of fixed rate mortgages has fallen a little over the last month most still look expensive in relation to tracker/discount rates, some of which have also fallen during the month. Thus variable rates continue to look more attractive for those borrowers who don’t need or want the security of a fixed rate. On Tuesday of this week Woolwich reduced the rate on its lifetime tracker by 0.45% up to 70% LTV and cut the early repayment charge (ERC) period to 2 years. Its new lifetime rate is Bank Rate + 2.29% with an ERC of 1% to 31/1/12. HSBC is still offering ERC free lifetime tracker rates at Bank Rate + 2.24% up to 60% LTV, Bank Rate + 2.45% to 75% LTV and Bank Rate + 4.09% to 90% LTV. With the exception of HSBC’s 2 year discount at 1.99% these 4 lifetime trackers are cheaper than nearly all the 2, 3 and 5 year trackers or discounts currently available and thus for most borrowers wanting a variable rate one of these lifetime trackers will be cheaper than a short term deal.And what will we see next month?The minutes of last month’s MPC meeting suggested that inflation will be very volatile over the next few months. They also flagged up that as the expected autumn utility price falls hadn’t materialised the likelihood of CPI falling below 1% was reduced but that short tem volatility in CPI would have little implication for policy unless the medium term outlook changed. Next month’s Quarterly Inflation Report will provide a useful update on the Bank’s inflation expectations and give the MPC more confidence in deciding whether to extend the Quantitative Easing programme. The one set of economic statistics which continues to record increases are the house price indices. Nationwide’s real, i.e. non seasonally adjusted, index, has risen by 5.7% in the first 9 months of this year and 9.5% from its floor in February. The imminent ending on 31 December of the temporary suspension of stamp duty land tax on properties between £125,001 and £175,000 will persuade some people to bring forward a purchase, especially as house prices are still rising, and, although the impact is likely to be modest, it will flatter house prices indices until the end of this year, at the expense of smaller increases next year. In line with my forecast last month house prices as measured by Nationwide for September are unchanged on a year on year basis. When October’s figures are announced I confidently expect the year on year figure to be comfortably into positive territory. I now expect this index to end 2009 with a rise of around 71⁄2% but for the rate of increase to slow down in the New Year. However, if house prices were to continue to increase next year at the current rate there would be a serious risk of an earlier than expected increase in Bank Rate.
On the Mortgage Strategy web site a spokeswoman for Northern Rock is quoted as saying: "Northern Rock regularly review its products and services to make sure they are meeting customer needs.
"Lifetime mortgages in particular have seen little consumer demand and are no longer seen to be part of our core product range."
She says that the decision was based on volumes of applications.
But she adds: "Lenders also have to take into account what is happening with their peers and so other lenders withdrawing from the sector probably would have been a factor in the decision."
Why can’t Northern Rock be more honest about the reasons for pulling out of the lifetime mortgage market. Other lenders who have pulled out of this market recently have stated that it is due to funding difficulties. Why would Northern Rock be any different?
The final comment from the Northern Rock spokeswoman gives the game away. You don’t have to be a rocket scientist to work out that other lenders withdrawing from the sector would increase demand, not reduce it. By saying “other lenders withdrawing from the sector probably would have been a factor in the decision” what Northern Rock is really saying is that it doesn’t want to be one of a smaller number of lenders still offering lifetime mortgages. That is nothing to be ashamed or defensive about. It is just a realistic assessment of the situation we are in.
In the latest blow to the Equity Release market Northern Rock has announced its withdrawal from that market, following on closely from the recent withdrawals of Coventry and Saffron. Northern Rock was one of the first lenders to enter this market and at one time was one of the top two lenders in this category. Furthermore, it was the only lender which offered a regular guaranteed monthly drawdown for life.
Voting is now taking place for the Equity Release Awards, with the winners being announced at a lunch on 13th November. With ongoing serious funding constraints for the long term end of the market having now having forced several lenders to withdraw from their lifetime mortgage range there must be a serious danger that by 13th November some of the winners will no longer be offering Lifetime mortgages.
This won’t be a reason to not offer an award to any of these companies if they win as the awards are based on achievements over the previous year. However, it will be a stark reminder that we are a long way from mortgage funding returning to normal. And this just a few days after the speech from MPC member David Miles on 30th September explaining that a key objective of Quantitative Easing (QE) was to reduce the cost of long term borrowing. He said the reduction in corporate bond spreads has “…helped to encourage increasing gross and net corporate bond issuance.”
Despite this, if the success of QE is to be measured on David’s suggested measure of reducing the cost of long term funding it has so far proved spectacularly unsuccessful as far as funding for this longest of all long term mortgage markets is concerned!
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