Today gives us an opportunity to look at the dog that did not bark. Was that not a Sherlock Holmes theme? We can start with the research student presenting the morning meeting at the Bank of England who will have a smile matching this sunny morning in London.
LONDON, Oct 7 (Reuters) – British house prices rose in September at the fastest annual pace since November 2022, according to data from mortgage lender Halifax, as expectations of further reductions in borrowing costs added to momentum in the property sector.
Yes, nothing improves your career prospects like telling the Governor that UK house prices are rising, and being able to announce the fastest pace for a while is the cherry on the icing on the cake. No danger of group think here as everyone independently thinks the same thing. But it does beg a question about the impact of the rises in Bank Rate and then mortgage rates on house prices. After all the media headlines virtually screamed for a while and yet where was the expected house price response?
If we look at the current situation according to the Halifax we are told this.
“UK house prices climbed for the third month in a row in September, with a slight increase of +0.3%,
or £859 in cash terms. Annual growth edged up to +4.7%, the highest rate since November 2022. This brings the average property price up to £293,399, just shy of the record high of £293,507 set in June 2022.”
Actually it is not clear to me that the present 4.7% annual growth matches circumstances now. But my main argument thrust is that we are pretty much back (in literal terms £108 short) of the previous peak. As you can see below the Halifax goes out of its way to avoid what this means by giving us a very different context.
“It’s essential to view these recent gains in context. While the typical property value has risen by around £13,000 over the past year, this increase is largely a recovery of the ground lost over the previous 12 months. Looking back two years, prices have increased by just +0.4% (£1,202).”
From their point of view we are not even back to where we started. The problem with that is the way that it ignores what may be the clearest case of pump priming the housing market in history as Bank Rate was cut to 0.1% and some £300 billion or so of QE bond buying was undertaken, and if that wasn’t enough we had the Term Funding Scheme to subsidise bank lending. In terms of the Halifax UK house price index the initial Covid impact was a fall from 414.7 in February 2020 to 410.1 in June.
We then saw what may be the maddest property price rise in history. The economy had for a spell collapsed via a far bit of it being closed but the Halifax house price index ended the year at 436 for a 6% gain on the June level. But the real issue is that the pumping and indeed pimping left the index at 507 in August 2022, or just under 24% higher than the June 2020 low. At this point the economy had barely eaked out any economic growth and we had been plunged into a cost of living crisis. Actually I would argue that the rise in house prices ( and then the subsequent rise in mortgage rates) created quite a cost of living crisis in itself. But we can look at things outside of that via the official CPI inflation measure which ignores owner-occupied housing. It printed a sequence of double-digit annual rises in the summer and autumn of 2022 peaking at 11.1% that October. If we look at the implications for real wages we were seeing solid consistent falls I think of the order of 4% per annum. For newer readers I reported the official average earnings figures in February 2021 as they were plainly a nonsense so there is doubt over the exact figures but no doubt they were falling.
Why did UK house prices not see sustained falls?
It is not that house prices did not fall as the Halifax has kindly pointed out there was a £13,000 or so fall. But my point is that it was minor compared to the economic situation. Let me start with mortgage rates which pre Covid were a bit above 2% mostly 2.1% or so and the Bank of England action reduced them to 1.5% in November 2021. Then it was forced to reverse course as it ran out of excuses for the inflation surge returning to a pre Covid level of 2.15% in June 2022, passing 3% that October and peaking at 5.34% last November. So we had a 3.4% rise from the lows combined with falls in real wages. This should have led us towards a 1990-92 type situation which for younger readers was the last sustained house price crash the UK has seen.
Whilst the situation back then had clear differences.
From an interest rate of 9.8% in April 1988, mortgage rates had seen a steady upward trend until they peaked at an all time high of 15.4% between February and November, 1990. (mpamag.com)
Plus the mortgage market was different.
Fixed rate mortgages were first introduced in the late Eighties — variations of this type of mortgage were available prior to this, but take up was minimal. Halifax helped to root “a fixed rate of interest” in mainstream home owning culture in 1989 when it launched its first fixed rate mortgage offering a rate of 12.75%. (mpamag.com)
So mortgage rates were vastly higher and rose by more in absolute terms. But if we switch to the economic impact we also need to remember that the level of house prices is much higher at around £293,000 as opposed to the £59,300 of 1990. So buyers are having to pay the mortgage interest on much much larger sums. Also whilst the UK being ejected from the ERM in 1990 made headlines in fact the economic growth performance was then better than what we have seen in recent times. Bur whilst ordinary economic analysis suggests house price falls the reality was hat they did not last for long and have now gone in spite of the fact that mortgage rates are still more than double what they were pre Covid we have house prices between a fifth and a quarter higher.
Comment
We had what looked like all the factors in play for a house price recession and indeed depression but what we have seen has so far been minor in comparison. There is something else that is awkward because if you calculate a type of Delta for the mortgage rate reductions and their impact on house prices you have a HAL from 2001 A Space Odyssey style situation when you try to apply that to the subsequent rises as they are from another universe. A 0.5% or so reduction led to a house price surge whereas a rise of above 3.5% led to only minor declines.
Some of it I think is psychology. Maybe more people than we think have cottoned onto the idea that the establishment will not let asset prices fall. Also there is the impact of demand and supply. I do not think we have much idea of the UK population but we do know that immigration has driven it higher. But in response house building has struggled to get over 200,000 per year when in the 1960s we consistently managed well over 300,000 and briefly over 400,000.