Wednesday 10 February 2010

UK House Price Thoughts

As part of my retirement investing strategy at some point I need to buy a house. As I have mentioned before I am not currently buying as I believe house prices are overvalued.

I have been looking for a data set that would show me when average interest rates charged by the banks for house mortgages were starting to rise. I was also looking for a measure that would show increases fairly quickly rather than waiting for lots of old fixed rate mortgages to expire. I thought I had found a good measure and started to see rates rising by using UK resident banks interest rates of new loans secured on dwellings to households when I blogged here.

I’ve been thinking about what loans secured on dwellings means and it seems likely that it includes a lot more than mortgages. I’ve had another trawl through the Bank of England web site and found a data set that should be certainly showing very recent changes to mortgage interest rates and might be more appropriate to use. This data set is the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households not seasonally adjusted (data set IUMTLMV). A chart of this is shown above. Unfortunately, unlike the previous ‘secured on dwellings’ data set variable rates are still at lows of around 4% having been as high as 8.87%. So unfortunately for those (including me) waiting for increasing mortgage rates to potentially reduce house affordability it appears we have a while to wait yet.

On a more positive note it’s not all good news for house prices. Firstly, as reported by the Financial Times lenders “have warned that they will have to slash mortgage lending and raise rates on home loans if the government insists on prompt and full repayment of the £300 billion they have received in state support since 2008”. This is linked to the Special Liquidity Scheme and the Credit Guarantee Scheme which must be repaid by 2012 and 2014. So the banks are back to big profits and big bonuses yet they can’t give the government back the money they have borrowed. That money is my taxes we are talking about. If they can pay bonuses they should be repaying their loans like everyone else. The article goes on to say that the “lenders cannot retain their existing loan books and still make new ones while access to wholesale funds is as limited as it is” and continues with “retail deposits, which are considered far more stable and which bank regulators are encouraging lenders to rely on more heavily as a source of funds for new lending, simply cannot grow quickly enough to make up for the wholesale funds that are being withdrawn.”

Here’s an out of the box idea. How about the government lets the market operate freely rather than distort it with all this intervention. So where do the banks then get their money from? Another ‘crazy’ idea. How about they start paying interest rates on savings that are above inflation and that will encourage people to start saving again. Oh that’s right, that would then force mortgages up and maybe bring house prices back to more sensible levels. Let’s see if the government after the next election gives in to the banks demands.

Secondly, the Financial Times also reports that estate agents have seen the first drop in new buyer enquiries for 14 months. Is this a genuine fall or due to the cold weather that we have been happening? I guess it will all show up in the house price figures in due course.

As always DYOR

1 comment:

  1. Like you I despair of the housing market ever correcting to a more sustainable level based on the real cost of money (I don't dispute house prices look affordable at current low interest rates, but I dispute they will stay like this for 25 years!)

    That said, if I'm honest it's been good for the economy for the past 18 months that Armageddon has been averted.

    My median expectation is now for +/- 5% a year for the next 5-10 years, as rates gently tick up, but I wouldn't be surprised to see London boom again.

    Re: Your search for data, been there, got the t-shirt. You can find excellent predictors for all kinds of angles of lending and buying, then the housing market just confounds you again and again.

    Good luck though, it makes for interesting reading!

    (Bitter? Moi? )