|Image: via Flickr|
The housing bears have become rather preoccupied with the interest rate cliff which awaits interest-only mortgage holders when their current fixed-rate or discounted-rate terms end.
Alternatively the housing market bulls have noted the existence of schemes such as the ‘Help to Buy’ and ‘Funding for Lending’ schemes which provide potential support for the property prices.
Overall, we come down on the bullish side, buoyed by the strength of key indicators that we follow. Although it is hard to get carried away by the potential gains from UK property, it does have some of the same features of the US housing market recovery:
- The UK housing market has fallen. It fell just around 20% between 2007 and 2009. By contrast the US housing market fell over 30% between 2006 and 2012.
- These falls have improved affordability which has retraced from its cyclical highs to its long term average. US housing, by contrast, has become more affordable now than at anytime in its past.
- The drivers of affordability are house prices, wages and interest rates. As we have regularly lamented, wage growth in the US and UK has been weak and that has held back affordability. In the US, however, mortgage interest rates have been forced down by quantitative easing. In the US, Federal Reserve purchases of mortgage-backed securities pass automatically through to long-term mortgage rates and consumers are free to refinance at those rates. In the UK, that relationship between conventional QE and mortgage rates does not hold but the Bank of England’s Funding for Lending scheme does seem to have lowered mortgage rates.
All of these factors reflect weak-form versions of the factors supporting America’s full-bodied housing market recovery. While they may not indicate 10% per annum price growth as the US is close to achieving, an improvement in house prices still has the potential to support the UK’s nascent recovery.
Higher house prices aid consumption through their wealth effect (they make people feel richer and provide access to credit). The impact on incomes is more nuanced as higher house prices reduces loan to value ratios, potentially opening up lower mortgage rates to borrowers. They also reduce the incentive for savers to make mortgage overpayments. Overpayments have been a meaningful drag on consumption since the crisis.
|Source: Bank of England|
We believe a key component of the UK’s economic recovery needs to be a recovery of consumption. Investment is likely to remain weak while the global economic output remains jaded. Government spending clearly retains a tightening bias regardless of the plan A/plan B debate and the structure of UK industry, coupled with weak eurozone demand, means an export-led recovery is not achievable in the short-term. Giving consumers the wealth and incomes with which to consume therefore represents an economic priority.
The ‘Help to Buy’ programme has increased the number of first time buyer enquiries - this has been consistent feedback from our equity analysts’ meetings with the banks, house builders and home improvement retailers - but it is too early to see now whether that is feeding through into higher housing activity.
However the shallow trend of higher house prices remains in place and even the depressed level of mortgage approvals supports the view that activity is recovering slowly.
The RICS house price balance released today is another good leading indicator of house price moves and it too supports the view of a recovering market.
Anecdotally we may yet hear of borrowers struggling to transition from discounted mortgages to standard variable rates but there are tailwinds for them too:
- Three years of mortgage overpayments and stable prices leaves the nations stock of housing equity in reasonably sound state.
- Save for any change in monetary policy it remains likely that mortgage rates will remain low or fall further over the coming months.
- Any investor who had a repayment vehicle in place to meet their interest only mortgage will have done particularly well given the strength of equity and bond markets over recent years.
Head of Portfolio Strategy