And we may see falls, says this writer.

One of the features of the modern era is the way that central banks have come to regard house prices as one of their main agents of monetary policy. Come rain or shine they must be pumped up. The crisis we have just been through is an example of this. It is simply extraordinary that the sort of recession/depression we have suffered and are still experiencing would be accompanied by this.

Overall, prices remain around £24,500 up on this time last year and £37,500 higher than two years ago. (Halifax)

I had long warned that this was the central bankers’ plan, which essentially involved singing along with West Ham fans.

I’m forever blowing bubbles,
Pretty bubbles in the air.
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.

Of course, the issue of what is a bubble is rather complicated and we get lots of hype about mortgages being cheap (true) and affordable (which rather ignores the ever-higher debt burden that is required). In fact, my latter point is symbolised by this monthly figure.

Net borrowing of mortgage debt by individuals decreased slightly to £3.6bn in December, from £3.8bn in November. This is below the pre-pandemic average of £4.2bn in the 12 months up to February 2020. (Bank of England)

This has been a long-term game which I have been warning about since the Funding for Lending Scheme began back in the summer of 2012, as its role was to make the net mortgages numbers positive. This was pumped up in the pandemic by the cut in Bank Rate to 0.1%, the rise in QE bond purchases to £895bn and the additions to the Term Funding Scheme as the Bank of England put its shoulder to the mortgage wheel.

So, we have ended up with what they call wealth effects and a boost for the economy, which I point out is also inflation for prospective house buyers and especially first-time ones.

The Halifax

Its release this morning was a little more downbeat than the Nationwide.

“House price growth slowed somewhat at the start of the year, rising by just 0.3% in January, the smallest monthly increase since June 2021. This followed four consecutive months of gains above 1%, and with annual growth remaining at 9.7%, the average UK house price was little changed, edging up slightly to a new record high of £276,759.”

Nonetheless, we have yet another rise and the annual growth rate is still 9.7%, so in a broad sweep we remain at or around double-digit percentage increases. This gives us another record high.

The current leaders of the pack in this regard are below.

In keeping with last year, Wales kicked off 2022 as by far the strongest performing nation or region in the UK. With annual house price inflation of 13.9%, down marginally from December, the average house price fell slightly to £205,253. Northern Ireland also continues to record strong price growth, with prices up 10.2% on last year, giving an average property value in January of £170,982.

In England, the North West was once again the strongest performing region (up 12.0% year-on-year, average house price of £213,200) and now has the second-highest rate of annual growth in the UK.

London is the laggard at 4.5% and is apparently picking up, which is amazing when you see some of the actual prices.

Looking ahead

There are changes ahead and one is coming from mortgage rates, which will be affected by this from the Bank of England last week.

At its meeting ending on 2 February 2022, the MPC voted by a majority of 5-4 to increase Bank Rate by 0.25 percentage points to 0.5%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%.

So not only was it raised, but more is on the way (if you had any doubts about this, the denial from Governor Bailey in the press conference settled the matter). However, in isolation this is a more minor issue than it used to be via the way people have switched from variable-rate borrowing to fixed-rate. Allowing for the numbers being a little out of date and the direction of travel, only a quarter of mortgages are variable-rate now.

Thus the main impact will eventually come from fixed-rate mortgages, for which we can note what has been happening to bond yields, which are a signal of what is on the way.

Consistent with the committee’s decision at this meeting to begin to reduce the stock of UK government bond purchases, the £27.9bn of cash flows associated with the redemption of the March 2022 gilt held by the APF would not be reinvested.

So we have gone through several stages of the Bank of England QE purchase programme. It is easy to forget now the first panic stage where they surged into markets afraid that the UK could not sell its debt. They will also want us to forget that it was not really an issue (the US dollar FX swaps fixed world markets) but the point for our purposes today is that over time we bought less and then stopped. Now we are reversing course (QT or Quantitative Tightening) or rather will be in March. Thus the support for bond yields and, hence mortgage rates, is over.

We see the change here as we note that the UK five-year yield is now 1.32%. It has risen by a bit over 0.2% since the Bank of England announcement on Thursday, which compares to 0.1% a year ago and is 1% higher than when the autumn began. So as you can see “the heat is on”, as Glenn Frey would say. Although in historical terms the move is small, the issue is that it is on larger sums these days.

Incomes

According to the Bank of England, a problem is on its way. The story starts well, as we have not seen wages growth like this for a while (care is needed, as they were misleading after the pandemic hit due to flaws in the calculations).

Underlying earnings growth was estimated to have remained above pre-pandemic rates and was expected to strengthen over the coming year, to around 4¾%.

The problem is that in real terms it will be a fall.

CPI inflation was expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7¼% in April.

This will be even worse if you use the RPI inflation measure which, unlike CPI, does factor in house prices. So a fall of 2% plus over the next year, which returns us to a point made by the Halifax.

Affordability remains at historically low levels as house price rises continue to outstrip earnings growth.

Comment

The mood music has changed as we see that affordability is under attack from two directions. The first is the rise in mortgage rates, although that will take its time to have a full effect due to the increased numbers of fixed-rate mortgages. So, there will be a smaller effect from variable-rate ones. This will be added to by the declines in real wages that we will see as 2022 progresses. There is likely to be another brake on things by the way that the pandemic savings boost seems to be over.

The combined net flow into both deposits and NS&I accounts in December (£3.2bn) compares to an average monthly net flow of £10.6bn in the 12 months to November 2021. The combined December net flow was lower than pre-pandemic flows; in the year to February 2020, the average net flow was £5.5bn.

We should see the annual rate of house-price growth slow and head towards zero. Due to the way so many have been priced out I welcome this, but our central banking overlords will not, so we may get a policy response. Maybe we will see some house price falls, which I would welcome too, as somehow we need to make things more affordable.

Originally published by Notayesmanseconomics’s Blog and reprinted here with permission.