This morning the focus is back on the Bank of England and we cam start with something which will match the new autumnal mood for the weather at least for the research student presenting the morning meeting.
“August saw a slight softening in the rate of annual house price growth to 2.1%, from 2.4% in July. Prices dipped by 0.1% month on month, after taking account of seasonal effects.” ( Nationwide)
Career prospects at the Bank of England are not improved by being associated with lower house prices. Also the detail from the Nationwide was rather gloomy on the issue.
“The relatively subdued pace of house price growth is perhaps understandable, given that affordability remains stretched relative to long-term norms. House prices are still high compared to household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years.”
It is not that often you get mortgage lenders confessing that UK house prices are simply much too high. Also the Nationwide then pivoted directly to the Bank of England’s watch.
“Combined with the fact that mortgage costs are more than three times the levels prevailing in the wake of the pandemic, this means that the cost of servicing a mortgage is also a barrier for many. Indeed, an average earner buying the typical first-time buyer property with a 20% deposit faces a monthly mortgage payment equivalent to around 35% of their take-home pay, well above the long run average of 30%.”
This reminds me of the one the main themes of my work which is that a combination of house prices and mortgage rates need to be in any proper cost of living measure because they are a large proportion of people’s spending. They are omitted from the official CPI measure because as the Nationwide has just confessed house prices have risen too much.
Mortgage Rates
Having looked at the overall rise in UK mortgage rates let us now look at the push me pull me battle going on. Here is one side of it from the Nationwide on August 7th.
Following the 0.25% decrease in the Bank Rate on Thursday 7 August, mortgage customers who are on Nationwide’s Standard Mortgage Rate (SMR) will see a decrease of 0.25%.
The new SMR of 6.74% will come into effect on 1 September 2025.
Rates on tracker mortgages held by existing Nationwide customers automatically decrease when Bank Rate is cut, so these will decrease to reflect the Bank Rate change from 1 September 2025.
The series of Bank Rate cuts we have seen will have pulled variable mortgage rates lower. Along the way we get a reminder of how punishing it is if you get stuck or trapped on a Standard Mortgage Rate. But we have seen at the other end of the spectrum the 30-year yield rise and this morning when I checked it was 5.63%. If we look back to the first interest-rate cut in this series from 5.25% to 5% on the 26th of July last year we then saw the 30 year yield decline to 4.34%.So far so good for the plans of the Bank of England and its theories that its interest-rate cuts would reduce fixed-rate mortgage rates too via lower bond yields.
Trouble is that started to reverse as last summer progressed and we now see a 30-tear yield around 1.3% higher in spite of further official interest-rate cuts. In terms of a yield curve shift it is of the order of 2.5%. Whilst such an ultra long bond is some distance away from mortgage terms it has pulled my leading indicator the 5 year yield up with it. Thus after falling to 3.6% last September it is now 4.12% and in a way it is the 0.12% above Bank Rate that is significant as everybody knows Bank of England Governor Andrew Bailey is on a rate cutting path.
You can number-crunch it in a couple of ways. Firstly as I have above or look across to the US where its 5 year is 3.7% and where the Bank of England would have hoped ours would be. This means that this has been more expensive that it would have hoped.
Three million UK households face the prospect of having to renew their mortgage within the next two years as their fixed-rate periods come to an end. ( Brunel university July 2024)
Indeed Brunel University also wrong-footed itself as it then claimed something which is not true.
Mortgage prices are directly linked to the Bank of England’s base rate.
Variable rates yes but not the majority of the market and as Yahoo Finance pointed out last week things have changed little there.
The average rate for a two-year fixed mortgage ticked higher to 4.74% this week, up from 4.7% last week, while the average five-year fixed deal was unchanged at 4.94%, according to data from Uswitch.
Only last week I looked at a speech from Catherine Mann which was full of Bank of England research and to the unwary will both sound and read impressive. But yet again we see a gap between its theory and reality.
Mortgage Lending
Overall the Bank of England will be happy with this.
Net borrowing of mortgage debt by individuals decreased by £0.9 billion to £4.5 billion in July, compared to a £3.2 billion increase of net borrowing to £5.4 billion in June. The annual growth rate for net mortgage lending slightly rose from 2.8% to 2.9% in July.
It’s objective of supporting house prices via keeping net lending positive which started explicitly in the summer of 2012 continues to work overall in spite of higher mortgage rates. Plus approvals remain solid.
Net mortgage approvals (that is, approvals net of cancellations) for house purchases, which is an indicator of future borrowing, increased by 800 to 65,400 in July. Approvals for remortgaging (which only capture remortgaging with a different lender) decreased by 2700, to 38,900 in July.
If we switch to mortgage rates we see an interesting pattern.
The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages decreased for the fifth consecutive month, to 4.28% in July from 4.34% in June. However, the rate on the outstanding stock of mortgages remained at 3.88%.
We see that in terms of new lending there looks to be a switch towards variable rates. But a brake has been applied to the economy as the overall rate has risen as it only passed 3% in August last year.
Consumer Credit
Things get a little more awkward for economic theory here as the era of higher interest-rates might have been expected to trim the numbers.
In July, net borrowing of consumer credit by individuals slightly rose to £1.6 billion, from £1.5 billion in the previous month…….The annual growth rate for all consumer credit increased to 7.0% in July, from 6.8% in June
I think that at least part of the answer is that the interest-rates are so high anyway as the period of ZIRP elsewhere rather passed them by.
The effective interest rate on interest-charging overdrafts decreased by 76 basis points, to 21.47% in July. Similarly, the effective rate on new personal loans to individuals decreased by 14 basis points, to 8.28%. The effective rate on interest-charging credit cards increased by 15 basis points, to 21.64%.
Comment
As you can see the Bank of England would like to cut interest-rates further to help house prices via higher mortgage lending. There is a catch via the behaviour of bond yields in the past year before we get to the issue of the official inflation rate challenging 4%. Also the money supply growth does not support it.
The net flow of sterling money (known as M4ex) was £7.1 billion in July, compared to £11.4 billion in June. Within this, households increased their holdings of money by £7.3 billion.
The annual rate of growth has been around 4% in the last few months. If we allow for the impact of QT running at an annual rate of £100 billion then we see it would otherwise have been stronger and thus we should not be cutting rates further. Let me finish with an irony as a reduction in the rate of QT would help mortgage rates via bond yields but would show higher rates of money supply growth.
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