Silverstone Mortgages

Goldman Sachs view on UK mortgages / inflation and BoE

Wed, 19 Jul 2023 09:11:08 Z

The views expressed are Goldman Sachs, are merely their opinion and not necessarily the scenario that may play out. Follow the link to get the full report, a very interesting read, page 1 summary below:-

https://www.gspublishing.com/content/research/en/reports/2023/07/07/d5f44f77-2e6d-4ae5-99b3-56873f466550.html

Quoted mortgage rates have risen sharply in recent weeks on the back of higher expectations for Bank Rate. The UK stands out as relatively exposed to mortgage refinancing risks compared to the US or Euro Area given short fixation periods. That said, effective rates on the stock of outstanding mortgages are responding more slowly to policy rate changes than in the past because of the shift from floating to fixed-rate mortgages over the last decade.
Our models suggest that the effective rate on outstanding mortgages will rise to 4.6% in 2024Q4 from 2.9% in 2023Q1 (and 2.1% in mid-2021). Based on a reasonable sensitivity of consumption to income, this translates into a meaningful cumulative drag on the level of GDP of 0.6% by the end of 2024, excluding second-round effects. Moreover, just over 50% of this drag is still to come.
That said, our models indicate that if the share of floating rate mortgages were as high as ten years ago, the effective rate would have already risen to almost 5% by 2023Q1 and would exceed 6.5% by 2024Q4. As such, the mortgage affordability channel, which has historically been highly important for UK policy transmission, is operating far more gradually than in previous hiking cycles.
How does this more gradual growth drag affect monetary policy? In a scenario in which inflation appears to be transitory, delayed transmission encourages policymakers to “look through” rises in inflation which are unlikely to persist. However, in an environment in which inflation shows signs of persistence, making it more important to reduce output in the immediate term to prevent inflation becoming entrenched, slower transmission means that a larger adjustment in rates is needed to move output into contractionary territory.
As such, we expect slower transmission to result in a more aggressive response of Bank Rate to signs of inflation persistence. Given the recent indications of persistence in the labour market and inflation data, we now expect a further 25bp hike in November, taking our terminal rate forecast to 6%, and forecast the first cut in 2024Q3.

UK—Slower Mortgage Drag, Bank Rate To 6%

Recent weeks have seen sharp increases in quoted mortgage rates on the back of higher expectations for Bank Rate (Exhibit 1, left). The UK is comparatively vulnerable to mortgage refinancing risks because of (i) high levels of mortgage debt to GDP, and (ii) relatively short fixation periods (Exhibit 1, right). Previous research shows that mortgagors have historically played an important role in monetary policy transmission in the UK, with the consumption response of mortgagors to monetary policy shocks being substantially larger than that of homeowners or renters.

[21th November 2021] Mortgage protection is important because hope is not a strategy...

Sun, 21 Nov 2021 21:16:09 Z

Of all the things that amaze me with this business it is that mortgage protection assurance is so easily dismissed, by which I mean customers resistance to buying a policy that aims to pay off their mortgage debt in the event of death or if they get a critical illness.

We all hope that during the course of our lifetime nothing bad happens to us. I hope I don't get cancer, have a heart attack, stroke or find later I have dementia or fall over because of Parkinson's disease.

We are still coping with the coronavirus and who knows what else is around the corner? Yet sadly if we just take cancer alone, 1000 people a day [1000 A DAY] are having a conversation that goes..."Arh I'm so sorry to tell you, you have cancer.."

https://www.cancerresearchuk.org/health-professional/cancer-statistics-for-the-uk

What that feels like I have no idea and I hope I never find out and I hope none of you reading this ever have to find out.

But lets be clear HOPE is not a strategy.

The curious part of any mortgage protection conversation is that its likely that the mortgage is not the only monthly expense, and that is less so for people on middle incomes and I focus upon this group because its they that take the conversation about mortgage protection as a big sell, and it really isn't. Our conversation starter is a minimum level of cover to shore up funding in the worst case.

If you have £500K of mortgage debt then likely you have a couple of cars, maybe on finance. Maybe a couple of children in private education, weekend activities, holidays, one in the summer another skiing in the winter. Eating out a couple of times per week isn't cheap, neither is the ongoing utilities, phone bills, everything SKY tv package and so it goes on...

Further financial planning to account for all of life's expenses would be prudent BUT as a starter having the downside protection for what is likely your major monthly expense is smart.

Without it what do those hours after the "Arh I'm sorry to tell you, you have cancer" feel like? Well to start with it doesn't even have to be you. What if your partner is the victim? They have less than a year to live and you're going to waste what time you have left going to work to keep a roof over the families head? What about a degenerative disease? Want to only spend time with them when they are at the end?

Its a wake up call because finding out after that you should and could have done something is no use at all.

People say "Yes but it might be a waste of money, paying all those premiums for nothing..."

I say "That would be a good thing wouldn't it? because it meant you didn't get cancer, didn't get a heart attack....." but if you did then perhaps it pulled you out of the financial fire.

[4th November 2021] BoE vote 6-3 to keep gilt purchase target £875BN....and 7-2 to keep base rate 0.1%

Thu, 04 Nov 2021 21:00:30 Z

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 November 2021, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted by a majority of 7-2 to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted by a majority of 6-3 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

So that is the headline and broad outline above and seems entirely consistent with what has been telegraphed over the recent months. Namely that central banks globally see inflation driven by post virus reopening and supply chain issues and whilst CPI is looking high central banks have all stood by the same transitory narrative. That jars with some - notably Bild where the German tabloid attacked ECB's Lagarde as "Madam inflation" after the ECB left rates unchanged several days ago. The Fed confirmed its unchanged Fed funds rate yesterday [although it will start to taper its asset purchase program] and so with asset purchase target maintained at the BoE a raise in rates would have been surprising.

Why is there this indifference to inflation? Well its because the global view on growth is that it is somewhat restrained by disruption in supply chains. Alongside the rapid pace at which global demand for goods has risen [post virus], this has led to supply bottlenecks in certain sectors. There have also been some signs of weaker UK consumption demand. While bottlenecks will continue to restrain growth somewhat in the near term, global and UK GDP are nonetheless expected to recover further from the effects of Covid-19 (Covid). UK GDP is projected to get back to its 2019 Q4 level in 2022 Q1.

There has also been some effect on real rates by some of the stronger jawboning on inflation in Q3. In the United Kingdom, market-implied expectations for the path of Bank Rate over the year ahead had increased sharply since the MPC’s September meeting, which appeared to reflect market participants’ perceptions of a further rise in inflationary pressures and recent MPC communications about the policy outlook. Most market contacts were expecting the Committee to raise Bank Rate to 0.25% by the end of the year, with expectations for the exact timing finely balanced between the November and December MPC meetings. The November Report was conditioned on a market-implied path for Bank Rate, based on the 15-working day average to 27 October, that rose to around 1% by the end of 2022. In the immediate run-up to the MPC’s November meeting, the market-implied path for Bank Rate had reached around 1.3% by the end of next year. Market contacts had noted that diminished market liquidity meant that it had become more difficult to infer a central path for Bank Rate expectations.

Lending rates on mortgages with loan-to-value (LTV) ratios higher than 75% had continued to fall since the September meeting, despite the increases in risk-free rates. The associated relatively sharp narrowing in mortgage spreads was in part likely to reflect the typical lagged response of mortgage rates to movements in risk-free rates, and so, all else equal, this effect would be expected to reverse to some extent. Perhaps consistent with that, there had been a rise in lending rates on some mortgage products with LTV ratios at or below 75% recently. The latest Credit Conditions Survey had suggested that unsecured credit conditions for households had continued to loosen somewhat.

In fairness central banks could not have made their intentions more clear. They will not risk re-railing economic recovery by moving early and whilst we might have some parts of the economy that are and have gone very well, namely Tech there are some sectors that have only in the last weeks started to emerge from the pandemic - think airlines, pubs, restaurants and some have only just emerged from their job furlough schemes.

Lets face it no amount of rate movement is going to make Taiwan make more semi-conductors for autos, it won't get more truck drivers to take petrol to the pumps or goods to the shops, it won't get more natural gas into Europe and it won't get more chickens or pigs through the slaughter houses.

Recent focus on energy prices [almost exclusively USD denominated] and their impact upon inflation makes the move in GBPUSD today even more painful...

[29th September 2021] STOP SCAMS by dialling 159

Wed, 29 Sep 2021 15:02:41 Z

I became aware of this new initiative to try and prevent telephone fraud and given the many people who have been financially impacted by such activities I thought it would be a good idea to promote it.

From the website 159 — Stop Scams UK

If you think someone is trying to trick you into handing over money or personal details…

…Stop, hang up and call 159 to speak directly to your bank.

Last year criminal gangs stole over £470m by pretending to be your bank or other service provider.

159 is the memorable, secure number that contacts you directly to your bank if you think you’re being scammed.

159 works in the same way as 101 for the police or 111 for the NHS. It’s the number you can trust to get you through to your bank, every time.

159 will never call you. Only a fraudster will object to you calling 159.

[28th September 2021] Credit markets

Tue, 28 Sep 2021 22:37:47 Z

One thing that is often overlooked in the retail finance space is just how the mortgages that get sold day in, day out to Mr & Mrs Average Joe come about. That isn't a slur on Mr & Mrs Average Joe, because they are retail customers, afforded the highest protection by the FCA, and are not assumed to know the workings of the credit market, but you might think that people working within the industry would pay attention to such things?

Perhaps they do but there is often a focus upon the Bank of England base rate which since March 2020 has been welded at 10bps and yet rates that you or I may pay in the market for our mortgages have been consistently falling since that time. The answer as to why is contained within the credit market.

So during a conversation with a friend recently the subject of UK RMBS came up and in particular spreads to other credit. RMBS are of course Residential Mortgage Backed Securities and the UK relating in this case to the territory of the United Kingdom. Without dumbing it all down too much essentially Bank A decides that they would like to gain some funding to make loans for people who would like mortgage finance - maybe someone like you.

One quite vanilla way of achieving this is for Bank A to offer an attractive savings rate, which draws in funds that can be made into mortgages. That is all fine except that it is quite a slow process and of course requires a large marketing effort to the masses in order to highlight the amazing savings rate. Another way to achieve the same is via something called securitisation.

So Bank A goes to the credit market via an investment bank who sell Bank A's mortgage loan structure and in return charge Bank A some fee for their work. The investors in this loan structure will typically get fixed interest payments over the period via some new entity, with a name that usually has no relevance what-so-ever with mortgages, and with a prospectus around what the money invested within this structure can be invested in along with a credit rating from a rating agency [best not mention Bradford and Bingley, Northern Rock, WaMu, Ambac Financial, HBOS, at this point...]. Its actually quite a complex process and outside of market professionals in the credit space the structuring of these loans is easier to explain with some real examples.

Take these recent issuances. So in a structure called Gemgarto 2021-1, the seller (Kensington) intends financing owner-occupied (OO) mortgages to underserved borrowers with complex incomes, the self-employed, first-time buyers with limited credit history, contractors, and later life or younger borrowers.

Another Brass No. 10’s (Yorkshire building society) the proceeds will fund higher-rate savings products, as well as improving first-time buyers’ access to competitively priced mortgages.

Whilst Finsbury Square 2021-1 Green is the first UK RMBS transaction categorised as a Green Bond, meaning that the senior tranche complies with ICMA’s Green Bond Principles. Proceeds from the issuance of the class A notes will finance the origination of mortgage loans for properties with an Energy Performance Certificate of ‘B’ or higher (green projects) to be advanced within five years of the issue date.

Without getting bogged down too much with the various tranche's that are contained within these structures why don't we look at an example, just a few weeks ago, about just how tightly these things are trading.

Shawbrook Bank priced its Lanebrook buy-to-let (BTL) RMBS deal in September at the joint-tightest spread on any version of the product since the global financial crisis in 2008, according to sources familiar with the deal. The Class ‘A’ notes on Lanebrook Mortgage Transaction 2021-1, rated Aaa/AAA by Moody’s and S&P, which make up 88% of the deal have been priced at 65bp over Sonia. This was considerably tighter than initial price thoughts at the low/mid 70s.

The Aa2/AA rated ‘B’ notes were priced at 95bp over Sonia, while the class ‘C’ tranche was placed at 125bp over. The ‘D’, ‘E’ and ‘X1’ notes were placed at 165bp, 270bp and 290bp over, respectively. Together, the specialist mortgage and loan lender also priced a deal — a non-conforming RMBS. Despite the lower quality of assets in that deal, pricing landed right on top of where Lanebrook came. The class 'A' notes were priced just 5bp wider, for instance.

Just to translate that. It effectively means that investors risk premium for BTL RMBS even at the worse tranche [i.e. the first tranche to default] is 290bps over. With inflation beyond 3% that to me seems incredible.

In other examples you've seen Pepper Money release its latest non-conforming UK RMBS deal, called Polaris 2021-1. Citi, National Australia Bank and NatWest Markets were guiding the £425m deal at around 80bp or in the low-80bp for the senior tranche. The class ‘B’ tranche was being guided in the low 100bp, the class ‘C’ tranche was in the mid-100bp, the ‘D’ piece in the high 100bp, and ‘E’ tranche in the mid-200bp and the ‘F’ in the mid-300bp.

By comparison, the senior paper on Tower Bridge Funding 2021-2, another recent UK RMBS, was priced at 78bp on July 2. Recent data on the performance of UK non-conforming RMBS may have played into the wider pricing on Pepper's deal, as well as the facts that 22% of the creditors in the pool have county court judgements against them and 35% are self-employed. In Tower Bridge Funding 2021-2, CCJs applied to 10% of the collateral.

If you need proof of what central bank asset purchase programs have achieved then look no further and for the moment investors still have appetite for UK RBMS paper. Enjoy things while they last...

[23rd September 2021] Donnez-moi un break...

Thu, 23 Sep 2021 08:01:41 Z

We have covered a variety of subjects in this blog and principal amongst them has been some thinking around inflation, as we know that to be a key driver of monetary policy, i.e. interest rates. 5th grade economics...I said you never loose it!

So just what could be a driver of inflation? Well perhaps this week we might have had our attention to the price of Natural Gas [NG].

I must apologise for my lack of clarity because the term Natural Gas is very ambiguous. You can prove it to yourself by simply going to the favourite argument settler 'google' and typing Natural Gas price chart. The chart you are looking at is more than likely the price of NG for delivery to Henry Hub in Louisiana. Now type in this into google:- Dutch TTF Natural Gas. If you visit here often just look at the front month future, Oct '21 (TGV21). Looks rather different doesn't it? It certainly looks inflationary!

Many are asking just what on earth has created this remarkable issue? I asked a very good friend who should know a thing or two about the subject because he used to be Head of Natural Gas trading for a Tier 1 investment bank. He said:-

As a start China has had a hot (ie high electric demand summer), their domestic coal production has issues and with the drought hydropower is down - so they have bought coal and LNG, pushing up prices.

South America has been dry and cold again pushing up LNG demand.

Normally Europe/UK is the marginal place that producers (USA. Qatar, Australia etc) sell LNG but with all the other demand there are less flows.

Then add in Russian gas production issue and an ongoing argument about NordSteam2 pipeline from Russia to Germany.

Then in the Electricity market we have had very little wind and there are big nuclear issues - so the whole of Europe/UK is burning as much gas and coal as they can to keep the lights on.

So basically UK/European Gas and Electricity prices are at records and if you are a UK consumer on a floating price deal you are sunk
... and from a political perspective carbon emissions are sky rocketing - not exactly the Green narrative they have been selling.

Only good point is that prices are now almost high enough that utilities in Asia and Chemical feedstock will switch to oil freeing up some LNG - again not exactly very "green".

When you hear about all these small UK Energy suppliers going bust its slightly more complex again because you have to factor in how they have hedged their sales - have they bought the gas/electric is advance? Then as prices rise they will also be needed radically more capital to run their business (both cash flow financing and margining of forward hedges).

[21st August 2021] UK house price growth driven by demand - not Stamp duty cuts - Resolution foundation report says

Sat, 21 Aug 2021 12:17:45 Z

The Resolution foundation think tank has published its report called Housing Outlook Q3 2021 and it contains some interesting colour that house prices have risen faster in areas where the savings from transaction tax holidays have been negligible.

There report - which you can read in full here [https://www.resolutionfoundation.org/publications/housing-outlook-q3-2021/] says:-

House prices have defied expectations over the last year, rising dramatically in the face of the Covid-19 economic crisis. While many commentators have blamed transaction tax holidays for this trend, analysis in this Housing Outlook suggests this is somewhat wide of the mark. Instead, there appear to have been stronger forces at play within the housing market over the past year such as enforced savings during lockdowns, changing housing preferences and super-low interest rates. We conclude that the transaction tax holidays have been problematic less because they were inflationary, and more because they have been wasteful (the Government has forgone an estimated £4.7 billion of tax revenues in England and Northern Ireland as a result).

Spotlight: The effect of transaction tax holidays on house prices

Over the past year, house prices have consistently bucked expectations (not least ours): data released this week shows the average value of a UK home increased by 13.2 per cent from June 2020 to June 2021.[i] To state the obvious, such price behaviour is highly unusual in a recessionary period: as the economy contracts, we would normally expect pressure on both incomes and consumer confidence to drive down house prices. So, what has been different this time around?

A number of distinctive features of this crisis spring to mind. First, the Covid-19 period has been marked by a dramatic increase in the aggregate saving rate as households’ ability to eat out, holiday abroad and the like have been severely constrained. Second, the pandemic appears to have affected housing preferences, with evidence of increased demand for larger homes and less populous areas. Third, mortgage rates have got cheaper and cheaper (at least for those with lower loan-to-value ratios). But fourth, many have pointed the finger at policy, suggesting that the transaction tax holidays introduced across all nations in summer 2020 have been inflating house prices.[ii]

It is reasonable to expect at least part of the savings from any transaction tax holiday to be capitalised into house prices (an HMRC evaluation of the stamp duty cut introduced for first-time buyers in wake of the financial crisis estimated that between 50 and 70 per cent of the value fed through into higher house prices, for example). But logically, if the cuts to transaction taxes have been the overwhelming driver of the house price trends observed over the past 12 months, we would expect to see higher growth in areas where the savings from the change in policy have been most significant as a share of the house price (although we recognise that the housing market works in chains so we would expect the effect to be somewhat dispersed). But as Figure 1 shows, that is not what we observe at all. Prices have grown by more in those local authority areas where the average buyer experienced negligible, if any, savings as a result of a transaction tax holiday, compared with areas where far higher savings were achieved (13 per cent in savings quintiles 1 and 2 compared to 7 percent in quintile 5).[iii]

{20th August 2021] When will interest rates increase?

Fri, 20 Aug 2021 21:25:43 Z

When giving mortgage advice one question keeps cropping up and that is the one about views on future interest rates. Of course the absolute answer is "I don't know" and if you look at a chart of the Bank of England base rate over the decade you could easily have been sucked into the view that rates could never be lower many times, only to see them stay welded at [then] historically low levels or move even lower.

However as a financial professional it is reasonable to have an intelligent conversation about the drivers.

The consensus expectation is that there will be no change in interest rates and Bank of England policy in the very near term. However, that does not mean there won’t be some heated debates over four key questions:-

1. How fast is the UK economy growing? Britain is bouncing back as restrictions are eased and we start to return to normal. People are getting back to work. Shops and hospitality venues have opened their doors. There is the lifting of travel restrictions - notably to France, the biggest destination for the UK’s holidaymakers.

What no-one knows, however, is how sustainable the recovery will be. Will we simply go back to our pre-pandemic ways or has Covid permanently changed how we lead our lives? Will that be good or bad for economic growth? The Bank’s forecasts for growth are a key input to its interest rate decisions.

2. Is rising inflation temporary or here to stay? This is the key question for the Bank because its remit is to keep inflation close to its 2% target. For most of the past dozen or so years it has tried to achieve that goal by stimulating the economy - slashing interest rates close to zero and buying billions of pounds worth of bonds in order to keep yields and, therefore, the cost of borrowing low.

America is facing the same dilemma and, there too, the central bank is sticking to the line that inflation is ‘transitory’, to use the Federal Reserve’s description. History shows that maintaining easy policy for too long can lead to prices spiralling higher and a painful hangover as policy is tightened to bring inflation back under control.

3. What is the employment picture? One of the key metrics in determining the health of the economy is the employment rate which is linked to point 1. However employment is also a big driver of inflation through increased wage demands and at the moment we are at a point where the jury is still out if the continued growth [and pace of growth] in the economy will not only see improvement in the employment rate but provide inflationary pressures through pay increases.

4. When should policy start to tighten - and how best to do it? Every member of the monetary policy committee knows that money policy cannot stay easy for ever. Where the eight-strong group of rate-setters disagree is on the timing of that move. Move too soon and the still fragile recovery could be choked off. Move too late and the measures needed further down the track could be painful.

There are two parts to the Bank’s stimulus - low interest rates and so-called quantitative easing (buying the bonds). It is currently conducting a review of whether it is best to cut rates and then stop buying bonds, or the other way around. These days central banks like to avoid surprising the financial markets so we should expect some hints and guidance on the future policy approach and when interest rates will rise, this week.

[30th July 2021] UK housing market

Fri, 30 Jul 2021 08:31:37 Z

Annual UK house price growth cooled in July as the rush to move home before the stamp duty holiday ended began to fade, but it remained in double digits as demand from buyers continued. The Nationwide house price index slipped to 10.5 per cent in July from 13.4 per cent the previous month, while seasonally adjusted prices fell 0.5 per cent month on month, bringing the average price of a home to £244,229. The price of homes is now close to a record high relative to incomes.

Oddly however whilst market commentators like to focus upon the stamp duty holiday as a key driver, the Nationwide figures showed that “savings” from the tax break were dwarfed by an increase in the price of homes. The cost of a typical UK property increased by £24,500 between July 2020 and June 2021, while the stamp duty saving was £1,900. Data from HM Land Registry highlighted that higher priced properties drove activity during the pandemic. The number of transactions involving builds of £500,000 or higher increased 37 per cent in the year to March 2021, compared with 2 per cent for all properties.

Robert Gardner, Nationwide’s chief economist, said underlying demand was likely to “remain solid” in the near term, because of low borrowing costs, and a lack of housing supply in the market. The potential for rising unemployment and the end of the stamp duty holiday would likely soften prices, he added, but sustained demand meant any falls were far from assured. “As we look toward the end of the year, the outlook is harder to foresee.”

{2nd July 2021] All about inflation.....or is it?

Fri, 02 Jul 2021 07:50:10 Z

BoE governor Andrew Bailey was making his annual Mansion House speech last night and the thrust of his message falls into line with expectations set by recent commentary from other central bankers, namely that the rise in inflation is seen as temporary.

In his speech, Bailey said there were at least three reasons why the increase in inflation would probably be temporary.

They included distortions caused by comparing prices now with those of a year ago during the first lockdown; shortages of supplies caused by a rush of pent-up demand and pandemic-linked bottlenecks; and a return to spending on services which would smooth out demand that has been concentrated on goods.

There is also the risk of new virus cases and the delay's in social distancing rules, the wider re-opening of the economy [especially travel and leisure].

As well as inflation, the BoE is concerned about a possible rise in unemployment.

The government began requiring employers to start contributing to the cost of keeping on furloughed workers from Thursday and was due to end the scheme at the end of September.

Bailey said in his speech on Thursday that a spike in average earnings was in large part due to heavy job losses in low-paying sectors such as hospitality which had been hardest hit by the pandemic.

Which is a theme of the US Fed, who of course have a dual mandate meaning the monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment.

Well its a good job its the first Friday of the month which means non-farm payrolls. Interestingly the employment picture in the US is such that sign on bonuses have become commonplace [where the new recruit gains an upfront bonus payment for agreeing to take the job] even some Burger King stores have a $1500 sign on bonus! Even in the UK there is a wide spread shortage of truck drivers with the Road Haulage Association suggesting there is a shortage of 60000 drivers. Did someone say wage inflation?

Elsewhere there is announcement that the G7 have agreed a global minimum tax rate of 15%. All very interesting but it reminds me of those UN meetings where everyone in the room is demanding action, yet with one contrarian voice, the UN time and time again has become a great big nothing done. This will surely be a feature of this tax ambition because currently Ireland has a 12.5% rate and has naturally said "NO". to 15%. Other nay-sayers are Estonia, Hungary and Nigeria.

{15th June 2021] G7, NATO, Fed meeting & UK delay reopening....

Tue, 15 Jun 2021 06:39:22 Z

As we head into the summer if you've been a reader of this blog or a financial publications like the FT you will be unsurprised by the recent newsflow in the main stream that the UK housing market is on fire and inflation has started to tick up.

The UK housing market has become utterly crazy and anecdotally I have heard stories that some customers have been making offers 15-20% over the asking price [which has likely been set by an estate agent with an ambition to already maximise selling price for the customer and their own commissions] but these offers come via viewings online or a quick 5 minute house tour via a video link on an iPhone.

The world has changed.

Yet this housing market was utterly predictable given the huge stimulus of stamp duty holiday, Help to Buy, 95% LTV government guarantee scheme all set to a low interest rate environment.

We have been talking about inflation for a while on this blog and it has been a big focus for central bankers and market participants certainly since the long end of the bond curves started to tick up towards the end of 2020, as economies started to see life beyond the challenges of the corona virus pandemic with vaccination roll outs.

Measuring inflation is not as simple as one might think.

Measuring changes in average price levels requires the use of a device called an index. It is impossible to keep an accurate record of every price change for every good and service in the economy at all times. In 1914, the UK Government began to monitor food prices to help protect workers during the First World War. In 1916, price checks on clothing, fuel and a few other items were added to generate a simple cost of living index.

Today, the UK uses a number of indices to track price changes, including the Consumer Price Index (CPI), which was introduced in 2003, and the much older Retail Price Index (RPI) which was introduced in 1947. Using an index allows a general picture to develop to show the average price change for a sample of goods and services, measured at monthly intervals. In 2013 two new indices were introduced – the CPIH and the RPIJ. In November 2016 the CPIH replaced the CPI as the ‘official’ measure of inflation in the UK.

The CPI is based on the European Harmonised Index of Consumer Prices (HICP) and its introduction in the UK allowed for more accurate inflation comparisons between the UK and Europe.

The chart shows the latest CPIH and whilst the absolute number in the UK is relatively low the rate of change is quite remarkable

Then just today UK economic data shows UK average weekly earnings in +5.6% & May unemployment claimant count -92600 month/month.

Yet all of this is set against other news that sees the UK push back its reopening date by perhaps 4 weeks.

It is this kind of uncertainty that allows central bankers to suggest that current inflation is merely transitory and keep the stimulus train rolling. Indeed many market participants agree that we are unlikely to see a rate rise before 2023 and perhaps the end of the Fed meeting today will likely give more colour on the thinking of the worlds most powerful central bank.

Elsewhere the recent G7 & NATO meetings gave its usual blah and its perhaps its reassuring that Russian and China are still wearing black hats... well unless we want to buy stuff or central Europe wants to heat its homes in winter [see Nord Stream 2 for further details]. The complaints around China and Russia are the usual state intervention....hang on what is this on the tape? Boeing / Airbus subsidies....

[19th April 2021] 95% LTV with government guarantee

Mon, 19 Apr 2021 07:56:54 Z

High Street lenders are now starting to offer mortgages to borrowers offering a deposit of just 5% under a new government guarantee scheme.

The policy, announced in the Budget, is designed to help more first-time buyers secure a home.

The scheme is similar to policies previously used to boost the housing market and the economy, as well as offering support to those buying a home for the first time.

The new scheme will be available to anyone buying a home costing up to £600,000, unless they are buy-to-let or second homes.

The government is offering a partial guarantee, generally of 15%, to compensate lenders if the borrower defaults on repayments.

The guarantee is designed to give lenders the confidence to offer 95% loan-to-value mortgages - many of which were withdrawn during the Covid crisis.

Lloyds, Santander, Barclays, HSBC and NatWest are starting to offer products this week and Virgin Money will do so next month.

However, some lenders such as Halifax, which is part of Lloyds Banking Group, and Barclays have said that these products will not be available for new-build properties.

However with rates around 4% if you can afford a higher deposit, which will of course give you a lower loan to value mortgage product you will get a much more competitive rate - saving as much as 1% in cases.

[16th April 2021] A big risk to the UK economy

Fri, 16 Apr 2021 19:20:56 Z

Difficult to know who reads these blogs or when they get read, but with the broad assumption that you may be reading this sometime in early 2021 and you have a basic interest in economics and markets you will likely agree with me when I say that we are currently 'off to the races'.

What do I mean by that? Well global economy's are enjoying the multi pronged benefit of huge central bank stimulus - perhaps like the US with actual cheques arriving in the post to its citizens, or like the ECB with direct market action and bond purchases, or like the UK where it is giving tax breaks to the housing market with SDLT freeze and more recently a government backed mortgage guarantee for high LTV loans. Of course some economies are using a mixture of stimulus measures.

Add to this the natural recovery as we emerge from broadly a year of lockdowns and restrictions and as we head into earnings season corporate earnings are beating on the top and bottom line with the consequence that equity markets making record highs in the US and very strong recoveries seen in UK, EU and Asia.

Happy days you might think. Yes indeed Happy days if you are long equities and other assets, yet there is a storm brewing in the UK.

One of the big failures in this authors opinion with UK policy is that we are continuing to stimulate a housing market that didn't really need stimulating. That inevitably creates asset price inflation. You can see that in any number of headlines. Here is a summary from the Investors Chronicle of April 15th:-

https://www.investorschronicle.co.uk/news/2021/04/15/the-health-of-housing/

"On the face of it, the UK’s housing market has become entirely dislocated from the reality of the economic situation the country finds itself in. In a year when gross domestic product suffered its largest contraction in more than 300 years, house prices accelerated to notch up the highest annual growth rate in over six years by December 2020."

Much of this growth is funded with the very common 2 year fixed rate mortgage, which is by far the most popular product usually because it has the lowest initial rate and even with the associated fees leaves the lowest month payment for borrowers to meet.

So what is the problem? Well in a benign low interest rate environment [where customers are able to roll their old 2 year product onto a new 2 year product at a similar rate] of course nothing. Yet what this 2 year product landscape means for the UK economy as a whole is that as rates increase it instantly takes funds out of the economy because it is likely to impact a larger segment of borrowers almost immediately, and those borrowers are forced to make greater monthly mortgage payments.

[26th March 2021] Inflation

Fri, 26 Mar 2021 14:34:25 Z

I'm a child of the 1970's. 1971 in fact and to be fair the inflation that plagued the UK through that particular period is something that is recounted to me by my father, usually dovetailed with grumbles about a 3 day week, blackouts, unions, Red Robbo and how at the end of the 1970's Mrs Thatcher for a brief period rekindled the UK and arguably became the most powerful person in the world.

Of course the 1970s were a period of great turbulence within the UK. The early years of the 1970s were a period of rapid economic growth. The Bank of England deregulated the mortgage market - meaning High Street Banks could now lend mortgages (not just local building societies). This helped fuel a rise in house prices and consumer wealth. The 1972 budget saw chancellor Anthony Barber make large tax cuts against a backdrop of high economic growth and there was the growth of credit.

By 1973, inflation in the UK was accelerating due to:

Rising wages, partly due to strength of unions.
The inflationary budget of 1972.
Growth in credit and consumer spending.
Oil price shock of 1973, leading to 70% increase in oil prices.

Belatedly, the government tried to deal with unemployment, through higher interest rates. Also, the Heath government tried capping wages. This was fuel for industrial unrest, leading to frequent and widespread strikes. In 1973, the miners went on strike and were also joined by sympathetic trades unionists. The 1973 oil crisis saw the price of petrol more than double and the UK faced an energy crisis to go along with a spike in inflation. The government seemed powerless as Britain was put on a three day week and TV was turned off at 10.30pm.

Against this backdrop the 1970s was a period of rapid house price growth, especially in the early 1970s. During the 1970s, home ownership rates increased from 51%, 1970 to 57% in 1981.

In 1970 Q1, average house prices were £4,377
By 1973 Q1, average house prices had more than doubled to £8,395

Real house prices rose in the early 1970s because:

Rise in incomes
MIRAS - tax relief on mortgages, encouraged people to get a mortgage.
Deregulation of mortgage sector
Greater aspiration to own a home

In the second half of the 1970s, real house prices fell between 1975 to 77 because they struggled to keep up with record inflation.

When people talk inflation it is usually this 1970s version that allows men and women of a certain age to look into the middle distance in terror. Hard to believe therefore that most of a younger generation have never lived through a period of significant rising inflation as since the early 1990s CPI has been kept largely at around 2%.

So why the sudden refocus upon inflation over recent weeks? Well the US 10 year treasury yield has been pushing up towards 1.6% [from around 80bps at the end of 2020] and that is seen as a canary in the mine for inflation expectations. Bond investors fear the US central bank will let inflation increase more than normal, eroding the value in bonds.[remember bond price down, yield up]. Market speculation that the U.S. Federal Reserve will allow consumer prices to overshoot have pushed 10-year inflation expectations to their highest since 2014, with the Treasury Inflation-Protected Securities breakeven inflation rate trading higher.

[22nd March 2021] Oops..! I did it again, Erdogan sacks central bank chief.

Mon, 22 Mar 2021 07:43:28 Z

The Turkish lira slumped toward a record low versus the dollar after President Tayyip Erdogan stunned investors over the weekend by replacing the hawkish central bank governor with a critic of high interest rates.

Erdogan fired the central bank governor only two days after a sharp rate hike that was meant to head off inflation of nearly 16% and support the lira.

The new central bank governor likely means a reversal of the hawkish and orthodox steps taken to battle inflation, which could lead to prolonged market volatility, analysts said.

“After regaining investor confidence with a series of aggressive rate hikes, Turkey has snatched defeat from the jaws of victory,” analysts at Brown, Brothers and Harriman wrote in memo.

Then this on the tape:-

LONDON (Reuters) - Societe Generale said the dismissal of Turkey’s central bank governor Naci Agbal had left the country “beyond the point of no return” and predicted the lira to weaken to 9.70 against the U.S. Dollar by end of the second quarter.

In a note to clients, analyst Phoenix Kalen also predicted that new governor Sahap Kavcioglu will try to undo Thursday’s 200 basis point hike at the 15 April monetary policy meeting as well as deploy substantial reserves between now and then to try to stabilize the lira. However Kalen added that Kavcioglu would likely lose the currency battle with markets and may have to engage in emergency hikes to halt the currency’s decline.

“We recommend exiting from any long positions in Turkish assets, considering the profound shift in policymaking and the likely financial turmoil ahead,” Kalen wrote in the note.

“Turkey may soon be headed toward another currency crisis”.

So just digest that. Soc Gen are suggesting exiting from any risk assets in Turkey. That is a huge statement and might I add huge credit to the analyst for the unambiguous remark.

Why do we care in the UK mortgage space? Well directly there isn't much read across for retail punters but what this will absolutely highlight in the coming months is just how asset prices are affected with what is increasingly looking like unorthodox monetary policy. Remember the initial moves by the previous bank chief were to try and control Turkish inflation.

[15th March 2021] A little wobble..

Mon, 15 Mar 2021 07:06:01 Z

Last week the US voted through Joe Biden's $1.9trillion stimulus plan. Now perhaps very many of you will be wondering why we care so much about the United States of America? Of course the simple answer is it matters because they are the worlds largest economy [an economy that in 2021 is very much inter connected as the virus has shown] and this is nearly TWO TRILLION dollars!

Politically it is quite interesting because it definitely shows a shift to the left in US politics [the plan just wouldn't have passed otherwise] but unlike many economic stimulus plans that typically involve liquidity measures that typically involve central bank rate control and/or direct market action in fixed income markets in this round of stimulus there will be direct payments to Americans.

The checks will be a maximum of $1,400 per individual, or $2,800 per married couple, plus $1,400 per dependent.

Like past direct payments, this third round will be based on income.

The income limits for those to receive the maximum amount will remain the same. Individuals who earn up to $75,000 in adjusted gross income, heads of household with up to $112,500, and married couples who file jointly with up to $150,000 will get the full $1,400 per person.

Last year the Federal Reserve had signalled a major shift in its approach to managing inflation, as it tried to do more to aid the US economy's recovery.

The central bank will now target an "average" of 2% inflation, rather than making 2% a fixed goal, giving it more flexibility, boss Jerome Powell said.

The intent was to allow the bank to keep interest rates lower for longer, stimulating growth to help tackle unemployment.

In Europe, where Germany is the senior partner, inflation is a very sensitive issue because of the history of Germany. The bond buying program of the ECB was in focus just last week as Bundesbank President Weidmann called on all European countries, not just Germany, to restore their public finances.

“But all member states of the monetary union, not just Germany, will need to get their budgets in order after the crisis. In the euro area, it is particularly the — in some instances — very high debt ratios that must be brought back down reliably,” he said.

Yet as we went through the weekend we see headlines of virus spiking across Italy, Germany and Eastern Europe. Add to which a European vaccination roll out that is in turmoil and the AstraZeneca vaccine suspended in at least nine countries worldwide, including Ireland, Denmark, Norway and Iceland, over safety concerns.

Check Please.....you won't be hearing that for a while as it seems 2021 Summer holidays just got cancelled.

[13th March 2021] House builders 'should drop appalling gagging orders' BBC

Sat, 13 Mar 2021 07:51:08 Z

I was going to write something about what has been an incredible week and inflation but that can wait until tomorrow because I was looking at the BBC's website and saw this.

I'll reproduce it here in its entirety and this doesn't just effect new purchases but it also hurts everyone in the chain as potential house purchases fall through because the home movers plans have been stifled because of more general issue with a new build development and buyers of homes that may have been in phase 1 of the development gets hit as issues in other parts of the same development become more widely known.

Here is the BBC story:-

House builders that carry out repairs on newly built homes need to be more open about what work has been required, according to the chairman of Parliament's Housing Committee.

Some home owners say they were asked to sign non-disclosure agreements (NDAs) as a condition of repairs being done.

The practice was "appalling" Clive Betts MP told Radio 4's Money Box programme.

The Home Builders Federation said NDAs were "not widely used" by developers.

Mr Betts said housebuilders should be obliged to inform home owners when systematic defects were identified that might affect their property, which he said would be normal practice in other areas.

"If this kind of thing happens in the car industry for example, car companies have to tell their customers, issue a recall, and get the problem fixed.

"I don't see why it should be any different when it comes to buying houses," he said.

It is hard to establish an accurate, independent picture of how common such NDAs are. People who have signed them are worried about speaking out because of the threat of legal action.

But Money Box spoke to several industry experts who said these gagging orders were used regularly.

'Despicable practice'

Chris Blythe, former chief executive of the Chartered Institute of Building, said it was "quite common" for developers to use them.

"Unfortunately, because of the nature of the agreement, i.e. non-disclosure, no-one knows very much about it," he said.

"But it's done for commercial reasons, because if it became known on a particular development that there are problems [then] other house buyers would be asking the house builder to do remedial work [for them too].

"So they use these to silence people... and it's a despicable practice."

Around 250,000 new houses were built in Britain, according to the latest annual figures, and defects in new build houses are common.

Many are minor and fixed without any problems, but serious defects can cost thousands of pounds to put right.

These include things like poor brickwork, faulty foundations, problems with windows and external doors, structural weaknesses with rooves and issues with plumbing and sewerage systems.

When remedial works cost such large sums of money developers sometimes delay carrying out work, Money Box was told. The programme was also told of cases where developers fought home owners for years and refused to carry out remedial works at all.

Hidden risk

Geoff Peter is a solicitor and founded Wingrove Law to help homeowners who bought houses and later discovered serious defects with their properties.

"Non-disclosure agreements... are of no practical benefit or use to homeowners," he said.

"The effects of them when they're used at scale, as they are in the [house building] industry, is really just to keep a lid on the true nature and scale of problems.

"So it's really impossible for... the buying public, to have any real idea of the risks they are taking when they buy a new build property... because there's no reliable source of information as to the nature and scale of the problems that they're likely to encounter."

When asked about NDAs industry body, the Home Builders Federation, said: "Settlement Agreements are legal contracts that are used by businesses across all sectors.

"They are not widely used by housebuilders and when they are, it tends to be with regards to details of compensation payments, sometimes at the request of the customer."

If you've been asked to sign a non-disclosure agreement as a condition of getting repair work done to your newbuild house email us in confidence at moneybox@bbc.co.uk and tell us about your experience.

[9th March 2021] What a week...and its only Tuesday!!!

Tue, 09 Mar 2021 21:28:29 Z

I'll cut to the chase. If you are looking at a new mortgage or a remortgage in the coming weeks and months then you really do need to be alive to the general macro environment and in particular the spread between 2 and 5 year products.

We may all know that the UK base rate is 0.10% since broadly this time last year. Why? Well we have all seen the utter economic [not to mention human] devastation from the virus. Retail is almost exclusively online, shopping malls [if you can remember what they are] are literally tumble week, hospitality hasn't been open for any consistent period for a year and airlines and travel is down at least 80%.

The pandemic was so fierce that demand for crude has plummeted [i.e. no one was driving, business was closed and airlines mothballed]. No one needed or wanted oil, so the price of oil keeps going down. Indeed last year on the last day of the option expiry for the front month i.e. the last day you can get out of the contract, when you don’t want or aren’t equipped to accept a delivery of physical oil. [You probably have nowhere to put it!]

With time short, you need to get out of that contract now so you don’t have to deal with an actual barrel full of oil come May prices actually turned negative. Negative prices mean you are actually paying the person with the oil to not give you the oil. In normal times there would be logistical and physical capabilities to buy extra oil and store it until it can be sold for a profit. This time last year, apparently, there’s so much unused oil already in storage that there isn’t enough room to store the oil they’d receive from the contracts expiring.

Yesterday crude oil traded above $70. Think about that for a second. We are literally just emerging from an economic meltdown and oil is already trading up around $70. Yes partly because of continued supply constraint from OPEC but also because some of the supply that was taken away by falling prices in 2020 means and this supply can't be turned on in a heart beat. Its not just crude oil, industrial metals are trading at multi year highs, as are some agricultural staples like wheat. Pork has doubled in the last year.

Why do you care? Well inflation and the market is starting to price this into the longer end of the curve. UK 10yr Gilts settled at the end of 2020 around 0.20% we are now up at 0.70%. Still incredibly low on historic metrics and we still have a long long way to go in the economic recovery BUT...

There is an absolute wall of stimulus and pent up demand waiting to get involved throughout 2021 and it seems to this commentator that when the usual spread seen in the mortgage market between the most popular product - the 2yr fixed rate - and the 5yr fixed rate of around 0.20% is that going to last?

[4th March 2021] Unsurprising UK budget

Thu, 04 Mar 2021 07:15:38 Z

The 2021 budget, certainly as far as the housing market was concerned was a little bit of a none event, as all of the big ticket items had been pre- announced.

The stamp duty holiday has been extended by 3 months to the end of June, no doubt enabling more buyers to take advantage of the potential savings.

Since the tax holiday was introduced in July 2020, the property industry has struggled to cope with surging demand, creating bottlenecks in transactions for mortgage brokers and conveyancers. The new deadline will most benefit those who are already underway with their property sale or purchase, given that the timescale to complete before the new deadline remains tight.

The government also confirmed reports that it will provide a guarantee on 95 per cent loan-to-value mortgages, designed to support potential buyers with smaller deposits. That’s good news for listed high street lenders including Lloyds, Barclays, HSBC and NatWest, which are all participating in the new scheme. The group will soon be joined by Virgin Money (VMUK), said Sunak.

The scheme could lower the cost of repayments for borrowers. For instance, if current 95 per cent LTV rates drop to 75 per cent rates to reflect the lower risk to the lender, it has the potential to bring down the monthly cost of repayments significantly.

The scheme will be available for new mortgages up to 31 December 2022 and allow borrowers to fix their initial mortgage rate for at least five years.

However, it is likely to chiefly benefit those in lower priced parts of the market, as regulatory limits on loan-to-income levels mean the high cost of homes in southern England - notably London - makes using a 95 per cent mortgage much harder, argued David Ross, managing director at property market analytics specialist Hometrack.

Given the supply of new homes coming onto the market remains below levels witnessed during the comparable period last year, a boost to demand could mean elevated levels of sales price inflation continue. In February, Nationwide’s house price index recorded annual growth of 6.9 per cent, up from 6.4 per cent in January.

[3rd March 2021] Sunak confirms 95% LTV mortgage guarantee scheme

Wed, 03 Mar 2021 13:49:13 Z

The government has announced further details of its new mortgage guarantee scheme during today's Budget.

The scheme is set to launch to lenders from April and will allow both first-time buyers and current homeowners to purchase properties up to £600,000 with a 5% deposit.

Speaking during the Budget, Rishi Sunak confirmed that several of the UK’s largest lenders including Lloyds, NatWest, Barclays, Santander and HSBC will be offering the mortgages from next month, with further lenders including Virgin Money to follow shortly after.

Michelle Andrews, HSBC UK’s head of buying a home, said: “We’re delighted to once again be supporting the Government Help to Buy scheme. Here at HSBC UK we’re committed to supporting people to get on to, or move up the property ladder. This scheme will make a real difference in enabling more first-time buyers and home movers, with a minimum of 5% deposit, to get the keys to their new home, and we’re excited to play our part in it.

"Our team of dedicated mortgage advisors will be ready to provide expert advice and guidance on this scheme from the 19 April.”

A Virgin Money spokesperson said: “We welcome the Government’s support for borrowers with a smaller deposit and we’re pleased to say that we will be an active participant in the Help to Buy Guarantee Scheme. We know how important it is that first time buyers get the right support and we look forward to launching Virgin Money Help to Buy mortgages to support this segment of the mortgage market.”

Guy Gittins, CEO of Chestertons, commented: “Any additional assistance for first-time buyers is always welcome. First-time buyers were hit particularly hard by the lack of mortgage availability during the pandemic. As such, the government’s introduction of a 95% LTV mortgage presents good news for first-time buyers, keen to get on the property ladder. Another audience likely to benefit are existing home owners wanting to trade up or re-mortgage to release equity.”

“Whilst the mortgage offering is likely to be in high demand and have a positive short-term impact on the UK’s economy, the loading of more debt onto private households is a risky undertaking and the detailed Terms and Conditions are yet to be released. We do hope that lenders are bound to tight due diligence checks that ensure borrowers are financially able to carry the risk.”

[2nd March 2021] Budget 2021 : Stamp duty holiday extension & 95% mortgages?

Tue, 02 Mar 2021 14:28:53 Z

The chancellor will pledge to use the government's full "fiscal firepower" to protect jobs and livelihoods, vowing to do "whatever it takes" to help businesses and people.

On the housing front it has been reported that the stamp duty holiday, which is due to end on 31 March, could be extended and a mortgage guarantee scheme to help buyers with just a 5% deposit.

A mortgage guarantee scheme would help people with small deposits get on the property ladder. The government will offer incentives to lenders, bringing back 95% mortgages which have "virtually disappeared" during the pandemic, the Treasury says.

The new mortgage scheme is not restricted to first-time buyers or new-build homes, but there will be a £600,000 limit.

The coronavirus pandemic has meant there are now few low-deposit mortgages available, the Treasury said, with just eight on the market in January.

They are often seen as riskier by banks as they are more vulnerable to negative changes in property prices - meaning people hold more debt than their home is worth.

Under the scheme, which will launch across the UK in April, the government will offer to take on some of this risk.