Ray Boulger's Blog

The "Real" Nationwide House Price Index rises 1.6% in June

Fri, 03 Jul 2009 23:38:00 +0100

Nationwide announces massive fixed rate mortgage increases

Wed, 10 Jun 2009 14:13:00 +0100

Following my blog a couple of days ago warning of imminent fixed rate mortgage increases Yorkshire Building Society yesterday announced increases of between 0.2% and 0.5% and today Nationwide has announced some massive increases from Friday. All its fixed rates are increasing, but the biggest increase is a stunning 0.86% on one of its 5 year fixes. A rate increase of this size on a £200,000 interest only mortgage will increase its total cost over 5 years by £8,600, or £143.33 per month! The maximum and minimum increases are as follows: 2 year fixes between 0.16% and 0.61% 3 year fixes between 0.20% and 0.26% 5 year fixes between 0.20% and 0.86% There is no obvious pattern to which rates are going up most. For example on 2 years it is the rates for the higher loan to values, whereas on for 5 years the biggest increases are on the rates to 60% LTV and the smallest on the rates to 85% LTV. Such large and varied increases indicate that either Nationwide wants to rebalance its mix of business or it has reassessed the relative risks of different types of business, or perhaps both. It may also indicate that it wants to reduce the overall amount it lends. If the latter is true yesterday's speech by Paul Tucker, Deputy Governor of The Bank of England, at The Association of British Insurers’ Biennial conference in London is prescient. He said, “For the moment it is unclear – as, I must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery”. He warned against the risks from banks simultaneously deleveraging by cutting back on the availability of credit, pointing out that “not lending would be a counterproductive business and financial strategy.” Nationwide is one of only 6 lender groups currently doing serious volume in the mortgage market and these rate increases will push more business to other lenders, most of whom will not want the extra volume and even if they do will in many cases not have staffed their new business departments to a level to enable them to cope with the extra demand. I have no doubt that this, plus the increased costs of funds affecting every lender as a result of recent sharp rises in swap rates, will result in most other lenders announcing increases in the cost of their fixed rate mortgages in the very near future. The corollary is that, albeit probably after a little time lag, better rates are likely to be offered to savers prepared to tie their money up for at least 2 years. Interest rates and equities appear to be rising because the market is coming round to the view that the economy is going to bounce back from the recession more quickly than was expected until recently. However, if rates rise too far too quickly there is a very real danger that whatever green shoots may be appearing will be strangled at birth.

Expect imminent increase in the cost of fixed rate mortgages

Mon, 08 Jun 2009 19:03:00 +0100

Today saw another sharp rise in gilt yields at the short end of the market, although there was a marginal fall in yields at the long end. The yield on 2 – 4 year gilts rose by around 0.15%, with the obvious knock on effect on swap rates, some of which rose even more. 2 year swaps were up by 0.22% to 2.48%, 3 year by 0.21% to 3.11% and 5 years by 0.14% to 3.76%. The 10 year rate was only 0.02% up at 4.24%. The recent lows for swap rates were on May 14, the day after the publication of the Bank of England’s Quarterly Inflation Report, when 2 year swaps closed at 1.98%, 3 years at 2.49%, 5 years at 3.14% and 10 years at 3.80%. Thus in just 3½ weeks 2, 3, 5 and 10 year swap rates have risen by a massive 0.50%, 0.62%, 0.62% and 0.44% respectively and this at a time when the Bank of England’s Quantitative Easing programme is meant to be driving down yields. This presents the Prime Minister, who is rapidly losing what little authority he has left, and the Bank of England with a major problem. Having pushed Bank Rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the Government is impotent in this area and has lost control of interest rates except at the very short term end. This situation has some parallels with the US. The yield on the US benchmark 10 year Treasury Bond bottomed out on 15 January this year at 2.14% but closed a whopping 1.69% higher last week at 3.83%, after rising 0.37% on the week. As a consequence rates on a US 30 year fixed rate mortgage, the most common type of mortgage in the US, have risen by 0.45% in the last month alone to around 5.45%. Following such a sharp rise in swap rates here in the UK I expect several lenders to increase their rates for fixed rate mortgages over the next few days, but there is no reason to expect tracker rates to increase as 3 month Libor is still slowly edging lower and at 1.25% the margin of 0.75% over Bank Rate is the lowest it has been for several months. With most borrowers (around 80% of our clients) currently choosing a fixed rate mortgage, if interest rates continue to rise the current recovery in the housing market, which is based primarily on much improved affordability as a result of the combination of lower house prices and lower interest rates, is in danger of being snuffed out.

This Month Mervyn King Achieves His Aim Of Being Boring

Thu, 04 Jun 2009 14:47:00 +0100

Today’s decision by the MPC to leave Bank Rate and the Quantitative Easing programme unchanged was widely expected but next month the committee will have to consider whether to utilise the final £25bn The Chancellor has authorised for Quantitative Easing. If the MPC feel the need to either consult with The Chancellor on this or ask for authorisation to exceed the £150bn already authorised it looks very probable they will have to deal with a different Chancellor. However, as the Prime Minister was no doubt actively involved in the original decision to go down the Quantitative Easing route no doubt, assuming he has not been ousted by this time next month, his influence will mean that the basic policy won’t change. Although a few lenders increased the maximum loan to value at which their best rates are offered during the last month, others have either increased the rates on their fixed deals, particularly those lasting longer than 2 years, or withdrawn some of their deals completely and some have in fact done both. This partly reflects a small increase in swap rates but a more important factor for lenders appears to be a need to restrict the volume of new business. Maintaining service standards is the often reason given for this, and everyone agrees this is very important. However, there is no shortage of experienced mortgage personnel in the market at the moment and so lenders will have had no trouble staffing their back offices at the levels necessary for the amount of lending they want to do. Therefore, the basic reason for rates increasing or disappearing completely is to avoid exceeding the amount of lending the lender is willing and able to do, taking account of, among other things, commitments given to the Government and capital constraints. Despite the Bank of England having used £80bn of the funds it has agreed to commit under its Quantitative Easing programme it is hard to see any visible impact of this so far in terms of any real increase in mortgage availability. It may be that with the housing market performing better than virtually all the forecasts at the end of last year, albeit with activity still at a historically low level, the modest extra mortgage demand this has generated is enough to be the straw that breaks the camel’s back. With no slack in the amount of mortgage funding available and lenders currently having no ability to easily increase the amount of money they have available to lend, the only ways they can restrict demand are the time honoured methods of putting up their rates or withdrawing products. The former has the bonus side effect of increasing their margins and until the Residential Mortgage Backed Securities market reopens it is difficult to see where any significant additional funding is going to come from, apart from The Government. What is making matters worse is that the FSA now requires building societies to stress test their balance sheets for, among other criteria, a fall of a further 50% from today’s levels of residential property prices. Such an Armageddon type test might have been appropriate at the beginning of the credit crunch but this is a classic example of a regulator on the back foot because of earlier failures and now overreacting, just as some confidence is returning to the residential property market. Such an onerous stress test reduces lenders’ ability to lend and thus compounds the supply-demand imbalance in the mortgage market.

The FSA accepts AMI's argument over fees

Tue, 02 Jun 2009 18:04:00 +0100

The campaign by The Association of Independent Financial Advisers (AIFA) and the Association of Mortgage Advisers (AMI) against the swingeing increase in regulatory fees originally proposed by FSA on its members was a major factor in the huge number of responses - 533 - to the consultation. Such a response was impossible to ignore and resulted in a major rethink by the FSA on how the fee increases should be apportioned to the different sectors of the market. The FSA will still increase its total fee income for 2009/10 by an outrageous 35.8% but even more of this increase will now fall on banks, insurers and principle dealers. The average regulatory fee charged to banks and other deposit takers will increase by a massive 109.4% from last year, compared to an only slightly less massive 94.9% in the FSA’s original proposals. For mortgage advisers the original proposed total levy of £13.7m (£11.3m in 2008/9) has been reduced to £11.6m, an increase of 2.7% compared with the original proposed increase of 21.2%. For firms with general insurance exposure the proposed total levy of £41.2m (£34.4m in 2008/9) has been reduced to £37.6m, an increase of 9% compared to the originally proposed increase of 19.8% The total reduction from the FSA’s original proposals in the regulatory fees payable in 2009/10 by firms represented by AIFA and AMI, i.e. mortgage brokers, general insurance brokers and IFAs, is £11.7m. Many firms will nevertheless still see their fees increased, but now by a far smaller amount than the FSA originally proposed. The minimum FSA fees, the basic fee which all firms must pay regardless of size, will be frozen at the 2008/09 level. The FSA commented that: "The FSA works hard to ensure that fees are allocated as fairly as possible, with the largest fee increases being allocated to the firms that require the most use of the extra supervisory resource." Chris Cummings, director general of AIFA, said: "This is an appropriate and welcome measure in difficult economic times. AIFA and AMI strongly believe that regulatory resources, and therefore costs, should be focused on those firms that require increased supervision and not those in the IFA and mortgage advice professions." Note. In the interests of transparency I should add that I am an AMI Board Member.

Gordon Brown's interview on the Today programme

Mon, 01 Jun 2009 11:02:00 +0100

When Evan Davis interviewed Gordon Brown on the Today programme this morning Evan, as expected, didn’t give him such as easy ride as Andrew Marr did yesterday on BBC1. A couple of questions in particular produced an answer I thought worth highlighting: When asked about Damian McBride Brown said “If people make a mistake they go. ”The Prime Minister’s application of that doctrine has clearly been very selective but in particular the fact that he himself hasn’t gone implies he still doesn’t recognise his own failings, particularly while he was Chancellor. Answering a question about whether he would resign if the results of the Euro election were very bad for Labour he said “I am not arrogant. I listen to people.” Any comment on that reply would be superfluous!

The Real Nationwide House Price Index rises 1.4% in May

Fri, 29 May 2009 23:12:00 +0100

The Nationwide House Price Index – The Real Figures v the Seasonally Adjusted OnesMonthAverage price (£)Real ChangeSeasonally Adjusted ChangeDifference2008Jan180,473- 0.9%- 0.6%+ 0.3% Feb179,358- 0.6%- 0.9%- 0.3% Mar179,110- 0.1%- 1.2%- 1.1% Apr178,555- 0.3%- 1.2%- 0.9% May173,583- 2.8%- 3.0%+ 0.2% Jun172,415- 0.7%- 1.1%- 0.4% Jul169,316- 1.8%- 1.7%+ 0.1% Aug164,654- 2.8%- 1.9%+ 0.9% Sept161,797- 1.7%- 1.6%Nil Oct158,872- 1.8%- 1.4%+ 0.3% Nov158,442- 0.3%- 0.4%- 0.2% Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.2%+ 0.4% Feb147,746- 1.8%- 1.9%- 0.1% Mar150,946+ 2.2%+ 1.0%- 1.2% Apr151,861+ 0.6% - 0.3%- 0.9%May154,016+1.4%+ 1.2%-0.2% As suggested in my comment on Nationwide’s April house price index the difference between the doctored, or to use the technical term, “seasonally adjusted” figure and the real, unadjusted, figure is small in May. It is also likely to be small for the next two months. Nationwide’s press release, and hence the media comment, focussed on a seasonally adjusted increase of 1.2%. The real increase was 1.4% but a difference of 0.2% is within the margins of statistical error. In fact Nationwide has adjusted its earlier seasonally adjusted figures by a total of 1%, by increasing the figure for 6 different months by 0.1% and reducing one month (May 2008) by 0.4%, resulting in a net change of + 0.2%. None of the real figures have changed, thus demonstrating very clearly just how much guesswork goes into the seasonal adjustments, particularly when a figure a year old has to be adjusted by as much as 0.4%. If this one month miscalculation was repeated on the same scale and basis every month the annual figure would be out by a whopping 4.8%, less than the annual movement in the index some years! It is dangerous to read too much into a single month’s figures, although Nationwide’s figures are less volatile than those from Halifax and also more transparent as Halifax’s press release doesn’t include the real figures. It is difficult to understand why Halifax’s figures are more volatile than Nationwide’s as its lending numbers are higher than Nationwide’s and therefore it is able to work from a larger sample. I suspect that when we get Halifax’s May index it will also record an increase, my reasoning being partly that for the last two months it has reported unrealistically large falls. Five months into 2009 it is becoming clear that just as most forecasts for house prices in 2008, including mine, were not pessimistic enough, nearly every forecast for 2009 is going to be too pessimistic. My forecast made six months ago for 2009 was for a fall of 8% by mid year, followed by a modest recovery leaving the market a net 5% down on the year. Despite the fact that my forecast was one of the least pessimistic I now think it is beginning to look too pessimistic. Halifax, Nationwide and the Council of Mortgage Lenders all broke the habit of a lifetime and refused to publish a house price forecast for 2009. I suspect this was because they were all so bearish that their internal forecasts were for falls of around 15%, but they weren’t prepared to go public with such a negative figure. I suspect their concerns about the impact such forecasts would have had on the market were overdone. What has happened so far this year demonstrates that there are enough people with access to funds and astute enough to back their own judgement on house prices to have neutered the impact of yet another 3 bearish house price forecasts. The net result is that Halifax, Nationwide and the Council of Mortgage Lenders all look cowardly. If they had made public what I suspect were their internal forecasts it would in retrospect have provided a robust defence against critics who consistently claim forecasts from people they describe as having a vested increase in the housing market are too optimistic. Whilst it is obviously true that anyone connected with the housing market has a vested interest in it, what the critics choose to ignore is that generally they also have a better insight into early trends in the market before these are picked up by the indices. Having said that, this is much more helpful in forecasting short term trends than a forecast for a period as long as a year! It is also worth making the point that anyone venturing forth with a forecast wants to maintain any credibility they have and one doesn’t do that by making forecasts one doesn’t believe in. I will leave you with a few other statistics from the real Nationwide house price figures, which show a very clear trend and provide strong evidence that the market is now moving as rapidly towards stabilisation as it did when it started falling: Price changes over: The last year: - 11.3%. The last 6 months: - 2.8%. The first 5 months of 2009: + 0.7%. The last 3 months: + 4.2%. The last month: + 1.4%.

My take on the Santander rebrand

Thu, 28 May 2009 21:29:00 +0100

The logic of Santander’s announcement to rebrand all their UK branches (Abbey, Alliance & Leicester and Bradford & Bingley) as Santander is obvious and when the integration has been completed will have clear benefits for those with a current and/or savings account with any of these brands as they will have access to a larger branch network. In particular Bradford & Bingley has a northern branch bias but Abbey a southern one and thus the geographical coverage will be much improved. The group’s best savings rates are very similar in its three High Street brands and so there will be little reduction in real competition there but the current account propositions are very different. If Santander doesn’t want to lose market share in the important current account market it will be wise to continue offering both the Abbey and the Alliance & Leicester current account propositions, albeit rebranded Santander and with each current account being given a different name for marketing purposes. If it fails to do this there will be a regrettable reduction of competition in the current account market. Santander’s already significant international coverage, which it no doubt plans to expand, will allow it to adopt a similar policy to HSBC and more easily market its overseas services to its UK customers and its UK services to customers in Spain and elsewhere. Santander said that it would be retaining its specialist brands such as cahoot, Cater Allen, James Hay, Abbey for Intermediaries and the international divisions of Abbey, Alliance & Leicester and Bradford & Bingley. Although it makes good sense to retain some of these very well respected specialist brands I would have thought the logic for integrating its UK branches under the Santander brand would have applied equally to the international divisions of those brands. In its press release Santander said that "one of the key drivers behind the rebrand is the switch to Santander's global IT platform, Partenon." I can only conclude that the IT benefits of amalgamating the UK branches don’t apply to the international divisions, but would expect these all to trade under the Santander name in due course. Assuming its global IT platform covers mortgages it would also seem obvious that the same logic would apply to intermediary mortgage sales, at least of mainstream mortgages (which in any case is all Santander currently offers), but mortgages sold through intermediaries will continue to be branded Abbey or Alliance & Leicester. Abbey has been developing a new IT system for some time and maybe this is a factor. For a bank with such a large slice of current mortgage lending as Santander it certainly makes sense to have more than one mortgage brand as it allows extra flexibility. For example if Santander decides to return to the buy to let market in due course it may prefer to do so through a separate brand. Apart from Barclays the top six lender groups in the current market all use at least two brands, although Lloyds Banking Group now has so many mortgage brands it will be culling some of theirs in the near future. As an intermediary my main concern with these changes is that with Santander retaining its existing mortgage brands it makes it even easier for it to use dual pricing. A lot may well depend on whether competition in the mortgage market has increased significantly by the time of the rebrand, which is due to be finalised by the end of next year. The ideal scenario from a broker perspective, which would also be good for consumers as it would give them maximum choice, would be for Santander to adopt a policy similar to Nationwide and offer Santander branded mainstream mortgages both through their branches and brokers and use the Abbey and/or Alliance & Leicester brands for broker distribution of non mainstream mortgages it may not want to offer through its branches.

Metro reports the average female lives 204 years

Fri, 22 May 2009 22:57:00 +0100

Today’s Metro has an article (p.4) about the number of births and deaths in England & Wales. Sourcing the Office for National Statistics it says that in 2008 there were 708,708 live births and that “the death rate for both men and women was the lowest ever recorded, at 6,860 deaths per million men and 4,910 per million women.” It also says "There were 509,090 deaths in 2008" The figures for the death rate looked odd to me and so I did some simple calculations. The UK population is about 61,000,000, with the figure for England and Wales being approximately 54,000,000. 51.4% of the population are female and 48.6% male. Thus there are about 26.25m males and 27.75m females in England and Wales. 6,860 deaths per million men and a population of 26.25m men equates to 180,075 male deaths in 2008 and likewise 4,910 deaths per million women with a population of 27.75m women equates to 136,250 female deaths. Thus these figures indicate total deaths in 2008 in England and Wales of 316,325, which is only 45% of the number of births and would mean an increase in the population of just under 400,000. It also compares with the 509,090 total deaths the article quotes. Looked at another way, with 180,075 male deaths and 136,250 female per year the average life of a male would be 146 years and the average life of a female 204 years! Now you might be thinking “what has this got to do with mortgages?” Well nothing really except that it clearly demonstrates a complete failure by whoever produced these statistics to do a sense check on them, thus proving yet again Mark Twain’s famous quote that there are lies, damn lies and statistics. Perhaps whoever produced these statistics just couldn’t be bothered to do a basic sense check as 80%* of people don’t understand statistics. He/she may have remembered the quote from American comedian George Carlin “Think about how stupid the average person is; now realise half of them are dumber than that.” Some of the one off housing and mortgage market statistics, as with statistics from other sectors, especially ones produced from surveys of the public, need to be treated with extreme caution, especially when the exact question asked is not stated. If a particular result is wanted it can easily be influenced by the way the question is asked. Regular monthly surveys will generally be more reliable, providing they are produced each month on a consistent basis and the reported figures are the real ones, or if they are doctored, i.e. seasonally adjusted, this is made clear. Some seasonal adjustments are massive, but in the current environment are pure guesswork. It would not be as bad if seasonally adjusted figures were reported as that, but often they are not, mainly because the provider doesn’t highlight the fact adequately. One of the worst offenders is the Bank of England, with its mortgage figures. The only figures they provide in their monthly press releases are the seasonally adjusted ones, and the last 6 reported months (to March 09) the adjustments of the mortgage approval figures from the real figures are as follows: - 5% (Oct 08), + 11%, + 41%, + 54%, +12%, - 16%. It is grossly misleading when these figures are reported as gospel and even the MPC member with by far the best track record in forecasting the scale of the current recession agrees. David Blanchflower told Newsnight "There are some difficulties in actually getting accurate data in a recession. It’s hard to seasonally adjust things and get the right data” * I made that number up

Fraudulent Self Cert mortgages and problem Mortgage Backed Securities

Thu, 14 May 2009 23:17:00 +0100

At Tuesday’s FSA Conference Managing Director Jon Pain said that a lot of self certification mortgages lent by specialist lenders has led to large numbers of arrears and frauds. If the FSA failed to recognise “large numbers of … frauds” were being committed it says as much about their failure to regulate adequately as it does about the lenders’ success at fraud prevention. Mr Pain said: "Some lenders, knowing they ultimately do not bear the financial risk of consumers' inability to pay, [have not worried] about affordability, either because they can sell on the mortgages by packaging them up and selling them on; or they believe they can rely on house prices to rise, [with] repossession ultimately providing a safety net - but not for the consumer." This demonstrates very clearly the problems that can arise when lenders are allowed to securitize without any recourse for arrears and bad debts, although my understanding is that most securitisations did effectively have some element of recourse. The most obvious lesson from this is that when the securitisation markets return the originating lender must continue to be on the hook for a proportion of any ultimate loss. Another clear message is that investors need to do proper due diligence in future before buying any mortgage backed securities and not take the lazy option of relying on potentially flawed analysis by one or more of the credit rating agencies, all of which have been discredited by even bigger failures than those made by the regulators. If investors had bothered to take the trouble to understand what they were being asked to buy most would not have bought into some US mortgage backed securities. That would have prevented some lenders from continuing to originate new mortgages and hence the current debacle would have at least been mitigated. Lenders, rating agencies and regulators have rightly been criticised over the causes of the credit crunch but lets not forget the foolish investors, and in particular the Chief Executives of those companies, who didn’t have the expertise to understand what they were buying. They are equally culpable.

The FSA should stop wasting its time

Wed, 13 May 2009 23:50:00 +0100

At the FSA Conference yesterday Lord Turner said "so should the FSA end up recommending limits to LTV or LTI – the headline issue on which the debate about the future of the mortgage market sometimes focuses? I do not at present know and I make no apology for that lack of certainty. What I have tried to do today is to indicate that the issue is a complex one, which requires careful consideration and further empirical analysis, running up to the FSA September Discussion Paper, and indeed subsequently, in a wide ranging debate.” He added “"We do not need to rush to decision. We do not face today, nor are we likely to face anytime soon, the danger of irrationally exuberant behaviour by either borrowers or lenders. We have time to get it right. And getting it right is very important given the huge importance of the mortgage and housing markets, to individual households, to banks, building societies and other credits intermediaries, and to the macro economy." I agree 100% with the second paragraph but the answers to the questions raised in the first paragraph are very simple - the regulator should definitely not limit Loan to Value or Loan to Income multiples. The new regulatory system set up by Gordon Brown failed abysmally to even mitigate the problems that have come to light over the last couple of years. The FSA must obviously accept its share of responsibility for the regulatory failure, but it is only fair to point out that it was following the remit set it by Gordon Brown. However, after any regulatory failure it is normal to see both politicians and regulators overreact and shut the stable door after the horse has bolted, which just makes the situation worse as it makes the recovery more difficult. The FSA is hiking its fees astronomically for the current year and the last thing we need is for it to waste money with an extensive review on whether to impose limits on maximum LTVs and maximum LTIs. I will give just a couple of examples why they should not impose such limits. Lenders have cut back massively on maximum LTVs and even though 90% LTV mortgages are available many applicants get rejected because their credit score is not high enough. But think about borrowers in negative equity. The lender will already have had to set aside a sizable amount of extra capital to support these mortgages under the Basle 2 rules, simply because the LTV has increased as a result of the property value falling. However, the borrower can’t move unless they have substantial savings as they generally won’t be able to borrow more than 90% of the value of the property they want to buy. Some lenders are now looking at allowing borrowers to port their negative equity, which would allow them to move. For example someone with a property worth £150,000 but a mortgage of £165,000 could buy a new property for £200,000 and borrow the full £200,000 plus the £15,000 of negative equity. The lender is no worse off than they were (in fact they are better off as the new LTV would be 107.5%, whereas the previous LTV was even higher at 110%.) The borrower can move, which may make enable them to take up a new job in a different part of the country. Any maximum LTV cap would prevent the lender offering their customer this helpful facility. Likewise, on income multiples, someone earning £100,000 can afford to borrow a higher multiple than someone earning £20,000 because they won’t spend 5 times as much on the basics of life as someone earning £20,000 and hence can allocate more to paying the mortgage. And so the message to the FSA is leave well alone.

Fixed rates increasing and the demise of another droplock

Fri, 08 May 2009 23:15:00 +0100

Several major lenders are increasing some fixed rates next week, mainly longer term rates except for RBS Group, which is increasing rates across the board. Medium and long term swap rates have risen sharply this week, with most of the increase taking place on Wednesday and Thursday. 2 year swaps are only up 0.08% on the week, but the 3 year rate is up by 0.19%, 5 years by 0.26% and 10 years by 0.28%. The increase in swap rates is the key driver for the rate changes and these increases have taken place while the 3 month Libor rate is still falling, albeit very slowly. 3 month Libor is 0.03% lower on the week at 1.42%, still a historically very large spread of 0.92% above Bank Rate, compared to a typical 0.15% before the credit crunch. I am surmising that the main reason for the increase in gilt yields this week, and the even bigger increase in swap rates, is that the market is getting increasingly nervous about the medium term inflationary outlook in the light of the additional £50bn the MPC confirmed yesterday for the Quantitative Easing programme. This virtually guarantees that Bank Rate will remain at 0.5% for at least the next 3 months while the Bank spends the remaining money they are "printing" and so short term rates like 3 month Libor will remain low and probably fall a little further. US$ 3 month Libor hit a new all time low today of 0.94%. The lenders we already know are increasing some or all of their fixed rates next week on Monday or Tuesday are Yorkshire B S and RBS Group on Monday and Britannia on Tuesday. RBS is taking the most draconian action with increases of between 0.1% (for their maximum 70% LTV range) and an outrageous 0.7% for their rates up to 80% LTV, with the rates to 85% being increased by 0.5%. These increases are allegedly to protect their service levels but with excuses like this RBS are just as bad as Ministers with their pathetic excuses over their expense claims. Plenty of experienced mortgage staff have been made redundant over the last year and so RBS would not have any difficulty adding to its back office if the real reason for the rate increases was staff shortages. We should be able to expect more honesty, especially from a semi nationalised lender, and if RBS want to cut back their lending they should be honest enough to say so, even if it embarrasses their principal shareholder which has committed them to increased mortgage lending. Yorkshire B S is increasing the rate on its 5 year fixes by between 0.2% and 0.3%, with the new rates starting at 4.89% up to 75% and 5.99% up to 85%, and offset versions available for 0.1% more. The arrangement fee remains at a well below average £245. Their subsidiary, Accord, on the other hand, is reducing some offset rates by up to 0.45%, but is withdrawing, and not replacing, its 5 year fix to 85%. Britannia is sharply increasing its 5 and 10 year fixed rates from Tuesday, which means it will no longer have market leading 5 year fixes up to 60% and 75% LTV, although there are no remortgages freebies with those rates. Going against the trend on Monday John Charcol is launching a very competitive 5 year fixed rate (to 31/8/14) for LTVs up to 75%. The rate is 4.85%, the fee £1,094 and the maximum loan size is higher than on many deals at £1m. One other important change from Monday is that Cheltenham & Gloucester will no longer offer a droplock facility (what it calls "All Weather") on its trackers. That means Nationwide will be the only lender still offering this facility, after Woolwich withdrew several months ago. This is a great shame as the droplock concept is ideal for borrowers who want to start off with a tracker rate, whilst leaving themselves the option to switch to a fixed rate at a time of their choosing without incurring an early repayment charge or remortgaging.

Quantitative Easing now the main focus of MPC meetings

Thu, 07 May 2009 20:51:00 +0100

Today’s decision by the MPC to leave Bank Rate unchanged for the second month running is likely to be the precursor for several more months of the same, with the committee’s focus now on how aggressively to implement the Quantitative Easing (Q.E.) programme. The announcement that an extra £50bn has been added to this programme, taking it up to £125bn and leaving another £25bn authorised by the Treasury but not yet committed by the MPC, is evidence that the MPC believes the CPI would remain below the target 2% for most of their 2 year time horizon without a further stimulus to the economy. The Bank of England’s Quarterly Inflation Report will be published next Wednesday (13 May) and will update us on the Bank’s current inflation/deflation expectations. The problem with Q.E. is that so far, despite spending £54bn in the first 2 months of the programme, there is little evidence much has been achieved. Following the initial announcement of the Q.E. programme in March the yield on medium and long dated gilts fell by up to 0.8% over the following week but yields are now roughly back to where they were before the announcement and swap rates are about 0.25% higher, having moved up sharply today. Conditions have eased a little in the mortgage market over the last few weeks and it is possible the Q.E. programme may have been a contributory factor. The addition of £50bn to the Q.E. programme, with an indication it will take another 3 months to utilise all the funds, is pretty solid evidence Bank Rate will stay at the current 0.5% for at least another 3 months and a strong indication it will need to stay at that level for several months beyond that and probably into 2010. However, the inflationary potential of the Q.E. programme means that when the MPC starts increasing Bank Rate it is likely it will rise quite quickly, which could be very uncomfortable for anyone still locked into a variable rate mortgage at that time, especially borrowers whose mortgage payment comfort zone has migrated to their current low payments. Borrowers on variable rate mortgages, especially those with any sort of interest only mortgage, should therefore be very aware of the risk of a rapid rise in their payments at some stage, even though that probably won’t happen this year. Switching to a fixed rate for at least 5 years will be the best way for most people to buy protection from increased rates, but the timing of when they should switch will depend on individual circumstances.

Record low Libor rates and cheaper mortgages

Tue, 05 May 2009 23:02:00 +0100

3 months Libor continues to drift gently lower and for the first time ever Dollar 3 month Libor fell below 1% today. The Dollar rate is now 0.99% and the Sterling rate 1.44%. In a testimony to Congress today Ben Bernanke said banks no longer appeared as concerned about each others’ near-term solvency and the softening Libor rates is a reflection of this. Woolwich has announced some improved fixed and tracker rates available from tomorrow and, no doubt partly as a result of the falling Libor rate, has slashed the rate on its offset lifetime tracker for mortgages of at least £200,000 up to 60% LTV to Bank Rate + 1.99%, a reduction of 0.5%. This is easily the cheapest tracker mortgage on the market, despite the relatively high fee of £1,499, and means that the benefits of offsetting are available without paying a premium compared to non offset rates. The other notable points from the new Woolwich range are that all their best rates are now available up to 70% LTV, 10% higher than previously, and it is offering a much wider choice of mortgages up to 80% LTV, with lower rates on the deals which were previously available up to 80% LTV, particularly on the 2 year fix, which has been reduced by 0.7% to 4.99%. This is further evidence of the trend we have seen over the last few weeks of lenders gradually improving the competitiveness of their rates for people without a huge deposit (or a large amount of equity for those remortgaging). More good news on the fixed rate mortgage front comes from The Coventry Building Society, which after Nationwide has been one of the most active building societies recently. It announced this afternoon some cheaper fixed rates available from Friday, although it is trimming its product range slightly. Its 3 year fixed rate is being reduced by 0.5% to 3.99% and its 5 year fix by 0.2% to 4.49%, with both rates being available up to 65% LTV and both being extremely competitive.

The Nationwide “Real” House Price Index is up 0.6% in April

Thu, 30 Apr 2009 18:12:00 +0100

The Nationwide House Price Index – The Real Figures v the Seasonally Adjusted OnesMonthAverage price (£)Real ChangeSeasonally Adjusted ChangeDifference2008Jan180,473- 0.9%- 0.6%+ 0.3%Feb179,358- 0.6%- 0.9%- 0.3%Mar179,110- 0.1%- 1.2%- 1.1%Apr178,555- 0.3%- 1.2%- 0.9%May173,583- 2.8%- 2.6%+ 0.2%Jun172,415- 0.7%- 1.1%- 0.4%Jul169,316- 1.8%- 1.7%+ 0.1%Aug164,654- 2.8%- 1.9%+ 0.9%Sept161,797- 1.7%- 1.7%NilOct158,872- 1.8%- 1.5%+ 0.3%Nov158,442- 0.3%- 0.5%- 0.2%Dec153,048- 3.4%- 2.6%+ 0.8%2009Jan150,501- 1.7%- 1.3%+ 0.4%Feb147,746- 1.8%- 1.9%- 0.1%Mar150,946+ 2.2%+ 0.9%- 1.3%Apr151,861+ 0.6%- 0.4%- 1.0% The Nationwide “Real” House Price Index shows prices up by 0.6% in April, after a rise of 2.2% in March, and this index records a fall of only 0.8% in the first 4 months of 2009. These factual figures paint a rather different picture to the “doctored,” or seasonally adjusted to use the technical term, figures Nationwide focussed on today. Nationwide and Halifax both always focus on the seasonally adjusted figures in their monthly house price surveys. Their comments are always based on these “doctored” prices, but although their press releases state the figures are seasonally adjusted the media generally ignore those two important words and misleadingly report the figures as gospel. The table above presents the Nationwide figures since the beginning of last year in such a way as to make it easy to see the real figures and how big an impact the seasonal adjustments makes some months. Based on last year’s seasonal adjustments the following 3 months will not see a significant difference between the percentage change in the real figures and the “doctored” ones, but in August the impact of seasonal adjustment will be to improve the real figure by about 1%, the opposite of what has happened in each of the last 2 months. Halifax, for some reason best known to itself, refuses to disclose the real figures in its monthly press releases and only belatedly publishes them on a quarterly basis. Nationwide, despite always ignoring the real figures in its comments, does include them every month in its table of historical data. This is helpful to anyone like me who prefers to use real figures rather than “doctored” ones based on someone’s view of the seasonal impact on prices. In current market conditions it is even more difficult than usual to decide how much price changes are influenced by seasonal factors and I would be very surprised if two economists came to the same conclusion on the correct adjustment required. The housing market is, of course, seasonal, but many other factors also have an important influence on prices, particularly consumer confidence, interest rates and the availability of credit. Until recently the latter factor had not been a significant problem since the mid 1980s and so maybe Halifax and Nationwide should have adjusted house prices over the last 18 months to take account of the restricted mortgage availability. Perhaps they should also adjust for changes in consumer confidence and interest rates. If they manage to get all these adjustments right, house prices adjusted for all these factors would permanently only change very slowly in line with wage inflation, resulting in “No more Boom and Bust.” In fact, come to think about it, Gordon Brown has missed a trick here in not passing legislation requiring all house price indices to be calculated in this way! I intend to publish updated figures of the “Real” Nationwide House Price Index every month on this blog.