Slowly Does It
The Puzzling Pace of Transactions
There hasn’t been quite as much interest rate stimulus to the overall market as the drop in the Bank rate suggests..
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In normal times when interest rates fall, the numbers of housing market transactions start to increase. Just as higher rates choke off mortgage lending and hence activity, lower rates should encourage them. But the big puzzle is that this hasn’t happened in this recovery.
While the bank rate fell to 0.5 per cent more than six years ago, mortgage rates didn’t follow. Even today a 95 per cent loan to value (LTV) mortgage rate is 4.58 per cent, just a 2.3 percentage point drop since 2009, compared with the 4.5 percentage point drop in the bank rate. 90 per cent LTV rates dropped by 3.4 points. Only the least risky loans, with LTVs of up to 75 per cent, dropped by a similar amount.
If only those with higher levels of equity get the full boost from lower rates, that limits the size of the interest rate effect on the overall market.
In addition those who do take out higher LTV loans will have to have sufficient income to meet the new more stringent affordability regulations. So the reason transactions haven’t picked up may be because it’s only those wealthy enough to be able to take out a lower LTV loan or pass the new affordability tests that are buying.
While it’s difficult to interpret data in averages, that seems to be implied by looking at mortgage approval data. Bank of England figures show the average loan size has increased over time, and is now almost £170,000. The Council of Mortgage Lenders (CML) reports that the average LTV has fallen to about 75 per cent which implies an average house price of about £225,000. That’s slightly lower than, but not far off, the average price of all properties sold in England in the first quarter.
But that doesn’t tell the whole story. Approaching two thirds (58 per cent) of transactions take place in London and the South of England where the weighted average price paid is about £340k, that compares with about £165k in the rest of England. So if more transactions are taking place in the South that implies that the average loan to value in the majority of transactions could actually be lower than 75 per cent. The alternative is that in the rest of the UK LTVs are much lower, which seems unlikely given the economic conditions. That makes sense too as it’s only in the South of England where house prices are above their pre-crisis peak, thus increasing the equity available to be able to qualify for a lower priced loan.
What does this mean for the market? As the rest of the country’s recovery begins to catch up with the South, restoring equity, that should help to increase house buying activity – and more importantly add to confidence in the markets outside the South.
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