Tuesday, Dec 22, 2015

FLS money (8.5bn in 2014 alone) continues to distort UK housing

Bloomberg: Cheap Money to Boost U.K. House Prices 6% in 2016, RICS Predicts

Low borrowing costs and a shortage of supply will drive U.K. house prices up 6 percent next year, according to the Royal Institution of Chartered Surveyors.
Demand for housing remains strong, driven by record-low interest rates and a resilient economy, and values grew an annual 7 percent in October, according to the most recent data from the statistics office. Chancellor of the Exchequer George Osborne is attempting to boost supply and announced additional spending on housing last month.

Posted by hpwatcher @ 08:59 AM (7454 views)
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18 Comments

1. hpwatcher said...

George Osborne reputation - and fiscal stupidity - now rivals Gordon Brown's for debt and incompetence.

Tuesday, December 22, 2015 09:01AM Report Comment
 

2. mombers said...

Crack open the champagne! Pity the next rung on the Gottverdammte 'ladder' just got further out of reach for those not at the top...

Tuesday, December 22, 2015 09:34AM Report Comment
 

3. icarus said...

From the article - "Property price increases forecast to outstrip income gains". Nothing new there then.

As Michael Hudson put it:

Most credit creation today (1) inflates asset prices without raising commodity prices or wage levels, and (2) creates a reciprocal flow of debt service, which tends to rise as a proportion of personal and business income, outgrowing the ability of debtors to pay – leading to (3) debt deflation. The only way to prevent this phenomenon from plunging economies into depression and keeping them there is (4) to write down the debts so as to free revenue for spending once again on goods and services.

Tuesday, December 22, 2015 10:30AM Report Comment
 

4. latterdaysinner said...

RICS have a strong vested interest in the current status quo, so I would take stuff from them with a large pinch of salt. It's enough to read the BBC piece based on the RICS release to understand their game. They're whinging on behalf of landlords and saying that measures against landlords will lead to higher rents while house prices will magically keep increasing. It's the sort of economically illiterate stuff you'd see on a landlord forum, and almost as emotional.

http://www.bbc.co.uk/news/business-35154420

Tuesday, December 22, 2015 10:43AM Report Comment
 

5. hpwatcher said...

RICS have a strong vested interest in the current status quo, so I would take stuff from them with a large pinch of salt

Indeed, but it's the FLS figures that are scaring me.

Tuesday, December 22, 2015 11:19AM Report Comment
 

6. latterdaysinner said...

The linked article does not mention FLS. Where is the £8.5bn figure for 2014 sourced and are there more up-to-date figures? My impression was that FLS is being gradually wound down and what we are seeing is the tail-end of its effect, but I could be wrong.

Tuesday, December 22, 2015 11:24AM Report Comment
 

7. hpwatcher said...

The linked article does not mention FLS. Where is the £8.5bn figure for 2014 sourced and are there more up-to-date figures? My impression was that FLS is being gradually wound down

Wow - what a naysayer you are! Not you is it Flashy?

Let's take each point individually.

The linked article does not mention FLS.
They don't need to, but that's where the bulk of the money is coming from. You don't honestly think that a bank is going to risk their own money do you, with the amount of additional cash they need to hold?

Where is the £8.5bn figure for 2014 sourced and are there more up-to-date figures?
From the BoE Website:-

''During the fourth quarter of 2014, the number of groups participating in the FLS Extension remained at 38. Of these, 14 participants made drawdowns of £8.5bn in total.''
http://www.bankofengland.co.uk/publications/Pages/fls/q414.aspx

This years figures [2015] not yet available, but it will be in the same order, as Q3 was around 2.2 billions.

My impression was that FLS is being gradually wound down
It has been extended and will continue to be extended as it is the key thing keeping a dead housing market alive.

Tuesday, December 22, 2015 11:53AM Report Comment
 

8. hpwatcher said...

Ah, FLS cash for 2015:-

Q1:
Of these, 10 participants made drawdowns of £3.1bn in total.
http://www.bankofengland.co.uk/publications/Pages/fls/q115.aspx


Q2:
Of these, 11 participants made drawdowns of £5.1bn in total.
http://www.bankofengland.co.uk/publications/Pages/fls/q215.aspx


Q3:
Of these, 14 participants made total drawdowns of £2.5bn during the third quarter of 2015.
http://www.bankofengland.co.uk/publications/Pages/fls/q315.aspx

In 2015, for Q1, Q2 and Q3 the FLS total so far is £11.2 billions - no wonder there has been a surge in house prices this year?

Tuesday, December 22, 2015 12:03PM Report Comment
 

9. latterdaysinner said...

I don't think my post was sufficiently categorical to qualify me as a naysayer, so take it easy, and thank you for the information.

It would be interesting to know how draw-downs by banks translate into changes in mortgage lending. There are several factors that muddy the relationship. The first is that, at a time of rising bank capitalisation requirements, banks may draw on the facility to increase their capital buffers cheaply without increasing net lending. The second is the conditions attached to FLS. v1 had funds for business and mortgage lending. v2 had a ratchet where x amount of extra lending to business enabled banks to draw a multiple of x for other (mainly mortgage) lending. I had a (admittedly superficial) look at v3 and it looked like funds were only available for business lending, but I doubt that BoE can draw such a clear line through commercial banks' books, so I would still expect there to be some effect on all lending.

Finally, I suspect that, with MMR in place and a clamp-down on BTL from various fronts, the constraining factor on net mortgage lending may be demand rather than supply.

"It has been extended and will continue to be extended as it is the key thing keeping a dead housing market alive."

I am skeptical that government can keep the housing in its current state with the tools available, at least not in London and surrounding areas. A pyramid scheme requires increasing numbers of new entrants. HTB helps but it is only available on new builds. It's a bail-out of developers, not current owners. In general, this statement is consistent with the attitude I see in the Guardian comments section. People bemoan the government fiddling of the housing market and insist that the government will do anything to stop prices from falling. The cynic in me (which is about 95% of me) wonders how many of them are balls deep in the hottest part of the market and are desperate for this to be true.

Tuesday, December 22, 2015 01:00PM Report Comment
 

10. cyril said...

So much for the idea of free market - I thought prices were supposed to be determined by supply and demand? If landlords simply pass on their increased costs to tenants then, according to economics, the tenants will go and live somewhere else. A cardboard box maybe.

Tuesday, December 22, 2015 01:38PM Report Comment
 

11. hpwatcher said...

The first is that, at a time of rising bank capitalisation requirements, banks may draw on the facility to increase their capital buffers cheaply without increasing net lending.

FLS money is specifically set aside to be lent out.:-
''The FLS offers funding to banks and building societies...[to]...encourage them to supply more credit by making more and cheaper funding available if they lend more.''

I am skeptical that government can keep the housing in its current state with the tools available, at least not in London and surrounding areas.

This thinking is simply not borne out by the facts. UK government have literally thrown everything at UK housing for many years. For example, lowest interest rates in 300 years, FLS - as described above, and a number of other schemes, including HTB and the RTB current incarnation. One poster on this site JackF suggested outright purchase to maintain asset prices. Literally, nothing would surprise me.

They have a printing press and aren't afraid to use it.

Tuesday, December 22, 2015 01:43PM Report Comment
 

12. mountain goat said...

@4 latterdaysinner
a 6% rise would be sad news but what is the price prediction track-record of the Royal Society of Chartered Surveyors (RICS)? I found this:

RICS system for predicting the future would have most statisticians turning pale. They simply ask their members "how they feel". If most are optimistic they believe prices will rise and if most are pessimistic they say prices will fall.

Strangely it actually seems to work but only to the extent that they have been quite successful in staying on the right side of zero - they say prices will rise and they do, they will fall and they do.

- Prices rose 9% and 2% respectfully in 2006 and 2007 compared to RICS prediction of 4% and 7%.
- In 2008 prices dropped 13% compared to their prediction of a 5% decrease.
- At the start of 2009 they predicted a 20% drop but later revised this to zero, which then matched the real market.
- After the 2009 suprise RICS 2010 forecast was simply to say 'further price gains over the coming months' which indeed they did to end the year 1.5% higher.
- 2011 was their most accurate year yet suggesting prices would fall and then rise ending the year 2% down. The reality was -1.3% making this their best forecast yet.
- In 2012 they went for 'static' while prices increased 1.7% which is close.
- 2013 saw them go off track again predicting a 2% rise when prices increased 4% but their 2014 8% prediction was spot on.

Despite not being particularly accurate RICS is actually one of the better indicators on the market. But if even they have to reverse predictions to the extent they did in 2009 perhaps they are not to be relied on too heavily.

In recent times their monthly reporting has also suffered from inconsistancy. On 10th January 2012 RICS said 'There is no sign of the UK property market picking up in the coming months' which was followed on the 14th February with 'Home sales are expected to rise'.

source

Tuesday, December 22, 2015 01:56PM Report Comment
 

13. latterdaysinner said...

@12 Thanks mountain goat. It sounds like their predictions are a gauge of current momentum. Given that the housing market is usually quite slow to turn, I guess I wouldn't expect them to be far wrong within a horizon of one year, but being able to revise your estimates halfway through they year helps as well :-D

Tuesday, December 22, 2015 02:40PM Report Comment
 

14. libertas said...

Our mortgGe is 931 whilst we could rent the house out for 1800. Heck, yes, money is cheap.

Tuesday, December 22, 2015 09:41PM Report Comment
 

15. jack c said...

@ Libertas - so why don't you rent the house out then ?

Wednesday, December 23, 2015 12:14PM Report Comment
 

16. libertas said...

Jack c, because we want to live in a house this big, and would have to pay a similar rent to what we would receive if we lived elsewhere with capital gains implications.

Renting it out would only work if we wanted somewhere smaller. However, we are converting the loft, providing a shower room and kitchenette and double bedroom up there that we will rent out for about £750 a month with ease. Add that to our £250 a month over-payments into the mortgage minus £250 a month interest payments to cover the home improvement loan for the loft and we will be mortgage free in about 12 years, during which time the house price will likely double.

What we can do to rent stuff out, is that once we have done our house extensions the property will be worth a lot more. We can do mortgage equity withdrawal to find a rental elsewhere. However, I do not wish to do do buy to let due to the tax situation getting worse and because having all assets in one asset class is silly. As such, we plan to buy the freehold to a shop in an edgy, but up and coming part of town, build a nice traditional shopfront and attract the sort of business that will help regenerate our area. If the shop has spare space upstairs we can convert that to a flat and rent it out as part of the project. With the profit from that, we would split it between stocks, shares and another similar project, and we should be able to retire early.

Monday, January 4, 2016 06:31AM Report Comment
 

17. libertas said...

The reason our mortgage is so much cheaper than rent is because we purchased it with a 30% downpayment. As a result of purchasing just prior to the area getting onto the Central London Tube Map and as a result of over-paying the mortgage, we now own somewhere between 40% and 50% of the property after having owned it for just over 12 months.

Monday, January 4, 2016 06:38AM Report Comment
 

18. This comment has been removed as it was found to be in breach of our Blog Policies.

 

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