A shiver ran through the market yesterday with the news that First Direct was stopping making new mortgages. Sure, the withdrawal is temporary, the result of a flood of demand as it offered better terms than its competitors for a two-year fixed mortgage. But it is one more sign of the squeeze on mortgages, raising the awkward possibility that even if the Bank of England does carry on cutting rates through the summer, this will not be much help to the market. The problem will not so much be one of price but of availability.
There was further confirmation of that yesterday with the figures from the Bank of England on new mortgage approvals, showing a modest further fall to 73,000 in February. That is a 13-year low but to give a frame of reference, in the early 1990s it fell to some 65,000 a month, so we are still above that level. But, of course, this has implications for prices, as the “fit” in the first chart, plotted by Capital Economics, would suggest. It seems plausible that we might have two or three years of gently falling prices, possibly something worse.
How much worse? It is hard to see anything more serious than the early 1990s and actually hard to see anything as serious as that for three obvious reasons. One is that we seem unlikely to face the same surge in unemployment as we did then. Next, we do have control of our monetary and exchange rate policy – we don”t have to shadow the euro, as we did the deut-schmark back then. And third, while the ratio of house prices to incomes has gone through the roof since 2001, thanks to lower interest rates the cost of servicing debt is still well below the 1990 peak, as the next graph shows. Standard & Poor’’s, commenting on that graph, reckons that prices will be flat this year and rise a little next but it admits that there are risks to this relatively optimistic outlook.
There is one big unknown here: the impact of the change in capital gains tax. Since gains on buy-to-rent property are now levied at 18 per cent instead of 40 per cent and mortgage costs for landlords are likely to rise, there may be a flood of properties coming on to the market in the next few months. It is not a great time to sell, of course, but some owners may feel it better to get out now, albeit at a slightly lower price that a year ago, and stick the money where it is earning interest for a couple of years. The effect may be that while the market as a whole may not fall much, some particular types of property, such as new-build flats, may do quite badly.
Let’’s assume, though, that the central case of house prices for the next two years being either stable or falling a little holds true. Even if that is right, the squeeze on availability of credit will curb economic activity. In the very short term, people who cannot increase their mortgages have other options to maintain their spending: they can increase their credit card debt. But that is replacing relatively low-cost borrowing with higher-cost debt. That makes no sense at all in the long run but it does seem to be happening on a huge scale.
The reason for thinking that something odd is happening is shown in the next graph. Last month, there was a sudden surge in consumer credit, a surge not associated with a parallel rise in consumer sales. That smacks of desperation. It is only one month’’s figures and that does not make a trend. But it would be consistent of people being forced to borrow on their credit cards to pay the bills that they had counted on being able to meet by re-mortgaging.
Whatever the explanation – and I think we should wait for a couple of months before jumping to conclusions – it does look as though people will no longer be able to support their lifestyles by taking out larger mortgages on their homes – “equity take-out” as it is called. The final graph shows how this practice surged after 2000, when at a peak it accounted for more than 8 per cent of post-tax income. We got figures for the final quarter of last year just yesterday, showing a further fall to 3.2 per cent of income, but that is before the squeeze really took hold.
So will equity withdrawal shrink to zero? It did in the early 1990s and…
