UK Mortgage Rates and Mortgage Approvals – May 2010 Update

Today I present two regular charts that as with last month continue to give me little information on what could be occurring in the housing market. The first shows the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 4.04% for April 2010 (actual low was 3.82% in April 2009). Compare this with the retail price index (RPI) of 4.4% and the average mortgage is better than free money with a negative real interest rate.

The second chart shows mortgage approvals. Non-seasonally adjusted rates continue to rise and are up month on month by 43% to 57,945 for March 2010 however as the chart shows this is a very noisy and erratic data set. Seasonally adjusted shows mortgage approvals rising by 4.3% to 48,901 for March 2010. So with better than free money on offer mortgage approvals are starting to rise however the numbers are still well below the long term average of 91,490.

So with these charts telling me little I will today instead turn to a few news articles that may be starting to give a hint as to what is possible in the coming months with respect to the housing market by looking at what could be about to happen with supply and demand.

Firstly on the supply side:

- The new Conservative-Liberal Democrat government are going to raise the rate of capital gains tax from its current 18% to rates “similar of close to those applied to income” according to the Financial Times (FT). If you are a 40 or 50% tax payer and only a few years away from retirement you could be thinking of selling about now to lock in the lower rate (unless of course you are planning to use the rent for your future income stream only and not depend on any of the capital). During the election campaign the Conservatives were talking about a budget with 50 days of taking the helm. If this is still the case we could see an increase in the number of properties on the market which will increase selling competition maybe leading to reductions for those who want to ensure the sale.

and then on the demand side:

- Bank of England Governor Mervyn King backed the government’s deficit reduction plan and said plans for spending cuts worth £6 billion in 2010 were "sensible" according to the BBC. £6 billion is not going to come from less office stationary. I can only see these savings coming from 3 areas – reduction in jobs in the public sector (or even a reduction in pay which would be a similar play to Spain today who cut pay by 5%), reduction in government “benefits” to the punter on the street or a cut in government contracts to the private sector. At the end of the day when these are all added together whether it’s just one of these or a combination of all it will mean less money in the average persons pocket. This could mean less money to spend on a mortgage and with my first chart showing mortgage rates static sellers may have to drop their prices by a proportionate amount.

- Unemployment rose today by 53,000 to 2.51 million according to the FT. That’s a rise of 2.1%. What’s even worse is that the number of people in employment fell by 76,000 to 28.83 million. Assuming a UK population of 62.23 million this means that only 46% of the UK population are currently working. These increases will also mean less money in the average persons pocket leading to a potentially similar effect to the first demand example.

So after all the government distortions applied to the housing market over the last few years if in there somewhere supply and demand still holds it could be an interesting remainder of 2010 for the residential housing market.

As always do your own research.