Mortgage approvals & house prices

The Bank of England says mortgage approvals in May fell to their lowest level since their data began in 1993.
This chart shows why this matters for house prices. It shows that mortgage approvals can be a lead indicator of annual house price inflation (on HBOS’s measure). For example, dips in approvals in 2000 and 2004 led to falls in price inflation, whilst rises in approvals in 2002 and 2004 led to rises in inflation.
Since April 1993, the correlation between approvals and price inflation in the following 12 months has been 0.42, with an R-squared of 23.5%. The regression equation is:
Inflation = -14.01 + (22.97 x 100,000 approvals)
If this equation continues to hold - and this is always a big if when one variable is at a record low - it points to prices falling 4.4% between now and May 2009.
This doesn’t seem too dramatic, given that prices have dropped 6.4% in the last 12 months.
However, this would leave prices more than 10% below their peak. And the standard error in this equation is 6.3 percentage points, so current approvals are quite consistent with prices dropping 10% by May 2009.
And this equation implies that approvals would have to rise to over 60,000 for prices to stabilize. That’s a 40% rise from current levels.
Good job housing isn’t net wealth, isn’t it?

Comments

[Bob B]

We must resist any beguiling temptation to regard the underlying problems of our housing market as of recent origin IMO.

Some informed observers were warning of the consequences of the emerging house price bubble as long as 8 years ago:

"All economists agree, however, that the current pace of activity in the housing market will weigh heavily on the MPC. Speaking at a conference last autumn, one committee member, Charles Goodhart, said house-price inflation was a better indicator of future inflation than other asset prices such as shares.

"'Across countries, changes in house prices are now a good predictor of inflation in goods and services one or two years out,' he said.

"He added: 'Monetary variables in general and house price movements in particular need to be given more weight in the assessment of inflation, particularly at a two-year horizon, than is done in some current models.'"

Professor Goodhart was one of the swing voters in favour of keeping interest rates unchanged in December [1999]. The chances must be good that the latest burst of steam emitted by the housing market will nudge the MPC's vote the other way this week. [10Jan00]
http://www.independent.co.uk/news/business/analysis-and-features/why-the-soaring-housing-market-is-setting-alarm-bells-ringing-727640.html

"CHARLES GOODHART, a former member of the Bank of England's monetary policy committee, warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

"His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . " [6 April 2002]
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

[kinglear]

Chris - as only you and I know that the value of one's house is utterly irrelevant to one's wealth, we are probably the only people in the UK who don't care if prices go up or down.

[Bob B]

C'mon. I can take all the issues about netting out the mortgage debt from the worth of a house and remembering to recall that if I move the cost of the next place will probably have moved up or down with the market as well as my present house.

But the sad fact is that some folks have converted house equity into once-in-a-lifetime retirement holidays or into paying for lifesaving drugs denied them by the NHS or for residential care with the onset of dementia. Options to do any of those things will be reduced by the fall in houseprices.

The credit crunch created by the subprime mortgage debacles in America and Britain and the hiatus here created by the bank run on Northern Rock are all consequences of the house-price bubble which reached relatively bigger dimensions in Britain than in America according to this chart in The Economist:
http://www.economist.com/finance/displaystory.cfm?story_id=10974135

"A BBC investigation has found evidence of serious mis-selling in Britain's sub-prime mortgage market. Industry insiders have described how people have been advised to lie about their incomes to take out loans far bigger than they can afford."
http://news.bbc.co.uk/1/hi/programmes/file_on_4/7010415.stm

[Bob B]

Btw for the record book, other consequences of the fall in house prices and the credit crunch in Britain:

"The number of homes built in Britain this year will plunge to its lowest level since 1945 and plummeting construction activity is expected to lead to the loss of 100,000 jobs. The country's most senior housebuilders confirm that completions will be around 100,000, some 70,000 less than last year."
http://www.guardian.co.uk/business/2008/jun/15/construction.housingmarket

"The number of new homes built this year will be under half that promised by Prime Minister Gordon Brown, the House Builders Association has said. The body says only 110,000 are likely to be built by end of this year, far short of Mr Brown's target of 240,000. That could fall to just 80,000 in 2009."
http://news.bbc.co.uk/2/hi/uk_news/7454376.stm

Well done, Caroline Flint, the present housing minister and her predecessor, Yvette Cooper.

[kinglear]

Bob B - you have it right. Of cpourse, this government has never actually done anything to help anything - they simply mouth some spun rhetoric and expect things to happen. Of course, there are several areas where they HAVE acted - only to bugger everything up. Even the empty property relief abolition is so ill-thought out that perfectly good modern buildings are being knocked down to avoid the taxes. So when things level off or pick up, as ever, Britain will be behind the curve for growth. Laughable really if it didn't make you cry.Scotland, of course, was wiser and deferred for a couple of years to get additional information. Just shows how good Salmond is compared to Brown.

[Bob B]

"Just shows how good Salmond is compared to Brown."

I'm very prepared to believe that but then Salmond is ex-GES and I think most New Labour politicians are seriously over-rated. I also think we haven't really had a calibre PM since Mrs T, eighteen years ago - and that doesn't impell me to endorse everything she said and did.

I lived and worked a while in Scotland in the early 1960s and quickly came to appreciate then that it was a different country with a completely different culture and one that I wasn't tuned into. Fortunately, I'm back now living in London where I was born and raised. I'll up and do the Lambeth Walk again:
http://www.youtube.com/watch?v=BcCLKn6W1xk

It's quite a thought that Scotland's total population is less than London's, not that I'm comparing Boris Johnston with Salmond. London is just unique, whether Boris Johnson is mayor or not:
http://news.bbc.co.uk/1/hi/uk/7368326.stm

[jameshigham]

But the sad fact is that some folks have converted house equity into once-in-a-lifetime retirement holidays or into paying for lifesaving drugs denied them by the NHS or for residential care with the onset of dementia.

A very good point indeed. Refinancing is raising its ugly head too.

[Bob B]

"Refinancing is raising its ugly head too."

Absolutely. And with this fresh news, the latest omens for the prospects of refinancing are increasingly dire:

"The Bank of England said 42,000 homes were approved in May, a 28% fall compared with the previous month and 64% down on a year ago."
http://news.bbc.co.uk/1/hi/business/7480834.stm

Of course, with a smaller house-price bubble there would have been less potential equity for house owners to extract but then the eventual downside would be less socially painful too. The consequential slump in house building - the worse since 1945 - implies a real national economic loss. The slide in mortgages approved means that house owners can't sell or refinance to extract any equity - and there is also the pain of the repossessions when owners can't afford to refinance.

The trouble stems IMO from the government's populist insight that the the house-price bubble was electorally popular so they decided to let it inflate to the extent where - as we've seen from that chart in The Economist cited above - the bubble in Britain is relatively larger than the bubble in America and that despite increasingly clamourous warnings from economists in Britain going back at least to 2000. The government knew there was a looming problem and did nothing.

As we can now appreciate, all that stuff GB was trailing around about having ended boom and bust was undiluted hogwash.

[hypotheek woning]

I feel good to post a comment for this excellant report.I agree with the fact that mortgage approvals may be a lead indicator of annual house price inflation.