Friday, May 16, 2008

Why won't they come down?

(click on the chart for a sharper image)

Mortgage rates have broken loose from the base rate. The Bank of England might have cut interest rates, but mortgage rates have kept on going up. Between January 2006 and April this year, the 2 year fixed rate, 95 percent LTV mortgage rate has increased by 198 basis points. Likewise, the 5 year fixed rate, 95 percnet LVT is up 170 basis points.

Even the standard variable rate has not been immune to this trend. Between August last year and this April, the spread between the base rate and the SVR rate increased by 38 basis points.

Higher rates; lower house prices.


  1. Interesting, but 95% LTV is a dying breed of mortgage.

    What's the picture like with, say, 75% LTV? Are these mortgages falling with the BoE rate?

  2. Asteve,

    You are about 5 minutes ahead of me here. Take a look at my next post. As you say, 95% LTV is a dying breed. I was merely pointing out what is killing them.

    Comparatively speaking, 75% LTV loans are not that important. They accounted for about half the market last year.

    Truthfully, I don't know what has happened to interest rates on these products. I will try and find out.

    However, I'm not sure that it will matter much. The housing bubble depended upon high LTV loans. Now that they are gone, or nearly gone, this will put unbearable pressure on the market. House prices will collapse, regardless of the interest rates on 75% LTV products.


  3. Alice: "Comparatively speaking, 75% LTV loans are not that important. They accounted for about half the market last year."

    Erm, yes - but the size of the mortgage market has contracted by over half... this is confirmed by the BOE approvals data.

    The 75% LTV stuff is going to define the turn of the market. People like me have 30% to 40% deposits - but are waiting for decent property to be offered at a sensible price. Only when first time buyers (OK, technically I'm not, but I'm indistinguishable from one as I didn't make huge profits when I disposed in 2002) return to the market will it start to stabilise. 75% LTV is where mortgage lending will start to pick up... where the buyer takes on the vast majority of the risk... and is playing with hard-earned not borrowed stakes.

  4. asteve,

    People with 30% to 40% deposits, like yourself, I suspect are more of an exception than the rule. I'm sure that as prices begin to fall some people will jump in. However, the UK housing market was a full-blown 100% totally over the top bubble.

    Such events are driven primarily by expectations which are no longer grounded in fundamentals. Once sanity reassert itself, the fall in prices can be dramatic.

    A key feature of bubbles is leveraging. This is what the 95% LTV loan is- massive leveraging. Now that they're disappearing, the bubble dies with it. Anyone buying a house on a 75% LTV could hardly be described as massively leveraged.


  5. I accept that the >30% deposit crowd are not run-of-the-mill, but there are going to be more of us than you at first may think.

    I've several friends with household earnings in the £60K to £120K bracket who rent... who've rented and saved since ~2000. Unusual but still there. We also need to consider STR players and downsizers (of which I'm sure there are tens of thousands.)

    My point is that high leverage is only viable when the market value can be established without reliance on eye-popping loans. This is where these low LTV purchasers come in... even if small in number.

    The market can't be reliably set by those who sell to move - since they can be argued not to be spending "real money" - just swapping one house for another. The market needs to be set by those who are currently waiting... at a price which convinces them to part with their savings.

    I don't need prices to fall, per-se... I could buy an average-priced house now... but I am not interested in buying a stepping-stone load-of-rubbish. I do not believe in the housing ladder. I want to buy a decent spacious home - of a sort that, in 2007 was selling for almost double the average price. I intend to pay around the 2007 average price. The complication is that I don't care if I pay slightly more with low mortgage rates - or slightly less with high mortage rates. It is the bottom-line paid-off-in-a-decade price that matters to me. I think that this is what will matter to other "real" (i.e. non-speculative) buyers too.

  6. Sweep the streetsMay 16, 2008 at 11:18 AM

    Not everyone is on the same page here. Take a look at this express story.........

  7. As I suspected, banks have been squeezing up interest rates as the Bank of Englans were reducing them. It is all about profits.

  8. "Higher rates; lower house prices."

    Amazing how the MSM doesn't get this simple truth.

    I'm with asteve on the LTV and deposit comments. I'd add this:

    - I too know plenty of people who earn plenty, rent, save plenty and have been waiting to buy. They are smart people and prices need to come down a long way before they pull the trigger;
    - Bubbles rely on drawing a trend line into the future and pocketing those expected gains. The MOMENT people stop believing, the bubble pops;
    - Leverage matters not just because of how low/no deposits motivate. But also it allows the higher prices to be paid;
    - First time buyers drive everything. That's why in a bubble they were the victims of a Ponzi scheme. All trade-ups are reliant on FTBs. For as long as FTBs stay out of the market, the whole thing freezes irrespective of how banks lend to current owners;
    - Losses staircase on the way down due to plenty of bottom-callers catching the falling knife. Don't underestimate the psychological bias of "price anchoring" such that 10% off a price you're accustomed to seems like a steal.