The last time U.K. mortgage approvals were this high, lender Northern Rock Plc hadn’t yet collapsed, Gordon Brown was prime minister, and U.S. investment banks Bear Stearns Cos. and Lehman Brothers Holdings Inc. were still in business.
Banks made 71,638 home loans in December, up from 70,820 a month earlier, the Bank of England said in a report today. That’s the most since January 2008 and is the 10th monthly increase, driven by Prime Minister David Cameron’s housing policies and the BOE. Analysts were expecting 72,900 loans, the median forecast of 23 economists in a Bloomberg News survey.
Home loans are picking up along with U.K. house prices, which had their best year since 2006 last year. The gains have been fueled by a BOE pledge to hold its key interest rate at 0.5 percent, an improving economy, and the government’s help-to-buy program for first-time buyers, raising economists’ concern that the combination of measures is too much.
“Now that the economy is moving and the housing market is going pretty strongly there is a case for taking the foot off that accelerator or there is a very real danger the housing market will overheat with longer term negative repercussions,” said Howard Archer, an economist at IHS Global Insight in London. “There is no real need to have any stimulus for the housing market anymore.”
U.K. house prices rose 8.4 percent in 2013, and a report yesterday from Swindon, England-based mortgage lender Nationwide showed a monthly increase of 0.7 percent in January to an average 176,491 pounds ($292,322) and an annual pickup of 8.8 percent.
Gains in London have dwarfed the rest of the country, complicating the government’s policy choices. Prices increased 11.6 percent in London in the 12 months to November, the latest for which official data are available, according to the Office for National Statistics. Excluding the capital and its commuter area in the South East of England, prices rose 3.1 percent.
There’s a “raging housing boom in London and the South East,” U.K. Business Secretary Vince Cable said last month, and officials “certainly need to look at” the government’s Help to Buy again.
The program enables buyers to take out a loan with a down payment of as little as 5 percent on all homes valued up to 600,000 pounds. The first phase came into effect in April, and only covered new properties. Chancellor of the Exchequer George Osborne in October expanded it to cover existing properties, and the government said this month that mortgages totaling almost 1 billion pounds have been sought through the program. The number of applicants has tripled since previous figures were published in November.
Since April, the average two-year fixed rate mortgage has dropped 0.47 percentage point to 2.4 percent, according to BOE data. Over the past decade the rate averaged 4.43 percent and reached a high of 6.6 percent in June 2008.
Osborne said last month he saw no sign of a bubble, and has charged the BOE’s Financial Policy Committee with conducting an annual review of the program starting in September. He also said he doesn’t intend to extend the program beyond its current three-year term.
“I was all for Help to Buy, you should never underestimate the express train that’s the U.K. housing market to get people spending and get growth going,” said Alan Clarke, an economist at Scotiabank in London. “If self-sustaining growth has to come from the housing market, so be it.”
Still, “there may be a risk that it’s too much of a good thing, and that it could backfire,” Clarke said.
The broader economic recovery has gained momentum, with gross domestic product expanding 1.9 percent in 2013, the best annual performance since 2007, data this week show. At the same time, Central Bank Governor Mark Carney said yesterday he wants to keep monetary policy loose for some time to entrench the return to economic growth, assuring borrowers that cheap credit won’t disappear soon.
Less than two months after Carney took the helm of the BOE in July he said the bank wouldn’t consider increasing the key rate at least until the unemployment rate dropped to 7 percent. BOE officials said in November they didn’t see that happening at least until 2015.
Though the recovery in the labor market has proved faster than expected, and unemployment is now at 7.1 percent, Carney hasn’t lobbied for higher interest rates. Speaking in Edinburgh yesterday, he said the recovery “has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy.”
The lending “environment is more favorable than it’s been in quite some time, banks have gone a long way to recapitalizing themselves,” said Philip Rush, an economist at Nomura International Plc. “There’s not much normal about where house prices are now. State schemes aimed at stoking demand rather than supply are out of kilter with market fundamentals.”
The Organization for Economic Cooperation and Development said in November that a shortage of housing is also contributing to the price gains and Britain risks “overheating” its property markets unless it takes steps to boost the supply of homes for sale.
England needs 250,000 new homes a year to satisfy demand, according to homeless charity Shelter. Developers built 107,950 homes in England during the year through November, according to the Office for National Statistics.
That demand helped the Bloomberg U.K. Homebuilder Index of 10 stocks gain more than 50 percent during the past 12 months. Telford Homes Plc, the biggest gainer, rose 3.3 percent to 354.75 pence in London today and Barratt Developments Plc gained 0.8 percent.
“This is no longer a recovery led by affluent second homebuyers with high equity or by government support of first time buyers,” said Pete Redfern, chief executive officer of High Wycombe, England-based Taylor Wimpey Plc, the U.K.’s second-biggest homebuilder by market value.
“Most of our main product areas are showing growth and most of the customer target groups that we sell to are,” Redfern said in a Jan. 15 interview. “We are seeing some underlying price growth of about 2 to 3 percent, but I would argue 2 to 3 percent is a healthy level of normal inflation after a pretty stagnant market for four or five years.”
Home lending is still well below the average of 104,000 per month in the decade before the financial crisis hit the British housing market in 2007.
Mortgage approvals exceeded 129,000 in November 2006, according to Bank of England data. That slipped to about 99,000 in September 2007 when the central bank had to provide emergency funding to Newcastle-based Northern Rock to prevent collapse, triggering the first run of deposits for a U.K. bank in 140 years. Under Gordon Brown, who had succeeded Tony Blair as Prime Minister months earlier, the government had to nationalize Northern Rock in February 2008.
Approvals plunged that year to a low of 26,590 in November, as the U.S. subprime crisis infected the global financial system and brought down Lehman Brothers and forced Bear Stearns to sell itself to JPMorgan Chase & Co.
“Mortgage approvals aren’t back to normal, but they’re increasing rapidly and likely to continue increasing rapidly,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “Interest rates are very low and house prices are rising which is increasing buyer interest. 2014 will be a good one for the housing market.”