Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

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Sunday, 23 November 2014

UK Mortgage Lending Rebounds

Box-Ticking

The UK can be an oddball when it comes to compliance. 

Some years ago when I worked in the accounting profession I had a number of clients with American parent companies, and would be most confused when I turned up at their premises to find entire finance teams poring over "process maps" and discussing in a confused manner what "upward certifications" could possibly mean.

"What on earth are you all up to?"

"SOX mate. Sarbanes-Oxley. We need to work out which people need to sign what so we can tick the box to say that we've done it".

The aim of "SOX" was to improve governance processes in listed companies, but in a great many cases the remedy was even worse than the disease, especially for those poor minnow UK branch subsidiaries of US listed parents. 

The main winners as I recall were the accounting firms who received another great windfall through virtually doubling their compliance fees in year 1 for SOX implementation (IFRS transition was another meal ticket for a couple of years), and then basically lost interest thereafter when the fees dried up.

Given what followed, it would be tough task to argue that corporate governance was ever improved a great deal by the box ticking, even if the review was well-meaning in its intentions.

MMR

While it may have achieved some good, the recent UK Mortgage Market Review (MMR) in Britain has had a similar feel to it, at least in my limited exposure thereto.

A recent request of ours for a mortgage consultation was met with an offer for a meeting in more than a month's time.

"What the...5 weeks for a consultation?"

"Yeah mate, we have to say that each meeting takes 2.5 hours now, so a maximum of only three consultations per day. Internal rules mate."

"Eh? You've got to be ki...what if the consultations don't take two-and-a-half  hours?".

"3 meetings per day, mate. It's our new rules."

I'm paraphrasing the discussion, of course - the actual conversation included explicit language inappropriate for a blog page!

Impact of MMR Implementation now Receding?

There seemed to be little doubt that, whether tougher new lending rules were implemented or not, the box-ticking and paper-shuffling required by the MMR would jam a spoke in the wheels of the British mortgage market.

For some context, here was the point of concern, namely that the gross quarterly value of UK mortgage lending had been increasing fairly consistently since Q1 2013.


October Rebound

Moving on to the latest monthly data for October 2014 from the Council of Mortgage Lenders (CML) and it seems that with the market having become gummed up by new administrative hurdles for the preceding two months, perhaps we are now coming out the other side, with an estimated £19,000 million of gross mortgage lending written in October.

The market is seasonal, of course, but this stands to be the highest October figure recorded since 2007. Reported the CML:

"The Council of Mortgage Lenders estimates that gross mortgage lending reached £19 billion in October. This is 5% higher than September (£18 billion), and 8% higher than October last year (£17.5 billion). This is the highest lending total for an October since 2007 (£33 billion)."


The drivers? Firstly, the impact of the implementation of the MMR is fading. Secondly there are forecasts of low unemployment and strong economic growth in 2015, with a potential rate hike at the end of next year. And thirdly, banks and building societies have been slashing rates.

Nevertheless, price growth in the market does appear to have slowed, particularly away from London.

'Bubble'

Eagle-eyed readers will note a small problem related to the supposed "UK property bubble" that self-proclaimed international experts have been harping on about for the last couple of years.

That minor issue being that it doesn't exist. The clue was in data, specifically that re-presented here.

October 2014 Gross Mortgage Lending - £19 billion

October 2007 Gross Mortgage Lending - £33 billion

In inflation-adjusted terms gross mortgage lending has halved, which is one the most peculiar "bubbles" I've heard of (and there has sure been some dumb overuse of the term in recent years).

Anyone who has bothered to visit Britain will intuitively know that the reality is a seriously hot London market, with high prices also existing in the south-east (the region which is adjacent to the capital).

What London's many housing bears have consistently failed to understand or recognise over the past two decades is that ramming 20 million people inside the restrictive "green belt" - 18.7 million persons at the time of the 2011 Census snapshot, and many more today - now combined with zero interest rates (ZIRP) and woeful levels of construction, will obviously push house prices higher than a multiple of 3 times incomes.

Away from London, where prices have pressed on higher by 30 percent since the 2007 peak, and the south-east, where prices up by 55 percent over the past decade, the market has been all but stagnant for nearly 8 years in many cases.

The "UK housing market" may have a combined value of more than £5 trillion, but well over £1.1 trillion of that is in only one of the UK's 69 cities, and more than £2 trillion of the balance sits in the London and south-east region alone.

As noted here previously, Britain needs to encourage business investment and jobs growth away from London in the regions, instead of thinking up ever more contrived ways to get northerners into London faster, a network of high-speed rail links being the latest wheeze.

Mortgage Lending 2003-2014

To put the level of mortgage lending in some context, we have charted below the annual gross mortgage lending figures since 2007, including our projection for 2014. Importantly, these are not inflation-adjusted figures.


It will be interesting to see whether any momentum can be carried into 2015 since house price growth expectations have been adjusted downwards.

With the fastest rate of population growth in Europe and some very punchy inflation numbers, one might expect mortgage lending to increase over time, but instead we have a London market driven higher by offshore capital but not a whole lot else to write home about.