The link between mortgage approvals and house prices is fairly intuitive. If someone goes to a bank or building society and gets a mortgage, you know that they’re going to be buying a house pretty soon. And in the UK, the supply of houses is essentially fixed, so if demand for houses goes up, house prices inevitably go up too.
By the summer of 2005, UK rates stood at 4.5% and the bond market was expecting rates to fall. But mortgage approvals were growing fast, and I therefore thought that a rate cut was very unlikely, and evidence of a rebound in the economy could mean rate rises. Sure enough, house prices in 2006 were strong and economic growth surged. This, coupled with a steady rise in inflation, meant that the Bank of England hiked rates in July 2006 and then again in November and at the beginning of this year. This time, being short duration was a great help to performance as investment grade bond markets had a tough time in 2006.
Mortgage approvals reached 129000 in November, the highest since late 2003, but on Tuesday it was announced that mortgage approvals fell to 113,000 in December, the lowest recording since April 2006 (but still not that low). The key question is whether this is a hint that recent hikes are taking some steam out of the housing market, or is it just a one-off soft reading and January figures will show a sharp rebound? My portfolios are still very short duration given where UK inflation sits, but the next couple of months could be absolutely crucial. It’s inevitable that the rate hikes witnessed in the UK will start to bite at some point this year, and when they do, there will be a great buying opportunity in the bond markets. I don’t think we’re there quite yet, but we’re getting closer.