Where has the interest gone?

But how soon that is will depend on lots of things. Two members of the Bank of England’s monetary policy committee were dissuaded from voting for a rise at its July meeting because of wobbles in Greece, but they are unlikely to be so cautious in future now that UK economic growth remains buoyant.

Decisions on interest rates in the US have a bearing on UK rates too, as do uncertainties about the outlook for the Chinese economy. The governor of the BoE himself has indicated that rates may begin to rise around the turn of the year, but there are no guarantees given the risks. And where will they settle after that? The shape of the economy now suggests it probably will not be as high as the long-term average, and may end up closer to 3 per cent rather than 5 per cent.

That is good news for the housing market as it should continue to help the affordability of credit needed to buy homes. But so far the lowest bank rate to date has not been enough to stimulate a return to mortgage or wider housing market activity. While the average house price in England and Wales has recovered to its pre-crash levels, property transactions still have a long way to go.

The same old grumble about a lack of supply is part of the reason for this. New supply cannot make a huge difference on its own because it forms such a small proportion of the overall housing stock. None the less, it is encouraging to see double-digit growth in new home starts and completions in the first quarter of the year. More important is the lack of existing stock turning over. Estate agents have long been reporting a lack of stock to sell, which keeps activity down and house prices up.

The other culprit is macroprudential regulations aimed at keeping the levels of household mortgage debt under control. The ex-chief economist at the BoE once described the UK’s housing market as having “a sort of microwave-type quality to it, with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds.”

Using the blunt tool of interest rates to control this and the rest of the economy at the same time is very difficult, hence the increasing desire for authorities to use other types of control.

That is clearly the view of at least one member of the MPC. David Miles’s last speech as a member of the committee said: “The best way to handle risk of huge costs from another financial crisis is to control leverage in the financial sector.” Looking ahead, that spells a different relationship between interest rates and mortgage transactions.

In normal times when interest rates fall, the numbers of housing market transactions start to increase. Just as higher rates choke off mortgage lending and hence activity, lower rates should encourage them. But this has not happened in this recovery.

While the bank rate fell to 0.5 per cent more than six years ago, mortgage rates did not follow. Even today a 95 per cent loan-to-value mortgage rate is 4.4 per cent – just a 2 percentage point drop since 2008, compared with the 4.5 percentage point drop in the bank rate. Ninety per cent LTV rates dropped by about 3.5 points. Only the least risky loans, with LTVs of up to 75 per cent, dropped by a similar amount to the bank rate.

Only those with sufficient income to meet the new more stringent affordability regulations can qualify, reducing the numbers again

That is important for the number of transactions and the value of mortgage lending. If only those with higher levels of equity are able to take out mortgages at good rates, that limits the size of the pool of potential borrowers.

In addition, the pool of borrowers who can take out loans is also reduced because of the mortgage market review. Only those with sufficient income to meet the new more stringent affordability regulations can qualify, reducing the numbers again. So the reason transactions have not picked up is likely to be because it is only those wealthy enough to be able to take out a lower LTV loan or pass the new affordability tests who are able to transact.

While it is difficult to interpret data in averages, that seems to be implied by looking at mortgage approval data. BoE figures show that the average loan size has increased, and is now almost £170,000. CML reports that the average LTV has fallen to about 75 per cent which implies an average house price of about £225,000. This is a bit lower than, but not far off, the average price of all properties sold in England in the first quarter of this year.

But that does not tell the whole story. Approaching three-fifths – 58 per cent – of transactions take place in London and the South of England, where the weighted average price paid is about £340,000. This compares with about £165,000 in the rest of England. So if more transactions are taking place in the South that implies that the average LTV in the majority of transactions could actually be lower than 75 per cent.

The alternative is that in the rest of the UK LTVs are much lower, which seems unlikely given the economic conditions. That makes sense too, as it is only in the South of England where house prices are above their pre-crisis peak, thus increasing the equity available to be able to qualify for a lower-priced loan.

What does this mean for the market? As the rest of the country’s recovery begins to catch up with the South, restoring equity, that should help to increase house-buying activity – and more importantly add to confidence in the markets outside the South. That should help to release more mortgage lending within the risk appetites of both the BoE and lenders’ own directors.

Fionnuala Earley is residential research director of Hamptons International

Key Points

The lowest bank rate to date has not been enough to stimulate a return to mortgage or wider housing market activity.

Bank of England figures show the average loan size is now almost £170,000.

Approaching three-fifths – 58 per cent – of transactions take place in London and the South of England.