Yesterday was a day which provided us with more information about the state of the UK and US housing markets. These are much debated topics and are important because the state of the housing market has many follow-on effects for the overall economy. Indeed on a day when we are expecting Gross Domestic Product figures for the third quarter in the UK we should recall that the previous quarters figures were boosted by a strong construction/housing element. This influence on the wider economy will have central bankers watching the figures closely as they debate whether to unleash more quantitative easing on each country.
Just to put the position into perspective the UK has a very high rate of owner-occupation. According to the latest figures from the Office for National Statistics the UK has a breakdown as follows, owner-occupation 68%, social housing 17% and private rented sector 15%. This means that house prices have a high weighting in the national psyche and are supposedly a subject of debate at every dinner party.
UK Mortgage Approvals
Some troubling figures were released by the British Bankers Association yesterday. and they showed that mortgage approvals for house purchases sank to an 18-month low in September. This is particularly troubling because those figures takes us solidly back into the period of the credit crunch when there were a lot of complaints that banks were not lending. The number of mortgage approvals amounted to just 31,104, which was down on a month on month basis from 31,781 in August and down 26% on a year on year basis from last September’s 42,042. The recent peak just for reference was 45,498 in December 2009 and the average for these figures since 1997 has been 58.871.
To illustrate the change in the market let me give you the mortgage approval figures for September from 2005 onwards 67,498; 71,074;54,629; 23,591; 42,052 and now 31,104. So an apparent improvement has been followed by a decline again which is troubling.
The number of remortgages has dropped considerably since the credit crunch. The pattern is not quite as severe in terms of a trend because the number of remortgages in September 2010 was 23,820 which is above September 2009s 20,896. However if we take the figures for September from 2005 to 2008 they vary from 51.992 to 69,185 so overall there has been a considerable fall here.
I see that the remortgage figures have been mentioned much less in the media than the headline mortgage approvals and yet in some ways I see them as a better measure of the banking sectors willingness to lend. Here they are lending to existing customers so the drop in the figures actually shows us quite a lot about the state of the mortgage market I feel and it is not good. Not only have volumes dropped but they have dropped a lot and the implication is that a lot of borrowers are now in effect trapped in uncompetitive deals. We find ourselves back on a subject discussed on here yesterday about official and unofficial interest rates as I can only conclude that an increasing number of mortgage borrowers must be finding themselves trapped in uncompetitive mortgages.
The slowdown in the mortgage market does have implications for the wider economy and its effects will be felt over time. However yet again we find ourselves in a position where if we look it detail at the remortgage figures we can see that in a world of UK base rates at 0.5% and UK five-year government bonds yielding less than 1.6% that these figures are not feeding through to mortgage borrowers and instead will be feeding through to bank profits.
One example quoted has been that of the Halifax where the deal for those who have less than 25% equity is some 2% per annum worse than for those that have. Accordingly they are unlikely to be able to remortgage for a better deal and may find themselves trapped on an uncompetitive standard variable rate. Also I have noticed talk that many borrowers pass the criteria of the banks and then find themselves turned down later on some procedural technicality. Accordingly I would like to know how many people actually get the headline rate and I worry that very few do and that yet again appearance does not reflect reality.
Our Banking system badly needs reform and reorganisation. My theme that nothing has changed from the too big to fail era remains and if anything with the merger of Lloyds and Halifax which in other circumstances would have been seen as a blatantly anti-competitive move, the situation got worse. Let us hope we get some new entrants into the market to restore at least a semblance of competition.
Reform suggested by the Governor of the Bank of England Mervyn King
I am grateful to one of the commentators on here who reminded me of this speech. This was interesting partly because it name-checked several of the more radical plans for reform of the UK banking sector such as the suggestion that ending fractional reserve banking would help. Some might think that this means that Mervyn King might be considering such a move. However I counsel caution on this front as Mervyn said this about the plans for Basel 111 reforms and the emphasis is mine.
One criticism of Basel III with which I have no truck is the length of the transition period. Banks have up to 2019 to adjust fully to the new requirements. Although some of the calculations of the alleged economic cost of higher capital requirements presented by the industry seem to me exaggerated (Institute of International Finance, 2010), I do believe that it is important in the present phase of de-leveraging not to exacerbate the challenge banks face in raising capital today.
As you can see Mervyn wants reform but not now and not more interestingly during his tenure as Governor of the Bank of England. So whilst he strives for some street credibility by name-checking some reform plans I notice that any actual reform were it to be a can has yet again been kicked down the road. Indeed in going so far as 2019 Mervyn appears to have outed himself as someone who feels that the can needs to be kicked a particularly long way. Some including me might wonder why this is?
Perhaps he is frightened of the end of the Special Liquidity Scheme and other support measures for the banking sector. Perhaps he is also wondering where they can raise the cash/liquidity to replace this. If so short-term expediency has triumphed over long-term reform again and in my opinion everybody apart from bank directors will be the losers.
UK Gross Domestic Product Figures surprise again on the upside
This morning has seen very strong figures again for UK GDP and this time it is for the third quarter of 2010. According to the Office for National Statistics.
Gross Domestic Product (GDP) increased 0.8 per cent in the third quarter of 2010, compared with an increase of 1.2 per cent in the previous quarter. Allowing for the recovery in Q2 following the bad weather at the start of the year, the underlying growth in Q3 is broadly similar to that in Q2.
So unambiguously good figures reinforced by the statement that underlying growth was as good last quarter as it was in the previous one. Indeed the growth also seems to be broadly based.
The growth in the third quarter is due to growth in each of the component aggregate series, namely services, construction and production.
The year on year figure is not at 2.8% which is a rather heady rate of growth and should leave those who claim we need more QE looking again at the figures. Looking at the breakdown I see that construction growth has fallen from the heady 9.5% of the second quarter to a more balanced 4% in this. The only slightly odd numbers in this estimate are the figures for government and other services which rose by 0.6% which may question the austerity mantra we are being fed.
Yet again Gross Domestic Product figures have borne virtually no relation at all to market expectations. Indeed growth for the UK on an annual basis is now a heady 2.8% on a year on year basis which I happily admit is much better than I thought was likely at the beginning of this year. However I would also point out that with our inflation consistently exceeding target it does back up my suggestion at the turn of this year that interest rates should have been nudged higher. Our economy would have a better balance if this had been done, however this does not necessarily mean I support Andrew Sentance’s plans for a rise now as timing is very important in such matters as the full impact takes eighteen to twenty-four months to be felt.
We now go forwards with economic output higher than expected and we should in the UK allow ourselves a brief smile. As we go forwards we face fiscal tightening, currency wars and a volatile world economy as well as a banking sector which is showing signs of already squeezing available credit as a way of dealing with the cash squeeze that is likely to hit it as support schemes begin to run down and expire. But there is a further good thing from these figures and this is that it should put Adam Posen’s plans for further Quantitative Easing firmly on the back burner for now and we should all be grateful for that.
The US Housing Market and “foreclosuregate”
There is debate over the figures released yesterday about the state of the US housing market. Some look at the sales numbers and see an improvement whilst others point out that they were the third worst ever and that inventories rose. However there was a clear development in the foreclosure scandal as Ben Bernanke the Chairman of the US Federal Reserve went out of his way in a speech to discuss the subject and state that the Fed. is looking into it.
Before I address the specific topics of this conference, I would like to note that we have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions. ……. We take violations of proper procedures seriously …… In addition, Federal Reserve staff members and their counterparts at other federal agencies are .
So the actual figures on the housing market were immediately overtaken by the fact that the Federal Reserve is worried too about “foreclosuregate” or perhaps “fraudclosuregate”. Just to add to the problem Bank of America announced that it had been conducting a review and that it was discovering irregularities in its paperwork, so this story looks set to run and run.