Yesterday saw the Autumn Statement given to parliament by the Chancellor of the Exchequer. I had a wry smile as I noted he confirmed my analysis of yesterday by opening his presentation by saying that he was planning a fiscal tightening overall which of course is not the norm for a pre-election statement!
So the measures I announce today are not a net giveaway but actually tighten the public finances a little.
However as I pointed out yesterday the UK National Debt has risen over the course of this parliament by some £208 billion more than originally planned. So I will leave readers to judge the next part of the statement for themselves.
I could have eased up on our determination to deal with our debts. I do not.
On that subject we plan to have a fiscal surplus in around four years time. As that is the same fiscal surplus promised four years ago it looks like a mirage in a desert.
What about house prices?
The efforts of the UK’s political class and this government in particular to “pump up the volume” in the UK housing market have been a recurring theme of this blog. Actually the song lyrics could exchange the price for volume as it we have seen a major effort to push house prices higher. It seems to have bothered no-one in authority that house prices rising and rising had been a substantial contributor to the credit crunch and that they had mostly been vociferous critics of this in opposition. A type of collective amnesia has been in play as we have seen measure after measure defend and then boost UK house prices.
The initial response of the Bank of England to the credit crunch was to cut Base Rates to 0.5% which had mortgage rates tumbling. This was backed up by some £375 billion of Quantitative Easing to reduce longer-term interest-rates (bond yields) which had a knock-on effect on fixed-rate mortgages. On the 13th of July 2012 the Bank of England decided that even this was not enough and launched its Funding for Lending Scheme. This was badged as a scheme to help small and medium-sized businesses but in fact lending to them has continued to decline. Whereas banks found themselves about to reduce mortgage-rates by approximately 0.9% on average which lit the house price burners “One More Time as Daft Punk might say. Then we had the Help to Buy Scheme from the government which meant that it was easy to think that they were fully deployed.
Readers may note that the Bank of England has been pretty much hand in glove with the government through this period as we mull the meaning of the word independence.
There’s No Other Way
It seems that George Osborne sings along to Blur as he decides what to do about the UK economy. We had been discussing on this blog that UK house price growth was definitely slowing and that the leaders of the pack in central London were now seeing falls in price. This was at least six months too early for the electoral timetable. What could he do next?
Stamp duty is charged at a single slab rate on the whole purchase price of a home. It means big jumps in tax when house values tip into a new band.The distortions can be particularly damaging at the lower end.
Okay George so where are we going with this line of thought?
As a result stamp duty will be cut for the 98% of homebuyers who pay it. If you buy an averagely priced home of £275,000, you will pay £4,500 less in tax.
The average home in London will see a similar reduction.
As I say, 98% pay less – and the whole reform represents a tax cut of £800 million per year.
Ah another boost to the housing market via higher house prices then? The Office for Budget Responsibility (OBR) certainly thinks so and the emphasis is mine.
The immediate reforms to stamp duty land tax announced in the Autumn Statement are likely to have significant effects on the UK housing market. The main effect is likely to be distributional – house prices and transactions will be lifted at lower prices (where the effective tax rate has been reduced) and will be depressed at higher prices (where the effective tax rate has risen).
What the OBR does not spell out is that in terms of numbers 98% will rise and 2% (which may well be beyond hope anyway…) will fall. So we do indeed have one more throw of the dice for UK house prices and as the move was to start at midnight obviously the plan is to have it in play in the run-up to May’s General Election.
What are house prices doing?
The Halifax Building Society has weighed in with its view on developments this morning and its view is that it is slowing down.
House prices in the three months to November were 0.7% higher than in the preceding three months. The quarterly rate of increase has now declined for four consecutive months. Annual price growth in the three months to November slowed further, to 8.2% from 8.8% in October.
Home sales fell below 100,000 in October – to 98,490 – for the first time in 2014
Numbers such as this must have upset Chancellor Osborne as he sang along to Yazz in his bath.
The only way is up, baby
For you and me, baby
The only way is up
For you and me
Regular readers will be aware that I have been very critical of the UK economic strategy of pumping up the UK economy via house price rises. It is too entwined with past problems two of which, our fiscal deficit and trade deficit, are presently in full force. I have never understood the help bit in “Help To Buy” as it encourages first-time buyers to purchase what are by pretty much any measure you choose over-valued properties. Indeed they are suffering even faster house price inflation if the official numbers are any guide.
In September 2014, prices paid by first-time buyers were 13.3% higher on average than in September 2013
As we put the word help into my financial lexicon for these times I am reminded that the price/earnings ratio of the Halifax has reached a post-credit crunch peak of 5.02. Whilst that may seem high I have pointed out in the past that they use “convenient” definitions for this series. Martin Whitlock has replied to my mentions of this on Twitter.
Based on standardised prices. @notayesmansecon ONS simple average (what people actually pay) gives a ratio of 7.47 (per person)
So it is in fact a Boeing Jumbo Jet rather than 5.02? What was that about statistics again?
Accordingly we move on with the frankly somewhat depressing view that can only generate some economic growth by inflation of view of our wealth by house prices. Actually we can throw in equity prices there too as so much official policy around the world operates to boost them too.
What about house builders?
It was rather symbolic that such moves took place on a day that this was announced.
Barratt Developments and Taylor Wimpey join FTSE 100
The companies’ shares have gained 30% and 20% respectively this year on the back of Britain’s rising property market.
Of the top ten risers in the UK FTSE 100 today as I type this some five are house builders as we wonder if they are as protected a class as our banks.
We were told yesterday in the Autumn Statement that our low Gilt (bond) yields were due to our fiscal credibility. Actually by chance our ten -year Gilt yield is 2% which is the same as the apparently fiscally credible Italy?
The OBR Club
On Share Radio yesterday I established this rule which you might like to bear in mind as the OBR is quoted pretty much everywhere today.
“If there is an OBR Club. First rule of the OBR club. The OBR is always wrong”-
I did qualify that with the fact that occasionally they can see what is right under their noses which is why I have quoted their view on the immediate impact of the Stamp Duty changes.
However I did note that on their risks to UK growth all six points were a downwards influence. So maybe 2015 will surprise us via lower oil prices after all…..