This week has seen confirmation that the UK economy continues to grow solidly in economic terms, albeit that the growth has reduced. Today I wish to look again at the area which has driven this growth spurt which is housing which of course via mortgages involves the credit sector of the UK economy too. Yesterday the Nationwide gave us more reinforcement to the theme that the UK housing boom is showing signs of fading.
Annual house price growth continued to soften at the start of 2015, slowing from 7.2% in December to 6.8% in January. This is the fifth month in a row in which annual growth has moderated, despite house prices increasing by 0.3% month on month in January.
Accordingly we see that an annual rate of house price inflation which peaked at 11.8% in June 2014 has now reduced to 6.8%. Care is needed with the precise numbers as different measures disagree on them but the broad sweep is true. As well as the implicit boost provided to the UK economy from this there has also been an explicit one.
It is encouraging that the number of new homes built in England was up 8% in the year to Q3 2014.
From the point of view of the political cycle this may turn out to be a case of poor management as of course the government would have liked the boom to reach the May General Election.
Activity has fallen too
It must be awkward for an institution like the Nationwide which has such a vested interest here to publish these numbers but here they are.
The number of mortgages approved for house purchase has been around 20% below the level prevailing at the start of 2014 and surveyors continue to report subdued levels of new buyer enquiries.
Part of the reason for this is the change of Bank of England policy from the “full speed ahead” of Funding for (Mortgage) Lending to the “icebergs ahead” of the Mortgage Market Review. Also as even the Nationwide implicitly admits many houses are simply too expensive now.
After taking account of seasonal factors, UK house prices are currently 2.4% above their precrisis peak.
As we know that real wages have fallen by around 10% (depending on inflation measure used) in the UK over the same time period houses have got more expensive. Even the Nationwide admits this with an earnings to house price ratio of 5 for the UK. I also note that London has risen to a stratospheric level of 9 on this measure!
UK credit conditions
So the Bank of England is none to keen on secured credit growth. However the Financial Planning Committee then looks rather foolish when we consider today’s data.
Consumer credit increased by £0.6 billion in December, compared to the average monthly increase of £1.0 billion over the previous six months. The three-month annualised and twelve-month growth rates were 7.2% and 6.7% respectively.
Excellent! So we slow secured credit so we can expand unsecured credit to make the system safer and more secure. Oh hang on….
The FPC is showing itself to be as clueless as it is anonymous. Having passed a member of the FPC in Battersea Park recently I think that might make me pretty much unique in knowing who she was! I do have an excuse as I used to work with her.
Meanwhile we are supposed to be pushing bank lending to businesses to new heights so let us take a look at it.
Loans to non-financial businesses decreased by £3.8 billion in December, compared to the average monthly decrease of £0.8 billion over the previous six months. The twelve-month growth rate was -2.8%.
Oh not so hot,still we know that small business loans are the priority of the new reformed Funding for Lending Scheme so they must be surging?
Within this, loans to small and medium-sized enterprises (SMEs) decreased by £1.0 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelve-month growth rate was -2.1%.
Net lending – defined as gross lending minus repayments – to large businesses was -£3.8 billion in December. Net lending to SMEs was -£0.2 billion.
Let us just take a moment to remind ourselves of the official Bank of England view on this. From Governor Mark Carney.
The extension announced today concentrates the FLS on the one area where support remains warranted: the supply of credit to SMEs.
There is a long list of claimed boosts for small business lending on the Bank of England website which I shall spare you and instead I shall remind everyone again about the actual figures which have been falling time and time again. Perhaps Paloma Faith was writing a critique of the Bank of England here.
Ain’t got no pain (Ain’t got no pain)
I aint got no rules (Aint got no rules)
I think I like (I think I like)
Living upside down (Living upside down)
So in summary the Bank of England is presiding over something of an unsecured credit boom whilst lending to businesses including the crucial small and medium-sized ones continues to contract.
What about interest-rates?
If we recall the words for former Bank of England Deputy Governor Charlie Bean that savers have to take their share of the pain there is a certain inevitability in the figures below.
The effective rate paid on households’ outstanding time deposits decreased by 7bps to 1.73% in December and the rate for households’ new time deposits decreased by 4bps to 1.50%.
The 1.5% for new savings seems a little dubious to me frankly but I do agree with the fact that savings rates continue to be cut.
Contrary to the MMR policy of the Bank of England we are seeing more interest-rate cuts here too.
The effective rate on the stock of outstanding secured loans (mortgages) decreased by 1bp to 3.18% in December and the new secured loan rate fell to 3.00%, a decrease of 10bps on the month.
A driving force in this has been the fall in UK Gilt (bond) yields which hit a new record low this morning for the ten-year benchmark of 1.39%. This impacts on fixed-rate mortgages most clearly and directly. Now of course this latest fall is after the figures we are discussing today but the downwards trend has been in place as 2014 started with it just over 3%.
There have been some decent-sized falls here.
The rate on outstanding unsecured personal loans decreased by 2bps to 7.22% in December and the new unsecured personal loan rate decreased by 31bps to 7.27%. The credit card rate (all balances) fell to 10.36%, a 31bps decrease on the month.
There is much to consider here as we look at how the Bank of England is controlling credit policy. It has trumpeted its efforts to slow down the mortgage market which had an effect although as we look forwards we wonder if lower mortgage rates will reinflate things. However as we observe a boom in unsecured credit combined with further reductions in business lending we see that Paloma Faith is right about it all looking upside down.
Meanwhile elsewhere much is happening and I would like to add a couple of snippets. Firstly Spain backed up my analysis of yesterday by declaring GDP growth of 0.7% for the fourth quarter of 2014. If we take that theme forwards then the Euro area annual inflation rate of -0.6% just released should not be firing off the media deflation klaxons in the way that it already has. I was interviewed on Share Radio this morning and will put up a link to the interview which covered these topics when it is available.
Oh and I hope that the unemployment and employment numbers released today by Italy are more accurate than the ones Canada has been releasing!