One of the features of the era of extraordinary monetary policy and Quantitative Easing in which we now live is that there is considerable doubt about the results. Regular readers will know that I have been amongst the doubters or in Dune terms heretics on this issue since 2010. The latest theoretical move is that is reduces the velocity of money in a brake on itself. However one clear feature of the era has been the boom in asset prices with many equity markets rising but also house prices getting an upwards push too. It is the latter that I intend to look at today with the theme song of West Ham United playing in the back ground.
I’m forever blowing bubbles
Pretty bubbles in the air
They fly so high, nearly reach the sky
Then like my dreams they fade and die
Perhaps some central bankers might like it as a ringtone.
If we go south and skip the land down under we can in a nod to the upcoming Rugby World Cup take a look at New Zealand and Auckland in particular. From the Reserve Bank of New Zealand or RBNZ.
At present, house price inflation is much higher in Auckland than in the rest of the country, reflecting stronger population pressures and constrained housing supply (figure 4.10).House price inflation is beginning to increase in some other areas, such as Hamilton and Tauranga.
The chart mentioned shows that annual house price inflation in Auckland is at 25%. Interestingly considering what is going on in other parts of the world there has been considerable migration and the RBNZ blames that for the price rises conveniently skipping over this bit.
Since the beginning of the year, two-year fixed mortgage rates have declined by more than 1 percentage point, with 0.7 percentage points of this fall occurring since the June Statement.
Why are they falling? Well another part of last night’s statement gave us a clue.
The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 percent
There has been a series of interest-rate cuts from the RBNZ in 2015 and in a warning for both the US Federal Reserve and the Bank of England they follow rises in 2014. Officially the cavalry is on its way.
Policy measures announced in Budget 2015 and restrictions on high loan-to-value ratio lending to investors in Auckland are expected to help dampen demand for existing houses.
However in reality I think that the outlook for first time buyers in Auckland will be all black for a while yet as macroprudential policies were abandoned in the past and that abandonment was not due to their success!
You could say that the Kiwis in Auckland went a long way to create a mirror image of the house price boom and bubble of London.
The Riksbank in Sweden has become a familiar theme on here as it mimics Agent Smith from the Matrix series of films crying “More! More!”. In specific terms that represents an interest-rate of -0.35% and an ever-increasing volume of Quantitative Easing as I discussed back on the 4th of August. This has spilled over into the housing market. From Sweden Statistics.
Increasing prices were reported in 21 out of 21 counties between the two last three-month periods….Real estate prices for one- or two-dwelling buildings increased by 4 percent during the last three-month period June – August 2015, compared to the previous period March – May 2015.
That is motoring by anybody standards and in Fleetwood Mac terms is “everywhere” with some more bubbilicious than others.
The largest increase was in Gotland County at 11 percent, followed by Västernorrland at 8 percent.
If we step back for a little more perspective we see this.
Prices increased by almost 10 percent on an annual basis during the last three-month period June – August 2015, compared to the same period last year…..Increasing prices were reported in all counties on a yearly basis.
For those of you wondering what this means in actual prices.
The average price for one- or two-dwelling buildings during the period June – August 2015 was more than SEK 2.5 million.
Actually it is 2,566,000 Swedish Krona.
Again macroprudential policy is in play so that the authorities can claim that they are “doing something”. However as we note that on the same standards as the UK the Swedish consumer inflation is 0.6%, so house prices are increasing at a rate some 9.4% higher than that.
The UK housing market turned just after the Bank of England pushed the accelerator with its Funding for (Mortgage) Lending Scheme in July 2012. Today the Halifax building society data suggests that the boom is ongoing.
House prices in the latest three months (June-August) were 3.0% higher than in the preceding three months.
That is not far off that of Sweden! So let us look at the annual numbers.
Prices in the three months to August were 9.0% higher than in the same three months a year earlier.
These rise came with a fair degree of bombast.
The underlying pace of house price growth is strong. The shortage of secondhand properties for sale on the market is resulting in upward pressure on house prices. At the same time, economic recovery, real earnings growth and very low mortgage rates are supporting housing demand. Strengthening demand and highly constrained supply are likely to mean that house price growth continues to be robust in the short-term.
The average price according to the Halifax was £204,674. Or in Swedish terms some 2.64 million Krona which seems a rather similar number doesn’t it? Of course there are plenty of caveats in such a comparison but it is intriguing.
In terms of comparing to earnings then the Halifax calculates that the average house price to earnings ratio has risen to 5.26. That is in spite of the fact that the earnings figure of male full-time employees is upwardly biased compared to the overall population.
There are various surveys on the UK housing market each with their own flaws but I note that the Halifax data has received some backing form the Royal Institute of Chartered Surveyors this morning.
The RICS price indicator reached a 15-month high in August, with a net balance of 53% more respondents reporting price-rises, and firm-growth being seen across all areas of the UK.
Further analysis, using Office for National Statistics’ data as the comparator, indicates that prices now look likely to rise in the region of 6% over the course of 2015, compared with 3% predicted at the beginning of the year.
Also one area where conditions have been icy cold seems to be on the move a bit like the football team.
The strongest price growth is forecast in Northern Ireland, where prices are now anticipated to rise by 11% throughout 2015.
A Space Oddity
I have not forgotten that just down the road from the area that uses the face of David Bowie for its currency ( the £10 note) something unusual may be happening. It was only yesterday that I reported troubles at the mega development in Nine Elms which we wait to see is prescient or a special case.
Another way of looking at London as a special case can be found here. From the London Evening Standard.
Deloitte is to introduce a bargaining tool to attract young talent to join the company — help to move into the former athletes’ village in east London.
One area where central banking toolkits are not “maxxed out” is in their ability to raise house prices as today’s data from 3 parts of the world indicates. We see past moves from the Bank of England still having an effect and current ones from the Riksbank of Sweden. We also see the RBNZ rushing to catch up on the lower interest-rate party on the other side of the globe.
However whilst central bankers love to trumpet wealth effects their trumpeting is of nowhere near the skill of whoever transformed the song Cheerleader. But the lyrics do apply to central banking attitudes to house prices.
Oh, I think that I’ve found myself a cheerleader
She is always right there when I need her
Oh, I think that I’ve found myself a cheerleader
She is always right there when I need her.
The problem is that the “wealth effects” trumpeted by central bankers look awfully like inflation to first time buyers as we see another front in the war of the generations.