With UK house prices falling and manufacturing booming are we rebalancing?

This morning has brought news which will send a chill down the spine of the Bank of England. This was from the Nationwide Building Society.

House prices show third consecutive monthly
decline for the first time since 2009.

Over the past three months house prices have gone -0.3% ( March), -0.4% ( April) and now -0.2% in May. For quite a few economic variables we look at the three monthly average to get an idea of trend and if we do that here we see that we can see which way the wind is currently blowing according to the Nationwide. If we look further back we see this.

The annual rate of growth slowed to 2.1%, the weakest in almost four years.

That time scale takes us back to pretty much the time that the Bank of England stepped in to boost the housing market with its Funding for ( Mortgage ) Lending Scheme or FLS. It led to a decline in mortgage interest-rates which was pretty quickly of the order of 1% per annum and according to the Bank of England itself reached a peak of 2%. Initially it was high equity to loan mortgages which benefited but this later spread to the lower equity value ones. This fed through into house prices as higher prices became more affordable due to lower mortgage rates. The house price rise over this period has been from £169,000 to just under £209,000 or around 24% which has allowed the Bank of England to claim that wealth effects have spread through the economy. Thus it will not be pleased to see that fading away and indeed showing signs of a reversal.

The other side of the argument is that much of this has been inflation as first time buyers face house price inflation and this is one I support strongly. In my world a fall in house price growth to around 2% is something to welcome and not to fear as it brings it pretty much into line with both economic growth and wage rises. Indeed I could go further and say that we need house price falls to bring things back into line. The argument for that goes as follows we see that house price growth was 24% but real wage growth according to official data was less than one tenth of that as the index has risen from 98.6 to 100.9. Let me give you two extra thoughts on that which is that the real wages number is in my opinion too high as the impact of higher house prices is excluded. But as an aside even on the favourable basis on which it is calculated to me what leaps off the page/screen is how little real wage growth we have had in what has been a good period for economic growth .

Regular readers will be aware that I have been expecting a house price slow down for a while as this from the 4th of January indicates.

What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls.

Take care

Just to say that the UK has several house price indices all of which give is different answers. The Nationwide should have actual trading prices but will be limited to Nationwide customers which tend to be more from the south. One thing it does offer is the timely nature of the data and this does fit with what we see from the less timely official series.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017). This continues the general slowdown in the annual growth rate seen since mid-2016.

Looking ahead there was also this message sent to me by Dan Cookson.

The non-seasonally adjusted mortgage approvals data took quite a drop in April http://j.mp/BoEMortgageApprovals …

I wonder if there has been something of an Easter effect like we saw in the retail sales data? We will know more next month.

Nine Elms

If there is somewhere which is the leader of the pack right now it looks rather like Nine Elms. That is both convenient as I live near to it and of course inconvenient as I consider the likely impact! For newer readers this is the scale of what is going on there. From Bloomberg.

Almost 20,000 homes are planned for the Nine Elms district, a regeneration site that extends from Lambeth Bridge in the north to Chelsea Bridge in the south.

I can tell you that it takes quite a while to pass it if you are on a Boris bike and actually due to the traffic scheme not a lot less by car. This led to quite a boom.

Prices for existing homes in Nine Elms, where most of the transactions took place, have risen by an average of 43 percent over the same period.

But now something of a bust.

Homes in SW8 postcode district had annual drop of 16% in March.

By some calculations there is a fair bit more to go or as Tube station announcements remind us “Mind the gap”.

Neal Hudson, founder of research firm Residential Analysts Ltd., said in a telephone interview, “Investors have dried up and the bulk of demand for London homes is now from owner-occupiers who can only afford” to pay 450 pounds per square foot.

The Nine Elms homes are priced between 750 pounds and 1,500 pounds a square foot, he said. The apartments are often sold with facilities including gyms, swimming pools and 24-hour concierge services.

Manufacturing

If we switch to a different part of the UK economy then we have just seen some good news. From Markit and its monthly business survey or PMI.

Manufacturing production and new orders both
expanded at above survey average rates.
Companies benefited most from the continued
strength of the domestic market. There was also a
solid increase in new export business as well.

This means that we can hope for a much better performance this quarter than last.

The strong PMI numbers suggest the
manufacturing sector has gained growth
momentum in the second quarter after the sluggish
start of the year.

If we look at the minutiae then the reading dipped from 57.3 in April to 56.7 in May but I doubt anyone believes the measure is that accurate. One intriguing reflection of this if we consider how strong UK employment has been is this.

These underlying dynamics are proving to be a real boon for the manufacturing labour market, with May seeing jobs
added at the fastest pace since mid-2014.

In ordinary times  we would expect to be seeing rises in wage growth and no doubt the Ivory Towers are on the case but the sad reality of the credit crunch era is that we have been singing along with Bob Marley.

I don’t wanna wait in vain.

Comment

As we have had a couple of months of house price falls and a rise in manufacturing then let me take you back to April 2002.

For the Monetary Policy Committee the
challenge is to keep inflation close to the target during a period in which a significant re-balancing of
the British economy will take place.

Sadly for the speaker it took another 15 years for us to have a hint of this and long after his role had ended. Still let me welcome even a flicker of a rebalancing of the UK economy but of course a genuine change would take years. The speaker for those of you who have not guessed was the then Governor of the Bank of England Mervyn King who is now Baron King of Lothbury.

Meanwhile at the Bank of England.

Staff at the Bank of England will begin voting on Thursday on whether to hold a strike this year in protest at below-inflation pay rises, union sources told Reuters.

If only there was an organisation which could help by keeping inflation low……

Sgt Peppers

Fifty years ago this album ( for younger readers music back then came on a piece of circular plastic which had to be put in a protective sleeve which led to some extraordinary and now famous artwork) was released by the Beatles and in my opinion deserves a doff of the cap. Plenty of great songs but my favourite is A Day In The Life.