As UK house price growth fades so has the economy

Today has opened with news that is in tune with my expectations for 2017. This is my view that house price growth will slow and that it may also go negative. Such an event would make a change in the UK’s inflation dynamics as that would mean that official consumer inflation would exceed asset or house price inflation and of course would send a chill down the spine of the Bank of England. Here is the Royal Institute of Chartered Surveyors.

The headline price growth gauge slipped from +7% to +1% (suggesting prices were unchanged over the period), representing the softest reading since early 2013.

The date will echo around the walls of the Bank of England as its house price push or Funding for Lending Scheme began in the summer of 2013. Also the immediate prospects look none too bright.

Looking ahead, near term price expectations continue to signal a flat trend over the coming three months at the headline level……..Going forward, respondents are not anticipating activity in the sales market to gain impetus at this point in time, with both three and twelve month expectations series virtually flat.

Actually flat lining on a national scale conceals that there are quite a few regional changes going on.

house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West. By way of contrast, prices continue to fall in London…….. the price balance for the South East of England fell further into negative territory, posting the weakest reading for this part of the country since 2011.

We see that price falls are spreading out from our leading indicator of London and wait to see how they ripple out. Northern Ireland is no doubt being influenced by the house price rises south of the border. A cautionary note is that this survey tends to be weighted towards higher house prices and hence London.

The Real Economy

Let us open with the good news which has come from this morning’s production figures.

In June 2017, total production was estimated to have increased by 0.5% compared with May 2017, due mainly to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production.

It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers! Of the 0.52% increase some 0.51% was due to it and as well as the impact of a lighter maintenance cycle there was some hopeful news.

In addition, use of the re-developed Schiehallion oil field and use of the new Kraken oil field are contributing to the increase in oil production. Both are expected to increase UK Continental Shelf (UKCS) production over the longer-term.

If we move to manufacturing then the position was flat as a pancake.

Manufacturing monthly growth was flat in June 2017.

However this concealed quite a shift in the detail as we already knew that there has been a slow down in car and vehicle production.

Transport equipment provided the largest downward contribution, falling by 3.6% due mainly to a 6.7% fall in the manufacture of motor vehicles, trailers and semi-trailers.

This was mostly offset by increases in the chemical products and pharmaceutical sectors with some seeing quite a boom.

Chemical products provided the largest upward pressure, rising by 6.9% due mainly to an increase of 31.2% within industrial gases, inorganics and fertilisers.

If step back we see that over the past year there has been some growth but frankly not much.

Total production output for June 2017 compared with June 2016 increased by 0.3%, with manufacturing providing the largest upward contribution, increasing by 0.6%

There is an irony here as a good thing suddenly gets presented as a bad one and of course as ever the weather gets some blame.

energy supply partially offset the increase in total production, decreasing by 4.6% due largely to warmer temperatures.

If we look at other data sources we can say this does not really fit with the Markit PMI business surveys which have shown more manufacturing growth. It may be that they have been sent offside by the fact that the slowing has mostly been in one sector ( vehicles). If the CBI is any guide then the main summer months should be stronger.

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

The overall perspective is that the picture of something of a lost decade has been in play.

Since then, both production and manufacturing output have risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (January to March) 2008, by 7.8% and 4.4% respectively in the 3 months to June 2017.


One of the apparent certainties of life is that the UK will post an overall trade deficit and the beat remains the same.

Between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, the total trade deficit (goods and services) widened by £0.1 billion to £8.9 billion as increases in imports were closely matched by increases in exports.

So essentially the same as there is no way those numbers are accurate to £100 million. Even the UK establishment implicitly accept this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

If the problems were minor this would not be ongoing more than 2 years later would it? But if we go with what we have we see that as we stand the lower level for the UK Pound post the EU Leave vote has not made any significant impact.

In comparison with Quarter 1 and Quarter 2 of 2016, the total trade deficit over Quarter 1 and 2 of 2017 has been relatively stable.

This gets more fascinating when we note that prices and indeed inflation have certainly been on the move.

Sterling was 8.7% lower than a year ago, with UK goods export and import prices rising by 8.2% and 7.8% respectively over the period Quarter 2 2016 to Quarter 2 2017.


This is sadly yet another area where the numbers are “not a National Statistic” and I have written before that I lack confidence in them but for what it is worth they were disappointing.

Construction output fell both month-on-month and 3 month on 3 month, by 0.1% and 1.3% respectively.

This differs from the Markit PMI business survey which has shown growth.


We are finding that the summer of 2017 is rather a thin period for the UK economy. I do not mean the weaker trajectory for house prices because I feel that it is much more an example of inflation rather than the official view that it is economic growth. Yes existing owners do gain ( but mostly only if they sell) but first time buyers and those “trading up” lose.

Meanwhile our production sector is not far off static. So far the hoped for gains from a lower exchange rate have not arrived as we mull again J-Curve economics. Looking forwards there is some hope from the CBI survey for manufacturing in particular and maybe one day we can get it back to previous peaks. But we find ourselves yet again looking to a sector which appears to be on an inexorable march in terms of importance for the services sector dominates everything now and for the foreseeable future.

Meanwhile there is plainly trouble at the UK Office for National Statistics as the rhetoric of data campuses meets a reality of two of today’s main data sets considered to be sub standard.

Me on Core Finance TV







35 thoughts on “As UK house price growth fades so has the economy

  1. With TFS ending in February, the FED raising rates and reversing QE thus credit seemingly tightening and stricter criteria to lend to BTL househoarders along with Section 24 tax bills hitting househoarders doormats, not to mention the fact the Tory party will be voted out if the under 45s continue to be “priced out” i’m optimistic that the stagnation in the housing market will lead to a sharper drop in prices. (not a full on crash, but thats in the post)

    When such a significantly large section of the population are not spending huge sums on rent, it will be spent in the “real economy” only then will the economy look slightly more balanced.

    Can’t but help think if they had raised interest rates significantly in 2003 (or before) when house prices rose by 25% all this insanity would never have happened.

    All in my humble opinion of course.

    • I would say that the tories are between a rock and a hard place here. I agree that, if house prices don’t become affordable, the under 45s will not be voting tory, but I would also suggest that:
      1. A house price collapse will affect a lot of other things, particularly the amount of money people spend on them (see below on the DFS profit warning);
      2. Many over 45s are very happy with high prices and, indeed, it is their only hope a comfortable retirement, given the lack of other savings; and
      3. Guess what, the banks will be in trouble again.
      Btw, I completely agree as to the insanity of prices and the social disaster upon us caused by them – I just feel that there will be a lot of problems in reversing the trend.

      • hello James ,

        I think that the return to ” normal” house prices ( post that 3.5 x main income + 1 x 2nd income – if thats normal enough) will cause

        1, the Banks to fail *
        2, many to give their keys back to the bank – see 1
        3, the sudden realization that we’re really are that poor
        4, HMG collapses
        5, coalition gov to take power
        6, adoption of the Euro
        7, enter the EU again with penal conditions sold as “the EU saved us!!”

        the sort of thing that the Remainers promised us all if we ever left the EU

        just as planned – MUWAHAHAHAHAHAHA ( erm sorry )


        * – actually if that ever was going to happen I expect extraordinary measures to be taken – at all cost to save them precious Banks.

        • Adopting the Euro would leave us as is the case with France & Italy at the mercy of Germany’s massive trade surplus, which has resulted in these deficit states all becoming increasingly very uncompetitive – especially as they can no longer fall back on devaluation. It is I think at the root of the EZ’s structural faults. I actually remember Norman Lamont on Irish TV warning them about the above.

          Also despite our own Ivory Tower & all of it’s faults, in the event of more problems from banking & the scale of our debt – I would prefer it very much if we were not wrapped up in the less than tender embrace of the ECB, which recently history has shown, does not have gentle hands when dealing with those who defy ‘ The Precious ‘.

        • Pretty much matches my timeline for the next five years or so Forbin, just not quite sure how the collapse will occur and what will be the main trigger, I think sterling’s collapse is the most likely culprit due to a combination of disastrous BREXIT talks,deteriorating economic statistics(that curiously never seemed to matter before the referendum?) and “the boy who called wolf” still threatening to raise interest rates but just unable to due to a multitude of reasons.

        • Hi Forbin,
          Can you “give your keys back to the bank” these days?
          It’s a long time since I had a UK mortgage but I understood the debt always stays with the borrower – Unlike the US system where, for example, many sub-prime loans were written on the property and you could give your keys to the bank and walk away.

          Here in NZ the mortgagee can force the sale of a property if the borrower gets behind with repayments – even then it doesn’t guarantee that the borrower will be debt free. But mortgagee sales are rare -primarily because the new buyer has no guarantee of access or vacant possession. In fact they are a nightmare all round.

          So it could be that any return to “price normality” will see the return of “extend and pretend” refinancing for those in difficulty in the hope things will only get better (cue D:Ream) – Anything, in fact, to protect the banks from the consequences of having bust customers.

          As always, I could be wrong.

      • Yes but when renters are able to own they will buy settees from DFS, tables from John Lewis and paint from B&Q, BTLers spend bare minimum, hence if prices don’t fall we will get more profit warnings in this sector.

        And a house price collapse will lead to millions of new customers to sell mortgage debt to who are able to pay it back without the need for ZIRP. the current lot seem to have extended as far as they can.

        But all that aside, they’ve kept the plates spinning for a decade, the last 4 years of debt fuelled growth has been funded by house price inflation, now its time to pay the piper.

        The govt need to bring in more money, to for example pay for old age care, the option of taking grannys house has been ditched for now so the govt are going to have to look at others ways of grabbing money. Taxing workers will be political suicide as the NI debacle proved … so its assets and wealth that will be hit in the coming budgets …and as most wealth is in housing i can’t but help think one way or another the govt will get grannys house to pay for her care.

        See what happens in the coming months, but those people reliant on their house being their pension may have to cancel their Saga cruise and go to Lidl instead of M&S.

        And if the Tory party do manage to keep the plates spinning with other peoples money, Corbyn will sort their socialism out at the next election (imho)!

        • In the case of a house price collapse renters won’t get a chance to borrow as the banks will have been taken down by the fall in house prices and there won’t be any entities to loan money out any more. So renters will remain renters whilst mortgagors/owners remain mortgagors/owners and the housing market collapses and then stagnates.

    • Arthur,

      House prices started going up quickly in 1997, when they were below long term average. Gordon Brown abandoned RPI – which recorded house price inflation for the useless CPI. Which allowed him to ignore rapidly inflating house prices for a decade – but has left a huge long term mess.

      I can’t promise a real crash, but the smart should not ignore the possibility thereof.

      QE is a band-aid which gives very modest benefit of lower borrowing in short term, while debasing the currency and increasing the risk of a severe recession. Should this happen QE will be exposed as a really dumb policy

      • “QE is a band-aid which gives very modest benefit of lower borrowing in short term, while debasing the currency ”

        Please explain €80 billion per month QE, later reducing to €60 billion per month against the backdrop of an appreciating Euro?

    • But Arthur, the reason the BofE were able to get away with stoking this housing bubble, was because house prices were excluded from inflation calculations, and to them and the government, there was no inflation!!!

      • The reason they were allowed to get away with it is because we’ve a complicit yet docile media who yell from the rooftops that all is great when house prices are rising aswell as boomers who vote purely on how much their house is worth.

        And a Tory party who didn’t think beyond the 2015 election as to what would happen if millions more got priced out.

        The game is up now.

  2. I do not know why the media always portrays a drop in house prices as bad news. It would be extremely good news for both of my kids and as I home owner I couldn’t give a fig if the ‘value’ goes up or down. I realise that those folk who have over extended themselves might be a bit concerned but you only realise a loss if you sell. House prices have had major up and downs in the past and will do so again.
    As for vehicle sales; I keep reading articles that claim brexit uncertainty is harming vehicle sales. No it isn’t, you media morons, its the government and local council threat to tax, limit or otherwise penalise fossil fuel cars, and diesel in particular, that is harming sales. I am just such a potential consumer who is adopting a ‘wait and see’ approach before buying.
    I prefer to listen to business confidence surveys as opposed to statistical records or predictions of a fraction of a percent. As I have said in the past; I just do not believe the accuracy and they are inevitably revised at a later date – which is seldom commented upon.

    • Hello Pav,

      “..and they are inevitably revised at a later date…”

      thats why they do it later , MSM has the attention span of a mayfly !

      ( if not out rightly BS the public at other times – I have come to think of them as a more upmarket Sunday Sport …….gotta sell copy 😉 )


    • house price falls are bad for banks as they book the mortgages as “assets”. Sufficient falls will result in less money available for lending as banks struggle to maintain lending and capital adequacy ratios so your kids still won’t get a mortgage but for different reasons.

      The fall in vehicle sales is nothing to do with Government threats to tax or limit fossil fuel vehicles 20 odd years in the future but is everything to do with the vehicle credit market becoming exhausted.

  3. Hi Shaun
    In response to the reported fall in house prices the Beeb came out
    with this little gem, “Overall,1% of surveyors reported prices rising
    rather than falling.” How many of them lied?
    As for new car sales it was rumoured that one of the main manufacturers
    which I won’t name (although I know that you own one Shaun!) had June
    figures down just over 20% and that includes rife self registering. On the
    used car front monthly falls have reached 2008 levels, even popular
    family hatches which have been quite stable are down £400 per month
    and high spec models three to four times that. This leaves the PCP
    market in a state of panic, watch this space


    • ah , so with all this stock the prices will drop dramatically and all those – rent-to buy care loans will go turtle ?

      oh god , not MORE QE !


    • JRH, well done for digging out the numbers. It is certainly not widely reported but quite self evident on the road. My favourite motor was made in Sunderland, a nissan primera 2.0gt. now a rare car, I bought it for £240, now probably the best performing primera of the year of 1997. Now most folk dont like that kind of thing but I love it. Every mile I do for the company nets £0.45 and depreciation is nil. Still very fast, economical and reliable.

  4. I really don’t get how anyone can think that the pricing out FTB or forcing them to spend more than 200,000 on a shitty flat

  5. Shaun, Hi there from sunny Castiglioncello in Tuscany. My first view is I’ll bet the authorities are glad that house prices are not in the Inflation measurement basket, just imagine what negative “rises” would do to the undex 😉

    Anyway glad to escape 15 degrees blighty for 30 degrees Tuscany. A new swell arrived today so all is rosy here in Italy, gelato is good too.

    • Hi Paul

      I thought it was hotter as the media has been reporting 40s and a friend went to Rome last week and she said it was 41 degrees. Actually she was rather upset about the contrast with yesterday’s rain here. It will probably make you feel better to learn that the phrase raining “cats and dogs” was an understatement

      • Yes, you are right, I landed as the big cool started. 27 degrees today , just right for an Englishman. Out in the midday sun surfing Lerici today, just fabulous the the views as well. 🙂

  6. If house prices fall (come back to reality….) under any government, that government is finished.
    The only way out of this trap is inflation in wage growth plus stagnant house prices. The latter is achieved by building more (not via the big builders) by relaxing planning laws. The relaxation has to be in greenbelt land but higher quality design and lower density.
    Naturally, there is no chance whatsoever of this happening…..road, can, kick…

  7. It is just like the late 80s all over again – Lawson wheeled out pontificating about his stamp duty cut to create a bubble, which blew up, followed by Major in 92 saying “we need to get the housing market moving (followed by the idiotic Stamp Duty holiday). Of course, you will get more activity with a tax cut – but the Government needs tax from somewhere!

    Bean was lying – the BoE did not cut rates to encourage spending, but to maintain the house price bubble. They know (or at least should do!) that the liquidity trap rate in UK is about 4%, below which it all goes into assets. The cut to .25% and now the LSE nonsense is just designed to keep the bubble inflated.

  8. “It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers!”

    Erm it’s actually your prediction in earlier bogs Shaun that production is fading and that the UK is rebalancing towards services so you appear to be criticising yourself without saying so.

    Mervyn King who you so often criticise for being “wrong” about the aim for the economy rebalancing towards production would appear to be “right” this month

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