Tomorrow the European Central Bank meets for what has become a crucial policy meeting. There is a lot for it to discuss on the economic front and let us open with an element of deja vu.
Bank Of Spain Governor De Cos: No Signs Of New Property Bubble In Spain – RTRS ( @LiveSquawk )
It is hard not to think of the “Never believe anything until it is officially denied” by the apocryphal prime minister Jim Hacker at this point. He is responding to this covered by El Pais yesterday.
The International Monetary Fund (IMF) is calling on Spain to monitor the price of real estate following a rebound of the property market after years of crisis. After analyzing late 2017 statistics, the global agency has detected early signs of “a slight overvaluation,” although it stressed that there is still nothing like a new housing bubble in Spain.
Here is a reminder of the state of play which is that Spain is a nation of home owners.
The IMF finds that house prices increased by around 15% between 2014 and 2017, but that sales are being driven by existing housing stock rather than new housing. Another change from pre-crisis days is that the home ownership rate has dropped from 80% to 77% as people increasingly turn to the rental market.
Let us bring the numbers up to date via INE from the end of last week.
The annual variation of the Housing Price Index (IPV) in the third quarter of 2018 increases four tenths and stands at 7.2%……The quarterly variation of the general IPV in the third quarter of 2018 is 2.2%.
The IMF seems to have missed that the pace of house price growth has picked up in Spain. Not only the 2.2% quarterly rise but the fact that the overall index set at 100 in 2015 is now at 120.5. Returning to the role of the ECB a typical mortgage rate (over 3 years) is 1.93%.
Ireland
Last time around a housing boom and later bust in Spain was accompanied by one in Ireland so let us check in on yesterday’s official update.
Residential property prices increased by 8.4% nationally in the year to October. This compares with an increase of 8.5% in the year to September and an increase of 11.7% in the twelve months to October 2017.
As you can see the heat is on again and is heading towards levels which caused so much trouble last time around.
Overall, the national index is 17.6% lower than its highest level in 2007. Dublin residential property prices are 20.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 22.7% lower than their May 2007 peak.
Also they have got there rather quickly.
Property prices nationally have increased by 83.8% from their trough in early 2013. Dublin residential property prices have risen 98.0% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 77.9% higher than at the trough, which was in May 2013.
Now that it has got the central banking holy grail of higher house prices the ECB seems to have, for some reason got cold feet about putting them in the consumer inflation index.
The ECB concludes that the integration of the OOH price index would deteriorate the current
frequency and timeliness of the HICP, and would introduce an asset element. Against this
background, it takes the view that the OOH price index is in practice not suitable for
integration into the official HICP.
It has turned into a classic bureaucratic move where you promise something have a committee formed to do it which concludes so sadly that it will not do it. The reasons stated were known all along.
Economic growth
Whilst house price developments will put a smile on the faces of Governing Council members other economic developments may wipe that smile away. One possible bright spot has gone a bit dark. From France24.
The Bank of France said the Eurozone’s second-biggest economy would eke out growth of only 0.2% in the three months to December, down from 0.4% in a previous estimate and from that rate in the third quarter.
“Services activity has slowed under the impact of the movement. Transport, the restaurant and auto repair sectors have gone backwards,” the bank said in its latest company survey.
The forecast is well short of the 0.8% that would be needed to meet the government’s 2018 growth target of 1.7%.
That was reinforced by the production and manufacturing data for October which was up on the month but 0.1% lower than a year ago. The growth shortfall will only make the next French problem worse. From Reuters.
Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday to defuse discontent, leaving his government scrambling to come up with extra budget savings or risk blowing through the EU’s 3 percent of GDP limit.
That is especially awkward considering how vocal the French government had been about the Italian budget plans which in percentage terms was set to be a fair bit smaller.
Italy
The perennial under performer in economic terms seems to be in yet another “girlfriend in a coma” style phrase. From the latest monthly economic report.
In Italy, the GDP decreased marginally in the third quarter due to a contraction in both gross fixed investments and private consumption. On the contrary, the net exports contributed positively to growth.
The employment stabilized on past months levels recording a re-composition, which favored full time employees. Unemployment rate increased and was complemented by a reduction in inactive persons.
Italian inflation continued to be lower than the Eurozone average but the gap is closing.
In November, both the consumer confidence and the composite indicators decreased. The leading indicator stabilized on past months minimum values confirming the business cycle weakness.
There is a genuine danger of what some of the media have decided to call a technical recession. I get the point about it being within the margin of error and applaud their sudden conversion to this cause. But missing from this is the fact that this is an ongoing depression in Italy which shows not only no sign of ending but may be getting worse.
Comment
This will be a meeting of two halves. The awkward part is that after all the extraordinary monetary action involving negative interest-rates, QE and credit easing the Euro area economy has slowed from a quarterly growth rate of 0.7% to 0.2%. If we were not where we are the ECB would be discussing a stimulus programme. Except of course the plan is to announce the end to monthly QE bond purchases. Some places are suggesting a delay to future interest-rate increases as they catch up with my long-running view that Mario Draghi has no intention of raising them on his watch.
The second half will be the one emphasised which is that the ECB has hit its inflation target.
Euro area annual inflation is expected to be 2.0% in November 2018, down from 2.2% in October 2018, according to a flash estimate from Eurostat.
Okay not the 1.97% level defined by the previous President Jean-Claude Trichet but close enough. I wonder if any of the press corps will have the wit to ask about the U-Turn on including house prices in the inflation measure and whether that is because monetary policy can inflate house prices?
Notayesmanseconomics's Blog 
And so it goes on, year after year, now decade after decade, the housing market must be supported at all costs, interest rates kept at zero, economic growth so low as to be hardly measurable, and yet the central bank is happy that house prices are rising, but refuse to put them in the inflation calculation, talk about wanting your cake and eating it!.
Sean is right, like Carney, Draghi has absolutely no intention of raising rates on his watch, and now QE is supposedly coming to an end, just wait and see how long that commitment lasts, given the massive falls in bank share prices and the Fed backtracking on its rate hiking cycle, December’s is baked into the cake but the planned four increases next year have about as much chance of materialising as BREXIT.
I think Breixt has a better chance 😉
Forbin
Remember the Fed is stocked with Dems, and they would ‘love it’ if the economy stalled just before 2020 election. Wouldn’t yet rule out more hikes , but nothing to do with economics.
Back in France for Christmas, veste jaune proudly displayed on my dash.
Can globalisation and all its off-springs like ‘climate change’ really be wound back by the French peasantry? No sign as yet of diminished support and if Rothschild’s child can be unseated then maybe anything is possible.
There are plenty of replacements ready, Merkel is being replaced by another Rothschild puppet.
Great blog as usual, Shaun. Thank God for your blog as no-one else seems to take much interest in the Eurostat decision regarding the OOHPI. This was supposed to be a final decision but the last paragraph of the document suggests the can is just being kicked further down the road: “the Commission’s assessment is that the OOH price index is CURRENTLY not available for integration into the coverage of the HICP… [I]n close co-operation with the ECB [something that was sadly lacking over the last decade] the Commission will pursue with the methodological work obviously required for the integration of the OOH price index into the HICP coverage…” There is no date provided for when this work will be done; hopefully, it will be some time before the second coming of Christ. A passage you quoted from the report said that “The ECB concludes that the integration of the OOH price index would…introduce an asset element.” This is ridiculously vague. It could mean that the inclusion of a dwellings acquisitions component in the HICP was ruled out altogether, so proceeding with further methodological work would be nonsensical. A paper by ECB economists Martin Eiglsperger and Bernhard Goldhammer indicates this is not the case: “[I]t turned out that land prices could not be separated reliably from the transaction prices. As a result, these experimental indices contain asset price elements.” So Eurostat mu need only reverse its decision to go with a “net weight, gross price” approach, and instead adopt a “net weight, net price” approach, i.e. replace the price index for houses with a proxy price index for dwellings. Eurostat could have gone with a “gross weight, gross price” approach, but ruled against that, although both expenditures and weights relate to dwelling and lot together, not just the dwelling. However, it seems the ECB objects on principle to a macroeconomic price index stepping outside the production boundary, so it is logical for them to insist on a “net weight, net price approach”. What is completely illogical is for it to be insisting on it now, after a vast amount of work has been done based on the “net weight, gross price” approach. The Eurostat OOHPI pilots involved virtually all EU countries from 2008 forward. Surely before that happened the ECB should have told Eurostat that it would never consider including an OOHPI in its target inflation indicator unless a “net weight, net price” approach were adopted. The caveats regarding frequency and timeliness aren’t serious. Why didn’t Eurostat require national statistical institutes in advance to calculate monthly OOHPIs with the same timeliness as the HICP? It set the criteria for producing the OOHPIs, and now we are told the experiment was a failure because their own designated criteria were a bust! If you invented a story like this, no-one would believe it.
Hi Andrew and thank you
Yes the Eurostat/ECB decision is something which the apocryphal civil servant Sir Humphrey Appleby of Yes Prime Minister would describe as providing “years of fruitful work”. He would raise a glass of sherry to the decade just spent on a road to nowhere and smile at the years of committee meetings ahead.
Meanwhile as you point out, all of the issues here were ones which were known at the beginning of this a decade ago. I do have a bit of sympathy with this bit as I have thought it all along.
““[I]t turned out that land prices could not be separated reliably from the transaction prices. ”
But then I was never a great fan of separating it from the beginning.
Frankly this was the establishment plan all along 😦
Shaun,
House prices pumped and EU further helping smaller banks by relaxing bail in rules & reserves need for next downturn – protecting the precious!
Hi Chris
Yes if I may switch books to Dune the Guild continually tell us “The Spice Must Flow”
Some classic quotes in that book btw
‘he who can destroy a thing controls a thing’
‘remember the first step in avoiding a trap is knowing of its existence’
I’m sure I will remember a few more during the day
Looking at banking shares today.
Interesting that Deutsche and BBVA etc. mostly seem to be making gains today.
Although looking at the chart for Commerzbank seems to show underlying concerns
https://www.commerzbank.de/en/hauptnavigation/aktionaere/aktie/aktuelle_kursentwicklung/aktuelle_kursentwicklung.html
Possibly due to the proposed merger between Commerzbank and Deutschebank?
A bit like Lloyd’s taking over HBOS to try and cover up all the losses and fraud???
yay!
good bank + bad bank = bigger bad bank
except if yer on of this lot……
will they ever learn ?
Forbin
Yeah, I bet commerzbank shareholders are over the moon about it, guaranteed wealth destruction and the inevitable state bailout of the combined entity to follow.
Only problem is they are both bad banks so its just making the mess even bigger (probably hiding a back door bailout somewhere in the transaction as per Lloyds/HBOS so they can avoid the nationalisation route).
DB’s derivative book will probably end up guaranteed by the German taxpayer (interesting point though most if not all are written through DB’s London office as Shaun will well know, what happens to them in a no-deal Brexit scenario is anybody’s guess)