Central banks plan to ride to the rescue of house prices one more time

It is good to be ahead of the pack as I note that this morning the Resolution Foundation has caught up with one of my main themes.

Housing costs have put increasing pressure on living standards for all generations alive today, compared to predecessors at the same age. Housingcost-to-income ratios fell faster (by 1 percentage point) for families headed by
under-30s than for older family units in the year to 2017-18, but this does little to alter the long-term picture. At age 30 housing costs were equivalent to 24 per cent of income for millennials born in the early 1980s, and 21 per cent for
members of generation X born in the early 1970s. That compares to 10 per cent at the same age for members of the silent generation born in the early 1940s.

As you can see this has been a long-running saga where housing in the UK has got more expensive. Yet our inflation numbers have missed much of this. This is for two reasons. The first is that we switched in 2003 to a measure called CPI ( Consumer Price Index) which excludes owner-occupied housing costs and that is what the Bank of England targets. So if we compare the latest situation as we were old yesterday that the official UK House Price Index in April was at 120.1 with for example the 67.8 of April 2003 you can see the danger of ignoring this area as it does.

In some ways more disturbing is that way that our official statisticians claim that such housing costs are now included when in fact they use imputed rental numbers in the CPIH measure. If there is a home owner out there who acts as if they pay themselves rent then you are fine, but the rest of us are not. Actually on a personal basis I fall down on the issue of even knowing how much rent my flat would get.

It gets better in that there are a lot of doubts about the rental series that the numbers are imputed from. These start with concerns that the balance of new to old rents is wrong leading to the number being around 1% too low. Next comes the issue that houses which are bought for ownership may well not be similar to ones which are rented. Finally there is the fact that the Office for National Statistics does not have sight of the actual numbers as it relies on data collected by others.

This is something which the Resolution Foundation returns to.

Younger cohorts are more likely to live in overcrowded homes: between 1994-96 and 2016-18, the share of family units headed by 18-29 year olds in overcrowded
homes increased by almost one-third (from below 8 per cent to above 10 per cent). Younger cohorts spend longer commuting too.

I have highlighted this because it suggests a problem which we have thought is taking place but is hard to get concrete numbers on. This is the issue of a lowering of the quality of housing. We may well be paying more for less meaning that the actual rate of inflation has been higher than we get from just looking at the price indices.

This has consequences.

Our spotlight analysis focuses on the fact that changes in housing costs could be having a more wide-ranging effect on living standards too.

That seems to be the written equivalent of mealy mouthed to me.

Has all the “Help” actually helped?

Maybe a little but as you can see the extraordinary efforts I have documented over the years on here have put only a minor dent in the trend.

While the latest evidence points towards a bottoming out of this decline – family units headed by 18-29 year olds experienced an increase in ownership
rates from 7.9 per cent in 2016 to 9.2 per cent in 2018 – the fundamentals of high house prices and deposit requirements remain a significant barrier to

So good work from the Resolution Foundation although as champions of the CPIH inflation measure they have stood on a land mine here in my opinion.

More! More! More!

The issues raised above are on my mind because as the song lyrics above from Andrea True Connection hint the world’s central banks are already riding to the rescue of housing markets and house prices. We have seen rate cuts recently from the Reserve Banks of India and Australia with the latter especially suggesting more is to come. Then yesterday evening there was the US Federal Reserve.

“Overall, our policy discussion focused on the appropriate response to the uncertain environment,” he said. “Many participants believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”……….“Many participants now see the case for somewhat more accommodative policy has strengthened,”  ( Federal Reserve Chair Jerome Powell via CNBC )

This meant that the market for a rate cut in July went straight to 100% with the only debate being whether it would be a quarter or a half point. So those with variable-rate mortgages can expect better news. Added to that we saw further strong rallies in bond markets with for example this morning the US ten-year Treasury Note yield dipping below 2%. Regular readers will be aware I have been writing for a while that I expect the cost of fixed-rate mortgages to fall and the falls just get larger.

If we switch to the Euro area it was only on Monday that we saw ECB President Mario Draghi move the goal posts on monetary policy. This morning a contender for his job post October has joined in. From Reuters.

“We in the Governing Council are ready to act as appropriate unless there is improvement in the economic conditions,” Rehn told a conference in Brussels.

Asked whether the ECB should proceed with rate cuts or resuming asset purchases, Rehn said: “The whole range of instruments is on the table.”

He is not alone as @DeltaOne reports.


Apologies for the capitals which are a regular theme of that twitter feed.

If there is going to be a coordinated easing party from the world’s main central banks then the Bank of Japan has its sake ready at body temperature.

BOJ Governor Kuroda: We Will Not Hesitate To Ease Further If Momentum Towards The Price Target Is Lost ( @LiveSquawk )

Although as they are not especially keen on negative interest-rates and are already buying assets like they are powered up pac-men and women their options are not so obvious.


This week has seen a turbocharger added to the central banking engine. It is also true that one of the drivers of this is asset prices albeit that President Trump concentrates on the stock market. But it increasingly looks that the central banking cavalry will ride to the rescue of house prices yet again. However there is a catch in that as we approach and then pass 0% for official interest-rates the responsiveness of mortgage-rates has fallen. So the cavalry could yet end up like General Custer.

One game changer would be if banks prove willing to pass on negative deposit rates to the retail customer. But even without that we seem set to see more of what took place in Denmark a few weeks ago when mortgage bonds moved into negative yield territory. The central bankers seem to be placing their tanks on this lawn and have added loudspeakers blaring out Whitesnake.

And here I go again on my own
Goin’ down the only road I’ve ever known
Like a drifter, I was born to walk alone
And I’ve made up my mind
I ain’t wasting no more time

Of course in the UK we see that the Bank of England has been wrong-footed by this change as it is still promising interest-rate increases. But I expect it will not take the unreliable boyfriend long to do another 180 degree turn.

The Investing Channel

11 thoughts on “Central banks plan to ride to the rescue of house prices one more time

  1. Hello Shaun,

    “But I expect it will not take the unreliable boyfriend long to do another 180 degree turn.”

    yup , he spins so fast we should tie him to a generator to power the National Grid !

    who needs windmills 🙂


    • forbin

      Chris Giles on twitter

      “The big question for @bankofengland after the June minutes:

      Why has all guidance remained the same when the outlook for the global and UK economy has deteriorated?

      Spoiler: there is no answer in the MPC minutes”


      But lets face it :

      “for all have sinned and fall short of the glory of God”

      Romans 3:23 v 23 New International Version (NIV)

  2. I have a target of 0.4% for the five year gilt and thus the five year fixed mortgage deal. In the last decade, no matter how insane the predictions for how far these bankers and their policies will go they have always been exceeded by a wide margin, so I probably think it will be reached sometime over the next year or so.

    The crowd I work with are all mortgaged to the hilt, and several are looking to refinance with five year fixed deals, I remember them telling me how much they had saved when they took them out, there was a massive drop in their monthly payments, this time I think the drops will be even bigger.

    Another shot of heroin for the junkies then, after Powell’s admission he was likely to cut rates next month, the dollar collapsed and gold spiked, all fiats are now racing to the bottom, but Carney is way ahead of them, he had a good head start handed to him from Mervyn King when he dropped sterling 30% in 2007/8, either a hard BREXIT or a new Labour government should provide the next downleg together with his refusal to raise rates.

    • Hi Kevin

      The 5 year UK Gilt yield closed at 0.6% tonight so you still have a fair bit of upside in price terms. It was 1.3% early last October and Governor Carney and the Bank of England should be called out on this as what use is the Forward Guidance below? But it does not happen.

      “The Committee continues to judge that, were the economy to develop broadly in line with its May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.”

      By the way I did mention a week or so ago that for a real change for Gold prospects it needed in my opinion to break US $1400. Well it is up 40 Dollars or so today and having quite a push for a breakout.

  3. BOE still hinting of a possible rise before end of the year and they downgrade growth outlook to zero in second quarter, you couldn’t make it up:


    Add to that cold weather in May hit retail sales and I don’t think June will see a massive rebound its been a washout rain and floods.


    With BREXIT turmoil thrown in the pan, political uncertainty and a possibility unemployment wont go much further lower (my take) I cant see things improving before the end of the year.

    All that said I think that there is a higher possibility of a cut in interest rates rather than a rise.

    But good on the BOE for putting a spin on things it all helps to stop the £ falling further albeit it will make its own mind up!

  4. In the world of fantasy that central bankers exist in, no statement can be too inaccurate, nothing can be too bizarre, no words can be too contradictory or hypocritical, so do not be surprised at the comments of one Stanley Fischer(former Fed Vice Chairman) on Tuesday in Sintra who warned Trump not to threaten or pressurise Powell into making interest rate cuts as THAT WOULD THREATEN THE FED’S INDEPENDANCE!!!! OK GOT THAT!!!!

    Errr….. so what about the pressure the Wall St banks put on the Fed by dropping the stockmarket 20% in three weeks last December until they saw the error of their ways????

    Or was it just Trump’s good advice they just didn’t take? Isn’t that ironic?

  5. Hello Shaun,

    “One game changer would be if banks prove willing to pass on negative deposit rates to the retail customer.”

    hang on we talked about that before , banks basically charging the customers to hold saving accounts and current accounts

    I can that will go down well , NOT!

    Good God , do they really want a full blown bank run ? no wonder the war on cash is stepping up

    you heard it here first , folks !


    PS: if it goes that way , don’t count on gold or silver , we’ve been there before – hand it in to those nice young chaps from the Army or be shot as a horder !!

    • Hi Forbin

      Well it has been a good day for gold bugs with the price up US $42 as I type this. As to bank runs perhaps money will be frozen in them, “your country needs you” style. One thing is sure and that is that the pressure on the system is about to be raised. If the ECB cuts then presumably it will take the Danes, Swedes and Swiss with it and they too start below zero.

  6. Great blog as usual, Shaun. Chairman Powell’s press conference was very interesting. I notice his opening remarks suggest growing international trade tensions: “Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data.” It seemed strange in a sense, since the conference was held on the same day that Mexico became the first of the three trading partners to ratify the USMCA. Steve Liesman of CNBC was the only journo to ask Powell about Mexico: “It was really the threat of tariffs against Mexico that caused at least the market to become definitively banking or pricing in rate cuts. If, for example, there’s a deal with China, does that take the possibility of rate cuts off the table?” The huge improvement in relations with Mexico from last month when Trump seemed ready to start an all-out trade war unless Mexico did something to stem the flow of Central Americans is remarkable, though only hinted at in Liesman’s question. Trump dropped his threat of a 5% tariff on June 10 when Mexico promised stricter border enforcement. It’s been a real roller coaster ride for international trade with Trump as President. While a US-China trade war could bring on a global recession, the threat of one could also disappear like the US-Mexico dispute. As Canadian trade lawyer Mark Warner said, Trump loves to slap tariffs on other countries or threaten to do so, but he also loves to make a deal and brag about it afterwards. He never would have gotten the Canadian negotiators to sign USMCA without the threat of auto tariffs hanging over their heads.

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