The Bank of England wants to control UK house prices?

Today has given us an opportunity to bring together several of our ongoing theme at once. Let me open with news that will be announced to smiles at the Bank of England morning meeting.

“Average houses prices rose again in December, stretching the current run of continuous gains to six months.
However, the monthly rise of 0.2% was the lowest seen during this period and significantly down on the 1.0% increase in November. The average house price was therefore little changed, but nonetheless still reached a fresh record of £253,374.” ( Halifax)

The smiles will have then turned to cheers and only Covid-19 social distancing will have stopped a round of high fives.

“All this left average prices sitting some 6.0% higher at the end of 2020 when compared to December 2019, a notably
strong performance given the anticipated impact of the pandemic earlier in the year. Whilst the annual rate of inflation did fall compared to November (+7.6%) to stand at its lowest level since August, it should be noted that this also
reflects a particularly strong period for house prices towards the end of 2019 as political uncertainty at that time began to ease”

With the rather parlous state of the economy this is really rather extraordinary but seen through the eyes of our central bankers this is quite a triumph. In their circle the numbers from Italy ( 1% annual house prices growth) we looked at yesterday will be seen as a disaster. Indeed PhD’s will be instructed to explain how the Bank of England monetary easing in March boosted the change in 2020 observed below.

“2020 was a tale of two distinct halves for the housing market. Following a strong start, the first half was dominated by the restrictions on movement due to COVID-19, and prices were subsequently down 0.5% at mid-year as the market effectively ground to a halt. However, when the market reopened, prices soared as a result of pent-up demand, a desire amongst buyers for greater space and the time-limited incentive of the stamp duty holiday.”

Indeed some started early back in June and if you want your research sponsored by the Bank of England this this the way to do it.

The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled

So confident are they after displaying such a number that they are willing to countenance a central banking heresy.

Recent commentary on this blog and elsewhere argues that this unprecedented rise in house prices can be explained by one factor: lower interest rates. But this simple explanation might be too simple.

But just as the Governor’s temper is tested they save the day by pointing out the contribution of other monetary policy measures.

Mortgage debt expanded rapidly as house prices rose in the UK before the crisis, so this could be an important channel for the UK.

This fits neatly with the £128 billion of the Term Funding Scheme which has pumped up the quantity of mortgage debt banks can offer without any need to attract any of those pesky depositors and savers. There is an irony here as, of course,  the money supply numbers I looked at on Monday show there has been a surge in deposits as savings have soared post the Covid-19 pandemic.

Central Control

I now wish to switch to a rather revealing speech by Andrew Hauser of the Bank of England yesterday. He opens by describing a scene which for a modern central banker sends a chill down the spine.

Increasingly we look to financial markets, rather than banks, to care for our savings or provide credit.
Millions save via pension, investment or exchange traded instruments……… And firms, large and small, borrow from capital markets or non-bank lenders.
Taken together, fully half of all financial assets are now held outside the banking system.

I guess we are reminding ourselves that a central bank has bank in its name. Because when you look at the liquidity mismatches which banking relies on this is quite a cheek.

Some of that reflects vulnerabilities in business models and practices of specific market participants: including liquidity mismatch in funds; leveraged and trend-following investment strategies; or insufficiently forward-looking margining practices.

Does “trend-following investment strategies” apply when the banks all piled into ( and then left with singed fingers) estate agents? Or when they lacked capital when the credit crunch hit as that is another form of margin? Anyway I am sure you have got the idea.

The issue is highlighted as we note the reference to the standard for this sort of thing.

And the canonical description of how to
achieve that is given by Walter Bagehot’s description of the ‘Lender of Last Resort’ (LOLR), which
(in essence) recommends stemming financial panics by lending freely, to sound institutions, against good
collateral, and at rates materially higher than those prevailing in normal conditions

It opens well as the Bank of England did splash the cash but at a time when the US Federal Reserve was liberally applying US Dollar swaps then “sound institutions” had a hollow ring in some cases and what is “good collateral” these days? I could write a whole article on that alone! For now let’s put that under Hmmmmmmm. Then the operations involving a Bank Rate cut, a surge in QE and the TFS were designed to give us rates materially LOWER than in normal conditions. You do not need to take my word for it as we get a confession later in the speech.

The Bank of England provided extra liquidity to banks through a wide range of facilities, at
favourable rates, in the early stages of the March crisis.

Next we get to the crux of what we might call the Hauser matter.

‘Market Maker of Last Resort’ (MMLR). Buiter
and Sibert believed that central banks, acting as MMLR, should be ready to tackle dysfunction in securities
markets relevant to monetary or financial stability, by making two way prices to buy and sell those securities,
or lending against them.

You can figure where that is going,especially if you have followed the mission creep of central banks in the credit crunch era. It is hard not to laugh as the Bank of England purchases of corporate bonds is used as an example because they were an example of a dictum used in the early stages of the Desert War ( World War Two) “order, counter order, disorder”

In case you had not figured out where we are being led.

The review of the Bank’s liquidity framework carried out by Bill Winters in 2012 recommended formalising the
Bank’s approach to MMLR, setting out public principles under which future interventions might occur……
But in the event, the Bank –
in common with other central banks – chose to say relatively little in public.

Comment

I wish now to give an example of the muddled thinking going on here. Let me start with this from the speech.

Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.

As even in these inflated times those are large numbers they have intervened on a grand scale. But apparently they do not influence the price at all.

Purchases typically took place at prevailing market prices

It gets worse.

While not charging an ‘insurance premium’ to market participants for an extended period may be understandable in a severe unexpected pandemic,

Actually they did exactly the reverse they actually paid an “insurance premium” to sellers of government bonds. What I mean by that is that they drove the price of them to record highs. For example they bought the UK’s 2068 bond in the 230s which is extraordinary for a relatively recent bond. This issue of the extraordinarily high prices paid gets ignored in the debate because these days the concentration is usually on yields. For those who prefer that the signal is that up to around the 6 year maturity the UK has negative bond yields and is paid to borrow.

Let me give you another example of what is at best muddled thinking.

driving term repo rates and government bond yields sharply higher.

Okay so the UK benchmark ten-year yield went to around 0.8% which in another perspective is historically extraordinarily low. Central banks intervened on a massive scale and it fell to 0.08% but apparently that is a “market price”

No the Bank of England set the price for UK bonds via the large scale of its purchases so could it set policy for house prices? Well this year I think we are about to find out.

 

18 thoughts on “The Bank of England wants to control UK house prices?

  1. Shaun, a great round robin in casue and effect. This year, if asset values fall, I exect the bank to “carpet-bag” property, demolish some and re-purpose other for subscription payments at the new UBI level agreed for residents.
    Simples.

    • Hi Paul C

      Maybe something was on the move today across the pond.The US bond market has been testing out whether the US Federal Reserve will bring in Yield Curve Control by pushing the ten-year yield to 1.12%. The thirty year is now 1.88% and these moves if sustained will put an end to this.

  2. shaun,

    “The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled”

    In 1980 interest rates were phenomenally higher than they are now and even on average lower than at any time in history.

    Then we have subsidies which you have also mentioned in your blog by the GOV but also pension returns have been poor which has contributed to the buy to let market.

    But where next some would ask?

    In fact no one knows for sure and its only guesswork many see a fall this year but rightmove see a rise.

    The first quarter of this year we will see a recession and then according to bank forecasts a rebound in the economy.

    I have to say even if unemployment rises any selling on the lower bound house prices could be taken up by buy to let investors due to low interest rates and I think there will be less distressed sellers this time round due to average lower interest rates.

    The facts speak for themselves its easier to service a mortgage on a 2% interest rates than say 4% 6% or 8% or even in double digits!

    Taking all the above into account rightmove could be right in their forecasts which some on here will not like which mean further rises from here.

  3. ” In the 100 years leading up to 1980 they only doubled”
    Hi Shaun, do you mean in the TEN years to 1980?

    Despite all the distortions and fraud that have rendered our markets(stock and bond)including housing a total ponzi scheme that is only perpetuated by further interventions and massive monetary injections by central banks, rather than admit their error and stop, they will now not even ease off the monetary stimulus and are instead putting the foot to the floor of monetary expansion and trying to inflate shares and house prices even faster than they already have. Bonds for the moment have reacted to the prospect of higher interest rates as a result of higher inflation(that will be ignored or just under measured by central banks)and pulled back slightly, but central banks have that covered too, as they have already hinted at yield curve control – buying specific durations of bonds to keep mainly the mortgage market from raising rates to where they should be if they reflected the inflation and loss of purchasing power caused by central bank policies.We can’t have house prices being allowed to fall now can we?

    The recent win by Biden means EVERY american will be getting $2,000, that is not each household – EVERY person in it! The last time they “only” got $600, and the effect it had on the stockmarket has only to be seen to be believed, people that had never ever owned a share before in their lives were able to download an app called Robin Hood(how ironic – they think they are stealing profits previously denied to them but in reality they are all getting poorer because their dollars are becoming increasingly worthless), and can buy and sell shares on their mobile phone, why bother doing research or anything as mundane as work? just buy Tesla – up from $70 in March 2020 and last night closed at $816, Tesla is now worth more than Toyota,Volkswagen,Daimler,GM,BMW,Honda and Ford COMBINED, and has a p/e ration of over 1600. Or why not bitcoin? Up from nearly $4,000 in March 2020 to currently $41,614, What could possibly go wrong?
    And what have they got to lose? The Fed has made it clear they will NEVER let the stockmarket go down and as I have mentioned several times on here before, once these stimulus checks have started – like QE, they can never ever be stopped, and as inflation starts to really become a problem, they will have to go up in dollar terms exponentially to try and keep pace with rising consumer prices(they won’t – as prices will always run ahead faster).

    So now in America what we now have is the WILLING DESTRUCTION OF THEIR CURRENCY and the biggest speculative bubble in the stockmarket that the world has ever seen, making previous bubbles look like mere blips on the charts in comparison, and now with these “stimulus” checks they are going to throw a bucket of petrol on a fire that is already completely out of control, but who cares? As Shaun points out above, when this bubble does explode – not pop – it will be historic, but do not worry, central banks have that covered as well, they are already making noises about buying equities, so when it does go bang, they will step in and start buying – this time overtly and publicly – as opposed to the last thirty years where they did it and no one asked questions. But as I have pointed out on here many times before, there is only one logical end o this insanity, where there will eventually be no stock or bonds market left in existence since companies(through share buybacks) will along with central banks and governments have taken ownership of the companies and there are no shares or bonds left to be traded?Eventually, I can see housing being owned by the state, when you default on your mortgage because your wages no longer put food on the table let alone pay the bills the sate will step in and take ownership(this is when even Bank of England inflationary policies no longer work) and let you live their if you sign it over to them , they will then pay you UBI if you lose your job or prices get so far ahead of your minimum wage that food is unaffordable, but you will have to keep your “social credit” score high enough to qualify.

    Mad? Never happen? If anyone told you twenty years ago what was happening now and that the MSM doesn’t even mention it let alone question it, and in most cases cheers it on(along with Peter of course), you would have called them insane, but if anyone can think of any other possible outcome please let us know.

    • Hi Kevin

      Good spot! You made me recheck the Bank Underground post which does say.

      “In the 100 years leading up to 1980 they only doubled”

      Meaning real house prices as they define it which has a major problem via the use of the CPI inflation measure. .This was introduced in 2003 and numbers were kept for maybe a few years before but the accompanying chart uses it from 1850! What could go wrong?

  4. Hello Shaun,

    Strange thing happened yesterday , we started publishing again the UK recovered figure. We stopped a while back .

    Deaths:78,508 < bad but still 90% are over the age of 65 *
    Recovered: 1,364,821 < the good news nobody in MSM talk about.

    the BoE buy houses ? could do , after all they get an asset for what they print to pay for it. They're the only ones legally who can do it. It will of course be a political decision but then since when have they been really independent ?

    * these poor souls may even had assets , ie a house. Do we have any handle on how many will reach the market? Sorry if that seems callous but the machiavellian in me suggested that HMG might just purchase these assets to help the poor inheritors who cannot get a good ( ie inflated ) price…. money gets injected to purchase more property by the inheritors , HMG get an asset they can sell later to recoup costs. What could go wrong ?

    Forbin

    • Forbin, a very likely oucome. Distressed seller appeals to local “expert” estate agent to be told that dont worry there is a new “floor buyer” for all property. 20% below market but money is instantly available.

      • I have no doubt that seeing all these people suffer & die from covid, is extremely upsetting for health professionals, BUT, the only differences between covid and a bad flu year, is that,
        1) we’re counting the victims
        2) covid is continually in the spotlight. (& tptb fully intend to keep it there)

        • Hi Buzz,

          As you know I follow the ONS published figures . These may be 2 weeks behind but its interesting that around Christmas time we normally see a fall in the ONS death figures.

          Except this year , week 52 its 11520 . diff from 2018 – 4389 more and diff from 2019 – 3987 more .

          from the same data ther is 2912 CV-19 related deaths . so 1075 or 1477 extra deaths that are not CV-19 related ( 9 – 12.8% extra ) . perhaps we are now seeing the fall out from those not getting their NHS treatments in time …..

          Forbin

          • What is apparent ( according to medical friends) is that deaths from flu and flu in general very rare this year and Covid has taken over. I suppose that all the precautions we are taking has had an effect on flu as well. Certainly very few colds around this year.

          • What you are forgetting is how the deaths are being counted.
            1) Wholly unsuitable PCR tests being used, which vastly, errantly, inflate numbers of positives.
            2) The previous years’ figures were not obtuse enough to count anyone in the last stages of cancer, etc. as a flu death, if they had tested positive for flu in the past month.

            Remember; it’s estimated that well over half of these deaths were going to happen last year anyway.

            Anyone stupid enough to believe ONS figures deserves to be shit-scared of this bogey-man.

          • Flu deaths are not rare this year; they are being counted as covid deaths whenever possible.

          • 2020 is a 53 week year. So the usual peak,tough, peak in the ONS data seen over the multi-bank-holiday year end will be a little different this year.

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