Can Britain solve its credit problems and debt addiction?

A long-standing feature of the UK economy has been a problem with credit. This has several features. A major one is our obsession with the housing market and the establishment view that the economy can best be boosted by pumping it up and claiming the higher house prices as higher wealth and evidence of economic well-being.

Figure 2 shows the value of land in 2016 is estimated to be £5.0 trillion, which is 51% of the total net worth of the UK. Land increased in value by £280 billion from 2015, a 5.9% increase. This is a notably smaller increase than in 2014 and 2015, when it increased by 15% and 10% respectively. Since the land underlying dwellings is a major contributor to the value of land, the House Price Index reflects this with house prices rising at a lower rate compared with 2014 and 2015.

So £5 trillion out of this.

The total net worth of the UK at the end of 2016 is estimated at £9.8 trillion, an increase of £803 billion from 2015 and the largest annual rise on record.

I hope you are all feeling much better off! If you are a home owner then this is rather likely to be the case.

The value of land has grown rapidly from 1995, increasing by 412% compared with an average increase of 211% in the assets overlying the land.

You may have noted the swerve here which is that we have switched from the value of houses to land which presumably sounds much more secure and safe. Also if we add the value of the houses back in then £1.77 trillion added to £5 trillion means the sector is £6.8 billion or so of UK national wealth and everything else is £3 billion. Even the most unobservant may start to wonder if that is a trifle unbalanced?!

Mortgage Debt

This is something which the Bank of England put a lot of effort into increasing back in the darker days of 2012 when there was talk of a “triple-dip” in the UK economy. As I pointed out above the traditional “remedy” is to do this to the housing market.

Pump it up when you don’t really need it.
Pump it up until you can feel it. ( Elvis Costello)

They were so keen on this that we got an official denial and the Funding for Lending Scheme was badged as something to boost small business lending something which has not gone well but more of that later. What it actually achieved was to boost net mortgage lending which then when positive and now is running at a net rate of around £3 billion per month. House prices were boosted across the UK although with widely varying impacts as London boomed but other areas struggled at least relatively. Thus we end up with a claimed asset value of £6.8 billion versus a mortgage debt of £1.37 billion. What could look safer?

The catch is that there are a litany of problems with this.

  1. The economy has been tilted towards the housing sector as we note Bank of England and government support ( Help To Buy) as well as ( capital gains) tax advantages. This has shifted resources to this sector.
  2. This would not look so good should house prices fall, what would the asset value and “wealth effects” be then?
  3. Those looking to enter the housing market or to trade up are not seeing a wealth increase but instead facing inflation. This is so worrying to the UK establishment they go to pretty much any effort to keep such inflation out of the official inflation numbers.

Accordingly we know that the Bank of England will be worried by this development at the beginning of the food chain for this area.

Mortgage approvals decreased in December (Table I), with falls for both house purchase and remortgaging approvals. House purchase approvals were the weakest since January 2015 and remortgaging approvals fell to 46,475, following strength in October and November. 

Unsecured Credit

This is something of an overflow area for UK credit. What I mean by this is that when the Bank of England gives the banks the green light to lend as evidenced by the Funding for Lending Scheme in the summer of 2012 or the Bank Rate cut and “Sledgehammer” QE of August 2016 this is the easiest area to expand. After all there is a flow of people into their branches or website wanting to borrow and saying yes is relatively simple. The tap gets turned on much more quickly than mortgage or business lending.

This how we found ourselves with unsecured credit running at an annual rate of around 10% per annum. The new feature this time around was the growth of borrowing for vehicle purchase via the growth of personal contract purchase and the like, so much so that very few people actually buy a car now.

 Over 86% of all private new car registrations in the UK were financed by FLA members.

Of course central bankers desperate to calm their fears about a possible recession were pleased at all the car buying but the ordinary person will be wondering what happens when the music stops? Actually according to the banking sector this is already taking place if you recall the survey the Bank of England published and of course the Financial Policy Committee is “vigilant”. This has led more than a few economists to tell us growth is over here. Meanwhile.

Consumer credit net lending was £1.5 billion in December, broadly in line with outturns during 2017 (Table J).  The annual growth rate ticked up to 9.5% in December. 

November was revised up from £1.4 billion to £1.5 billion as well. So we have growth of 9.5% with economic growth of around 2% and wages growth of a bit over 2%. What could go wrong?

The total for this category is now £207.1 billion.

Business Lending

Lending to smaller businesses was supposed to be the rationale for this and the official view was this.

The extension builds on the success of the FLS so far

The extension continued the rhetoric.

 to increase the incentive for banks to lend to small and medium‐sized enterprises (SMEs) both this year and next;

How is that going?

Lending to non-financial businesses fell by £1.0 billion in December (Table M).  Loans to small-and-medium sized enterprises fell by £0.4bn, the largest decline since December 2014. 

Comment

There is a fair bit to consider here. But let me look at this from the point of the Bank of England. It opened the credit taps via credit easing in the summer of 2012 and added to it with the Term Funding Scheme in August 2016. This of course added to the Bank Rate cuts and QE bond buying. This was supposed to boost small business lending but in fact in spite of the economic growth we have had in recent years there has been very little of that. Indeed even the better numbers were below the economic growth rate and if anything new lending to smaller businesses is stagnant at best.

Meanwhile net mortgage lending was pushed into the positive zone and more latterly unsecured credit has been on quite a tear. So if the Bank of England was a centre forward taking a penalty kick it has not only missed the goal if we looked at the unsecured credit data it may even have cleared row Z and the stands. Or of course its true intentions were always different to what it has claimed.

 

 

 

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UK unsecured credit continues to flow unlike business lending to SMEs

Today gives us our first main insights into the UK economic trajectory so let us start off with a familiar issue. From the Nationwide Building Society.

UK annual house price growth ended 2017 at
2.6%, compared with 4.5% in 2016

So a slowing as we expected here although there were fewer cases of actual falls than I thought that there might be.

London saw a particularly marked slowdown, with prices
falling in annual terms for the first time in eight years, albeit by a modest 0.5%. London ended the year the weakest performing region for the first time since 2004.

So far house price falls are primarily a London thing as we wait to see if it will prove to be a leading indicator one more time or if you prefer the canary in the coal mine. If we return to the national picture we see that overall for the first time in a while house price growth and wage growth are similar albeit that the former still slightly edges the latter. A period of this ( or even better wage growth exceeding house price growth) would be good but somehow as ever the UK establishment seems to have other plans.

Certainly plenty of help seems to be needed as this from Henry Pryor infers.

Still struggling with this;- 3,858 first time buyers earning over £100k appear to have had Help2Buy..

Apparently according to @Andrew_J_Carter life on over £100k requires help although he has figured out what Abba would call the name of the game.

My household earns over £100k a year. We can’t afford a house (no money from parents for deposit), why shouldn’t we be entitled to Help to Buy, given the sole intent of the Government is to drive house prices up?

This brings us to regional differences as we get a new look at an issue we have discussed many times.

The picture that emerges is that this ‘typical buyer’ moves
up the income spectrum as you move from the north to the
south of the country. In Scotland and the North of England,
this buyer would lie in the 30th income percentile, while in
the South East they would be at the 80th percentile and
above the 90th percentile in London (the closest percentile
with available data).

So a cautionary note reminding us that the overall picture needs a fair bit of regional refinement especially in Northern Ireland where prices are still 40% below the previous peak. Here is some food for thought for you from the ratio of house prices to earnings for first time buyers. Back in the latter part of 2007 it rose to 8.1 in Northern Ireland and we know what happened next which should make property owners in London mull a ratio which is at 9.8!

As ever there is a general cautionary note that these figures cover only Nationwide customers and whilst it does a fair bit of business it is not the whole market and will for example miss purchases for cash.

Unsecured credit

For newer readers this has been on something of a tear in the UK over the past couple of years and in my opinion eyes cannot avoid turning to the “Sledgehammer QE” and “muscular monetary easing” of the Bank of England in August 2016 as a driver of this phase. If you look back at UK economic history monetary policy easing invariably slips into this area as frankly it is easier for the banks to do than even mortgage lending but especially business lending a subject I will return to in a moment. So where do we stand now? From the Bank of England this morning.

The annual growth rate of consumer credit slowed to 9.1% in November (Table J), the lowest rate since
December 2015. This fall partly reflects a particularly strong flow in November 2016 falling out of the annual
growth rate.

In a way it speaks for itself that 9.1% is the lowest annual rate of growth for a while. Even so it is some 7% higher than the economic growth we have been seeing and also wages growth. We have seen increases of £1.4 billion a month for the last three months which has dropped the annual rate of growth from 10% to 9.1%. So a little better but perhaps only from white-hot to red-hot so far. Also yesterday an annual rate of 6.7% growth seemed high in the Euro area and we are considerably above that.

The brochures for QE and interest-rate cuts never stated they aimed at a surge in unsecured credit did they? In fact we were assured that we were deleveraging until it was impossible to make such claims.

Business Lending

The official reason for at least some of the monetary easing in the UK was to boost lending to smaller and medium-sized businesses or SMEs. How is that going? Well net lending was zero in November which is not untypical. Also there was a clue to a possible answer to a question several of you have asked which is has lending here gone to corporate buy-to-lets? The category including rented or leased real estate rose by a net £100 million.

So as a perspective we have an area where monetary easing was definitely not supposed to go rising by £1.4 billion a month whereas the area where it was supposed to has risen by £0. It is going to require quite a few counterfactuals to cover that chasm I think!

Moving to total’s we see that unsecured credit has risen to £205.8 billion whereas lending to SMEs has stayed at £165.6 billion.

Meanwhile the Term Funding Scheme which provides cheap funding for the banks has grown to £102.8 billion which is a fair rate of growth considering it only started in August 2016. Those who follow my social media output will have noted challenges suggesting this is not a subsidy for the banks. Odd isn’t it that they have taken £102.8 billion of something for apparently no gain to them?

Comment

I am reminded of a past Bank of England Governor who is now called Baron King of Lothbury. He used to regularly give speeches about a “rebalancing” of the UK economy except it was not a rebalancing towards unsecured credit which his successor has managed to achieve. That road has been one which has involved higher house prices (check), balance of trade problems ( check) and one which led to overheating of the economy and interest-rate rises to correct it. In a world where consumer inflation is low and we have only had one interest-rate rise in the last decade the old concept of overheating no longer applies but parts of it can.

If we move to the real economy we see that in spite of the “hokey cokey” style policy of the Bank of England on interest-rates since the EU Leave vote the economy has in fact continued pretty consistently. This morning’s Markit PMI business survey was of a still the same variety.

the survey data are consistent with the economy having grown 0.4-0.5% in the fourth quarter of 2017.

There is an irony in that just maybe some of the rebalancing that Baron King could only dream of during his term of tenure as Governor of the Bank of England may be taking place.

Alongside the solid expansion seen in manufacturing.

If so we are doing better than the raft of annual forecasts released this week would suggest. But there is a potential black swan tucked away in the pack concerning the growth of unsecured credit and in particular its interrelation with the automotive industry. Ironically UK sales only have a relatively minor impact on UK production which is mostly exported but over the seasonal break there were a lot of adverts on the radio for car price cuts or excuse me scrappage schemes which may indicate trouble ahead.

No doubt the Bank of England is “vigilant” but the definition of that word is not what it was……..

 

The Bank of England has a credit problem

There is a lot to consider already today as I note that my subject of Monday Bitcoin is in the news as it has passed US $10,000 overnight. The Bank of England must be relieved that something at least is rising faster than unsecured credit in the UK! Sir John Cunliffe has already been on the case.

. Sir JohnCunliffe says cryptocurrencies not a threat to financial stability – but says it is not an official currency and urges investors to be cautious  ( h/t Dominic O’Connell )

It is probably a bit late for caution for many Bitcoin investors to say the least. However if we return to home territory we see an area where the Bank of England itself was not cautious. This was when it opened the UK monetary taps in August 2016 with its Bank Rate cut to 0.25%, £60 billion of extra Quantitative Easing and the £91.4 billion and rising of the Term Funding Scheme. This has continued the house price boom and inflated consumer credit such that the annual rate of growth has run at about 10% per annum since then.

The credit problem

As well as the banking stress tests yesterday the Financial Stability Report was published and it spread a message of calm and not a little complacency.

The overall stock of outstanding private non-financial sector debt in the real economy has fallen since prior to the crisis,though it remains high by historical standards, at 150% of GDP.

There are two immediate problems here. The credit crunch was driven by debt problems so using it as a benchmark is plainly flawed. Secondly many of those making this assessment are responsible for pushing UK credit growth higher with their monetary policy decisions so there is a clear moral hazard. In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household
debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees. From HM Parliament in June.

Currently more than £13 billion is loaned to students each year. This is expected to grow rapidly over the next few years and the Government expects the value of outstanding loans to reach over £100 billion (2014 15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014 15 prices) by the middle of this century.

Pretty much anything would be under control if you exclude things which are rising fast! On that logic thinks are okay especially if use inflation to help you out.

Credit growth is, in aggregate, only a little above nominal GDP growth. In the year to 2017 Q2, outstanding borrowing by households and non-financial businesses increased by 5.1%; in that same period, nominal GDP increased by 3.7%.

They have used inflation ( currently of course above target ) to make the numbers seem nearer than they are. This used to be the common way for looking at such matters but that was a world where wage growth was invariably positive not as it is now. If we switch to real GDP growth which was 1.7% back then or wages growth which this year has been mostly a bit over 2% in nominal terms things do not look so rosy.

If we apply the logic applied by the Bank of England above then this below is a sign of what Elvis Presley called “we’re caught in a trap”

The cost of servicing debt for households and businesses is
currently low. The aggregate household
debt-servicing ratio — defined as interest payments plus regular mortgage principal repayments as a share of household disposable income — is 7.7%, below its average since 1987 of 9%.

So not much below but something is a lot below. There are many ways of comparing interest-rates between 1987 and now but the ten-year Gilt yield was just under 10% as opposed to the 1.25% of now. So we cannot afford much higher yields or interest-rates can we?

Consumer credit

The position here is so bad that the Bank of England feels the need to cover itself.

consumer credit has been growing rapidly,
creating a pocket of risk

Still pockets are usually quite small aren’t they? Although the pocket is expanding quite quickly.

The outstanding stock of consumer
credit increased by 9.9% in the year to September 2017

What are the numbers for economic growth and wages growth again? There is quite a gap here but apparently in modern language this is no biggie.

Rapid growth of consumer credit is not, in itself, a material risk to economic growth through its effect on household spending. The flow of new consumer borrowing is equivalent to only 1.4% of consumer spending, and has made almost no contribution to the growth in aggregate consumer spending in the past year.

This is odd on so many levels. For a start on the face of it there is quite a critique here of the “muscular” monetary policy easing of Andy Haldane. Also if the impact was so small the extra 250,000 jobs claimed by Governor Carney seems incredibly inflated. In this parallel world there seems almost no point to it.

Yet if we move into the real world and look at the boom in car finance which supported the car market there must have been quite a strong effect. Of course that has shown signs of waning. Also if you look at what has been going on in the car loans market and the apparent rise of the equivalent of what were called “liar loans” for the mortgage market pre credit crunch then the complacency meter goes almost off the scale with this.

Low arrears rates may
reflect underlying improvement in credit quality

Number crunching

I know many of you like the data set so here it is and please note the in and then out nature of student debt.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion).
It is equal to 134% of household incomes (Chart A.9), high by historical standards but below its 2008 peak of 147%.(1)
Excluding student debt, the aggregate household debt to
income ratio is 18 percentage points below its 2008 peak

Most things look contained if you compare them to their peak! Also if we switch to mortgages we get quite a few pages on how macroprudential regulation has been applied then we get told this.

The proportion of households with high mortgage
DTI multiples has increased somewhat recently, although it
remains below peaks observed over the past decade ( DTI = Debt To Income)

Comment

The issue here can be summarised by looking at two things. This is the official view expressed only yesterday.

Lenders responding to the Credit Conditions Survey reported that the availability of unsecured credit fell in both 2017 Q2 and Q3, and they expect a further reduction in Q4.

Here is this morning’s data.

The annual growth rate of consumer credit was broadly unchanged at 9.6% in October

As you can see the availability of credit has been so restricted the annual rate of growth remains near to 10%. The three monthly growth rate accelerated to an annualised 9.6% and the total is now £205.3 billion.

The situation becomes even more like some form of Orwellian scenario when we recall the credit easing ( Funding for Lending Scheme) was supposed to boost lending to smaller businesses. So how is that going?

in October, whilst loans to small and
medium-sized enterprises were -£0.4 billion

There is of course always another perspective and Reuters offer it.

Growth in lending to British consumers cooled again in October to an 18-month low, according to data that may ease concerns among Bank of England officials concerned about the buildup of household debt………The growth rate in unsecured consumer lending slowed to 9.6 percent in the year to October from September’s 9.8 percent, the slowest increase since April 2016.

 

 

 

The continuing surge in UK unsecured credit adds to Mark Carney’s woes

This week will be a significant one for Mark Carney and the Bank of England as we await their decision on UK interest-rates. Today brings us another brick in the wall in terms of factors which will influence them as we receive the latest money supply and unsecured credit data. On the latter the Bank of England has undergone something of a change because if we go back to January 2016 Governor Carney told us this.

This has not been a debt-fuelled recovery. Aggregate private credit growth is modest compared to pre-crisis conditions, and is just now coming into line with nominal GDP growth.

However if we step forwards to the 30th of November of that year the BBC was reporting this.

The governor of the Bank of England, Mark Carney, has given a warning about the high level of debt in UK households.

In particular he said that consumers were borrowing more on their credit cards and other unsecured debt.

Figures from the Bank this week showed that credit card lending is at a record level, up by £571m in the last month.

Overall unsecured debt – which includes overdrafts – is rising at its fastest pace for 11 years.

“We are going to remain vigilant around the issue, because we have seen this shift,” he told a press conference at the Bank.

The really awkward point about all this arrives if we note who was at the van of causing the problem. From the Bank of England on the 4th of August and the emphasis is mine

This package comprises: a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

As so often it was something which was not a headline maker that was the main player here as the banks were given access to cheap central bank funding.

In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate. This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

A further smokescreen was provided by the claims about business lending which was unlikely to change materially and even to some extent mortgage lending as the Bank of England had pushed that higher a few years before. Thus a fair bit of the cheap funding was likely to head for the unsecured credit sector. So the problem the Bank of England has been warning about is a consequence of its own policies.

Today’s data

Credit continues to flow to the UK economy.

The net flow of sterling credit remained robust at £9.6 billion in September. Within this, lending to households has been growing steadily at around 4% per year.

The outlook for secured credit to households continues pretty much as before.

Mortgage approvals for house purchase fell slightly to 66,232 in September, close to their recent average .

But the worrying news for the Bank of England is this.

The annual growth rate of consumer credit has remained broadly unchanged since June, at around 10%. The flow was £1.6 billion in September, also close to its recent average

So contrary to what we have been told the flow of unsecured credit remains strong to the UK economy. There have been various claims that it has been slowing but so far each monthly update has kept the rate of annual growth around 10%. In addition this month has seen some upwards revisions to past data.

 

Business Lending

At the start of each new policy initiative we are invariably told that it is to boost business lending.

Large non-financial businesses made net repayments of £1.8 billion of loans in September (Table M), with manufacturing contributing the most to this movement.

From this we learn several things. Firstly some of the welcome boost seen in lending to manufacturing a couple of months or so ago has dissipated away. But if we look at the general picture there is no great sign of any surged. As it happens smaller businesses ( SMEs) had a better September borrowing some £400 million but this only raised the six month average to £100 million. The official response involves quoting a counterfactual world where lending to smaller businesses was even lower. Odd that they do not feel the for counterfactuals about unsecured credit don’t you think?

What about interest-rates?

If we look first at savings rates we see that the Bank of England thinks that new deposits will now get a bit over 1% ( 1.11%) driven by this.

Effective rates on new individual fixed-rate bonds between 1 and 2 year, and over 2 year maturity have increased by 16bps from 1.13% to 1.29% and 1.32% to 1.48%, respectively.

Of course this means that in real terms they are losing at a bit under 2% if you use the CPI inflation measure and a bit under 3% if you use the RPI. Meanwhile new mortgage rates remain below 2% ( 1.97%). Also “other loans” ( unsecured credit) have ignored the rhetoric of the Bank of England and got a bit cheaper as 7.54% in June has been replaced by 7.15% in September.

Comment

So we see that unsecured credit growth remained strong in the third quarter of 2017. This leaves us wondering if earlier this month the banks pulled the wool over the eyes of the Bank of England.

Lenders responding to the CCS reported that the availability of unsecured credit fell in both Q2 and Q3.

Indeed this morning’s upward revisions change the narrative somewhat for the sector below.

This decline was mainly due to weaker growth in lending for dealership car finance, although this continues be a key driver of consumer credit

Thus we see that the “unreliable boyfriend” will be finding it ever harder to be unreliable with economic growth nudging higher and unsecured credit continuing to surge especially with inflation above target. Perhaps he will concentrate on the weaker CBI surveys we have seen but there will be quite a debate going on this week in Threadneedle Street. Especially as the unsecured credit boom is something the Bank of England lit the blue touch-paper on.

 

The outlook for UK house prices is turning lower

Today brings together two strands of my life. At the end of this week one of my friends is off to work in the Far East like I did back in the day. This reminds me of my time in Tokyo in the 1990s where Fortune magazine was reporting this at the beginning of the decade.

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

Back then property prices were so steep that these came into fashion and to set the scene the Imperial Palace and gardens ( which are delightful) were rumoured to be worth more than California. Younger readers may have a wry smile at the interest-rates which these days they only see if student loans are involved I guess. But this feature of “Discovering Japan” or its past as Graham Parker and the Rumour would put it comes back into mind as I read this earlier. From the BBC.

The average mortgage term is lengthening from the traditional 25 years, according to figures from broker L&C Mortgages. Its figures show the proportion of new buyers taking out 31 to 35-year mortgages has doubled in 10 years.

We have noted this trend before which of course is a consequence of ever higher house prices which is another similarity with Japan before the bust there. Although there is an effort to deflect us from that.

Lenders have been offering longer mortgage terms, of up to 40 years, to reflect longer working lives and life expectancy.

Let us look into the detail.

The average term for a mortgage taken by a first-time buyer has risen slowly but steadily to more than 27 years, according to the L&C figures drawn from its customer data.
More detailed data shows that in 2007, there were 59% of first-time buyers who had mortgage terms of 21 to 25 years. That proportion dropped to 39% this year.
In contrast, mortgage terms of 31 to 35 years have been chosen by 22% of first-time buyers this year, compared with 11% in 2007.

Should the latest version of “Help To Buy” push house prices even higher then we may well see mortgage terms continue to lengthen. This issue will be made worse by the growing burden of expensive student debt and the struggles and travails of real wages.

If you extend a mortgage term the monthly payment will likely reduce but the capital sum which needs to be repaid rises.

The total cost of a £150,000 mortgage with an interest rate of 2.5% would be more than £23,000 higher by choosing a 35-year mortgage term rather than a 25-year term.
The gain for the borrower would be monthly repayments of £536, rather than £673.

House Prices

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

Prices also held steady in September at the national level, with 6% more respondents seeing a rise in prices demonstrating a marginal increase. Looking across the regions, London remains firmly negative, while the price balance in the South East also remains negative (but to a lesser extent than London) for a fourth consecutive month.

“firmly negative” is interesting isn’t it as London is usually a leading indicator for the rest of the country? Although care is needed as the RICS uses offered prices rather than actual sales prices. Looking ahead it seems to be signalling a bit more widespread weakness in prices.

new buyer enquiries declined during September, as a net balance of -20% more respondents noted a fall in demand (as opposed to an increase). Not only does this extend a sequence of negative readings into a sixth month, it also represents the weakest figure since July 2016,

It is noticeable that there are clear regional influences as some of the weaker areas are seeing house price rises now, although of course that may just mean that it takes a while for a new trend to reach them.

That said, Northern Ireland and Scotland are now the only two areas in which contributors are confident that prices will rise meaningfully over the near term.

The Bank of England

This morning has seen a signal of a possible shift in Bank of England policy. If we look at its credit conditions survey we see that unsecured lending was supposedly being restricted.

Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4 (Chart 2). Credit scoring criteria for granting both credit card and other unsecured loans were reported to have tightened again in Q3, while the proportion of unsecured credit applications being approved fell significantly.

As demand was the same there is a squeeze coming here and this could maybe filter into the housing market as at a time of stretched valuations people sometimes borrow where they can. Care is needed here though as the figures to August showed continued strong growth in unsecured credit making me wonder if the banks are telling the Bank of England what they think it wants to hear.

Also we were told this about mortgages.

Overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — were reported to have narrowed significantly in Q3 and were expected to do so again in Q4.

However on the 6th of this month the BBC pointed out that we are now seeing some ch-ch-changes.

The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low.

Barclays and NatWest have become the latest lenders to increase the cost of some of their fixed-rate products.

At least nine other banks or building societies have also raised their rates in the past few weeks.

Business lending

This is an important issue and worth a diversion. The official view of the Bank of England is that its Funding for Lending Scheme and Term Funding Scheme prioritise lending to smaller businesses and yet it finds itself reporting this.

Spreads on lending to businesses of all sizes widened in Q3 (Chart 5). They were expected to widen further on lending to small and large businesses in Q4.

This no doubt is a factor in this development.

Lenders reported a fall in demand for corporate lending for businesses of all sizes — and small businesses in particular (Chart 3). Demand from all businesses was expected to be unchanged in Q4.

The Bank of England will no doubt call this “counterfactual” ( whatever the level it would otherwise have been worse) whereas the 4 year record looks woeful to me if we compare it to say mortgages or even more so with unsecured lending.

Comment

There is a fair bit to consider here especially if we do see something of a squeeze on unsecured lending as 2017 closes. That would be quite a contrast to the ~10% annual growth rate we have been seeing and would be likely to wash into the housing market as well. Some will perhaps borrow extra on their mortgages if they can whilst others may now be no longer able to use unsecured lending to aid house purchases. These things often turn up in places you do not expect or if you prefer we will see disintermediation. It is hard not to wonder about the car loans situation especially as it is mostly outside the conventional banking system.

So we see an example of utter failure at the Bank of England as it expanded policy and weakened the Pound £ as the economy was doing okay but is now looking for a contraction when it is weaker. We will need to watch house prices closely as we move into 2018.

Meanwhile people often ask me about how much buy-to-let lending goes vis businesses so this from Mortgages for Business earlier made me think.

Last quarter nearly four out of every five pounds lent for buy to let purchases via Mortgages for Business was lent to a limited company. With strong limited company purchase application levels throughout Q2, and the softer affordability testing that is commonly applied to limited companies leading to higher-than -average loan amounts, it is no surprise to see them take such a large slice of buy to let purchase completions in Q3.

Now this is something of a specialist area so the percentages will be tilted that way but with”softer affordability testing” and “higher than average loan amounts” what could go wrong?

 

 

 

UK unsecured lending continues to surge ahead

Today we get more information on just how loose Bank of England monetary policy is. But as it happens markets signalled the state of play yesterday. From the Financial Times.

The price of 10-year UK government debt rallied to its highest since October, as the general election build-up comes more clearly into investors’ view. The yield on benchmark 10-year gilts, which moves inversely to the price, dipped below 1 per cent on Tuesday to an intra-day low of 0.978 per cent, as investors sought the safety of government bonds after the long bank holiday weekend.

So if we want a strong Gilt market all we have to do is have more bank holidays, what a curious view? There are two much more relevant issues here of which the first is the easing on UK monetary conditions as the Gilt market has rallied since late January with the ten-year yield falling from 1.51% to around 1% now. The second is that it is in my experience rather extraordinary for the latest part of the rally to be taking place in an election campaign particularly one which veers between insipid and shambolic. The polls are in an even worse place as they suggest that the Conservatives may either lose their majority ( YouGov ) or win by 100 seats! Mind you after the 2015 debacle I can see why so many now simply ignore them.

Inflation

A consequence of easy monetary conditions is rising prices and we have seen another sign of what we have been expecting today already.

Grocery inflation hit 2.9 per cent in the 12 weeks to May 21, according to Kantar Worldpanel’s latest survey of the grocery sector, ahead of the official year-on-year inflation rate of 2.7 per cent. ( FT )

I doubt many consumers will be grateful for this nor will they agree with the central banking fraternity that by being “non-core” it can mostly be ignored. But they are doing their best to avoid it in an example of rationality.

in a sign that inflation is starting to affect consumers’ spending habits, cheaper products and discount retailers saw the biggest rises……Aldi and Lidl recorded their fastest growth rates since 2015, hitting a combined market share of 12 per cent. Across the sector, sales of supermarkets’ cheaper own-label products were 6 per cent higher than the same period last year,

Unsecured Credit

On the 29th of September last year I warned that the bank of England was playing with fire with its Bank Rate cut and other monetary policy easing. In particular I was worried about the growth of unsecured credit.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

So how is that going now?

The flow of consumer credit was similar to its recent average in April, at £1.5 billion; the annual growth rate was broadly unchanged.

As you can see some months later the beat goes on. The only changed is that the Bank of England seems to have changed its policy about declaring the actual growth rate so shall we see if it has something to hide? If we check we see that the three-month annualised growth rate is 9.8% and the twelve-month growth rate is the same as last August at 10.3%.

So as the late Glenn Frey would say.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Just as a reminder the numbers were “improved” a few years ago on this basis.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans……….This new measure of
consumer credit will be introduced in the August 2012 Bankstats release.

That is what we have now and as a comparison times were very different back then.

Consumer credit excluding student loans is estimated to have contracted by 0.4% in the year to June 2012.

Whereas student loans were expected to surge.

Government projections suggest that the outstanding balance of student loans will be more than £80 billion by 2017/18.

They were pretty much right about that but what does it mean for consumer credit? Well the total is much lower than it would be with student loans in it. For example I estimate that the current level of consumer credit of £198.4 billion would have nearly £100 billion added to it. As to the monthly net growth well the current £1.5 billion or so would be somewhere north of £2.5 billion and maybe at £3 billion. The reason why I estimating is that the numbers are over a year behind where we are.

Secured Credit

This will not be regarded as such a success by the Bank of England.

Net lending secured on dwellings in April was £2.7 billion, the lowest since April 2016 …. Approvals for house purchase and remortgaging loans fell further in April, to 64,645 and 40,575 respectively

Of course the Bank of England has made enormous efforts in this beginning four summers ago with the Funding for Lending Scheme. Those efforts pushed net mortgage lending back into positive territory and also contributed to the rise in UK house prices that has been seen over the same time period. Last August yet another bank subsidy scheme was launched and the Term Funding Scheme now amounts to £63 billion. However it seems to have given more of a push to unsecured lending than secured.

Of course Governor Carney also claims that car loans are secured lending ( no laughing please) and here is the latest data on it from the Finance and Leasing Association.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016.

That meant that £3.62 billion was borrowed in March using what is described as dealership finance.

Business lending

The various bank subsidy schemes have been badged as being a boost to business lending especially for smaller ones, but have not lived up to this.

Loans to small and medium-sized enterprises decreased by £0.3 billion ( in April)

Comment

The Bank of England claims that it is “vigilant” about unsecured lending in the UK but we know that the use of the word means that it is not. Or as it moves from initial denials to acceptance we see yet again a Yes Prime Minister style game in play.

James Hacker: All we get from the civil service is delaying tactics.

Sir Humphrey Appleby: Well, I wouldn’t call civil service delays “tactics”, Minister. That would be to mistake lethargy for strategy.

But it opened the monetary taps last August with its “Sledgehammer” expectations of which pushed the UK Pound lower and now we see unsecured credit continuing to surge and broad money growing at just over 7%. The old rule of thumb would give us an inflation rate of 5% if economic growth continues to be around 2%. In fact it is if we add in the trade deficit exactly the sort of thing that has seen boom turn to bust in the past.

 

 

 

 

 

 

Both UK unsecured credit and car loans surge

After looking at US auto-loans yesterday attention shifts today to the consequences of the easy monetary policy of the Bank of England. This was where Bank of England Governor Mark Carney regularly gave Forward Guidance about interest-rate rises and then ended up cutting them to 0.25% in Bank Rate terms. We also got an extra £60 billion of UK Gilt (government bond) QE and £10 billion of corporate bond QE of which the former is complete but the latter continues. As ever a subsidy for the banking sector or “The Precious” was tucked away in it and now amounts to some £47.25 billion of cheap funding called the Term Funding Scheme. All this was based on the Bank of England’s grim economic forecasts post the EU Leave vote. How have they gone?

BANK OF ENGLAND MPC’S MCCAFFERTY SAYS DOES NOT EXPECT UNCERTAINTY TO DISSIPATE SOON, BUT HAVING LESS IMPACT THAN PREVIOUSLY FEARED ( @hartswellcap )

BoE’s McCafferty says “We did get it wrong last August” on the forecasts for downturn made after Brexit vote ( @KatieAllenGdn )

In other words they got it wrong again but will he respond to rising inflation with an interest-rate rise?

“I don’t know if I will vote for a rate hike… hahahaha. It will depend on how I feel at the next meeting” ( @SigmaSquawk )

In spite of admitting to being wrong he appears unwilling to put right his mistake and as he was one of those considered to be most likely to be willing to do so the UK Pound £ fell below US $1.25.

Unsecured Lending

If we look for a consequence of easy monetary policy we would expect to find it here and regular readers will be aware that I have been warning about this since late summer last year. I warned about unsecured credit growth back on the 29th of September in particular.

The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

How is that going? From this morning’s update.

The net flow of consumer credit was £1.4 billion in February. The twelve-month growth rate remained at 10.5%

So as you can see the UK consumer continues to borrow at what frankly is an alarming rate if you look at the growth in the economy or even worse real wages. Each month we get a hint of slowing ( this month in personal loans) but there were hints of that in January which have just been revised upwards!

Car Loans

Some of the increases above are from the car loan sector so let me hand you over to the Bank Underground blog from last August.

This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses.

This was discussed in yesterday’s comments section and the blog puts it like this.

First, a growing proportion of finance is now provided by the car manufacturers themselves, often through their own finance houses. Intelligence gathered by the Banks’ Agents suggests that these so-called “captive” finance providers have a market share of about 70% of all private new car finance. Second, households increasingly rent their vehicles using Personal Contract Purchase (PCP) plans.

This is another version of the economic world using the rental model which in truth is a sort of back to the future change and it has happened on a grand scale.

Industry contacts of the Bank’s Agents estimate that around two-thirds of private new car buyers now rent their vehicles using PCPs. Under PCP, the car buyer does not initially take ownership of the vehicle, but instead rents it for an average length of typically three or four years.

There are various changes here and let us start with the monetary and economic one.

This change in buyer behaviour has undoubtedly contributed to the sharp rise in new car registrations and the level of consumer debt in the economy in recent years.

This has fed into the economy and boosted economic output and GDP as more cars are bought.

The popularity of PCPs has thus been associated with a shortening of the replacement cycle for private buyers, thereby boosting the aggregate level of consumer demand for new cars.

So far, so good, although where do the old cars go and what happens to them? Is there some sort of graveyard or perhaps lower prices for older cars? We also get a confirmation of my view that the economic world is increasingly rented these days.

A consumer who might never own the car is likely to view it in the same way they view a mobile phone contract, i.e. just another monthly Direct Debit.

The conclusion is that sooner or later there will be trouble.

Those structural changes have: (a) concentrated financial risk in an industry that is especially sensitive to the economic cycle (in contrast to previous cycles when risk had been shared to a greater degree with the household sector); (b) contributed to increased household borrowing, reflected in the very rapid growth of car finance in recent years and a trend towards premium models; and hence (c) made the car industry more vulnerable to negative shocks, including hikes in interest rates, exogenous falls in market prices of used cars, lengthening of the replacement cycle and changes in consumer tastes.

 

Number Crunching

The UK Finance and Leasing Association or FLA helps out.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer car finance market grew 12% by value and 8% by volume in 2016……The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

Meaning the Bank of England was behind the times again. In terms of amounts there is this.

£88 billion of this was in the form of consumer credit, over a third of total new consumer credit written in the UK in 2016. £41 billion of it supported the purchase of new and used cars,

Here are the most up to date numbers we have.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 9% by value and 3% by volume in January, compared with the same month in 2016.

On the way we see another hint of inflation in the UK. Oh and should you look at their website I too am unsure why they have a Base Rate at 0.5%.

Business Lending

Back in the summer of 2013 when the Funding for Lending Scheme began we were promised that it was for business lending. In reality we have seen the mortgage market return to positive net lending and for unsecured credit to mimic a hot air balloon. So what about business lending?

Loans to non-financial businesses decreased by £1.8 billion in February, compared to the recent average increase of £0.9 billion . Loans to small and medium-sized enterprises (SMEs) increased by £0.6 billion in February.

If we look for some perspective the annual growth rate is 1.7% overall and 1.2% for SMEs which provides quite a contrast to the household unsecured credit data does it not?

Comment

As you can see the easy monetary policy of the Bank of England has boosted unsecured credit and a lot of it comes from the car loan sector it would appear. So earlier this week it warned about the consequences of its own actions.

UK household indebtedness remains high by historical standards and has begun to rise relative to incomes.  Consumer credit has been growing particularly rapidly.

Is that the same unsecured credit that it has told us is not growing rapidly or a different one? As to the motor industry there are clear worries although so far it assures us there is no problem. From MotorTrader on the 20th of this month.

The used car market is showing “no signs” of cooling down despite the high volume of PCP cars coming back into dealers as part exchanges.

As a last thought has the borrowing been shifted from businesses to the household in the car sector? That fits with the novel below.

Dune

A great novel and are we on the way to its suspensor suitcases?