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?

 

 

 

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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?

How would the UK establishment respond to house price falls?

A major feature of the UK economic landscape in its recent boom phase has been that house prices have been rising. Indeed as the Funding for Lending Scheme (FLS) began in the summer of 2012 and set mortgages rates on a lower path ( estimated to be nearly 2% lower by the Bank of England) we saw around 6 months later a pick-up in both house prices and the economy. A sign of the house price boom was seen in yesterday evening’s London Standard.

A houseboat moored on the Thames in Chelsea has gone on the market for £2.25million, almost four times the price of the average London home. The 3,050sq ft luxury barge is being sold by estate agents Knight Frank, who describe it as “possibly the best houseboat available in London.”

I will be passing that way later so will take a look for myself, maybe I will even find out what the “climate-controlled heating system” is? It seems that with land so expensive the water as represented by the river Thames has got more popular.

The number of people living in floating homes in London has risen by 50 per cent in the past five years, with houseboats – which are exempt from stamp duty – being seen as a cheaper alternative to getting on the housing ladder.

Cheaper? Well that is of course relative to an ultra expensive area.

A three-bed house in the area would cost upwards of £6million, but the new owners will have to pay mooring and maintenance fees estimated at £27,000 a year.

The extremes of the London property situation were also highlighted.

Recently, a flat in Covent Garden was put on the market at £1.3m, making it what is thought to be Britain’s most expensive ex-council property….In contrast, a room rivalling Harry Potter’s cupboard under the stairs was on rent in London last week for £350 per month.

Perhaps another sign of things is this tweeted by Henry Pryor earlier.

Big day for who may join the FT100 group of companies today. Impressive performance, well done to all involved over the years.

He thinks that they have mostly taken business off other estate agents but it is hard to believe that they have not benefited from the house price boom. We can both agree that it has been a UK success story if not for exactly the same reasons.

The Nationwide Index

This morning has seen the house price update from the Nationwide Building Society.

UK house prices edged up 0.2% in May and, as a result, the annual rate of house price growth was little changed at 4.7%, compared with 4.9% in April.

If you read between the lines they are in fact rather nervous.

In the near term, it’s going to be difficult to gauge the underlying strength of activity in the housing market due to the volatility generated by the stamp duty changes which took effect from 1 April.

This is because of what happened before April Fools Day.

Indeed, the number of residential property transactions surged to an all-time high in March, some c11% higher than the pre-crisis peak as buyers of second homes sought to avoid the additional tax liabilities.

Indeed a report with an obvious temptation to upside bias is by its standards rather downbeat.

House purchase activity is likely to fall in the months ahead given the number of purchasers that brought forward transactions……..especially in the BTL sector, where other policy changes, such as the reduction in tax relief for landlords from 2017, are likely to exert an ongoing drag. ( BTL is Buy To Let).

Actually annual house price growth has gone 5.7%, 4.9% and now 4.7% on this measure which some but not the Nationwide might consider to be a trend.

The official view

This is of course to sing along with Depeche Mode about house prices.

You should be higher
I’ll take you higher

Any remaining doubts on this front were extinguished when Chancellor Osborne presented what he thought was a knock-out blow in the Brexit referendum debate. From the BBC.

A UK vote to leave the European Union would cause an “immediate economic shock” that could hold back growth in house prices, the chancellor has said. In the event of a vote for Brexit, by 2018, houses could be worth up to 18% less than if the UK voted to remain, George Osborne told the BBC.

Young people and first-time buyers – who are not necessarily the same group these days – are likely to positively welcome such a development! The Bank of England FLS inspired house price push has seen the house price to earnings ratio for them rise from 4.4 to 5.2 according to the Nationwide this morning. No wonder first time buyers need “Help to Buy”. As I have pointed out before they are also likely to be singing “Please, help me” from the famous Beatles hit.

We need to recall that such price earnings series are on favourable definitions for earnings (£39.300 per annum). But we can note that we are at 5.2 on this series very new to the supposedly unaffordable 5.4 of 2007 to which we were promised we would never return. London has in fact surged past its previous peak of 7.2 to 10.1. The word bubble is over used these days but what other word is appropriate to cover such a number?

Looking ahead

We got a clue this morning from the money and credit release from the Bank of England which needs to be accompanied by the sound of screeching brakes.

Lending secured on dwellings increased by £0.3 billion in April, compared to the average of £4.2 billion over the previous six months.

Which led to this is we look a little wider.

Total lending to individuals increased by £1.6 billion in April, compared to the average of £5.7 billion over the previous six months

Actually consumer or unsecured credit is in the midst of its own boom and ignored the mortgage slow down.

The three-month annualised and twelve-month growth rates were 10.4% and 9.6% respectively.

That leaves us with secured credit strangled but unsecured credit surging which flashes a warning light to say the least. Of course the Financial Policy Committee will be “vigilant” especially to the lunch menu and the cakes on the Bank of England tea trolley.

Actually the overall supply of credit to the UK economy had rather a grim April.

M4Lex is defined as M4 lending excluding intermediate OFCs. M4Lex decreased by £2.1 billion in April, compared to the average monthly increase of £10.4 billion over the previous six months.

Looking further ahead we can say that the outlook is for a slowing in mortgage growth.

The number of loan approvals for house purchase was 66,250 in April, compared to the average of 71,075 over the previous six months.

Comment

We are seeing a clear change in the UK house price situation as growth slows. What we do not know for certain yet is if this is temporary or in the new vernacular “skewing” or a permanent change. Should it be the latter then I expect a policy response most likely from the Bank of England. It could cut Bank Rate or undertake a reinforcement of schemes like the FLS one above to further reduce mortgage rates. The catch as we have learned from places like Sweden and Switzerland is that going to negative interest-rates only reduces mortgage rates for a while then they rise again as banks re-establish profit margins. So the establishment would really need to “Pump It Up” this time with all the associated dangers and risks. This of course would ignore the issue which I analysed yesterday where the retail sector has been boosted by lower prices rather than higher ones.

Meanwhile the FLS was supposed to boost business lending how is that going?

 Within this, loans to small and medium-sized enterprises (SMEs) were broadly unchanged, compared to an average monthly increase of £0.2 billion over the previous six months. The twelve-month growth rate was 1.4%.

Three years down the road that is a very poor return when you consider that the growth rate may be just positive but the total is down a fair bit since then. The situation is in fact so bad the official response is to use a long word “counterfactual” . If we look to wider business lending and recall we have been in a 3 year economic boom well the numbers speak for themselves.

Loans to non-financial businesses decreased by £0.1 billion in April, compared to an average monthly increase of £0.9 billion over the previous six months. The twelve-month growth rate was 0.7%.

 

 

What is the true situation about UK household debt?

The issue of debt and what to do about it was of course one of the causes of the credit crunch and has been debated constantly during it. Today as it is often misrepresented I wish to look at household debt in the UK. But before I turn to it the national debt of the United States passed another threshold on Monday so let us doff our caps to the US $19 trillion threshold and move on. Oh and in case you were wondering about the debt ceiling it has been suspended until March next year which if you consider the chaos it created for no particular sustained gain that is probably the for the best.

UK Household debt

There has been some rather chilling research on this subject released this morning so let’s get straight to it. From City-AM.

The average Brit will not pay off unsecured debt, like credit cards and certain loans, until they are 64, a survey by the Centre for Economics & Business Research (Cebr) for peer-to-peer lender Zopa found.

That rises to 69 once mortgages are included.

Well at least they are being sensible and paying off the most expensive debt first! Actually if you read it again that is not what it is saying. So it is not only the younger generation who are facing a lifetime of debt singing along to LunchMoney Lewis.

I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills

Perhaps the prospect of all this is behind this reported by the Office for National Statistics yesterday.

Ratings of life satisfaction and happiness were at their lowest, on average, for those aged 45 to 59.

On current trends they may well have to raise the ages named here.

those aged 65 to 79 tended to report the highest average levels of personal well-being

Actually for Londoners like me there may well be quite a different set of age bands.

Londoners may have to wait until they reach 77 to live debt-free, according to new research…….Londoners are saddled the longest as they typically take on more unsecured debt and secure mortgages later, despite their higher wages.

Those of you who live in the North-East can have a laugh at our expenses as you pass the threshold at 57. In fact you are the only group of people who have expectations that approach reality.

The survey also found a big gap in expectations: Britons expect to start a debt-free life when they hit 57 – 12 years earlier than they are likely to.

I am not sure if it is a good thing or a bad think that the younger generation are the most out with their view of their future.

Those aged 16 to 24 are the most optimistic – they expect to be rid of unsecured debt at just 38.

That also makes them wildly wrong: if they buy a home with a mortgage they’ll be waiting until age 74.

There are obvious caveats in such research but it does highlight existing trends.

A space oddity

There is an institutional problem in having debts at ever later ages in the UK and it has been given the oxygen of publicity this week too. From BT.com.

Peter Day wanted to extend his mortgage in order to pay for his daughter’s wedding. At the time he was 59 and close to paying off his mortgage, but asked to extend his term by five years.

However, despite having three final salary pensions ready to cover him in retirement, he was turned down for the mortgage extension by Co-operative Bank.

For foreign readers UK mortgage providers have long had rules that say that you have to have a provable income to repay it which poses problems at retirement so the state retirement age of 65 was a potential issue as was 60 for those who were lucky enough to have a pension from then. It would seem that much of the financial sector has not kept up with the times. Who da thunk it? As Turkish pointed out in the film Snatch.

That by the way is the same financial sector who requires very highly paid staff because they have such valuable skills and abilities.

Number crunching

The research quotes these numbers.

The average British debt per household was £53,904 in December including mortgages, according to the Money Charity.

That works out at £28,891 per adult, which is 112 per cent of average earnings.

Based on December’s figures, Brits each spend an average of £1,037 on interest repayments every year –four per cent of a typical salary.

The debt figure quoted is in fact including mortgages and if you want a total it comes to this.

PEOPLE IN THE UK OWED £1.455 TRILLION AT THE END OF DECEMBER 2015. THIS IS UP FROM £1.424 TRILLION AT THE END OF DECEMBER 2014 – AN EXTRA £627.09 PER UK ADULT.

Apologies for the capitals and the estimated cost of this is shown below.

BASED ON DECEMBER 2015 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£52.371 BILLION.

 The official denial

We know how to treat these and at Davos Mark Carney gave us one and the Financial Times joined it as it prepared for the first question at the next Bank of England press conference.

But household consumption has grown slower than the economy since the recovery started and the appetite for debt has fallen sharply. Households have increased their outstanding debts £5.1bn on average every quarter since 2009, nearly four times less than the £22bn rate between 1997 and 2009.

These numbers are no doubt true but miss some important points. If you argue that the amount of debt was an issue pre credit crunch then the fact it has risen since poses a question. Also yes household consumption and debt have slowed over the time period quoted but more recently they have picked up. For example retail sales were very strong in 2015 and the December lending data told us this.

The three-month annualised and twelve-month growth rates were 4.0% and 3.3% respectively.

So the economy is growing at around 2% per annum but we have no inflation so debt has risen relatively here. Also there is an important sectoral shift which matters as some groups are piling up debt as others repay creating quite different groups. This is highlighted by the mortgage data.

Gross lending secured on dwellings was £19.5 billion and repayments were £16.0 billion.

Also unsecured credit is on something of a tear.

Consumer credit increased by £1.2 billion in December, compared to the average monthly increase of £1.3 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.1% and 8.6% respectively.

The acceleration which began in late summer 2014 continues.

Comment

The Financial Times also made the point that if you look at debt you need to look at assets and here is its view.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

The point is valid but of course it is using a marginal price and I would argue an inflated one for house prices which are the biggest asset by far. As Feeling QEzy points out in the comments what could go wrong?

For example UK housing stock annual turnover is circa 4% while 30% of homes have a mortgage, and as we all know it is the marginal seller that drives the price in a weak market.

Whilst I am no fan of the projections of the Office for Budget Responsibility they do pose a question as they project rises in household debt although typically they have changed it in 2021 to 163% of income from 172%. That shows a danger in this sort of analysis.

So where do we stand? Not quite in the quicksand that some argue. But we are seeing rises in unsecured debt again and you do not have to take my word for this just check the absence of the phrase “household debt levels are falling” in recent Bank of England speeches. This poses a problem as for a start how can they raise interest-rates in such an environment? Also if you are wondering what is the big deal here the US National Bureau of Economic Research takes up the story.

In a study summarized in the January edition of The NBER Digest, researchers find that a rise in household debt relative to a nation’s GDP is often associated with a subsequent economic contraction, and that this debt ratio increased in many countries prior to the decline in global GDP growth in 2007-12.

Oh and the area which is supposed to be benefiting from Bank of England policy smaller businesses how is that going?

Net lending to SMEs was £0.0 billion ( in December 2015)

UK mortgage lending grows whilst business lending sinks and Carney spins

The outlook for UK monetary policy is one of the main determinants of what happens in the UK housing sector and house prices. After all we are still in the boom created by the bank subsidy scheme called the Funding for (Mortgage) Lending Scheme which began in July 2012 and as of the half-way point of 2015 amounted to some £61.4 billion. You might think that such a sum would be a matter of large public debate but it skulks in a shadow which the mainstream media fails to shine a light on.Oh and as to the “Open Mouth Operations” about it being for small and medium sized businesses or SMEs they got an extra £0.5 billion in the second quarter of 2015 whereas the total rose by £4.2 billion leaving an unspecified £3.7 billion rise. I think we know where that went!

Also the international environment changed last week with Mario Draghi of the ECB promising more policy easing including a hint of an interest-rate cut and China following with a 0.25% reduction. Even more yields in Europe are now negative with even short-dated bonds in Italy and Spain dipping in and out of it. This means that the UK with its “lower-bound” (Mark Carney) of 0.5% Bank Rate looking attractive which has seen the UK Pound £ nudge 1.39 after being more like 1.36. This means that UK monetary policy has tightened a little when we consider how much trade we do with the Euro area. It also represents a change as the UK Pound £ had been drifting a little lower.

Governor Mark Carney

Over the weekend an interview with the Bank of England Governor was published in the Mail on Sunday. The Bank of England has not published it as perhaps someone was embarassed by these bits. Actually you need to look into the Mail on Sunday achives now as otherwise there have been some redactions.

“the 50-year-old charmer” “matinee idol Governor” “British financial royalty with a pedigree to match”

Rather breathtakingly as the Toad of Toad Hall approach continues we are expected to believe that the Governor said this “‘Am I in trouble?” when this was a PR exercise masquerading as journalism. However there was one policy sound bite which applies to the UK housing and mortgage markets as it concerns his often repeated promise of an interest-rate rise.

There’s no certainty that they will happen, but it is a better position to be in if households expect what we think is likely to happen, and to some extent are prepared for it.

I doubt whether households will agree if he ends up doing a U-Turn and they have taken out a fixed-rate mortgage with penalties for changing based on his promises! Indeed they may already be worried by this.

For Carney, the concern is with those he calls ‘vulnerable’ – the householders who could find it hard to pay their bills if rates rise. He says: ‘While there’s been a lot of progress paying down debt, there’s still a substantial proportion of British households carrying a lot of debt.

They may fear that the ground is being tilled such that a U-Turn would be to protect the vulnerable especially as household debt is rising again. Let me show you from today’s British Banking Association release how households have been paying down debt.

the overall mortgage stock is now 1.7% higher than a year ago…….Over the past two years, net borrowing through personal loans has been rising and has expanded notably over the past two years.

Accordingly one might mull this sentence from the interview.

If events mean that does not happen and rate rises are not appropriate, then we will do the right thing and we will not adjust rates.

This is rather different to say the least from what we got at Mansion House back in June 2014.

The economy is still over-levered. The housing market is showing the potential to overheat.

So we have borrowed more since and house prices have risen as well as rents soaring so this must have happened ages ago, right?

It (the first interest-rate rise) could happen sooner than markets currently expect.

This was taken as a promise by markets back then as for a Bank of England Governor this was considered to be plain-speaking. Now we seem to be getting echoes of the past from one of Harold Macmillans supposed phrases/excuses.

Events my dear boy events

Today’s mortgage lending data

If we look at the BBA release for the main high-street banks we see that there is considerable growth on a year ago.

Gross mortgage borrowing was £12.1 billion in September, 17% higher than in the same month last year.

In fact net mortgage lending has been picking up again and was some £2 billion higher in September. If we look forwards we see this.

Approvals overall were therefore lower than in August but some 24% higher than at the same time a year ago.

So a dip compared to the very strong August numbers but still above the 6 month average. Even if we allow for the remortgaging boom inspired by the promises of Mark Carney there has been an increase in house purchase approvals of 14% on a year ago.

Putting it another way the reduction in mortgage-rates driven by FLS has been a major factor in this being reported by City-AM today.

HOMES in England and Wales are at their most affordable in 13 years, new research from Hamptons International claims…….The estate agent’s latest Ability to Buy index increased by two per cent year-on-year in the second quarter to bring it to its highest level since the first quarter of 2002.

As real wages have fallen in the credit crunch era that kind of leaves mortgage rates does it not? Some care is no doubt required with the exact number but the principle behind it seems fairly sound.

Up down and flying around

Bloomberg Business thinks that London is about to pass Mars I think.

Lower mortgage costs and a shortage of homes are fueling speculation that values in the U.K. capital are set to spike again. Lenders are also loosening borrowing conditions, with loan-to-income ratios rising for the first time in a year in the third quarter, according to the Bank of England. That’s prompting brokers to increase price forecasts for London homes,

Whereas Sober Look is well more sober.

Quote (UK property research firm): Chinese authorities curbing capital flows, impacting London property market –

I will have to go out and look at some point as Battersea Power Station and the Nine Elms development we have discussed on here before get mentioned.

Comment

There is much to consider here as we note that for all the cries of Bank of England independence it has been aligned with the UK establishment in boosting the housing market. The UK government has had its own policies and Deputy Prime Minister Nick Clegg asked for FLS to be put “on steroids” back in March 2013. Does £61.4 billion qualify? However the boom leaves us with situations like this as reported by the BBC.

The towns of Virginia Water and Cobham, in Surrey, have become Britain’s first million pound towns – where average house prices are more than £1m…..Beaconsfield in Buckinghamshire is also in the millionaire’s club, according to research by Lloyds Bank.

Now some of that is of course the London effect where overseas money poured into the property market and helped drive prices higher. Now we see that London prices are seeing a more troubled outlook and new developments may well be falling in prices. Now if that continues and spreads out to the rest of the country what happens next? What if a Bank of England Bank Rate rise contributed to that? It would be rather bizarre to go to so much trouble to pump house prices up and then to be the one who bursts the bubble. No wonder Bank of England Governor Mark Carney is engaging reverse gear.

Oh and what happened to putting business lending “on steroids”?

Companies’ net borrowing decreased by £1.0 billion in September mainly reflecting the unwinding of some short-term lending.

Over the past six months the average increase in borrowing by non-banks has been zero.

The UK Money Supply numbers show rising unsecured credit and falling business lending again

Today is a day for examining the state of play of the UK monetary system as we peruse data on both lending and the money supply. But before I get to that something significant has taken place earlier this morning. The cavalry from India has arrived as this from the Reserve Bank of India indicates.

it has been decided to:reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect;

My first issue with this is the simple point that if the world economy is doing so well and is in a recovery why are so many places cutting interest-rates rates? It is almost as if they are afraid of something they are not telling us. Jeroen Blokland has put this on a map for us.

This is especially relevant in an article about UK monetary policy as the “Forward Guidance” from Mark Carney and the Bank of England is that an interest-rate rise or rises are on its/their way. If you deduct the from the countries in red on the map those who raised interest-rates because of currency falls you see that there is very little left and that the UK would be in danger of being as Brian Clough so memorably put it “in a class of one” if it raised Bank Rate. Is the UK economy that strong?

The other feature of this is that with RBI Governor Rajan India has a “Rock star” central banker just like the UK has with Mark Carney. Their “Rock star” has just cut interest-rates following a quarter where the official statistics tell us that the economy grew by 7.5% on a year before. Also I note that he thinks this of such a rate of economic growth.

Domestic economic activity remains moderate in Q1 of 2015-16.

Of course as the DnaIndia highlights there may be another issue.

Many economists suspect, however, that the government statisticians’ new way of counting GDP overstates how well India is doing.

Does anybody believe the new ways of counting Gross Domestic Product or GDP?

UK Money Supply

The UK measure of broad money supply used by the Bank of England is M4 excluding intermediate other financial corporations (OFCs). In case you are wondering about the number four we did have an M3 which became £M3 but ahem, it blew up. One of the factors back then was the way that building societies became banks for example with the word disintermediation to the fore. Returning to UK broad money it has been fairly stable for a while around the numbers below.

The three-month annualised and twelve-month growth rates were 4.0% and 4.2% respectively.

A rough rule of thumb is that this equals likely economic growth plus inflation. Currently that works much better if we use the Retail Price Index and economic growth rather than the Consumer Price Index. However for both measures we see that UK economic growth would be constrained by the pick-up in inflation which is likely with the oil price around $65 per barrel (Brent Crude). Actually if we put house prices into the CPI as I have long argued it would work really well right now but we would then have the problem that looking forwards the likely inflation pick-up (which began for example in Germany yesterday) would restrain economic growth. Perhaps that is what other central banks have been thinking as they have cut official interest-rates.

UK mortgage market

Interestingly it looks as though something is stirring again here.

The number of loan approvals for house purchase was 68,076 in April, compared to the average of 60,679 over the previous six months.

If we look for a driver of this it seems likely that the falls in mortgage interest-rates that we have been discussing are a factor here. The Bank of England has stopped driving them down so aggressively via its Funding for Lending Scheme but of course other factors such as the interest-rate cuts and monetary easing abroad have come into play. Thus we are also seeing a rise in remortgaging.

The number of approvals for remortgaging was 35,930, compared to the average of 32,308 over the previous six months.

Perhaps the overall background is a factor too. From This Is Money.

How to join the buy-to-let boom: Get started and pick the mortgage that’s right for you.

A recent report by economists showed that buy-to-let landlords have enjoyed incredible returns of nearly 1,400 per cent since 1996, beating all other investments.

If you put £1,000 into a rental property at the end of John Major’s government, it would have grown to £14,897 by last year, according to the research.

As the Outhere Brothers put it.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

Or as a current hit puts it.

Oh I think that I’ve found myself a cheerleader

With reports of “Irish Trophy Homes Are Back With the Property Bubble a Distant Memory on Bloomberg shall we misquote Prince and partly like its 2006/07?! What happened next?

Recently net mortgage lending has been stable at around £1.7/1.8 billion per month on average which compared to the past is low because whilst some have the tap open into the UK mortgage market another group are repaying as fast as they can. Repayments amounted to £15 billion in April as we mull two separate groups at play here.

Unsecured lending

The Financial Planning Committee set out to restrict the rules on risky mortgage lending via its Mortgage Market Review. Except that since in a predictable repetition of the past we seem to have got this.

Consumer credit increased by £1.2 billion in April, compared to the average monthly increase of £1.0 billion over the previous six months. The three-month annualised and twelve-month growth rates were 8.2% and 7.2% respectively.

Up until the Funding for Lending Scheme was introduced unsecured lending was falling in the UK but growth began again and as you can see recently it is picking-up with a vengeance.

Loans to businesses

The whole purpose of the Bank of England FLS these days is supposed to be to drive bank lending to businesses particularly smaller ones higher so let us see how it is doing.

Net lending – defined as gross lending minus repayments – to large businesses was -£1.6 billion in April. Net lending to SMEs was -£0.2 billion.

Loans to non-financial businesses decreased by £1.6 billion in April, compared to the average of £0.0 billion over the previous six months. The twelve-month growth rate was -0.4%. Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.3 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelvemonth growth rate was -0.8%.

Hence the use of the word counterfactual which I note is not necessary when referring to mortgage growth or unsecured lending.

Comment

An analysis of the UK money supply and credit situation provides quite a bit of food for thought. As we look forwards and inflation rises back towards its target then we face the prospect that economic growth may slow. The situation is not helped by the fact that UK credit growth has been skewed towards the housing market and more latterly towards unsecured lending. Although of course it does allow bodies to claim that there is a bonanza now and even more of one just around the corner. From Legal and General yesterday.

has quantified the size and shape of the UK’s “Last Time Buyer” (LTB) market for the first time, and in doing so has identified 5.3m under-occupied homes in the UK, with 3.3m LTBs looking to downsize. The LTB market owns 7.7m spare bedrooms and a total of £820 billion of housing wealth, set to reach £1.2 trillion in 2020.

Wow! Can we mobilise this as after all we could pay off all the unsecured debt quite easily? Sadly life is not that easy and we have the issue of the fact that in spite of all the promises to the contrary there is little sign of credit growth for smaller businesses well apart from buy to let ones.

Where on this road does one see an interest-rate rise? A bit like a solution for Greece where we have been promised so many in the last week alone it seems to be a Mirage.