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?!
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.
- 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.
- This would not look so good should house prices fall, what would the asset value and “wealth effects” be then?
- 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.
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.
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.
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.