Slow house price growth and a fall in credit card borrowing will worry the Bank of England

2020 has only just begun to borrow a phrase from The Carpenters but already the pace has picked up. Should the oil price remain above US $68 for a barrel of Brent Crude there will be consequences and impacts. But also we can look back on the Bank of England’s priority indicator in 2019 and on the subject here is the Nationwide.

Annual UK house price growth edged up as 2019 drew to a
close, with prices 1.4% higher than December 2018, the first
time it been above 1% for 12 months.

I have put in the format that would be most sensible for whoever is presenting the Bank of England Governor’s morning meeting. That is because pointing out the rise was only 0.1% in December does not seem as good and noting that unadjusted average prices fell by £452 may rewarded with an office that neither the wifi nor the cake trolley reach.

Continuing with that theme perhaps looking north of the border will help.

Scotland was the strongest performing home nation in
2019, with prices up 2.8% over the year.

Might be best to avoid this though.

London ended the year as the weakest performing region,
with an annual price decline of 1.8%.

If you are forced into looking at London then the Nationwide has done some PR spinning of the numbers.

While this marks the tenth quarter in row that prices have fallen in the capital, they are still only around 5% below the all-time highs recorded in Q1 2017 and c50% above their 2007 levels (UK prices are only around 17% higher than their 2007 peak).

Best to avoid the fact that London is usually a leader of the pack for the rest of the country.

Affordability

Should our poor graduate find themselves in this area then perhaps a new career might be advisable as even the Nationwide cannot avoid this.

“Even in the North and Scotland, where property appears
most affordable, it would still take someone earning the
average wage and saving 15% of their take home pay each
month more than five years to save a 20% deposit. In Wales
and Northern Ireland, it would take prospective buyers nearly seven years, and almost eight years for people living in the West Midlands.
“Reflecting the trend in overall house prices, the deposit
challenge is most daunting in the South of England, where it would take an average earner almost a decade to amass a 20% deposit. Again, the pressures are most acute in the
capital, where someone earning an average income would
need around 15 years to save a 20% deposit on the typical
London property (this is even longer than was the case
before the financial crisis, when it would have taken around
ten and a half years).”

So houses are very expensive and in many cases effectively unaffordable which contradicts the official measures of inflation which somehow ( somehow of course means deliberately) miss this out. So officially you are richer it is just unfortunate that you cannot afford housing….

Consumer Credit

Our unfortunate trainee cannot catch a break today as we note this.

The net flow of consumer credit was £0.6 billion in November, the smallest flow since November 2013.

Within it was something to send a chill down the spine of a modern central banker. The emphasis is mine and it will also have stood out in capitals to the Bank of England.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.6 billion in November. This is the weakest since November 2013, and below the £1.1 billion average seen since July 2018. Within this, there was a net repayment of credit cards for the first time since July 2013, of £0.1 billion. Net borrowing for other loans and advances also weakened, to £0.7 billion.

Actually the stock of credit card borrowing fell by a larger amount from £72.4 billion to £72.1 billion. However whilst the drop stands out a little care is needed as the October flow was more than has become usual ( +£400 million) so the drop may be a bit of an aberration.

We learn more from the next bit.

These weak flows mean the annual growth rate of consumer credit fell to 5.7% in November, compared to 6.1% in October. It has now fallen 3.7 percentage points since July 2018, when it was 9.4%.

Whilst that may be true ( we recently had some large upwards revisions which reduced confidence in the accuracy of the data series) it dodges some important points. For example 5.7% is still much faster than anything else in the economy and because of the previous high rate of growth had to slow to some extent due to the size of the amount of consumer credit now ( £225.3 billion in case you were wondering). Also the other loans and advances section continues to grow at an annual rate of 6.6% which has not only been stable but seems to be resisting the impact of a weaker car market as car loans are a component of it.

Mortgage Lending

This morning’s release was a case of steady as she goes.

Lending in the mortgage market continued to be steady in November, and in line with levels seen over the past three years. Net mortgage borrowing fell marginally to £4.1 billion, and mortgage approvals for house purchase remained unchanged at 65,000.

The catch is that the push which began with the interest-rate cuts and QE bond buying after the credit crunch and was turbo-charged by the Funding for Lending Scheme in the summer of 2012 is losing its impact on house prices.

For those of you wondering what the typical mortgage rate now is another release today gave us a pointer.

Effective rates on new secured loans to individuals decreased 9bps to 1.87%.

For more general lending they seem a little reticent below so let me help out by saying it is 6.88%.

Effective rates on outstanding other unsecured loans to individuals decreased 4bps

That is another world from a Bank Rate of 0.75%. Meanwhile on that theme I would like to point out that the quoted interest-rate for credit cards is 20.3%. I have followed it throughout the credit crunch era and it is up by 2.5%. Yes I do mean up so relatively it has risen more as official interest-rates declined. This is something that has received a bit of an airing in the United States and some attention but not so here.

Comment

Let me open with two developments in the credit crunch era. The first is that even high interest-rates ( 20%) above do not seem to discourage credit card borrowing these days. I will also throw in that numbers from Sweden and Germany suggest that a combination of zero interest-rates for many and negative ones for some seem to encourage saving. That is a poke in not one but both eyes for the Ivory Towers.

Moving to our trainee at the Bank of England then I suggest as a short-term measure as the Governor is only around until March suggesting a man of international distinction is required to deal with issues like this.

Meteorologists say a climate system in the Indian Ocean, known as the dipole, is the main driver behind the extreme heat in Australia.

However, many parts of Australia have been in drought conditions, some for years, which has made it easier for the fires to spread and grow.

Returning to the economy then there was some better news from the broad money figures as November was a stronger month raising the annual rate of M4 growth to 4%. The catch is that it takes a while to impact and so is something for around the middle of 2021.

Me on The Investing Channel