What is happening to house prices in Australia?

I thought that today we would look at an economy via one of the priorities of central bankers, You can present all the economic output and GDP data that you like but they will be impatiently waiting to see what is taking place with house prices. After all rising house prices provide wealth effects and support the balance sheet of the banks in something of a central banking double whammy. If we journey to the other side of the world we see a country that had quite a bit of that as the resources boom meant it avoided any credit crunch recession but the party has ended and was replaced by something of a hangover being experienced. This has been illustrated by this morning’s official data release.

Residential property prices fell 0.7 per cent in the June quarter 2019, according to figures released today by the Australian Bureau of Statistics (ABS).

The falls in property prices were led by the Melbourne (-0.8 per cent) and Sydney (-0.5 per cent) propertymarkets. All capital cities apart from Hobart (+0.5 per cent) and Canberra (+0.2 per cent) recorded falls in property prices in the June quarter 2019……….Through the year, residential property prices fell 7.4 per cent in the June quarter 2019. Prices fell 9.6 per cent in Sydney and 9.3 per cent in Melbourne. Hobart (+2.0 per cent) was the only capital city to record positive through the year growth.

Grim news for any central banker as the report then thrusts a dagger in any central banking heart,

The total value of Australia’s 10.3 million residential dwellings fell by $17.6 billion to $6,610.6 billion in the June quarter 2019. The mean price of dwellings in Australia is now $638,900. The total value of residential dwellings has fallen for five consecutive quarters, down from $6,957.2 billion in the March quarter 2018.

Reserve Bank of Australia

Of course this was really painful for them and as I pointed out on the 2nd of July so painful that they could not actually bring themselves to say house prices were falling.

Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently.

But they could at least respond in boom,boom fashion.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting.

Whilst they would have not know the full detail at the time the report below, especially the bit I have highlighted will have got their attention as reports came in.

The main contributors to the fall in the housing group this quarter are electricity (-1.7%), gas and other household fuels (-0.5%) and new dwelling purchase by owner-occupiers (-0.2%). This is the first quarterly fall for the housing group since the March quarter 1998, driven by lower electricity and gas prices, weak housing market conditions and increasing rental vacancy rates in some capital cities. ( ABS)

Credit Easing and Tax Cuts

The Australian authorities will have learnt from others experience that interest-rate cuts may be a necessary requirement for house prices to rise again but in the credit crunch era they are not sufficient so we got this too in July. From Reuters.

The Australian prudential regulator on Friday scrapped a minimum 7% interest testing rate for bank customers’ loan applications, adding to the stimulatory tools being deployed to revive the sluggish economy………..the government passed A$158 billion ($111 billion) worth of tax cuts to boost an economy that is threatening to stall.

Like elsewhere criticism of the banks only lasted as long as it took house prices to fall.

The changes also mark a softening of APRA’s more strident position on mortgage regulations that followed a scathing year-long public inquiry into banking sector misconduct.

These people are what you might call intellectually flexible. You see the household debt to disposable income ratio was 189.7% at the end of March as opposed to 157.5% a decade earlier. The housing debt to disposable income ratio has risen from 84.5% to 109.3% over the same time period.

What about now?

There must have been a huge sigh of relief at the RBA as this news came in. From today’s Minutes.

Established housing market conditions had steadied in recent months. Reported housing prices in Sydney and Melbourne had risen noticeably in August and auction clearance rates had increased further, although volumes had remained low.

What do they mean by that? Well here is new.au.com.

The national property market has recorded its largest monthly increase in more than two years as Australians capitalise on low interest rates, tax cuts and a slight loosening in lending standards.

The national market lifted 0.8 per cent over the last month.

Sydney had been at the centre of the downturn, but the New South Wales capital appears to be once again on the rise.

I hope the numbers are more accurate than the one later in their piece.

“One of the key considerations for policymakers is household debt levels remain around record highs, around 90 per cent of disposable income.”

Just the 100% short…

If we return to the RBA then it will be worried about the low volumes.

Housing turnover had remained low.

It will be much happier with this bit.

Variable mortgage rates had declined broadly in line with the reductions in the cash rate in June and July. Fixed mortgage rates had also declined substantially over the preceding six months.

Green shoots?

Growth in housing credit had been little changed over the year to July, having declined steadily through 2018. Credit to investors had declined slightly over previous months. Meanwhile, housing loan approvals to both owner-occupiers and investors had increased for the second consecutive month in July.

Oh and in case you were wondering what mortgage rates are lets go back to news.au.com

You can now find advertised mortgage interest rates below 3 per cent. That’s an extremely cheap loan,

Comment

Let us now switch to the other matter that will be concerning the RBA.

More generally, global trade volumes had fallen over the previous year, reflecting both the escalation of trade tensions and slower growth in Chinese domestic demand.

If you are in effect the South China Territories you will have been further worried by the August industrial production number for China only showing an annual growth rate of 4.4%. Whilst the oil price rise ( Brent Crude is around US $69 as I type this) is neutral for Australia it is most definitely negative for China.

If we look at the money supply data then I am afraid there is a cautionary note.

The history of M1 has been revised to include all transaction deposits, whereas previously some of these deposits were only included in M3. The history of M3 and Broad Money has also been revised, reflecting minor conceptual changes. Beyond these historical revisions, movements in transaction and non-transaction deposits between June and July 2019 are larger than usual.

Indeed they are and all I can tell you is that in July broad money ( M3 ) contracted as whoever the clown was at the RBA who made these changes they have made M1 useless as a guide. Unless of course you believe it rose by 11% in a month. They should have run both series for a while . Returning to broad money growth an annual rate of 2.5% is not much as we recall it covers both future inflation and growth.

So in spite of higher oil prices and the likely effect on inflation from it I expect a ying and yang. The Australian authorities will move to support house prices via more interest-rate cuts and credit easing but can that offset a weaker economy which might include an actual contraction? Much might change of course especially as my reliable signal via narrow money has been neutered.

 

 

 

 

 

 

The UK looks on course for some house price falls

As ever there is plenty of news about the UK housing market around but let us start with a consequence of government action which led to this reported by the BBC at the end of last week.

The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.

“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.

The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.

The BBC even provides a pretty good explanation of why this is a hot topic.

A combination of rising house prices, low interest rates enabling people to borrow more cheaply and government incentive schemes have been credited with driving all housebuilder shares higher.

In particular we find ourselves looking at a bonus scheme set at £4 compared to a payout based on one of £24 in case you wonder how we got to such an eye watering amount. But the real problem is that Help To Buy provided what is called in economic theory excess profits for housebuilders. We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect. So in turned into help for housebuilders profits and bonuses. Sadly it also showed the weakness of shareholders these days as only 48.5% of Persimmon shareholders voted against this at their annual general meeting, which begs the question of what would be enough greed to provoke a shareholder revolt.

What about now?

Here is the result of the latest Markit Household Finances survey.

UK households are generally projecting higher
house prices over the forthcoming 12 months in
October, but the degree of optimism regarding
property values dipped to the lowest since the
immediate aftermath of the EU referendum in July
2016.

Sadly for Markit recorded time seems to have started in July  2016 because if we look back we see some interesting developments. For example the reading in early 2014 at around 75 was the highest in that series. This means that those surveyed not only realised the UK economy was picking up but seemingly had figured out the determination of the Bank of England and UK government to drive house prices higher.

Also another piece of news hints at a change. From Financial Reporter.

The proportion of homes in England and Wales bought with cash fell to 29.6% in H1 2018, according to Hamptons International, the lowest figure since its records began in 2007.

In H1 2007, 33.6% of homes were purchased with cash, peaking in H2 2008 at 37.8%.

In H1 2018, 113,490 homes were cash purchases, totalling £25.3 billion in value according to Land Registry – the lowest level in five years and a drop of 21% compared to H1 2017.

You may not be heartbroken at the main reason why.

Hamptons International says the downward trend in the proportion of homes bought with cash reflects a drop off in investor and developer purchases. Countrywide data shows that in H1 2018 investors accounted for 24% of cash purchases, down from 32% in H1 2007 and a peak of 43% in H1 2008.

The same goes for developers who purchased just 2% of the homes bought with cash in H1 2018, down from 6% in H1 2007.

What about the house price indices?

The official data released last Wednesday told us this.

Average house prices in the UK have increased by 3.2% in the year to August 2018 (down from 3.4% in July 2018), remaining broadly stable at a national level since April 2018 .

So a welcome slowing from the period where annual growth remained about 5%. But the truth is that a lot of the change is represented by one place.

 The lowest annual growth was in London, where prices decreased by 0.2% over the year, down from being unchanged (0.0%) in the year to July 2018.

London has affected the area around it to some extent as well but much of the rest of the country has carried on regardless.

A somewhat different picture was provided on Friday by LSL Acadata.

At the end of September, annual house price growth stood at 0.9%, which is the lowest rate seen since April 2012, some
six and a half years ago.

They take the Land Registry data of which 35% is available now and have a model to project that as if 100% was in. They then update the numbers as for example around 80% should now be in for August. So taking what should be, model permitting, the latest data shows a much clearer turn in the market and they expect more.

Our latest outlook for the 2018 housing market suggests that the annual rate of house price growth will be in negative territory by the end of the year.

One reason for that is simply the trend is your friend.

This was the sixth month out of the last seven in which monthly rates have fallen, with the combined decline since February totalling some -2.0%. The average house price in England & Wales now stands at £302,626. This price is already some £2,240, or 0.7%, below the level of £304,866 seen last December, meaning that it will take a number of months of house price increases to make up this shortfall.

Also they point out that this has taken place in spite of the economic environment still being very house price friendly.

All this comes at a time when interest rates are at almost historic lows, mortgage supply is good, the number of people in work is higher than a year earlier, and average weekly earnings have increased by 2.4%, on a year-on-year basis. The housing market should be booming.

They would be even more bullish if they realised wage growth was 2.7% rather than 2.4%. There is also an element of “reality was once a friend of mine” below as we wonder what it would take for them to notice that this has been happening for some time?

While current initiatives (Help-to-Buy and Stamp
Duty relief) have relatively minimal overall effect on prices, as government continues to ratchet up the initiatives, the
risk is that these in turn could simply add to the affordability problem by causing prices to rise

This has particularly affected younger people which they do seem to have noted.

highlighted the falls in home ownership amongst 25-34-year-olds over the last 20 years, despite endless government initiatives to rectify the situation. As the report notes “Since 1997, the average property price in England has risen by 173% after adjusting for inflation, and by 253% in London. This compares with increases in real incomes of 25- to 34-year-olds of only 19% and in (real) rents of 38%.”

Some night think that raising prices some 173% above inflation was quite enough to cause an affordability problem!

Comment

UK house prices have proved to be very resilient and I mean that in the commonly used version of its meaning, not the central banking one. I thought that the real wage decline in 2017 would send annual growth negative but so far it has resisted that. However the LSL data set suggests it may finally be quite near.

As ever the danger is of the UK establishment panicking just like they did in 2012/3 and pumping it up, one more time. Or as LSL Acadata put it.

Announcements on Help-to-Buy, Starter Homes and possibly a Rent-to-Own programme based around giving CGT relief to landlords have all been mooted.

Personally I think we have had way too many announcements and initiatives which via windfalls to existing house owners and especially house builders have made the situation worse rather than better. For now the Bank of England at least seems stymied but of course this is the one area where they can be both inventive and innovative.

 

 

 

The Bank of England has a credit card problem

This morning has brought a development in two areas which are of high interest to us. So let us crack on with this from the Financial Times.

The Bank of England has issued a warning about the sort of risky lending practices particularly important to Virgin Money, at a critical time in the bank’s negotiations over a £1.6bn takeover by rival CYBG.

When one reads about risky lending it is hard not to think about the surge in unsecured consumer lending in the UK over the past couple of years or so.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March ( Bank of England)

That rate of growth was described a couple of months ago as “weak” by Sir Dave Ramsden. Apparently such analysis qualifies you to be a Deputy Governor these days and even gets you a Knighthood. Also if 8% is weak I wonder what he thinks of inflation at 2/3%?

However the thought that the Bank of England is worried about the consumer fades somewhat as we note that yet again the “precious” seems to be the priority.

In a letter sent to bank chiefs last week seen by the FT, the Prudential Regulation Authority, BoE’s supervisor of the largest banks and insurers, said “a small number of firms” were vulnerable to sudden losses if customers on zero per cent interest credit card offers then leave earlier or borrow less than expected.

How might losses happen?

Melanie Beaman, PRA director for UK deposit takers, wrote that banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.

The word effective makes me nervous so what does it mean?

EIR allows lenders that offer products with temporary interest-free periods to book in advance some of the revenues they expect to receive once the introductory period ends.

That sounds rather like Enron doesn’t it? I also recall a computer leasing firm in the UK that went bust after operating a scheme where future revenues were booked as present ones and costs were like that poor battered can. Anyway there is a rather good reply to this on the FT website.

I am expecting to win the lottery. Can l  bank the anticipated income now please?  ( TRIMONTIUM)

There is more.

Optimistic assumptions about factors such as customer retention rates and future borrowing levels allow banks to report higher incomes, but increase the risk of valuation errors that could lead to a reversal and weaken their balance sheets, according to the PRA.

Are these the same balance sheets that they keep telling us are not only “resilient” but increasingly so? We seem to be entering into a phase where updating my financial lexicon for these times will be a busy task again. Perhaps “Optimistic” will go in there too?

Moving on one bank in particular seems to have been singed out.

Almost 20 per cent of Virgin Money’s annual net interest income in 2017 came from the EIR method. Industry executives said any perceived threat to capital levels could strengthen CYBG’s (Clydesdale &Yorkshire) hand in negotiations. Virgin Money declined to comment on the PRA’s letter or the merger discussions. CYBG and the PRA also declined to comment.

This is a little awkward as intervening during a takeover/merger raises the spectre of “dirty tricks” and to coin a phrase it would have been “Fa-fa-fa-fa-fa-fa-fa-fa-fa-far better” if they have been more speedy.

FPC

We do not mention this often but let me note this from a speech from Anil Kashyap, Member of the Financial Policy Committee. Do not be embarrassed if you thought “who?” as so did I.

The statute setting up the FPC also makes the committee responsible for taking steps (here I am
paraphrasing) to reduce the risks associated with unsustainable build-ups of debt for households and
businesses. This means that the FPC is obliged to monitor credit developments and if necessary be
prepared to advocate for policies that may lead some borrowers and lenders to change the terms of a deal
that they were otherwise willing to consummate.

Worthy stuff except of course if we move to the MPC and go back to the summer of 2016. This was Chief Economist Andy Haldane in both June and July as he gave essentially the same speech twice.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature
rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption.

Seeing as monetary policy easings in the UK had invariably led to rises in unsecured borrowing you might think the FPC would have been on the case. However Andy was something of a zealot.

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a
collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale
of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be
delivered promptly as well as muscularly.

Not only had Andy completely misread the economic situation the credit taps were turned open. He and the Bank of England would prefer us to forget that they planned even more for November 2016 ( Bank Rate to 0.1% for example) which even they ended up dropping like it was a hot potato.

My point though is that the cause of this below was the Bank of England itself. So if the FPC wanted to stop it then it merely needed to walk to the next committee room.

Consumer credit had been growing particularly rapidly. It had reached an annual growth
rate of 10.9% in November 2016 – the fastest rate of expansion since 2005 – before easing back
somewhat in subsequent months. ( FPC Minutes March 2017)

As some like Governor Carney are on both committees they could have warned themselves about their own behaviour. Instead they act like Alan Pardew when he was manager of Newcastle United.

“I actually thought we contained him (Gareth Bale) quite well.”

He only scored twice…..

Credit Card Interest-Rates

Whilst the Bank of England is concerned about 0% credit card rates albeit for the banks not us. There is also the fact that despite all its interest-rate cuts,QE and credit easing the interest-rate charged on them has risen in the credit crunch era.

Effective rates on the stock of interest-charging credit cards decreased 22bps to 18.26% in April 2018.

I remember when I first looked back in the credit crunch day and it was ~17%.

Comment

You may be wondering after reading the sentence above whether policy has in fact been eased? I say yes on two counts. Firstly it seems to be an area where there is as far as we can tell pretty much inexhaustible demand so the quantity easing of the Bank of England has been a big factor eventually driving volumes back up. Next is a twofold factor on interest-rates which as many of you have commented over the years a lot of credit card borrowing is at 0%. It may well be a loss leader to suck borrowers in but it is the state of play. Next we can only assume that credit card interest-rates would be even higher otherwise although of course we do not know that.

What we do know is that unsecured lending of which credit card lending is a major factor has surged in th last couple of years or so. Accordingly it was a mistake to give the Bank of England control over both the accelerator and the brake.

Me on Core Finance TV

 

The Bank of England is about to take economic centre stage

Today the Bank of England meets to set policy for the UK and it is the most “live” meeting since the early part of 2009. After a long period of dullness and ennui we have entered a new phase where we are now likely to see policy changes on Bank Rate and/or Quantitative Easing. As we progress I expect to see an addition to Credit Easing policies such as the Funding for (Mortgage) Lending Scheme, however it is not under the formal control of the Monetary Policy Committee as the Governor will decide it with the Chancellor of the Exchequer.

We have been discussing in recent weeks the design of the Funding for Lending Scheme (FLS) that you and I announced in our speeches at the Mansion House in June. ( Governor Mervyn King to Chancellor Osborne)

Unlike the ECB the Bank of England does not have a formal procedure for announcing such policies in the way that the ECB uses its press conference after its interest-rate announcement. Also it is in essence a two man operation albeit that neither of those responsible for the original FLS announcement are in office so we could see a tweak or two. But the fundamental point is that so far external members (4) of the MPC have been excluded from such discussions and in fact involvement of insider/core members has been ephemeral.

Whatever happened to Baron King?

Those who recall his critiques of banking and banker remuneration may have wondered about this.

As the Financial Times revealed on Friday, he has emerged as a senior adviser to Citigroup.

Apparently a near £8 million pension pot is simply not enough these days for a Baron about town. Also perhaps he meant his criticisms for British banks and American ones were and are fine. For someone often so keen to be in the news and media it was also odd that the news came out via the back rather than the front door.

Oh and as Michael Saunders of Citigroup is about to join the Monetary Policy Committee it looks a little like a revolving door style operation to me.

Economic Outlook

NIESR

The National Institute for Economic and Social Research has produced a report on the UK economic outlook and we should review it noting that after predicting 0.6% GDP growth for the second quarter of 2016 they are a batter in form so to speak. From the BBC.

The UK has a 50/50 chance of falling into recession within the next 18 months following the Brexit vote, says a leading economic forecaster.

We get a more specific forecast here.

Overall the institute forecasts that the UK economy will probably grow by 1.7% this year but will expand by just 1% in 2017….This would see the UK avoid a technical recession, typically defined as two consecutive quarters of economic contraction.

If we move to DailyFX we see that a contraction is expected in this quarter.

NIESR also said that the country’s economy is likely to decline by 0.2 percent in the third quarter of this year.

So the contraction is half that suggested by the flash business survey produced by Markit on July 22nd which suggested a 0.4% decline this quarter. As to inflation it thinks this.

With regards to prices, the institute expects inflation to peak at over 3 percent by the end of 2017.

Regular readers will be aware that I suggested the rise in UK annual inflation due to the post Brexit fall in the value of the UK Pound £ to be of the order of 1%. The NIESR also expects a rise in the unemployment rate to 5.7% so what used to be called the Misery Index ( inflation and unemployment added together) is on the march.

Policy Prescription

Again from DailyFX here is the NIESR prescription.

In these forecasts, the NIESR projected under the assumption that the Bank of England will reduce the main lending rate to 0.25 percent at their August meeting and then to 0.10 percent in November. Their analysis also suggests that a further round of £200 billion in quantitative easing could boost the economy by as much as 1.5 percent over the next 2 years.

The prescription seems to me to be an example of silly (cut to 0.25%), sillier (then cut to 0.1%) and silliest ( £200 billion of QE). There are good reasons to think that interest-rate cuts are not a stimulus when we are near to 0.%. Also a cut to 0.1% is just so obviously avoiding cutting to 0%! Nearly as bad is the fact that a the 0.15% cut implied is hardly likely to work if the the preceding  5% or so of Bank Rate cuts has not. Then we get to the silliest bit where we provide some £200 billion of QE with a ten-year Gilt yield of 0.8% to start with. What is that expected to achieve? One think it might achieve is to further heighten the crisis in final salary pension funds where deficits rise as yields (strictly corporate bond ones) fall. So as companies move to put money into the pension schemes to counteract the new “deficit” we see a contractionary effect on the economy.

One thing that the NIESR may have provided us with is a template for what Bank of England Chief Economist Andy Haldane told us.

Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

In case you were left in any doubt as to when we got this

By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August Inflation Report round.

Andy is a curious chap as whilst he exclaims “More,More,More” and indeed “Pump It Up” he also tells us this.

And monetary policy of course needs to be mindful of the potential adverse consequences of administering ever-larger doses of the monetary medicine.

Purchasing Managers Indices

The last of these in the July series was produced this morning so let us take a look at it.

At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of GDP. “It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.

Thus they are a little more bearish for current economic prospects than the NIESR.

Comment

So as of late this afternoon UK monetary policy seems set to be on a different course although the vast majority of us will not know until 12 pm tomorrow when the official announcement is made. So in the gap there will be the danger of “some being more equal than others” and this change driven by Governor Carney was a mistake in my view for that reason. Official vessel are often leaky.

Also the Bank of England seems set to ignore its inflation target yet again. As the “looking through” of the rise in inflation in 2010/11 turned into an economic disaster via the sharp fall in real wages it caused the portents are not good. Just because there is pressure to “do something” does not mean that “something” will “do”. I would vote for unchanged policy as I waited to see how we respond to the lower value of the UK Pound £ which on the old rule of thumb has provided a move equivalent to a 2%  Bank Rate cut.

Meanwhile there is of course the issue of the fact that I have been forecasting that the next Bank of England Bank Rate would be down for over a couple of years now. Meanwhile the credibility of any Open Mouth Operations and Forward Guidance of Governor Carney falls and falls.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect. ( Mansion House June 2014).

That was taken as a promise as it turned out to have the value of a pledge at best.

HSBC

It is a strange world at times where we are told banks need more capital and yet things like this take place.

Announcing a share buy-back of up to $2.5bn in the second half of 2016 (‘2H16’) following the successful disposal of HSBC Bank Brazil on 1 July 2016.

It was not as if the HSBC performance in the latest Euro area stress tests was anything to write home about.