Could the UK target house price inflation and should we?

Yesterday brought news of a policy initiative from the Labour party on a subject close to my heart and was a subject which occupied much of my afternoon and evening. It also reminded me of the way that social media can have more than a few different but similar strands ongoing at the same time. So if I missed anyone out apologies but I did my best and did better at least that the respondent who seemed to think my name was Tom.

Here from The Guardian is the basis of the proposal.

The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes.

The shadow housing secretary, John Healey, is considering whether, under a Labour government, the Bank should be set an explicit target following a decade of runaway growth in the property market, with the aim of tackling the housing crisis.

The author of the idea is Grace Blakeley and I replied to her that there are various problems with this but let us set out her idea properly from her paper for the think tank the IPPR.

This would be equivalent to the remit the Monetary Policy
Committee has to control consumer price inflation. Under such a target the Bank of England should aim to keep nominal house price inflation at (say) zero per cent for an initial period – perhaps five years – to reset expectations,
and allow affordability to improve.

As I replied to Grace I am a fan of that in spirit but there are issues including one from the next sentence which I have just spotted.

It should then be increased to the same
rate as the consumer price inflation target of 2 per cent per year, meaning zero real-terms house price growth.

Er no that is not zero in real terms because if you are aiming for “affordability to improve” your objective must be for wage growth to exceed house price growth yet it does not apparently merit a mention there. If for example both consumer and house price inflation were on this target at 2% per annum you would be losing ground if wage growth was below that level.

How would this be enacted?

The target should be implemented using
macroprudential tools such as capital requirements, loan-to-value, and debt to-income ratios.

The first question is whether you could do this? Mostly a new policy regime could as we already have some moves in this direction from the Bank of England as pointed out in the paper.

The FPC recently implemented a
loan-to-income ratio of 4.5 per cent for 15 per cent of new mortgages,

The two catches as that this area is one where the truth can be and sometimes is hidden as those who recall the  “liar loans” era will know. Next is the concept of shadow banking or if I may be permitted a long word the concept of disintermediation where you restrict the banks so people borrow form elsewhere such as offshore or overseas.

These problems would be especially evident if you tried to implement this.

Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific.

That recognition is welcome but the scale of the issue troubles me. Let me give you some examples from right now where house prices are rising in much of the Midlands and Yorkshire as well as Northern Ireland whilst falling in and around London. Also as @HenryPryor pointed what the situation in Northern Ireland is very different to elsewhere.

Confirmation from that despite enjoying robust inflation in recent months, house prices in Northern Ireland remain some 41% 𝐥𝐨𝐰𝐞𝐫 than they were just prior to the start of the financial crisis in 2007.

Perhaps you could define Northern Ireland but is even it homogenous? A clear danger is that you end up with a bureaucratic nightmare with loads of different definitions and all sorts of border issues as well as increasing the likelihood of another form of disintermediation.

The relationship between the Bank of England and the government

A clear issue is that whilst the Bank of England can influence house prices it does not control them and the paper sets out areas where it is not in control.

House prices are also determined by other factors, not least the supply of housing, and therefore adoption of the target would need to be accompanied by a much more active housing policy. This might include public housebuilding, changes to planning policy, and curbs on overseas purchases of UK homes (Ryan-Collins et al 2017). The FPC should be able to request that the government do more with housing policy if it judges that it will be unable to meet its target through macroprudential tools alone.

The supply of housing is something we have discussed on here pretty much since I began writing articles and the theme has been that government’s of many hues have serially disappointed. The Ebbsfleet saga has been the headline in this respect. Also I have to say that the idea of the Financial Planning Committee needing to “request” help from government policy is welcome in one way but problematic in another. First it is a confession that macroprudential policies are far from a holy grail in this area. Second I can see many scenarios of which the main one would be an upcoming election when the government would simply pay lip service or worse ignore the “request”. Thus we would likely find ourselves singing along to Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

I do mostly agree with this part though and so does the Bank of England as otherwise it would not have introduced the Funding for Lending Scheme back in the summer of 2012.

It is also worth noting, however, that recent research has shown that the level of mortgage lending is the primary determinant of house prices (Ryan-Collins et
al 2017).


There is a lot to consider here and let me again say that as regular readers will be aware I think that economic policy does need to take account of asset price booms and busts. The catch is in the latter part though because the very same Bank of England that you would be asking to reduce house price growth has been explicitly ramping it since the summer of 2012 and implicitly before then with the Bank Rate cuts and QE bond purchases that preceded it. So the current poachers would have to turn into gamekeepers. Would they? I have my doubts because as we look around the world central banks seem to fold like deck chairs when asset prices fall.

Next comes the issue of could this be done? To which the answer is definitely maybe as you could start on this road and at first your theories would apply. But if we look back to the past history of macroprudential policies there was a reason why they were abandoned and it is because they themselves lead to a boom and bust cycle and bringing things up to date I have doubts on these lines as well as I tweeted to Grace.

One of the problems of central banks in the modern era is that they have often ended up operating in a pro-cyclical fashion. How can you be sure with their poor Forward Guidance record that they can be counter cyclical?

It is easy to spot cycles in hindsight but looking ahead it is far harder as otherwise the aphorism that central banks have never predicted a recession would not keep doing the rounds.

Can we fix it? Yes we can make a start as I hinted at here.

Whilst I support the spirit of this in terms of including house prices. I would point out that the UK could change things by simply going back to the Retail Prices Index as an inflation target because it includes house prices.

Personally I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect. So in effect we would be reversing the changes made by Gordon Brown in the early part of the 2000s. Then off we go although something else would have to be changed as well as basically a clear out of current Bank of England policy makers.

you have the issue of it these days also supporting the economy as defined by GDP

Me on The Investing Channel

For the Bank of England the only way is up for UK house prices

A major factor in the UK economy is the behaviour of house prices.  These are seen by the UK establishment as a bell weather for the state of the economy itself. The Bank of England Underground Blog offered us these insights back last December.

What explains the strong comovement between the housing market and the labour market in the UK?

it is essential to better understand the drivers of the striking comovement between house prices and labour markets in the UK.

So there is a clear implied view that is you stop house price falls then you are likely to stop unemployment rising. That explains the way that the Bank of England introduced the Funding for Lending Scheme in the summer of 2013 which reduced mortgage rates by up to 2% by its own estimates and sent house prices higher again. Perhaps it also explains this type of rhetoric when he was Chancellor from George Osborne. From the Financial Times on May 20th..

A vote to leave the EU would hit UK house prices by between 10 per cent and 18 per cent, George Osborne has warned, in an escalation of the referendum rhetoric.

So we were supposed to then fear a rise in unemployment? Actually it was never quite as badged because in fact it was a reduction from expected growth.

The Treasury estimates that, by mid-2018, house prices would be at least 10 per cent below their expected trend.

So let us take a look at the evidence so far as we mull the fact that even though this was just rhetoric the Bank of England was so affected by it that it produced a “sledgehammer”.


The Nationwide has offered us its thoughts on the state of play in August.

UK house prices increased by 0.6% in August, resulting in a slight pick up in the annual rate of house price growth to 5.6%, from 5.2% in July, although this remains within the 3- 6% range prevailing since early 2015.

So much more “same as it ever was,same as it ever was” (Talking Heads) than “end of the world as we know it” (REM) on a price measure. As to the future the Nationwide spends quite a few paragraphs telling us that it does not know.

There was one interesting change to note which is this.

However, the decline in demand appears to have been matched by weakness on the supply side of the market.

So for all the furore about prices it is in fact quantity where we are seeing some action and of course this feeds into an existing trend after the spring Stamp Duty changes. Indeed it has led to this.

Surveyors report that instructions to sell have also declined and the stock of properties on the market remains close to thirty-year lows.

Of course lower volumes could be because even on the highly favourable definition used the first time buyer house price to earnings ratio has hit 5.3. Some of that is due to london rising to a breathtaking 10.4 but by no means all of it.

Mortgage Approvals

The Bank of England was singing the same song yesterday as it told us this.

The number of loan approvals for house purchase was 60,912 in July, compared to the average of 68,775 over the previous six months.

So another sign of a quantity fall which has been translated pretty much everywhere as a sign of lower prices to come although as noted above if supply remains low that may be much less certain. Also for completeness  net mortgage volumes fell.

Lending secured on dwellings increased by £2.7 billion in July, compared to the average of £3.5 billion over the previous six months

However care is needed because gross mortgage volumes rose ( not by much but rose) and the change was that repayments were higher by £1.6 billion in July compared to June.

The Bank of England

We now need to consider the Bank of England response to this as we know that it sees the housing market not only as a bell weather but also as a powerful causative agent.

These uncertainties are expected to cause: some companies to delay major decisions such as investment and hiring plans; lower house prices; and less spending by households.

The opening salvo was provided by this.

A cut in Bank Rate from 0.5% to 0.25%

So tracker mortgages will respond to this and may have already cut but for new mortgages the impact of this is very minor as the Mortgage Advice Bureau has reported.

The wealth of product availability, coupled with rock bottom rates has led to the overwhelming majority of people fixing their mortgage; those remortgaging and fixing dropped slightly in July to 88.4%, down from 90.7% in June, with 93.2% of purchase applicants opting for a fixed deal.

The variable rate to fixed rate picture has in fact shifted substantially according to the Nationwide.

The proportion of mortgage balances on variable rate products is lower than average at present (c.45% compared to an average of around 60% since 2001).

Thus we see that the Bank Rate weapon has weakened over time which means that the Bank of England is using other tactics and here is this afternoons effort.

Date of operation 31/08/16 Total size of operation Stg 1,170mn

Stocks offered for purchase UKT_2.25_070923 UKT_2.75_070924 UKT_2_070925 UKT_6_071228 UKT_4.75_071230

This is the current effort to reduce the interest-rate on fixed-rate mortgages which is having an impact. For example whilst you need a 50% deposit the Coventry has offered a 7 year fixed rate mortgage at just below 2% (1.99%). That is the mortgage market flip-side of a UK seven-year Gilt yield of less than 0.5%.

If you look at the UK’s past track record and also likely trends for inflation you can see why people are going for fixed-rate mortgages at this time. It is also noticeable that those doing so now have benefitted from ignoring the Forward Guidance of Bank of England Governor Mark Carney who of course promised interest-rate rises and then cut.

Term Funding Scheme

This does not yet actually exist but seems likely to be the bazooka for the housing market or the real “sledgehammer” of Bank of England Chief Economist Andy Haldane. Somewhat awkwardly for Bank of England pronouncements that the UK economy needs urgent help it does not start until September 19th! Central bankers must have their holidays it seems. But the Nationwide seems to have nailed down what it will achieve.

The creation of the new Term Funding Scheme is also important, as it means that lenders will have guaranteed access to low cost funding from the Bank of England, which should help ensure the supply of credit is maintained.

They of course mean the supply of credit to mortgages.


Let me hand you over to Bank of England Chief Economist Andy Haldane who told the Sunday Times this over the weekend.

As long as we continue not to build anything like as many houses in this country as we need to … we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.

Actually Andy is forgetting the impact of the policies he so strongly supports but then self-awareness is not one of our Andy’s strengths. “I never have [felt wealthy]”

Haldane owns two homes – one in Surrey and a holiday home on the Kent coast. His basic salary at the Bank is £182,000 and he is in line for a pension of more than £80,000 a year when he retires. (The Guardian).

He has never felt the need for a credit card either. Oh and according to Hargreaves Lansdown if he was more financially literate he might realise this.

Andy Haldane’s pension benefits are estimated to be worth in excess of £3 million, which is not bad going for someone who professes not to even know how pensions work.

Still we at least have a song for Andy’s advice on UK house prices. Cue Yazz.

But if we should be evicted
Huh, from our homes
We’ll just move somewhere else
And still carry on

(Hold on) hold on
(Hold on) hold on
Ooh, aah, baby

(Hold on) hold on
(Hold on) ooh ooh aah

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now



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


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.


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.


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.


The unreliable boyfriend takes center stage at the Bank of England

Take is a rare day in that it is one where we have a live Bank of England policy meeting where there is a good chance that the announcement will not be unchanged! I am being careful with my words because the nine members of the Monetary Policy Committee voted yesterday. So market players will this morning face the issue of potentially trading with people who have an early wire on the news. Should there be a Bank Rate cut then it will be the first since March 2009 and the last vote for more Quantitative Easing was in early 2013 when the previous Governor of the Bank of England Baron King failed to get enough for a majority. That was for the best as he would have eased policy into a boom.

Mark Carney presses for a cut

A few days after the Brexit referendum Bank of England Governor Mark Carney told us this.

we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.

Considering his pre referendum warnings about the impact of a vote to leave the European Union this provided food for thought which he then backed up with this.

It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners.

He then committed himself.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

The bit about not pre judging the views of the other 8 members sadly badly with this bit.

As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum. This was the view of all nine independent members of the MPC.

If I was one of the 8 other members of the MPC I would have been very unhappy with this.

Shadow MPC

There are various shadow MPCs around and the City AM version has voted for a cut. Mind you some care is required with these bodies. You might like to check who is on them and the record of the longest established one from the Institute of Economic Affairs has not been great. They told us this less than a month ago.

In its June 2016 e-mail poll, the Shadow Monetary Policy Committee (SMPC) elected, by a vote of five to four, to raise rates in June.

This does mean that they are not a guide to what will happen next I think! Although they have much more of a chance with their suggestion of a hold today of course.

The unreliable boyfriend

This phrase was used about Mark Carney by the Labour MP Pat McFadden just over two years ago. From the BBC.

“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.

“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”

Lest we forget Mark Carney had used a 7% unemployment rate as a threshold for interest-rate rises and had just hinted at an interest-rate rise “sooner than markets expect” in his Mansion House speech. What Mr McFadden did not know then was that there would be more policy swerves and U-Turns and that rather than a series of interest-rate increases raising Bank Rate to between 2.5% and 3% there would in fact be none at all.

There is a begged question of here whether Mark Carney will also be an unreliable boyfriend on the issue of interest-rate cuts?

The case against a cut

There has already been quite an easing in monetary policy. If we look at the fall in the effective or trade-weighted exchange-rate since the Brexit referendum is if we use the Bank of England rule of thumb equivalent to a 2% cut in Bank Rate. The situation over the past year is similar to that (slightly more ). If we look back we are near to the recent low established in March 2013 on this measure but returning to the monetary consequences we will receive a boost to both output and inflation from this if we stay here. The catch of course is the mixture which a Bank Rate cut could easily make worse rather than better.

There is also the issue of the fall in Gilt yields ( UK sovereign bonds). The night before the Brexit referendum the 10 year Gilt yield closed at 1.37% and it is at .0.77% as I type this. We have seen a response to this in the falls in fixed-rate mortgages sometime to record low levels. Also if we look longer-term there has been an enormous change in what it costs to borrow with our 30 year yield being 1.61% as I type this. The underlying principle of what I wrote below remains.

This does move us towards the arena of fiscal policy and combines with the issue of the UK having a new Chancellor and government. The “mood music” such as we have it points towards an easing of fiscal policy but we have little or no idea of how much or when beyond hints towards the Autumn Statement in November. Perhaps someone has noticed the hints of a 0% coupon perpetual Japanese Government Bond which have emerged this week which is the nearest I have ever seen to the economics concept of “free money”. Of course they have not yet actually done this but in the current environment it seems feasible as of course it does appear that the spaceship described by Douglas Adams is currently in orbit around the Earth.

“Please do not be alarmed,” it said, “by anything you see or hear around you…We are now cruising at a level of two to the power of two hundred and seventy-six thousand to one against and falling, and we will be restoring normality just as soon as we are sure what is normal anyway. Thank you…”


There is much to consider today as we find ourselves considering hints and promises made by a man who is an “unreliable boyfriend”. Those who remortaged or took out fixed-rate business loans on the back of his Forward Guidance may well have rather unpleasant  thoughts about the consequences. So we know that his Forward Guidance about interest-rate rises was useless which begs a question about Forward Guidance for cuts.

As regular readers will know I stood alone against the barrage of Forward Guidance forecasts of interest-rate rises in the media and by official bodies as it was back in December 2013 I first made my view know that a cut was as likely as a rise. It is awkward saying something will happen when you do not agree with it but these days I find I have a lot more company in that expectation! Have any of them issue a mea culpa? Surely someone must have?

As to other policy measures then an addition to the Bank of England’s £375 billion of QE is a possibility. I have felt that Governor Carney has given the impression that he is not a QE fan over his period of tenure at the Bank of England but of course the infinite improbability drive is in play. I feel that some version of a boosted/revived Funding for Lending Scheme is not far off a certainty but that may have to wait. That needs the permission of the Chancellor and would therefore have to be quite a rush job. Also that tends to be announced away from monetary policy meetings.

I will be updating this as the day progresses but as Douglas Adams pointed out whatever happens.

Don’t Panic

Update 2:45 pm

The correct decision was reached by the majority in the end as shown below.

At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.

Those who have followed my analysis will not be surprised to read that Gertjan Vlieghe voted for a cut and became the first person to vote for a UK Bank Rate below 0.5%. If there was a surprise it was that Andrew Haldane did not join him in that. Maybe Governor Carney found a way of corralling the Bank of England insiders.

However in spite of the almost continual failure of his efforts at Forward Guidance Mark Carney tried Mark 21.

To that end, most members of the Committee expect monetary policy to be loosened in August.

Those are the same members who have been expecting a Bank Rate rise (from themselves) over the last two years or so! Truly we can say that the left hand does not know what the right hand is doing.




Yesterday I gave my thoughts on this to TipTV Finance.

Prospects for the UK housing market and house prices

It is hard to keep housing and property out of the news in the UK. In the run-up to the Brexit referendum there was the announcement from Chancellor George Osborne that house prices would fall by 18% is the UK voted to leave the European Union. As the UK did leave we will find out whether that was accurate or more like his forecast that interest-rates would rise which faces a reality of ever lower Gilt yields. Yesterday the UK issued a 5 year Gilt at a yield of 0.38% which was both an all time low and below the Bank Rate of 0.5% which gave a clue as to where the wind is blowing. Here is some news on the front from the Guardian.

The lowest 10-year mortgage rate on record is set to be launched on Friday….Coventry Building Society is to offer a rate of just 2.39% for borrowers willing to fix their loan for a decade.

There has been an effect on commercial property funds where 5 others have followed Standard Life in declaring a suspension usually of 28 days. If we look back we see that they had previously had such a good run that they were vulnerable and of course under a thinnish veneer they are always illiquid. Unless you can sell a shopping centre or mall quickly and those of course poses the questions of to whom  and at what price? Also as soon as one went the others were likely to be like dominoes. Should it go very wrong then a familiar crew will be left holding the baby. From Bloomberg.

The major banks have 69 billion pounds of exposure and smaller banks and building societies hold the remaining 17 billion pounds.

According to the analysts quoted this is a sign of success, a view unlikely to be shared by those owning bank shares.

House Prices

Today has seen an intriguing set of data from the Halifax.

House prices in the three months to June 2016 were 1.2% higher than in the three months to March 2016….Prices in the three months to June were 8.4% higher than in the same three months of 2015 .

Actually they rose by 1.3% in June itself which did not show much sign of pre Brexit referendum nervousness. I also note that the thoughts and indeed for first time buyers hopes of house price falls after the changes to Buy To Let stamp duty in April have so far failed to happen.

It is quite extraordinary that house prices have maintained annual growth which even at a slightly lower annual growth rate of 8.4% is way ahead of wages growth (2%) or economic growth (~2%). Looked at like that not only would a period of decline not be a disaster more than a few would see it as good news. Along the way we have seen the first time buyer earnings to house price ratio go back above 5. Sadly it is no longer available but must have got worse.


The latest monthly Economic Review has a section which looks as though it has been written by someone who have been living in a cave for quite some time.

Generally, house prices grew strongly in Great Britain before the economic downturn.

I am also not sure about the use of Great Britain when they say they use data from the property service of Northern Ireland but let us carry on.

there has been resurgence in recent years.

However we then get an analysis of the relationship between their data for wages and house prices since 2005 and as you can imagine my eyes lit up at that. So what do they tell us?

Before the 2008 downturn, the annual percentage change in house prices was higher than annual weekly earnings in the UK.

That is hardly news on here but let us bring this more up to date.

From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%

Oh and the ONS has slipped away here from the official view which is that lower mortgage rates has improved affordability. If we move to the ratio between house prices then we see that we are almost back to what was supposed to be one of the causes of the credit crunch.

Prior to the economic downturn, the house price to earnings ratio in Great Britain followed an upward trend due to strong house price growth outstripping wage growth, with the average house price up to 8.5 times the average wage at an annualised level in mid-2007……..The ratio did not markedly increase until late 2013, when a resurgence in house price inflation and relatively slow growth in AWE caused the ratio to increase from 7.2 in August 2013 to beyond 8.0 after August 2015.

It will be above 8.1 in May 2016 if their numbers follow the same pattern as the Halifax/Markit series. Please note the use of the number 8 which replaces the number 5 used for earnings if you look at individual rather than joint numbers. Makes a difference does it not?!

Figure 21- House price to earnings ratio for Great Britain

Some of this represents the London effect which has pushed the average numbers higher and there are clear regional differences as for example North East England has become more affordable. There is a data swerve used here for which I apologise on behalf of the ONS but we get this if we switch to annual wages data (ASHE) which is only up to April 2015.

London continued to be the least affordable region in the 2014 to 2015 financial year, in which the house-prices-to-earnings ratio was 9.2. In the North East, the ratio has declined sharply since the economic downturn and stood at 4.0

What next?

I would expect the following to take place. Firstly some deals will be stopped due to uncertainty and on an anecdotal level someone told me they were doing that only yesterday although theirs was a wait and see approach. So volumes will take a dip as will  at least some prices. Again at this stage such news is anecdotal.

Not convinced this is true in London. Agent rang yesterday with a post Brexit 10% reduction…and sounded desperate. ( @beachcomberpage )

Added to that might be  foreign owners who are facing currency losses and fear property price losses as well and in a way this was reflected by UOB of Singapore stopping lending for London mortgages last week. Although the 11 quarters in a row of falls in house prices in Singapore was no doubt also a factor.

On the other side of the equation is this from the Guardian.

The plunge in sterling following the UK’s decision to leave the EU has prompted a flurry of interest in luxury homes in  London from overseas buyers, who stand to save about 10% of the cost of buying a £1m property, a property consultancy has claimed.

The caveat is of course “a property consultant has claimed” and I note the intriguingly named Mr. Cleverly has quoted the changes in UK Pounds when surely foreign buyers would be interested in the price in their currency. But for new buyers the currency fall is true.


We find ourselves in a time of heightened uncertainty looking at a UK property market which has become increasingly unaffordable to domestic buyers. There is a nuance here which is that this is massively true in London and influences the area around it. It is less true in the North of England for example where prices have at least adjusted to some extent to weak wages growth.

If we look at the Bank of England which lit the blue touch-paper for the subsequent house price growth with its July 2012 Funding for Lending Scheme then I expect a response next week. It may be too early for a more technical response such as a new rebadged FLS aimed at small business in theory but boosting mortgage lending in practice but a Bank Rate cut and more QE have been heavily hinted at by Bank of England Governor Mark Carney. So the band seems set to play on as we wait to see if they are on the Titanic or not.

Meanwhile let me offer you some insight on HSBC from @DavidKeo of the FT.

this price move may be in either direction

It was about the UK Pound £ and of course they missed the possibility it would be unchanged.

Oh and whilst there may not be many of these there will be some. What about those with a UK property but a mortgage in a different currency?

Don’t mess with Mario

The Slovenian police have upset Mario Draghi by raiding the office of the Slovenian central bank. Apparently when Mario told us that the ECB was a “rules based organisation” he did not mean the rule of law. In response here is the new ECB theme song featuring MC Hammer.



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.


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.

What will happen next to the UK housing market and house prices?

The latter stages of the UK coalition government involved various attempts to fire up the UK economy via the housing market. Or if you prefer economic plan A for the UK establishment as we wonder if plan B has ever existed! The political and media emphasis was on the Right To Buy policy but in fact the major driver was the action of the “independent” Bank of England in using its Funding for Lending Scheme to drive mortgage rates lower. This was something of a dream ticket for the Bank of England as it was able to give a further subsidy to UK banks via the provision of cheap liquidity and pump up the value of their balance sheets via house prices all in one go. Overall mortgage rates were pushed around 1% lower on average by this although as I discussed yesterday fixed rates often fell by more. Accordingly we are seeing record lows for mortgage rates as this from yesterday’s Mortgage Introducer indicates.

Offset rates have fallen to record lows with the average offset fixed rate now priced at 2.65%, over one percentage point lower than two years ago, research from Moneyfacts has revealed.

This has happened recently in areas that you might not expect because we were told that high Loan To Value mortgages were a cause of the credit crunch and were to become a thing of the past. More latterly the MMR (Mortgage Market Review) of the Bank of England was supposed to tighten things up. Let us look at what high LTV (90%+) mortgage rates have been doing.

average best-buy fixed and variable mortgage rates fell by up to 0.88% between 11 November 2014 and 30 March 2015. On a mortgage of £150,000 this would save around £1,300 a year in interest payments..

Up is the new down one more time.

Where next?

The incoming Conservative administration faces a problem which is at least partially of its own making which is that house prices are now so high and mortgage rates so low there is not much room left. An idea of the scale of UK house price rises was given by a BBC 4 documentary on Reverdy Road in Bermondsey which I watched with my mother because she grew up in Bermondsey. A whole estate of 791 properties and 20+ shops was sold in 1960 for less than a refurbished house on the road would sell for now. Extraordinary isn’t it!? I guess the word exponential was developed for situations like this.

Back to the future

We are seeing the past being raided for ideas as the Right To Buy policy of the 1980s gets revived. From the BBC.

Plans to support home ownership and extend the right-to-buy scheme  to 1.3 million social housing tenants in England feature in a new Housing Bill. Under the plans, housing association tenants will be able to buy the homes they rent at a discount.

Also we get a continuation of the Starter homes policy.

There will also be help for first-time buyers, with 200,000 starter homes made available to under-40s at a 20% discount.

The fact that both plans are for people to buy at a “discount” is as near to a confession that we will ever get that house prices are too high and unaffordable for the majority. Also these plans have the issue of whether the government can legally force housing associations to do this and whether the latter is a form of age discrimination.

The Bank of England

I discussed only yesterday the way that at least part of the economics establishment was attempting to pressurize the Bank of England into an interest-rate cut. It however has been feeling the pressure and has decided it has been working too hard. From the Financial Times.

The MPC will continue to meet 12 times a year, but this will be reduced to eight if new legislation is passed.

It is quite a strain having to meet 12 times a year apparently! Also as MPC (Monetary Policy Committee) external members are paid some £133,091 per annum (2013/14) I await the Bank of England review of productivity in this area as by my maths we have gone from £11,090 per meeting to £16,636 which also provides quite an inflationary surge! Is this how the Bank of England plans to end deflation?

Also there is another example of inflation at the Bank of England.

This Bill would formalise changes to the Bank’s top team, by legislating to put the new Deputy Governor, Minouche Shafik, on the Court and the FPC.

This inflation of roles has been quite evident in the current Governorship and it particularly applies to what you might call “Carney’s cronies”. If we consider the issue of productivity this inflationary development poses its own questions as the performance of Ms. Shafik has been poor. Let me be clear that I welcome the appointment of women to the MPC but feel it is a shame we scoured the international organisations of the world for “Carney’s cronies” rather than appointing British women.

As the Bank of England has not actually changed Bank Rate for over 6 years it is rather a moot point as to whether 12 meetings of “masterly inactivity” provide more productivity than 8 as dividing by 0 has its problems. But in theory it should do. This issue is a counterpoint to the fact that today’s confirmation of UK GDP growth being 0.3% in the first quarter of 2015 implies yet more productivity issues for the UK economy as the labour market remains strong.

Today’s mortgage numbers

There was indeed something of a pre-election push. From the British Bankers Association.

There was a significant rise in the number of mortgage approvals in April……..which we would expect to continue in the coming months. House purchase approvals were higher than last month and 3% higher than in April 2014.

Whilst the BBA and the Bank of England would deny it there has been an easing in credit conditions overall in the UK.

Unsecured borrowing is growing at its highest annual rate, of 4.9%, since autumn 2010, reflecting strong consumer confidence.

A pre-election splurge? Well there do seem to have been some elements of that if we look at the retail sales and trade figures as well.

Although the actual mortgage lending figures were not as strong, were individuals willing to plan but less willing to actually trade pre-election?

Gross mortgage borrowing in April was £10.5 billion – 13% lower than in the same month last year but 2% higher than in March.


There is much to consider about the UK housing market and its interrelation with the UK economy. It was not long after the beginning of the Bank of England FLS in July 2012 that the UK economy picked-up. Whilst it was not the only cause of it the new government and the Bank of England will be nervous about the implications of turning the tap off especially as it would appear that the UK services-sector has been having a growth hic-cup.

The service industries grew by 0.4% in Quarter 1 2015 (Figure 3), revised down 0.1 percentage points from the previous estimate, marking the ninth consecutive quarter of positive growth. This follows a 0.9% increase in Quarter 4 2014.

That is its weakest effort in this new growth spurt. The problem for the UK is that so much has already been ploughed into the housing market what can they think of next? The moves are getting increasingly expensive as this estimate of Right To Buy costs from the National Housing Federation indicates. The emphasis is theirs.

This means that across the country there are 221,000 households that are eligible for the new proposal and able to afford the mortgage. And if all of these households decide to take up the scheme, it would cost £11.6 billion.

Is that £11.6 billion a type of helicopter drop of money?Then we have the issue that what will they do in say 3/4 years time to get us ready for the next election?  I am reminded of this from Alice In Wonderland.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

I am open to suggestions….