Are London house prices set for more falls?

This morning has brought news on the state of play concerning UK house prices although I think the Guardian has tripped over its own feet a little in an attempt to slay several dragons at once.

House prices in parts of London that were once at the epicentre of the UK property boom have fallen as much as 15% over the past year in fresh evidence of the impact of the EU referendum.

Actually if you then read the article no evidence of it being caused by the EU referendum is given but in the article linked to by it from December we are pointed towards one rather likely cause as Russell Galley of the Halifax tells us this.

“As a result of the rapid price growth in the capital, house prices in relation to average earnings are still very high in London; at 8.8 times annual average earnings they are close to the historical high of 9.”

I do like the “additionally” in the sentence below, what could it be about the house price to earnings ratio that causes this?

Additionally, mortgage affordability in London is worse than its long-run average, the only region in the UK where this is so.

As we progress on we discover that the peak or nadir of the falls depending on your perspective is rather close to home for me.

Figures from Your Move, one of the UK’s biggest estate agency chains, reveal that the average home in Wandsworth – which includes much of Clapham, Balham and Putney – fell by more than £100,000 in value over the last 12 months………..Homes in the London borough of Wandsworth were fetching an average of £805,000 in January 2017 but this has now fallen to £685,000.

There have been falls elsewhere too.

Other London boroughs are also showing steep price falls. In Southwark, south London, the average price has dropped from £666,000 to £585,000 in 12 months, while prices have pegged back in Islington, north London, from £750,000 to £684,000.

At this point with Wandsworth and Southwark on the list I am starting to feel a little surrounded although a common denominator is beginning to appear.

Wandsworth and Southwark are home to huge speculative property developments facing on to the River Thames – including the Battersea Power Station development – but the market for £1m-plus one-bed properties has shrivelled in recent years.

The scale of this was explained in the Times just under a fortnight ago.

The new neighbourhood — Europe’s biggest regeneration zone, with 39 development sites across 561 acres — will contain 20,000 homes as well as cultural, retail and business facilities. It is set to be completed by 2022. A £1.2 billion Northern Line Tube extension will create two new stations, Nine Elms and Battersea Power Station, to open in 2020.

Or if you prefer in in picture form, here is a part of it which is yet to come.

If you cycle through it as you now can you get an idea of the scale that somehow cycling past does not quite give, If we return to the economic consequences of this we see that the existing lack of affordability in central London combined with the surge in supply is something that can explain the recent price falls. It was always going to require quite an influx of wealthy people to populate the area and of course that would be in addition to the many who have arrived in recent times. A sort of “overshooting” I think in assuming that a trend would not end. If we wish to help the Guardian out we could suggest that the EU Referendum has probably deterred some although it does not actually make that case and curiously I have seen one or two bits of evidence that more in fact have arrived ahead of possible changes. So something along the lines of what happened with Hong Kong a couple of decades ago.

Looking wider

If we do we get something much more sober. Here is LSL Acadata which produced the report.

Prices in London fell again in January, down £4,662 or 0.8%, leaving average prices in the capital at £593,396. That’s down 2.6% annually, the biggest decline since August 2009.

So we have gone from the 15% click bait to a reality more like 2.6%, However as we have often discussed this is significant as the UK establishment pretty much lifted heaven and earth to stop a significant house price fall post credit crunch. I remember prices falling in my locale and wondering of those selling were making a wise decision and that buyers would regret it? Instead of course we got the UK establishment house price put option as interest-rates were cut to 0.5% where they remain, QE and when they were not enough more QE the Funding for Lending Scheme and then more QE as well as the Term Funding Scheme. The latter has now finished albeit a stock of £127 billion remains as we await the next move.

Before we move on there was another hint in the data that affordability is the main player here.

The cheaper boroughs have fared better. More than half have seen price rises over the year, led by 4.5% growth in Bexley, which, with an average price of £363,082, still has the cheapest property in the capital outside Barking and Dagenham (£300,627).

Up up and away

We get reminded that the UK is in fact a collection of different house markets which are connected but sometimes weakly.

That’s now led by 4.6% annual growth in the North West, one of four regions to see new peak prices in January (along with the East Midlands, the South West and Wales).
Just eight months ago, the region was trailing every other region bar one. Now, it’s seeing strong growth in every part of the market: at the bottom, Blackburn with Darwen has seen the biggest increase in prices in the country, up 16.4% annually. At the top, Warrington is also seeing double digit growth, with prices up 10.3%.

Comment

We find on today’s journey that the trends for UK house prices remain in place as we see substantial falls in the new developments in central London and helping make the average price fall there too. This means that the UK picture is according to LSL Acadata as shown below.

Including this February, we are now in the ninth month where the annual rate of house price growth has continued to slow. It now stands at 0.6% when including London and the South East, or at 2.5% when excluding these two regions.

This represents quite a change from the 9% of February 2016 and the change has mostly been seen in London. This particular series makes a lot of effort to be comprehensive but like all efforts has its challenges and estimations.

We have subsequently recalculated all our various house price series on the basis of the new weightings, which has had the effect of decreasing the average house price in December 2017 by £6,340.

So did the average house price from this series go above £300,000 or not? I will let you decide.

One consequence of the new weightings is that the average price of a home in England & Wales has fallen below the £300,000 threshold, which we reported as having been breached during 2017.

As we mull what is or is not Fake News there was this in the Evening Standard?

Millennials, criticised by baby boomers for buying avocado on toast instead of houses….

Meanwhile eyes turn to the Bank of England as we wonder how it will respond as house prices in London fall? Perhaps its Governor Mark Carney is already thinking that June 2019 cannot come fast enough.

 

 

 

 

 

Advertisements

The problems of UK house building and prices are a result of government policy

This morning has brought news from the UK government on an area which is regularly reported as being in crisis ( housing supply) which brings us to a related area which has been in recession since the early part of last year ( construction). From the BBC.

Construction firms that have been slow to build new homes could be refused planning permission in future under a shake-up to be unveiled by Theresa May.

The PM will tell developers to “step up and do their bit”, warning that sitting on land as its value rises is not on at a time of chronic housing need.

There are various issues here as a fair bit of this is vague such a “slow to build” and doing your bit may be far from sufficient incentive to house builders who in some cases have been doing rather well.

Bonuses in the construction sector have been under the spotlight since Persimmon announced last year that 140 staff would share a bonus pool of £500m and that its chief executive was in line for a pay-out of £110m, a figure that has since been reduced by £25m following an outcry among investors

As an aside if £110 million is so wrong I find it fascinating that £85 million is apparently okay! Still at least something was done. As to the concept of housing need the Joseph Rowntree Foundation has crunched some numbers.

Independent analysis shows that an average of 78,000 additional affordable homes (a mix of low-cost rent and shared ownership) are required in England each year between 2011 and 2031. This level of supply is required to meet newly-arising need and demand.

 

Delivery has been falling short. On average 47,520 additional affordable homes have been provided in England each year since 2011, leading to a cumulative shortfall of 182,880 homes over the last six years. A step change is needed to boost supply of affordable homes by at least 30,000 more a year.

That seems a lot lower than what we are usually told which reminds us that such numbers are open to more than a little doubt and speculation. This poses a problem for a government increasingly heading down the central planning road.

Let me add another issue which is that a factor often ignored is that it matters where you build the houses as well as how many. This often seems to be ignored as for example once you think like that an arrow points at London and the South East. But you cannot just build anything as the current travails only a mile or two away from me at Nine Elms are proving.

The economic depression

There are quite a few problems for economics 101 in the current situation. Firstly you might think that higher house prices would quite quickly generate more supply but it would not appear so. Also the housing industry was supposed to respond to monetary policy and as we find ourselves after a cut and a rise back at the emergency Bank Rate of 0.5% there is much to mull and that is before we factor in the £435 billion of Bank of England QE.

Yet house building responded little to this as if we set 2015 as 100 we get some interesting numbers. The pre credit crunch peak was 2006 and 2007 which were both in the 95s. The scale of the initial hit is shown by the fact that 2009 was 55.4 showing a big hit and then crucially very little recovery as the number oscillated around 70 for the next three years. Along the way many smaller building firms went to the wall as our supply capacity fell and I wonder if that was a much larger factor than often realised. It is hard not to wonder if some support for smaller house builders might have protected us from the need for much larger support measures later. This meant that this sector clearly had an economic depression.

The official response

This provides quite a lot of food for thought for the central planners in Downing Street and Threadneedle Street because in response to the numbers above we saw a two-pronged strategy. In the summer of 2012 the Bank of England deployed the Funding for Lending Scheme which reduced mortgage rates quite quickly by around 1% ( and later by up to 2% according to its research) and made sure the banks had plenty of cash to lend. Then in March 2013 the Guardian reported on this.

In his budget speech, George Osbornelaunched Help to Buy…………This £3.5bn scheme will run for three years from 1 April and help up to 74,000 buyers, as well as providing a boost to the construction sector, said the Treasury.

This saw the UK establishment put the pedal to the metal in this area but the most recommended reply was already on this case.

Another tax-payer funded scheme to prop up house prices. Has it never crossed Osborne’s mind that if people are not able to afford a house on the basis of prudent lending criteria, house prices might be too high and should come down? ( ReaderCmt ).

There was a clear side effect to this as the tweet below highlights.

As you can see the clear effect here was on profits for house builders which surged and financed the payment of extraordinary bonuses for those at the top. This leaves us wondering if the house builders were happy counting their cash and in no great rush to expand supply as they were doing nicely anyway. How much of the effort simply went straight to the bonuses we looked at above?

House Prices

We know that these measures boosted house prices as according to the official series the price of the average house rose from £167,682 in February of 2013 to £226,756 last December. This provided its own problem however because real wages have in fact failed to recover to pre credit crunch peaks so houses became much more expensive relative to them. Yes the wheels of affordability were oiled by ever lower mortgage rates but at these prices demand for house purchase was always likely to dip which puts a brake on supply.

It is however nice to see the Joseph Rowntree Foundation implictly agreeing with my argument that house prices should be in the main measure of inflation.

Real income growth among the bottom fifth of the population in recent years is mostly wiped out once housing costs are considered, with consequences for the living standards of those on low incomes.

Comment

If we look at recent years we see that economic policy in the UK was based on the housing market. It was a type of credit easing and the consequences were higher house prices with large and what can only be called excess profits for the main house builders. No doubt some economic activity was generated but those looking to get a foothold in the market have been hit by high inflation when real wages have fallen. On that basis this is pretty much breathtaking.  The quotes below are from the BBC.

Young people without family wealth are “right to be angry” at not being able to buy a home, Theresa May has said.

Announcing reforms to planning rules, the PM said home ownership was largely unaffordable to those without the support of “the bank of mum and dad”.

This disparity was entrenching social inequality and “exacerbating divisions between generations”, she said.

It is of course true but it is a clear consequence of the policies pursued by what is now her government but before one in which she was Home Secretary. It came on top of house price friendly policies from preceding governments also.  Anyway the speech shows a complete lack of grasp of how the private-sector operates.

Mrs May criticised bonuses which are “based not on the number of homes they build but on their profits or share price”.

Another way of writing the quotes below would say you can only afford the new higher prices if someone who has already benefited helps you.

“The result is a vicious circle from which most people can only escape with help from the bank of mum and dad.

“If you’re not lucky enough to have such support, the door to home ownership is all too often locked and barred.”

That in essence the problem in the central planning approach as the initial problem is the apparent failure to grasp not only reality but their own role in the problem. I fear more central planning is unlikely to help as so far what has been called help has in fact mostly hindered.

Perhaps the biggest irony of all is that house building had responded in 2017 as according to the official numbers it was 20% higher than in 2015.

 

 

The Bank of England has a credit problem

This morning has opened with news that the winter chill affecting the UK has blown down Threadneedle Street and into the office of Governor Mark Carney at the Bank of England.

House prices fell by 0.3% over the month, after
taking account of seasonal factors…..“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months.”

That was from the Nationwide Building Society – as ever care is needed as it is only Nationwide customers – and it backed it up by saying that the outlook was also not so good.

Similarly, mortgage approvals declined to their weakest
level for three years in December, at just 61,000. Activity
around the year-end can often be volatile, but the weak
reading comes off the back of subdued activity in October
and November (approvals were around 65,000 per month
compared to an average of 67,000 over the previous 12
months). Surveyors report that new buyer enquiries have
remained soft in recent months

So at this point Governor Carney will be miserably observing weaker business for the “precious” and a monthly house price fall. If he is cold prospects may not be so good. From the Guardian.

National Grid has issued a warning that the UK will not have enough gas to meet demand on Thursday, as temperatures plummeted and imports were hit by outages.

Good to see that there has been plenty of forward planning on this front.

The crunch is also the UK’s first major energy security test since the country’s biggest gas storage facility was closed by Centrica last year. The Rough site in the North Sea had accounted for 70% of the UK’s gas storage.

Forward guidance anyone?

Three cheers from Governor Carney

However there was something of a warm fire in the Governor’s office today as he observed this from his own data.

Mortgage approvals increased in January for both house purchase and remortgaging, to 67,478 and
49,242 respectively.

The plan that started back in the summer of 2012 with the Funding for Lending Scheme continues.

Annual growth in secured lending was unchanged at 3.3% in January , with net lending at £3.4 billion.

In essence the plan was a type of credit easing where feeding cheap cash to the banks was designed to boost the UK economy via turning net mortgage lending from negative to positive. It took around a year to work but as mortgage rates fell ( initially by around 1% and later by more) net mortgage lending turned positive and has remained so. The Governor’s office will feel ever warmer as he observes this from the Nationwide.

net property wealth is the second largest store of household wealth after private pension wealth and amounted to c.£4.6 trillion over the July 2014 to June 2016 period – equivalent to around two and a half times UK output in 2016.

Any Bank of England economist looking for career advancement only has to write about these wealth effects feeding into the economy. Should he or she want solitude then all they have to do is point out the madness in using marginal prices especially at lower volumes to value a stock of housing. Then before you can cry “Oh Canada” they will be dispatched to a dark damp dungeon where the Bank of England cake trolley never arrives.

Overheating

After the speech from Chair Powell on Tuesday this has become something of a theme and there is a clear example of it in the UK unsecured credit data.

The annual growth rate for consumer credit has slowed over the past year to 9.3%, driven by other
loans and advances.

This is where we get a lesson in number crunching from the Bank of England as this is represented as slowing whereas say wage growth is always on its way to a surge. In reality consumer credit has been on something of a tear and the monthly growth of around £1.4 billion has been fairly consistent whereas wage growth has so far gone nowhere. Or to put it another way the economy is growing at around 2% so there has been a 7/8% excess for quite some time now. One area which was driving this seems now to be a fading force.

The UK new car market declined in the first month of the year, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,615 cars were driven off forecourts in January, a -6.3% fall compared with the same month in 2017.

This fading has been reflected in the UK Finance and Leasing Association figures.

 New business in December 2017 fell 2% by value and 5% by volume compared with the same month in 2016.

Yet unsecured lending has continued on its not so merry path and has now risen to £207.5 billion.

Business Lending

This was the main aim of the Bank of England especially for the smaller business sector, at least that is what we were told. Indeed  the scheme was modified we were told to improve that success. How is that going?

Lending to non-financial businesses fell by £1.6 billion in January . Loans to small-and-medium
sized enterprises fell by £0.7 billion, the largest decline since December 2014.

If we look for some perspective we see that three of the last four months have seen credit contractions and the six month average is -£100 million. So the Bank of England arrow if I may put this in Abenomics terms missed the smaller businesses target completely but scored a bullseye in consumer credit which is still growing at 9.3% per annum. The latter is of course in spite of us being told that conditions were much tighter in the latter part of 2017.

Comment

Those who have followed the UK economy over the years and indeed decades will know that today’s data follows a familiar theme. An easing of monetary policy such as the credit easing of the FLS and now the Term Funding Scheme ( £115.4 billion) followed by the Bank Rate cut and Sledgehammer QE of August 2016 would be expected to have the following results. A rise in mortgage lending and then later a rise in unsecured lending it has been ever thus. This is because it is easy to do for the banks and it is an area in which they excel whereas business lending is both more complex and harder to do. Track records do matter as I recall my late father telling me (he had a plastering business) that when he really needed finance the banks took it away whereas at other times it was plentiful. Please remember that when we are told small businesses “do not want to borrow” it may be because they have much longer memories than the banks.

Oh and in case the Bank of England tries to tell us unsecured credit growth can be cut by a Bank Rate rise or two please remember that credit card debt costs around 18% per annum according to its data.

If we switch to the real economy then there is another area where the Bank of England is lost in a land of confusion. This is the impact of the post EU leave vote fall in the UK Pound £ which according to the PMI business survey this morning seems to have helped UK manufacturers.

the continued rise in export orders s and an uplift in new orders from the domestic market provided evidence that the
foundations for continued growth were still buoyant………New orders
showed the largest monthly gain since November
and are outpacing the rate of growth in output to
one of the greatest extents in more than a decade.

It is possible that we are seeing import substitution as well as export growth. It makes you wonder how well they would be doing if the banks supported them with more and better finance doesn’t it?

Me on Core Finance TV

http://www.corelondon.tv/feds-powell-needs-just-get/

 

 

 

 

 

 

 

 

 

 

 

Can Britain solve its credit problems and debt addiction?

A long-standing feature of the UK economy has been a problem with credit. This has several features. A major one is our obsession with the housing market and the establishment view that the economy can best be boosted by pumping it up and claiming the higher house prices as higher wealth and evidence of economic well-being.

Figure 2 shows the value of land in 2016 is estimated to be £5.0 trillion, which is 51% of the total net worth of the UK. Land increased in value by £280 billion from 2015, a 5.9% increase. This is a notably smaller increase than in 2014 and 2015, when it increased by 15% and 10% respectively. Since the land underlying dwellings is a major contributor to the value of land, the House Price Index reflects this with house prices rising at a lower rate compared with 2014 and 2015.

So £5 trillion out of this.

The total net worth of the UK at the end of 2016 is estimated at £9.8 trillion, an increase of £803 billion from 2015 and the largest annual rise on record.

I hope you are all feeling much better off! If you are a home owner then this is rather likely to be the case.

The value of land has grown rapidly from 1995, increasing by 412% compared with an average increase of 211% in the assets overlying the land.

You may have noted the swerve here which is that we have switched from the value of houses to land which presumably sounds much more secure and safe. Also if we add the value of the houses back in then £1.77 trillion added to £5 trillion means the sector is £6.8 billion or so of UK national wealth and everything else is £3 billion. Even the most unobservant may start to wonder if that is a trifle unbalanced?!

Mortgage Debt

This is something which the Bank of England put a lot of effort into increasing back in the darker days of 2012 when there was talk of a “triple-dip” in the UK economy. As I pointed out above the traditional “remedy” is to do this to the housing market.

Pump it up when you don’t really need it.
Pump it up until you can feel it. ( Elvis Costello)

They were so keen on this that we got an official denial and the Funding for Lending Scheme was badged as something to boost small business lending something which has not gone well but more of that later. What it actually achieved was to boost net mortgage lending which then when positive and now is running at a net rate of around £3 billion per month. House prices were boosted across the UK although with widely varying impacts as London boomed but other areas struggled at least relatively. Thus we end up with a claimed asset value of £6.8 billion versus a mortgage debt of £1.37 billion. What could look safer?

The catch is that there are a litany of problems with this.

  1. The economy has been tilted towards the housing sector as we note Bank of England and government support ( Help To Buy) as well as ( capital gains) tax advantages. This has shifted resources to this sector.
  2. This would not look so good should house prices fall, what would the asset value and “wealth effects” be then?
  3. Those looking to enter the housing market or to trade up are not seeing a wealth increase but instead facing inflation. This is so worrying to the UK establishment they go to pretty much any effort to keep such inflation out of the official inflation numbers.

Accordingly we know that the Bank of England will be worried by this development at the beginning of the food chain for this area.

Mortgage approvals decreased in December (Table I), with falls for both house purchase and remortgaging approvals. House purchase approvals were the weakest since January 2015 and remortgaging approvals fell to 46,475, following strength in October and November. 

Unsecured Credit

This is something of an overflow area for UK credit. What I mean by this is that when the Bank of England gives the banks the green light to lend as evidenced by the Funding for Lending Scheme in the summer of 2012 or the Bank Rate cut and “Sledgehammer” QE of August 2016 this is the easiest area to expand. After all there is a flow of people into their branches or website wanting to borrow and saying yes is relatively simple. The tap gets turned on much more quickly than mortgage or business lending.

This how we found ourselves with unsecured credit running at an annual rate of around 10% per annum. The new feature this time around was the growth of borrowing for vehicle purchase via the growth of personal contract purchase and the like, so much so that very few people actually buy a car now.

 Over 86% of all private new car registrations in the UK were financed by FLA members.

Of course central bankers desperate to calm their fears about a possible recession were pleased at all the car buying but the ordinary person will be wondering what happens when the music stops? Actually according to the banking sector this is already taking place if you recall the survey the Bank of England published and of course the Financial Policy Committee is “vigilant”. This has led more than a few economists to tell us growth is over here. Meanwhile.

Consumer credit net lending was £1.5 billion in December, broadly in line with outturns during 2017 (Table J).  The annual growth rate ticked up to 9.5% in December. 

November was revised up from £1.4 billion to £1.5 billion as well. So we have growth of 9.5% with economic growth of around 2% and wages growth of a bit over 2%. What could go wrong?

The total for this category is now £207.1 billion.

Business Lending

Lending to smaller businesses was supposed to be the rationale for this and the official view was this.

The extension builds on the success of the FLS so far

The extension continued the rhetoric.

 to increase the incentive for banks to lend to small and medium‐sized enterprises (SMEs) both this year and next;

How is that going?

Lending to non-financial businesses fell by £1.0 billion in December (Table M).  Loans to small-and-medium sized enterprises fell by £0.4bn, the largest decline since December 2014. 

Comment

There is a fair bit to consider here. But let me look at this from the point of the Bank of England. It opened the credit taps via credit easing in the summer of 2012 and added to it with the Term Funding Scheme in August 2016. This of course added to the Bank Rate cuts and QE bond buying. This was supposed to boost small business lending but in fact in spite of the economic growth we have had in recent years there has been very little of that. Indeed even the better numbers were below the economic growth rate and if anything new lending to smaller businesses is stagnant at best.

Meanwhile net mortgage lending was pushed into the positive zone and more latterly unsecured credit has been on quite a tear. So if the Bank of England was a centre forward taking a penalty kick it has not only missed the goal if we looked at the unsecured credit data it may even have cleared row Z and the stands. Or of course its true intentions were always different to what it has claimed.

 

 

 

Is the UK construction sector in a recession?

So far 2017 has been a year of steady but unspectacular growth for the UK economy. However one sector has stood out on the downside and that is construction. Of course this is the opposite of what the unwary might think as we are regularly assailed with official claims that house building in particular is a triumph. But the pattern of the official data series is certainly not a triumph.

Construction output contracted by 0.9% in the three-month on three-month series in September 2017…….This fall of 0.9% for Quarter 3 (July to September) follows a decline of 0.5% in Quarter 2 (April to June), representing the first consecutive quarter-on-quarter decline in current estimates of construction output since Quarter 3 2012.

Whilst our official statisticians avoid saying it this is the criteria for a recession with two quarterly falls in a row and in fact they had revised it a bit deeper.

The estimate for construction growth in Quarter 3 2017 has been revised down 0.2 percentage points from negative 0.7% in the preliminary estimate of gross domestic product (GDP), which has no impact on quarterly GDP growth to one decimal place.

The last month in that sequence which was September showed little or no sign of any improvement.

Construction output fell 1.6% month-on-month in September 2017, stemming from falls of 2.1% in repair and maintenance and 1.3% in all new work.

September detail

Here is an idea of the scale of output.

Total all work decreased to £12,628 million in September 2017. This fall stems from decreases in both all new work, which fell to £8,209 million, and total repair and maintenance, which fell to £4,419 million.

And here are the declines.

Construction output fell by £361 million in September 2017. This fall stems predominantly from a £236 million decrease in private commercial new work, as well as a fall of £165 million from total housing repair and maintenance.

There may be some logic in new commercial work being slow but the fall in repair and maintenance seems odd to say the least. The issues for the former might be that there has been so much building in parts of London combined with uncertainty looking ahead in terms of slower economic growth and what the Brexit deal may look like.

Maybe we are seeing some growth in new house building if we look at the longer trend.

Elsewhere, the strongest positive contributions to three-month on three-month output came from housing new work, with private housing growing £138 million and public housing expanding by £65 million.

Boom Boom

This weaker episode followed what had been a very strong phase for the UK construction industry. The nadir for it if we use 2015 as 100 was 85.3 in October 2012 as opposed to the 105.9 of September this year.  Over this period it has been even stronger than the services sector which has risen from 93.7 to 104.4 over the same period. Of course at 6.1% of the UK economy as opposed to 79.3% the total impact is far smaller but relatively it has been the fastest growing of the main UK economic categories in recent times.

If we look back to possible factors at play in the turnaround it is hard not to think yet again of the Funding for Lending Scheme of the Bank of England which was launched in the summer of 2012. There is a clear link in terms of private housing in terms of the way it lowered mortgage rates by more than 1% and the data here makes me wonder if some of the funding flowed into the commercial building sector as well. At this point we do see something of an irony as of course the FLS was supposed to boost lending to smaller businesses but sadly many of those in the construction sector were wiped out by the onset of the credit crunch.However this from the TSB suggests an impact.

As part of our participation in the Funding for Lending Scheme*, we have reduced the interest rate by 1% on all approved business loan and commercial mortgage applications.

Indeed some loans were made although as Co Star reported in January 2013 maybe not that many.

The Lloyds FLS-funded senior loan funded last Friday. Kier said the “competitively-priced” £30m loan will be used in connection with its infrastructure and related projects.

This is understood to be only the second commercial real estate loan drawn by Lloyds’ Commercial Banking division under the FLS scheme, after the bank drew down a further £2bn under the scheme before Christmas, taking its total capacity to £3bn.

The issue is complex as the Bank of England itself was worried about the state of play in 2014.

 The majority of the aggregate fall in net lending in 2014 Q1 was accounted for by a continued decline in lending to businesses in the real estate sector (Chart 2).

One area that I think clearly did see growth but is pretty much impossible to pick out of the data is lending to what are effectively buy-to let businesses.

Looking ahead

There has been a flicker of winter sunshine this morning from the Markit PMI business survey.

November data pointed to a moderate rebound in
UK construction output, with business activity rising
at the strongest rate since June. New orders and
employment numbers also increased to the greatest
extent in five months.

Indeed in an example of the phrase “there is a first time for everything” the government may this time be telling the truth about house building.

House building projects were again the primary
growth engine for construction activity. Survey
respondents suggested that resilient demand and a
supportive policy backdrop had driven the robust and
accelerated upturn in residential work.

Whilst the overall growth was not rapid at 53.1 ( where 50 in unchanged) at least we seem to have some and it was reassuring to have another confirmation of my theme that the 2016 fall in the UK Pound £ is wearing off.

However, cost inflation eased to its least marked for 14 months, with some firms reporting signs that exchange-rate driven price rises had started to lose intensity.

Comment

So the overall picture is of a boom which then saw a recession and hopefully of the latest surveys are correct a short shallow one. However not everyone is entirely on board with the recession story as this from Construction News last month points out.

Industry activity continued to grow between July and September, according to a new survey by the Construction Products Association.

The official data series in the UK for construction has been troubled to put it politely. The official version is this.

The Office for Statistics Regulation has put out a request for feedback and comments from users of these statistics, as part of the process for re-assessing the National Statistic status for Construction statistics: output, new orders and price indices.

In essence you cannot say what real output is until you have some sort of grip on the price level. Also  the excellent Brickonomics pointed out several years ago that some of the improvement in the data was via simply transferring a large business from services to construction. Solved at the stroke of a pen? Also this year there were large revisions to last year which is not entirely reassuring.

The annual growth rate for 2016 has been revised from 2.4% to 3.8%.

If that error was systemic then this years recession could easily be revised away. The truth is that there is way too much uncertainty about this which is surprising in the sense that the industry relies on physical products many of which are large. A few weeks back I counted the number of cranes along Nine Elms ( 24) for example in response to a question asked in the comments.

So we had a boom ( maybe) followed by a recession (maybe) and are now recovering (maybe). Hardly a triumph for the information era…..

Some Music

Here is a once in a lifetime opportunity to hear Donald Trump as a Talking Head.

 

 

Has UK housing policy taken yet another turn?

Over the weekend we saw an announcement from a cabinet minister that may usher in a new phase of UK housing policy so let us take a look. From the BBC.

The government should borrow money to fund the building of hundreds of thousands of new homes, a cabinet minister says.

Communities Secretary Sajid Javid said taking advantage of record-low interest rates “can be the right thing if done sensibly”.

There are various begged questions there as for example I can recall us being told we were building large numbers of new homes and there was something of a confession on this front.

Mr Javid said successive governments had failed to build enough homes,

We can dispute as to the issue of “enough” but it is true that government’s have failed to build the number of homes that they claimed they would. The story of the Ebbsfleet development in Kent has been the major example of that. Back in 2006 Ruth Kelly announced this.

160,000 new homes in mixed communities, built to the highest design standards.

Much of this was to be built at Ebbsfleet and wags no doubt pointed out that the homes would have to be of the highest standard as the development was on a flood plain. An international railway station was built but in case you got the impression that lots of homes had been built a different government was on the case more recently. From the BBC.

Seven parks, 15,000 homes, a major new commercial centre and improved public transport are among plans being set out for Britain’s newest garden city.

The vision for Ebbsfleet, Kent, will be developed around the international railway station over the next 15 years.

The Javid plan

This attempt to increase the supply of housing will have the following features according to the BBC.

He said between 275,000 and 300,000 homes a year – a level of house-building not seen since the 1960s – were needed in England alone to help tackle the shortage in affordable housing.
“We are looking at new investments and there will be announcements,” he said, saying these would come in next month’s Budget.

This adds to the apparent switch in policy towards the supply side of the housing market that we have seen recently from the UK government.

Recent announcements by the government include a pledge by Theresa May at the Conservative Party conference this month of an extra £2bn to build an additional 25,000 social homes.

We also get an idea of the costs involved as if 25,000 homes cost £2billion then presumably 300,000 would cost £24 billion a year.

The public finances

I do not know if it was a coincidence on not that such an announcement came on the back of better figures for the public finances on Friday but we do seem to be getting a change of tone.

Asked about the change in tone from the Tories’ previous approach to borrowing, Mr Javid said a distinction should be drawn between “vitally important” deficit reduction and “investing for the future” in housing and infrastructure.
“So for example… you borrow more to invest in the infrastructure that leads to more housing – take advantage of some of the record-low interest rates that we have. I think we should absolutely be considering that,” he said.

Most people will be scratching their heads as to how “deficit reduction” and “investing for the future” go together. Governments love this sort of thing where they claim that a part of their spending should be excluded from the numbers! Hence developments like cyclical budget deficits which can easily be manipulated by simply changing the cycle. Of course housebuilding is a type of investment both literally ( bricks & mortar) and conceptually although I have to confess the distinction between investment and consumption has faded in recent times. I do not mean the theory I mean the practice.

Number Crunching

Are interest-rates at a “record low”? Yes in terms of Bank Rate but I do hope that the Communities Secretary realises that it is not the relevant one here. If we move to UK bond or Gilt yields then he is not literally telling the truth as they happened as the Bank of England charged into the Gilt market like a bull with £60 billion to spend in a china shop last summer. But the 50 year Gilt yield is in historical terms rather low at 1.7% albeit not as low as the 1.1% bought by Mark Carney and his ilk.

So you could build houses and assuming the numbers above apply you could set a level for rent at the low yield plus an allowance for repaying the capital as a type of mortgage. The biggest begged question is around could be issue say £25 billion of a 50 year Gilt and at the moment I think we could as investors remain thirsty for yield. Or the properties could be sold and the money repaid that way.

Why are houses unaffordable?

This is really rather awkward for the UK government and Bank of England as they have done their best to make them so. Indeed the government announced a new effort on this front as recently as this month as I pointed out on the 2nd.

The government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder, Theresa May has said.

So in basketball terms they pumping the ball up at the same time as letting air out of it! Also the Funding for Lending Scheme of the Bank of England reduced mortgage rates and in the words of the Bank of England led to this.

Lower mortgage rates and increased availability of credit have helped to release pent-up demand and encourage new demand for house purchase. ( August 2013 Inflation Report).

Meanwhile according to the Office for National Statistics once those policies came in effect UK house price inflation has pretty much been between 5% and 10% per annum. So job done in terms of house prices! Except of course it has made ever more of them unaffordable or created the problem this new plan is supposed to solve.

Gazumping

Mr Javid had a busy weekend as according to the BBC he also wants to improve the way houses are sold.

Home-buying and selling in England and Wales could be “faster and less stressful” under plans to simplify sales and tackle gazumping.

Communities Secretary Sajid Javid launched an eight-week review, saying he wanted to “hear from the industry” on how to streamline home-buying.

Ways of locking in deals and stopping sellers accepting higher offers at the last-minute will be considered.

It would be welcome so let us see if anything happens on this front. Maybe we could learn from Scotland which has less of it.

Comment

There is a fair bit to consider here especially if we note that the record of UK governments this century has been as follows. Policies to raise demand for houses ( economic policy and immigration) quite a lot and policies to increase supply of housing much fewer. As to whether building more houses will reduce prices and make housing more affordable well that does seem to have worked rather close to me. From the Telegraph on the 29th of July.

In the south London area, new-build luxury apartments continue to flood the market. Figures from LonRes reveal that there are 10,937 homes currently under construction or with planning permission there, many of which are luxury flats priced out of reach of ordinary Londoners.
With low levels of transactions and high prices, there is a dearth of buyers. The average price per sq ft of homes for sale in the area was 6.2pc lower in the second quarter of 2017 than the same period last year.

One group that has done well out of UK housing policy has been the house builders. There has not been a share price rally in response to the latest news but this may well be because the ones I looked at had seen pretty strong rallies recently anyway. Meanwhile is this a case of one bubble meeting another? From the Evening Standard.

Buyers of a Notting Hill mansion going on sale this month for £17 million will have to pay in Bitcoin, in what is believed to be a first for London.

The owners of the six-storey stucco-fronted home near Portobello Road will accept only the digital currency as payment and will not take cash.

At the current exchange rate the price is equivalent to about 5,050 bitcoin,

 

 

“Help” for UK house prices makes the property ladder look more like a snake

As one recovers from an opium trip ( just for clarity 30mg of morphine from the anaesthetist at my knee operation) care is needed with the news as perception and reality may well diverge. After all things may not be what they seem to you. However as I recover I note that one of the theme’s of my economic analysis is continuing in play. That is that the UK establishment will do pretty much anything to keep house prices rising and to banish any thoughts of falls. This was confirmed yet again by Prime Minister Theresa May yesterday. From the BBC.

The government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder, Theresa May has said.

There is only a little detail at this point but even this makes me wonder if we will see snakes as well as ladders.

The extra cash will help buyers get a mortgage with a deposit of as little as 5% to buy newly built homes.

It was not so long ago that the UK establishment queued up to tell us that small deposits and/or low equity were one of the features which led to the credit crunch whereas now they are official government policy! The half-life of establishment memory appears to be rather short. Also it is trapping itself ever more into higher house prices as can you imagine the storm if the “Help” leads (young) people into negative equity?

A trigger?

Perhaps this from the Financial Times on Friday firmed up the government plans.

London house prices fall for the first time since 2009 Nationwide says prices declined 0.6% year-on-year in third quarter.

We have been noting declines in London for a while and the fear for the establishment was that it would prove to be a leading indicator one more time. There is a possible additional factor which is that when people have spoken about a “Westminster Bubble” there has been more than one meaning.

House prices are too high

The same FT article gives us evidence of this.

 

Since the financial crisis, house prices have grown faster than earnings across the country, but the gap between the two measures has been particularly large in London and the south-east. The ratio of the average house price to average earnings for people living in the capital rose from 7.8 in 2009 to 12.9 last year. While national house price growth has moderated during the past year, the latest figures from the Office for National Statistics show that average house price growth — 5.1 per cent over the year to July — has continued to outstrip earnings growth, which was 2.1 per cent over the same period.

We have seen house prices rise nationally but real wages have fallen. There are some pockets where house prices have recovered little but the general position is that house prices are too high. This is the cause of policies like Help To Buy and the Funding for (Mortgage) Lending Scheme of the Bank of England but of course by driving prices even higher they create a future problem. Even worse the rises are recorded essentially as economic growth when the truth is that for many they are inflation.

On that subject we received some updates on Friday as the “Blue Book” was published. Firstly the past was a little better than we thought.

GDP is now 9.3% above the pre-downturn peak instead of 9.0% above as previously published.

However the latter part of 2016 was revised down and the first quarter of 2017 up ( to 0.3% GDP growth) with the net effect over the past year being -0.2%. I warn regularly about the dangers of relying on 0.1% movements in GDP.

Oh and it appears that news was so grim in 2012 we were all on drugs to cope. From the trade figures update.

The largest positive revision occurs in 2012 with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Personally I would have thought giving students other bills to pay would reduce the illegal drugs data maybe this is yet another way that millennials are different.

The Bank of England

Sadly I missed the celebrations of twenty years of independence at the Bank of England last week. If I had been able to indulge in the excellence of its wine cellar then as it combined with the morphine I might for a brief period have actually believed it was independent. The “unreliable boyfriend” has given us two clear periods of Forward Guidance ( 2014 and 16) where he promised an interest-rate rise which eventually involved an interest-rate cut. Now he is at it again or at least he was on BBC Radio 4 on Friday..

If the economy continues on the track that it’s been on… we can expect interest rates would increase somewhat.

Governor Carney wants us to believe he really means it and maybe he thinks he does but it was hard not to raise a wry smile as only a few hours later UK annual economic growth was revised down from 1.7% to 1.5%.

The winners

If you look at the share price data this morning then the leaders are as I type this Barratt Developments and Persimmon both up 3.9% and out of the top ten we see six from the construction industry. The construction industry has been a winner in terms of its executives and share prices but as we note from the official figures there has not been much of a supply response. This was interesting from the FT.

One executive claimed recently that the scheme had allowed him to raise selling prices by 10 per cent, which would almost double the profit margin for most builders.

Oh and there is the issue of economic growth where we see this.

The methodological change to actual rental is showing stronger growth into 2015 than the old methodologies and data sources.

Would you like to take a stab in the dark about what this does to the Imputed Rental figures?

Comment

It would appear that we are in one of those zombie apocalypse movies where the zombies cannot be killed. Oddly the Bank of England is claiming to be heading in the opposite direction although of course it has already collapsed like a deck chair twice after giving us such Forward Guidance. But the principle remains that the UK establishment is “caught in a trap” as Elvis Presley put it. To “Help” those suffering from high house prices it pushes prices higher meaning ever more need “Help”. Whilst it is one of my favourite songs I do not think John Lennon meant this for the housing market.

Help! I need somebody
Help! Not just anybody
Help! You know I need someone
Help!

As soon as the “Help” stops then the property ladder seems set to metamorphose into a snake.