State financing of deposits would simply push UK house prices even higher

Yesterday saw a development we have been expecting for a while now. After all the weaker outlook for UK house prices with London seeing house price falls and the country as a whole seeing slower house prices growth was always going to unsettle an establishment that wants them higher. The trouble is of course that after all the credit easing from the Bank of England and the “Help” from the government there was a shortage of extra things which could be done. Well on Sunday the Housing Finance Institute and Radian shouted “Hold my beer”

The paper is instead calling for more of the £44 billion housing budget to be prioritised in favour of helping young people get on the housing ladder and in delivering a larger, more flexible social rented sector.

Okay how? The emphasis is mine.

The Government should significantly extend home ownership support schemes at the end of the current Help-To-Buy programme in 2021. There are a range of different schemes that could be implemented from providing direct deposits, to tax breaks, to mortgage  finance guarantees. These should be fully considered by the national housing delivery commission and set out in the national housing delivery plan.

That is a pretty comprehensive list of the sort even the Bank of Japan might be proud of. So more “Help” with the unwritten implication that it will in fact be permanent under such a policy operation. Also the return of tax breaks which we spent quite some years removing ( as they were a distortion on the market) followed by mortgage finance guarantees. It is only a short step from the latter to getting your mortgage from a state bank although of course the Bank of England would much prefer even more aid being funnelled to the “precious” banking sector. Indeed the banks would be delighted to see this.

A direct loan by government of up to 10%
per property could double the number of
people that can be helped.

Of course there was an ersatz version of this in the run-up to the credit crunch as banks used personal loans and the like as a way of funding deposits. Of course that was not supposed to happen and this new plan would take us into a new era of 100% mortgages. The next issue comes from wondering how would this be repaid? On this road we discover a can of worms or two. Again the emphasis is mine.

A home deposit loan could be recovered through the tax
system from deductions and could allow a
difference between repayment trigger dates
and amounts for higher and lower paid
salaries, and/or deferring final repayment
to the sale of the property.

The initial suggestion looks alone the lines of the student loan system which is not entirely reassuring as we note that many such loans may never be repaid. If we now look at the highlighted suggestion then the can is potentially being kicked a long way into the future. This offers security on the asset but of course unless house prices rise yet again will leave the individual(s) concerned yet again lacking funds for house purchase unless they move somewhere smaller. Then again the plan is simply to kick the can into the future and hope for the best.

Why?

In essence this report has been driven by this.

Over the period from 2002 over 2.5 million
extra private rented households were
formed; more than the total number
of all extra households in that period.

This is the flip-side in the boom in the buy-to let sector as the houses bought will come onto the market to be rented out. Whilst I am no fan of the buy-to-let boom I am also sure that many and maybe much of the private-rented sector provides decent homes so I think we have a fair degree of overkill here. No doubt some are poor quality but the social sector is not perfect either and the boundaries can be blurred lines as the Grenfell fire disaster showed.

Anything else?

Well just in case converting deposits from savings to loan finance is not enough there is also this.

A housing allowance tax scheme
could be introduced where young home
owners’ mortgage interest can be deducted
from tax.

We used to have something like that called MIRAS ( Mortgage Interest Relief At Source ) which was scrapped some years back. The only difference is that the tax relief is for younger buyers and some of you may be pleased to note that at one part of the document 44 seems to be regarded as an age threshold!

Comment

If we step back for a moment and imagine a situation where the policies suggested above are implemented then the first consequence would be higher house prices. This of course would start the bandwagon rolling again as the new higher house prices would be even more unaffordable and thus the cry would yet again go up for more “Help”

My independence seems to vanish in the haze
(But) but every now and then (now and then) I feel so insecure (I know that I)
I know that I just need you like I never done before ( The Beatles)

It is a bit like putting your I-Pod or MP3 player on repeat and listening to the same old song again and again on this particular road to nowhere. These higher house prices will be on the back of the ones driven higher by the previous “Help (To Buy)” and the 0.5% Bank Rate and credit easing of the Bank of England.

On this particular road we then find that a new group needs help as if we change the rules to help millennials then it will be the post millennials who will face an even bigger problem at which point there may be nothing left apart from the government buying the house for them.

The house price move could be very quick. It would not be as fast as exchange rate movements ( for newer readers we have seen those predate expected moves by ~6 months) but if history is any guide will see house prices adjust by the change so say 10% within a year or two. At which point there is a windfall for those who sell their property paid for by new buyers and increasingly financed by the state. Unless you sell the property or raise more finance it is only a paper windfall so only small numbers have a real gain. The catch is that collectively we are back where we started as the younger house buyers face higher prices and will increasingly report that they are unaffordable yet again. That issue is driven by the gap between the house price rises and the official data on real wages as we try to do more with less.

average total pay (including bonuses) for employees in Great Britain was £489 per week before tax and other deductions from pay, £33 lower than the pre-downturn peak of £522 per week recorded for February 2008

Meanwhile I note that we have seen today the numbers for unsecured credit including student loans released this morning. The annual growth rate including them was 11.3% in the year to March whereas it was 8.6% without them. Any thoughts as to why they are usually left out?

 

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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.

 

 

UK housing policy continues to promote ever more unaffordable prices

This week has opened with a barrage of news on the UK housing market. Whilst this is of course the equivalent of a hardy perennial there are two factors bringing it into focus. The first is that it is the UK Budget next week and the second is a weekend where a strong end to the last week for the UK Pound £ has been replaced by this.

Barclays trade of the week (short EURGBP) stopped out at Monday 0857am… ( @RANSquawk )

Is that some sort of record? As Prince would say it is a Sign O’ The Times.

One issue at play is building evidence of changes in the housing market. From Estate Agency Today.

Sellers have launched “their own sale” in response to the stagnating market by slashing asking prices according to Rightmove – but some sellers have not cut enough.

So what has happened?

The portal says sellers of homes that are new to the market have trimmed asking prices over the past month by a modest 0.8 per cent; more dramatically, 37 per cent of properties already on the market have reduced their asking prices since first being listed.

The 37 per cent figure represents the highest proportion at this time of year for five years, the portal says in its latest monthly market snapshot.

It is not the fact that there are price offers at this time of year that is unusual it is the amount of them. Also the five-year timing will be noted by the Bank of England as that takes us back to developments which influenced its decision to boost house prices with its Funding for Lending Scheme.

At the moment the situation as regarding price drops is recorded thus.

Analysis of those properties that actually sold last month after having reduced their prices shows that their average reduction between initial and last advertised asking price was also 6.3 per cent.

However the state of play in London seems rather different especially as we note this in the Guardian is from an estate agent.

Lucy Pendleton, of the London estate agent James Pendleton, said sellers in the capital are facing some particularly tough decisions. She argues that one large price cut can work better than several small ones.

As to the gap between asking prices and actual selling ones Henry Pryor helps us out.

Average asking prices measured by across the country have fallen slightly. They’re now just 27% (£84k) higher than average sale prices recorded by

LSL Acadata

This body covers all transactions including those for cash and tells us this.

The slowdown in prices continued into October, with values flat over the month and up 0.8% on an annual basis. This is the slowest growth since March 2012, and at £298,438 prices are now roughly level with November 2016.

The driver of the slow down is very familiar.

London continues to weigh on the market, with the decline in prices there (now 2.4% annually) dampening growth substantially though. Prices fell more slowly in September than the previous month, down 0.3%. The average house in the capital remains at £583,598, despite a fall of £14,250 over the year.

Government Policy

We have had various suggestions and hints from ministers over the past couple of months but this morning has brought this in the Financial Times.

UK chancellor Philip Hammond is drawing up plans to help first-time buyers in his Budget later this month, in an attempt to show the government is getting to grips with the housing crisis.

Having opened this piece with a mention of hardy perennials we have one which blooms very regularly in the UK which is what the UK government will badge as help for first time buyers. I would imagine that many of you will be able to guess what form this will take before reading the details below.

The chancellor is preparing a stamp duty cut for first-time buyers as a signal that the Conservative party understands the widespread resentment felt by those locked out of the housing market because of high prices, according to government aides………The Treasury regards a stamp duty cut for first-time buyers, which might be introduced for a temporary period, as one way to address a growing feeling of inter-generational unfairness in Britain.

There are more than a few begged questions in that but let us for the moment move on whilst noting the changes at play.

This problem is exemplified by how younger people are struggling to follow in the footsteps of their parents by buying their own homes. The number of homeowners under the age of 45 in England has dropped by 904,000 since the Conservatives entered government in 2010: down from 4.46m in that year to 3.56m in 2015-2016, according to data from the Department for Communities and Local Government.

Also this is an intriguing way of looking at the likely impact which also points out the wide variation in average house prices around the UK.

Lucian Cook, head of residential research at Savills, an estate agency, said any cut in stamp duty for first-time buyers would primarily benefit those purchasing homes in London and south-east England. Stamp duty is not payable on properties worth less than £125,000, and Mr Cook highlighted how the average price for a first-time buyer in Yorkshire was just over £125,000.

So a response to house price falls in London? We have been wondering on here how long that might take….

Bring me a higher love

The hardy perennial theme continues as I note this from City-AM.

Writing to the chancellor, an influential group of housing associations urged Hammond to allow developers to extend the height of properties without having to secure planning permission.

Under the “build up not out” plan, championed by Tory MP John Penrose, developers would be able to increase a building’s height so it matched the tallest building in its neighbourhood, or the height of surrounding trees.

The supply of homes is of course an issue in the UK although of course developers have quite a vested interest in being able to build higher as I recall the Yes Prime Minister episode that referred to this. Those who live next door may not be quite so keen so care is needed.

Comment

There is a clear problem with two possible government policies which is the proposed expansion of Help To Buy we looked at back on the 2nd of October and today’s Stamp Duty cut. This is that moves which are badged as help are tactically true but strategic disasters. What I mean by this is that the person helped gains at that moment but that fades away as we note that these moves are not only associated with but cause ever higher house prices. Sometimes they are priced  straight in and people may be being helped to buy at the top of the market signified by the ever higher multiple of income required. This of course then requires even more help to stop house prices falling as the cycle repeats so far endlessly.

An irony is that a Stamp Duty cut would also damage one of the better revenue areas for the government in recent times. From the FT.

The Treasury’s receipts from stamp duty surged to a record high of £11.77bn in 2016-17, up 10 per cent per cent compared with the previous year.

There are regular debates about taxation and the apparent impossibility in more than a few areas of increasing it. Well Stamp Duty has not been one of them and has seen increasing flows to the UK Exchequer.

The issue of raising housing supply seems much better founded than raising demand. But it is problematic for the current Chancellor of the Exchequer as whilst it is welcome I think to see someone who is not just a career politician owning businesses which are in property development and construction raises a moral hazard question. Approving changes which benefit you personally is not a good look especially when the developers have benefited from the whole Help To Buy era.

Also if we look back to October 23rd there was this.

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”.

If Mr.Javid was a Chelsea footballer it would appear that he has been sent to Vitesse Arnhem on loan maybe permanently.

Meanwhile there is news from the Bank of England that house buyers have had the advantage even before it existed.

 

 

 

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,

 

 

The stability of the UK economy is quite remarkable

Today gives us another opportunity to take a look under the engine cover of the UK economy and to do so considering the stated position of the Bank of England.

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

Those were the words of Bank of England Governor Mark Carney on the BBC’s Today programme on Radio Four last week. Listeners will have been wondering if it will be third time lucky for his “Forward Guidance” as he has tried this tack before? More tucked away at the end of last week was a consequence of the actions of Governor Carney and his colleagues in August 2016 when they cut Bank Rate to 0.25% added a “Sledgehammer” to the QE ( Quantitative Easing ) programme and added a soupcon of credit easing with the Term Funding Scheme. Please remember the implications of giving banks cheap funding as you read this from the BBC about the interview with Governor Carney.

“What we’re worried about is a pocket of risk – a risk in consumer debt, credit card debt, debt for cars, personal loans,” he told BBC Radio 4’s Today Programme.
He said banks had “not been as disciplined as they should be” in their underwriting standards and pricing of this debt.

How is that going?

This is the data up to the end of August from the Bank of England.

The annual growth rate of consumer credit remained at 9.8%, with a flow of £1.6 billion in August.

As you can see this is a triumph for the “Sledgehammer QE” of Chief Economist Andy Haldane who wanted precisely this. Oh hang on sorry, it is now the result of unexpected behaviour by the banking system and is a worry for the Bank of England.

Also we see that monetary growth has picked up more generally.

Broad money increased by £16.6 billion in August (Table A), the highest flow since September 2016. Within this, flows for all sectors were positive (Tables B-D) with the largest contribution from non-intermediate other financial corporations (NIOFCs) (Table D).

The monthly numbers are very erratic but this was a surge but the overall picture remains one of strong unsecured credit growth and growth in the wider aggregates that may be picking up again. What is in doubt is the mix that this monetary growth will provide between economic growth and inflation but it suggests that if inflation is 3% economic growth will be 2%.

Remember when we were told that all of this was for smaller businesses or SMEs? Well lending to smaller businesses fell by £200 million in July and £100 million in August.

Business Surveys

Today saw the last of the PMI business surveys for the UK and it was a case of steady as she goes.

The headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index posted 53.6 in September, up from an 11-month low of 53.2 in August. Looking at Q3 as a whole, growth has eased slightly since the previous quarter (the index averaged 54.3 in Q2, compared to 53.5 in Q3).

So the changes are much less that the likely error term. This was reflected in the overall picture described.

The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

Markit have a default setting of downbeat on the UK economy which is a switch of sorts as they used to treat France like that. But there is an interesting perspective in the detail of their report.

The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric and hike interest rates. However, the decision is likely to be a difficult one, as the waning of the all-sector PMI in September pushes the surveys slightly further into territory that would normally be associated with the central bank loosening rather than tightening policy.

The inflation picture

We learnt more about this at midnight from the British Retail Consortium or BRC.

In September, Shop Prices reached the shallowest deflation level in the last four years of 0.1%, with prices falling just 0.1% compared to a 0.3% year-on-year decline in August. Non-Food price deflation accelerated to 1.5% in September, from 1.3% in August, although Non-Food prices are less deflationary than in September 2016, when they had fallen 2.1% year on year. Food prices increased in September to 2.2%, up from 1.3% in August.

So food prices are rising but other prices are falling as we seem set to shift from disinflation to inflation in the retail sector although the BRC gets itself into quite a mess on this subject.

Overall shop price deflation reached an all-time low in September with prices now teetering on the edge of inflation.

The food inflation is being driven by butter prices ( a worldwide issue presumably leading to happy days in New Zealand) and on a personal level I note that the rises in the price of broccoli we looked at a while back don’t seem to have reversed much if at all.

Government policy

We should find out more later about this. We are already expecting a boost to the Help To Buy scheme which has led to this.

3,858 first time buyers earning over £100k appear to have had Help2Buy…  ( @HenryPryor )

Also the mind boggles as to what the with a household income below £20,000 per annum were able to buy! Maybe it’s because I am a Londoner………

Also the new £10 billion will be an expansion on what has gone so far ( figures to June 2017).

The total value of these equity loans was £6.72 billion, with the value of the properties sold under the scheme totalling £32.37 billion.

Perhaps we will see more emphasis on social housing later as well.

Comment

Imagine you are an “unreliable boyfriend” what is the worst scenario? It is of course the sort of stability that the UK economy seems to be providing as it seems fairly likely that the first three-quarters will each provide GDP ( Gross Domestic Product) growth of 0.3%. Of course the unreliable boyfriend in question will be hoping we forget his Forward Guidance for what 2017 would be like and instead focusing on his heroic efforts which prevented that. The same heroic efforts he now hints he will reverse. As he spins like a top we are reminded that in monetary policy of a version of  the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Putting UK interest-rates back where they were clearly suggests that they should never have been cut in the first place. Even worse an unsecured credit boom has been fed. Oh and even the ratings agencies are raising the issue of credibility.

S&P troll BOE

S&P: WE BELIEVE RECENT STATEMENTS BY BOE AND CARNEY ARE PRIMARILY AIMED AT PROPPING UP GBP TO REDUCE IMPORTED INF PRESSURES ( @stewhampton )

“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.

 

 

 

UK House Prices look ever more unaffordable

Hello and welcome to the summer solstice and longest day of the year which with apologies to any Australians reading this is one where even the rain cannot end my good cheer after the rugby. Also the UK’s national broadcaster seems to have spotted that house prices are extremely expensive in much if not all of the UK. So let us take a look at the research it has provided us with.

The Help to Buy Scheme

This has seen several changes since it began but one of the more recent changes was what might be called a bribe to get people to start saving for a house or flat. Let us remind ourselves of the details.

If you are saving to buy your first home, save money into a Help to Buy: ISA and the government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000.

Actually this both is and is not the maximum as the next bit points out.

The accounts are available to each first time buyer, not each household. This means that if you are planning to buy with your partner, for example, you could receive a government bonus of up to £6,000 towards your first home.

Many ordinary savers may well be singing along to the “It’s Not Fair” of Lilly Allen at this point. They will be singing a bit harder when they realise that higher interest-rates are paid on this type of ISA than elsewhere, sometimes much more. For example the Halifax Building Society pays 2.5% but even this is eclipsed by the Penrith and Cumberland Building Societies who pay 4%. For ordinary savers the Bank of England tells us this is the state of play.

The effective rate paid on households’ outstanding time deposits decreased by 3bps to 1.39% in April and the rate for households’ new time deposits increased by 3bps to 1.31%.

 

Quite a gap isn’t it?

The Problem

Readers of my output will be aware that I have long argued that house prices in much of the UK have become too expensive and therefore unaffordable. This is diametrically opposed to the official view of consumer inflation which excludes owner-occupied housing on the road to telling us that for a while now there has effectively been no inflation. If so how do we get to the situation described below. From the BBC.

Would-be-homeowners in large parts of England are being priced out of a government scheme to help first-time buyers, a BBC investigation has found……..Help to Buy Isa scheme ‘helps lucky few’

The reason for this situation is that there is a cap on the property price in the scheme.

 the maximum purchase cap of £250,000, or £450,000 in London.

This is broken down as follows. First let us look nationally.

Overall, outside London, two-bedroom homes exceed the cap in 28% of areas.

You will not be surprised to read that the issue is mostly a southern England one.

Average asking prices exceed the cap in 67% of areas in the South East, 65% in London, 61% in the South and 53% in the East.

We can narrow done a lot of the issue to London itself.

In London, an average two-bedroom flat exceeds the cap in two thirds of boroughs, while one-bedroom flats exceed the cap in a third of boroughs…Only 10% of average three-bedroom homes in London are below the cap.

In this respect London is a little like the Euro area with not only trouble within its boundaries but also trouble in surrounding areas.

All of this not only reinforces a main theme of this blog but also raises two main questions. Firstly what happens if while people are saving a deposit house prices move out of reach? That is hardly unexpected with house price rises of the order of 9% per annum. Also there is a way of this policy sort of working in reverse although the government would not put it like that. What I mean is that it is not working in the most expensive areas which does show some form of sense although of course that begs the question of why the cap is higher in London.

The latter point hits the problem that this is not the only “Help to Buy” available as if we put in the starter homes scheme amongst others we get to the situation described below by Joe Sarling.

all three policies (20% Starter Home discount; £3,000 government ISA bonus; 40% government loan) could be used in conjunction . When this happens, the Government effectively funds 53% of the home.

The UK government is using taxpayer money ( or more strictly off-balance sheet promises) to provide a put option for house prices at £450,000 in London and £250,000 elsewhere. This means that it will use “all its powers” to stop us getting anywhere near there as the increasingly unbalanced ponzi-like scheme continues.

Stagflation Alert

This caught my eye as we know that houses and room sizes have been getting smaller something of double-barrelled effect as we get larger.

Richard Donnell, research and insight director from Hometrack, said: “In order to appeal to a wider group of buyers, builders need to start building smaller houses to offer at the lower price point to help first time buyers get on the housing ladder.

Paying more for less?

House Price Boom

City-AM are hammering home this issue today although perhaps unwittingly.

Rightmove director and housing market analyst Miles Shipside noted that property prices in London have grown by almost 55 per cent since June 2010, compared to 24 per cent in the rest of the country.

Now real wages have done what exactly? No wonder we need so much more “Help”!

RightMove

Care is needed with their data because they use asking prices rather than actual trading or sold prices but let us see what they tell us.

Housing market momentum pushes price of property coming to market up by 0.8% (+£2,320) to new high of £310,471.

If there has been any Brexit refendum impact it seems to be in two areas. The first is that it seems to have put some people off putting their property up for sale. Secondly there does seem to be a regional influence and guess where?

The price of property coming to market falls by 0.2% (-£971) this month, the only region to record a fall.

Yes it is London. But do not shed a tear for sellers who have seen an extraordinary surge in prices especially as we recall the nature of these times.

Capital’s +55% rise since 2010…….the price of property coming to market is still £228,632 higher than it was six years ago.

Actually the recent minor dip does hide some wide swings. If we stay central then prices in Southwark are up 11.2% over the past year whilst Kensington and Chelsea or should that be Chelski down 16%.

Comment

There is much to consider here as we note that there are some very familiar players here. Very little real wage growth meets surging house prices especially in London and the South-East. This means that even the “Help to Buy ISA” which has many similarities with a bribe may be out of range and touch by the time people have saved up. On and on its goes with little sign of any end and whilst it is good that the BBC is at least covering some of the consequences where is the analysis. Oh and so far we seem to have a situation where even the buy-to let pre Stamp Duty rise and the Brexit referendum seem only minor inconveniences. Intriguing when for example we see a strong move in the UK Pound £ this morning to US $1.46.

Meanwhile some relativity. From Jonathan Eley of the Financial Times.

“My mansion and pool cost £9,000 to heat. What can I do?”  Thanks to for keeping it real…

Mind you it may be a case of the biter bit as the FT only recently informed us of this.

Aged 45, she works in IT marketing for a large consumer goods company and lives in a £700,000 house in Croydon, south London. Married with a four-year-old daughter, the combined income of Nisha and her husband nudges £200,000 a year. Life should be good, yet incredibly, Ms Sharma claims she and her family are struggling.

Of course the FT is playing to its demographic but we do get some humour as someone points out why does someone who earns £200k live in Croydon! Apologies if you do not get that but for south Londoners like me it is hard not to smile. #PrayForNisha indeed.