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 @MoneyTelegraph 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.

 

 

 

 

 

The UK housing market is an example of junkie style economics

It is time for us to dip our toe again into the situation in the UK mortgage market as we know that via its impact on house prices it has an impact on both economic growth and inflation. Or to be more specific officially recorded economic growth but not inflation as the headline Consumer Price Index or CPI excludes owner-occupied housing costs. They were supposed to be added “soon” after its introduction back in 2003 but somehow they got forgotten for a decade and were then shuffled both by going into a subsidiary measure (CPIH) and by morphing into (usually lower) rental costs.

What is current Bank of England policy?

The headline is the Mortgage Market Review of late April 2014 which supposedly ended interest-only loans and tightened rules on the availability of high income multiples. Of course as I discussed last week interest-only loans simply metamorphosed and boomed in the buy to let sector whilst our valiant regulators myopically look elsewhere.

Meanwhile the pedal has been pushed near to the metal in many areas. After all we still have an emergency Bank Rate of 0.5% and £375 billion of QE which amongst other things was expected to reduce the cost of fixed-rate mortgages. The latter will be extended next week as some £6.3 billion of maturing Gilts gets rolled forwards in maturity some of it to the ultra longs as Operation Twist fires up again. Also we have the Funding for (mortgage) Lending Scheme or FLS which now amounts to some £61.4 billion of cheaper funding for UK banks and grew by £4.2 billion in the second quarter of 2015. Of course this is badged as being for business lending (struggling) and not mortgages (booming), but reality is rather different.

What about an interest-rate rise?

This seems to be fading into the ether in spite of the rhetoric and Open Mouth Operations of Bank of England Governor Mark Carney. Yesterday the latest member of the Monetary Policy Committee member Gertjan Vlieghe who had to be forced to give up his links to the hedge fund he previously worked for told us this. Form the Guardian.

A Bank of England policymaker has said UK economic growth must stabilise or pick up before he will be persuaded of the need to raise interest rates.

Actually it has been fairly stable but perhaps there were other priorities than checking on this when he was a hedgie. However he has spotted what since the UK Pound nadir of March 2013 has been  a theme of this blog.

“We’ve had a huge tightening from the exchange rate,” said Vlieghe, who added that he would prefer an interest rate cut to another round of quantitative easing–

Ironically a side-effect of the currency rise may have reduced pressure on the UK housing market as for example we rose in round numbers from 50 Roubles to the UK Pound to 100. So some foreign buyers may have been deterred applying a brake for London perhaps whilst of course existing ones do something of a jig.

But Gertjan continued with his message.

there had been “a little bit of disappointment” on wage growth.

Really? I guess nobody challenged him as he ploughed a furrow which headlined with interest-rate rises then moved them into an unspecified future whilst somehow finding the time to mention an interest-rate cut! Have you notice how much more frequently interest-rate cuts are being mentioned by UK policy-makers?

As to QE additions I think that he is in line with Governor Carney here as his body language is plain when the subject is mentioned. Of course Mark Carney is a “dedicated follower of fashion” but as we stand QE in the UK seems fixed at £375 billion.

A substantial interest-rate increase for a few

Ironically one of the government policies to support the housing market has led to an interest-rate rise for some.The Halifax is offering an interest-rate of 4% compared to the 0.8% available on its ordinary cash ISA. This is quite a boost and is before we allow for the 25% bonus which you can get from the government which is tax-free. So a five-year savings plan would earn the equivalent of around 9% per annum.

However the Halifax changes its rates and others are more like 2% then ordinary cash ISA holders may well feel that there much lower interest-rates are cross subsidising the mortgage market. Perhaps our government should take a look, oh hang on, they created it…..

Government schemes

There is a dizzying list of schemes now under the Help To Buy banner. As you peruse the list below you might want to remind yourself that all this “help” is only necessary because the Bank of England policy moves have pushed us to a situation where house prices are up 18% in the credit crunch era and real wages are 6% lower. Indeed the numbers are worse for younger people who are more likely to be saving up for a property purchase.

With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.You won’t be charged loan fees on the 20% loan for the first five years of owning your home.

 

A mortgage supported by the Help to Buy: mortgage guarantee scheme works in exactly the same way as any other mortgage except that under the scheme the Government offers lenders the option to purchase a guarantee on mortgage loans.Because of this support, lenders taking part are able to offer home buyers more high-loan-to-value mortgages (80-95%).

I have already covered the Help To Buy ISA which subsidises a deposit so you can afford to enter a subsidised scheme! Also you may note that the government is supporting the high loan to value mortgages which were and indeed are supposed to be out of favour. But there is more.

We are seeing the return of Right To Buy in England at least.

The Right to Buy scheme helps eligible council and housing association tenants in England to buy their home with a discount of up to £103,900 (£77,900 outside London).

And we also have this.

Halifax is supporting the Governments MoD Forces Help to Buy scheme, which allows forces personnel to borrow up to £25,000 interest free (repaid over 10 years) to use as a deposit when buying a property to be used as their main home.

It is quite a list which has led to some speculation as to how many of these you could qualify for in one go? From Joe Sarling.

Q: Would I be able to use both #HelpToBuy ISA (free £3k) and London #HelpToBuy (40% Govt loan) to buy a Starter Home (20% disc) in London?!

Will we end up paying someone to buy a house? That gets ever less ridiculous as we note that the junkie culture at play here needs ever higher doses of the drug. Oh and it would appear that I missed Help To Buy for London off my list so apologies.

Comment

Just when you thought that we had used up the policy measures that could support the UK housing market our establishment finds another. On the “Road To Nowhere” that we are on this has to continue as the “Help” is required because house prices are so high relative to incomes especially if we look at the incomes of those likely to buy a property. Even in a much better year for wages which 2015 has been both nominal and real wages have lost ground to house prices.

Today has seen more evidence of credit conditions doing their bit  from the Bank of England dataset.

Lending secured on dwellings increased by £3.6 billion in October, compared to the average monthly increase of £2.8 billion over the previous six months.

The number of loan approvals for house purchase was 69,630 in October, compared to the average of 68,099 over the previous six months.

That is out of sequence with the electoral cycle which makes us wonder what “delights” will be served up as we approach 2020. Also in the past we have seen unsecured lending leak into the housing market when there are restrictions like the current MMR.

Consumer credit increased by £1.2 billion in October, in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.8% and 8.2% respectively.

Meanwhile there are stirrings across the English Channel as we await to see if the European Central Bank fulfills its hints and promises to cut interest-rates even further on Thursday. Such an eventuality will have the Riksbank of Sweden, the Nationalbanken of Denmark and the Swiss National Bank on “action stations” later this week. We are already seeing markets adjust as Swiss ten-year yields fall to a record -0.41% and I wonder if the path for UK Bank Rate will be dragged lower? What about house prices then? Time for some music for prospective house buyers.

Help, I need somebody
Help, not just anybody
Help, you know I need someone, help

Should we hit even harder times and the bubble bursts then they will be joined by the UK taxpayer who is underwriting so much of this.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

 

 

 

The Bank of England FPC is like the dog that barks but has no bite

One of the economic themes of 2015 has been disinflation as we have seen consumer inflation fall across most of the world and sometimes fall into negative territory. Another example of that has been seen this morning as consumer inflation in Tokyo fell to an annual rate of -0.1%. However there have been areas as I have been recording in recent days of asset price inflation (particularly house prices) which has been exacerbated by the loose monetary policy being deployed by the majority of central banks around the world. Of course the falling headline rates of inflation have encouraged even looser monetary policy as we saw from Norway yesterday.

Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.75 percent.

This also came with a clear hint that it would not be feeling lonely.

The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year.

So yet another central bank cutting interest-rates in 2015 which I think makes 40 for this year but it is hard to keep up! Meanwhile on the interest-rate rise side of the equation we seem to be getting promises via Forward Guidance instead. From Janet Yellen of the US Federal Reserve last night.

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.

If the interest-rate rise is as small a deal as they keep telling us then why did they not do it last week? Regular readers will be aware of my view that Forward Guidance currently involves promising interest-rate rises to hopefully change expectations and markets thus making the actual rise unnecessary. So if you like she is the girl who cried wolf and Governor Carney of the Bank of England is the boy who cried wolf.

Asset Price Inflation

This provides a problem if the previous weapon of interest-rate rises is unavailable. On that note we have yet another message from the land of the rising sun as it was 20 years ago this week that the Bank of Japan cut interest-rates to 0.5% a level they have yet to exceed. In fact interest-rates there are pretty much zero or if we look at the latest estimate of average deposit rates in Japan 0.02%.

Central bank inflation

One area where there is plenty of inflation is in well paid jobs for central bankers which is a trend that is booming under the current Governor Mark Carney. However even before he arrived the UK establishment formed a Financial Planning Committee back in 2011 as an interim measure. Presumably because the bureaucratic response to a policy failure (inflation was about to go over 5%) is of course more bureaucrats! Oh and i do not know if he drove it but on Governor Carney’s watch this happened to salaries.

In February 2014, the Committee reviewed, in the light of experience, the time commitment involved for the members of each of these committees, and decided to increase the fees of an FPC external member to £90,698p.a., and of an Independent member of the PRA Board to £102,326p.a.,

That was an increase of 17% for the FPC and 32% for the PRA. Good to see the Bank of England doing its bit for real wages isn’t it?! Oh and with inflation according to the CPI measure which they tell us is best at 0% so far in 2015 then we have seen another nudge up.

For 2015/16, these fees were increased by 1.5%.

Perhaps Ben Broadbent of the Bank of England was referring to them in his speech on the changing composition of the UK workforce. We have higher wages but where is the productivity?

What does the FPC actually do?

I am afraid that the following is the written equivalent of something of a mouthful.

The Committee is charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.

What have they said today?

The opening salvo is in central banker speak.

Overall, the FPC judges that the outlook remains challenging.

Really? Anyway let us look for specific examples.

The UK current account deficit remains close to a record high.

I agree that this is a risk so what are they going to do about it?

Although the capital flows financing the deficit remain mostly long-term in nature and do not give rise to material mismatches, the Committee will continue to monitor closely risks associated with the current account.

Ah okay nothing! But they have protected their backs should it blow up in future. Note I said their backs not ours..

UK housing market

Again we get something of a warning and it comes with an expectation of worse to come.

In the United Kingdom, house prices continue to rise faster than incomes, with forward-looking indicators suggesting that house price inflation will pick up further in the near term.

This was backed up by this weeks data from the British Bankers Association.

Gross mortgage borrowing in August was £12.2 billion. This was 14% higher than a year ago and the largest increase since 2008. Net borrowing of £2.0 billion was the highest monthly rise since August 2010.

If my role was financial stability then I would be concerned that mortgage lending and house prices were surging ahead of the economy but business lending was stagnant. But apparently officially everything is fine.

The Committee judges that the insurance provided by its June 2014 housing recommendations for the owner-occupier market remains warranted.

What about buy to let?

The FPC points out that it has been on the march.

The outstanding stock of buy-to-let mortgage lending has increased by over 40% since 2008. Over the same period, the stock of owner-occupier mortgage lending rose by only 2%. The share of buy-to-let in the stock of outstanding mortgage lending has risen to 16% from 12% in 2008.

What it does not do is point out the role of the Bank of England in this. After all from July 2012 it drove house prices higher via its Funding for (Mortgage) Lending Scheme or FLS which meant that house prices became ever more unaffordable. That is plainly a challenge to future financial stability. There is no mention either of the UK becoming more of a rentier style society or of the economy being tilted towards the housing market one more time.

Help To Buy

Governor Carney and the FPC have written a formal letter this morning on this subject and the crucial sentence is below.

Under current market conditions, the Committee assesses that the scheme does not pose material risks to financial stability.

Can you see the swerve? It says that it is fine but should it go wrong they will blame “market conditions”. So it is pointless in reality. Oh and this bit is interesting.

While the share of high LTV lending has picked up slightly over the past year, it remains low relative to the level before the crisis.

“The crisis” is hardly a benchmark unless we intend to plunge over the same cliff. Also it begs the question of why high LTV (Loan To Value) mortgage loans are required? My contention would be that a major factor is that house prices are too high and in particular they are too high relative to incomes.

Comment

The FPC is worse than the dog that didn’t bark as it promises a bite but does not deliver it. It provides plenty of platitudes and words its Minutes so that should there be a future collapse it can say that it warned us but what does it actually achieve? My contention is that it is part of the central banking theme to claim that they are not “maxxed out” with policy options. As the UK has not and seems very unlikely to use the interest-rate weapon against asset price inflation then the central bank has to offer something else. Or at least appear to offer something else because macroprudential policies were abandoned in the past because they did not work.

This is a trend way beyond the UK as macroprudential polices are spreading as central banks come to a similar conclusion. The taxpayer is paying for more bureaucrats who then spend their time giving us open mouth operations.

The UK housing bubble is caused by demand for housing exceeding supply

This morning and indeed the weekend just gone has seen a flurry of news about both UK house prices and also our housing situation. The government has noticed as it has begun its own version of open mouth operations in the vein of Bank of England policy. This of course feeds back into Friday analysis where a sub-plot was the rise what is presented as housing wealth but of course has a slab of inflation in it too. Let me open with an outburst of what can only been called property porn from Rightmove.

Rightmove

They present it differently but here is an underlying tenet from Friday’s discussion.

Property-rich getting richer:

In terms of actual numbers then we see something which is very reminiscent of the property bubble of the previous decade.

Average £2,550 rise is the largest amount seen in month of September since 2002, driven by price jump in family-home sectors (+1.2%) as owners of first-time-buyer properties see prices stall (-1.1%).

Interestingly several measures are now picking up weakness in first time buyer prices. Have they finally reached a level which cannot be afforded? I will return to that in a moment. But here is the consequence of the house price rises.

Price of property coming to market this month hits new national record, up 0.9% to £294,834, as demand is fuelled by cheap borrowing yet supply is limited by some home-owners’ reluctance to move.

Another way of putting that is that it is some 11.4 times the average earnings figures we received only last week. If you want some real exploding ratios then I guess one only has to look at London.

The average price of a newly-marketed home in the capital is at a new all-time high of £620,003, up by 0.8 per cent on the previous record set in July of this year.

We get data on London earnings less frequently and we switch to a median as opposed to an average but here it is.

In April 2014, London topped the regional list for median earnings for full-time employees, at £660 per week.

So if we assume a Stavhanovite work ethic of 52 weeks a year than we get a house price to earnings ratio of 18!

Care is needed here as the Rightmove system encourages property porn by using asking prices rather than actual trading data. Also I doubt the latest London data which seems sugar coated – for property owners – to me. But there is a drumbeat being hammered out.

One might have thought that the collapse of Lehman Brothers would have led to house price falls well in my home borough of Wandsworth prices have risen by 60% since then! Actually that is worse than the London average of 71% and is firmly in bubbilicious territory.

Official Policy

I have written many times how the Bank of England Funding for Lending Scheme of July 2012 drove much of this by subsidising bank mortgage funding. However there has also been the Help To Buy scheme which Shelter has analysed.

the two distinct Help to Buy schemes have supported over 100,000 home purchases across the UK. With the extension of the scheme until 2020, the government will spend up to £6 billion on equity loans and will guarantee up to £12 billion worth of mortgages.

That is the scope of it so far and Shelter conclude this about its impact.

Based on the volume Help to Buy mortgages so far, it is estimated that so far the scheme has increased house prices by 3.0%. That is around £8,250 based on the current UK average house price of £274,000 .

From this they conclude by recognising a theme that will be familiar to readers on here.

In other words, it has helped a small number of people to buy, at the expense of worsening the overall affordability crisis for everyone else.

What about demand for homes?

The lack of sufficient house building is something which has been one the drivers of the UK housing crisis. This has gone back for successive governments over decades and in more recent times has been added to by the rise in the UK population which whatever ones views on the rights and wrongs matter has been a fact. In 2005 the recorded UK population was about to push through 60 million according to Eurostat whereas this year it is on its way to pushing though 65 million.

So demand has been rising over time of that we can be sure.

What about the supply of homes?

The BBC has looked into this with the help of the National Housing Federation.

The National Housing Federation estimated 974,000 homes were needed between 2011 and 2014…….But figures from 326 councils showed only 457,490 were built.

Exact numbers are of course open to debate but the underlying principle of a shortage of housebuilding in the UK is regularly commented on here. The conclusion produced a number which is consistent with past suggestions.

The federation said about 245,000 new homes were needed each year in England.

Bringing supply and demand together

The Free Exchange section of the Economist pointed out this.

In the 1970s, for every person added to the British population, two dwellings were added to the housing stock. But by the time you get to 2014, for every additional person in Britain you get way less than an extra dwelling.

So there has been a clear change in the balance between supply and demand.

The figures are the worst in British history, except for during wartime. And even these figures are likely to be an underestimate, since the average household size in Britain has dropped in recent decades.

Some care is needed because if you read the first paragraph quoted there is the implication we need a house each rather than one per household! But the point of a shift in the demand/supply balance is true.

There was a further interesting snippet.

Data from Neal Hudson of Savills, an estate agent, show that over the past forty years the average time that Brits take to pay off a mortgage has risen from eight years to 20 years.

Was it really the norm to pay off a mortgage in eight years.

Financial problems for housing associations

These have underperformed according to Channel 4 news.

Housing associations have delivered just 26,000 net new homes a year between 2000-2014 – half the amount required,

As we see Right To Buy 2.0 then the Office for National Statistics is looking at whether housing association debt should be part of the public sector in the way that Network Rail was reclassified. Around £60 billion is at stake and if we look back to the past such a reclassification would be much more likely to restrict future building than to add to it.

Comment

We regularly see promises from UK governments on the subject of extra house building  and this morning has seen more hot air emitted. From the BBC.

‘Million’ new homes target declared by minister Brandon Lewis

Is that like the inflation target? Oh and if there was real intention behind this I rather suspect it would have been announced by a minister we have all heard of! As ever I want to avoid the politics and would remind readers that this is a continuation of the scenario of the Ebbsfleet development which Labour and the Coaltion have announced so many times that it would solve the housing crisis on its own! In reality the planned numbers of houses being built there has fallen. If you look back at the promises there you can find a speech from 2008 by the then Prime Minister Gordon Brown which contains this.

And that’s why Yvette Cooper has made it her challenge to build three million more homes by 2020.

Promises are much easier than doing aren’t they?

Also let me congratulate Japan on its victory in the Rugby World Cup on a weekend of sporting shocks. Meanwhile what did governments do for revenue before they discovered fines?

Shares in Volkswagen  plunged the most in almost six years in early Monday trading after U.S. authorities accused the German carmaker of falsifying emissions data, which means it could face penalties of up to $18 billion.

As we mull whether Wolfsburg did in fact need the cash when they sold Kevin De Bruyne to Manchester City. I note that Reuters Jamie has been reviewing some past advertising.

UK rents are surging to all-time highs making them much higher than in Europe

Yesterday I analysed the way that yet more austerity is likely to squeeze the life out of the Greek economy one more time. Today I return to a very British problem and crisis which is the cost of housing which for many people squeezes the life out of the family budget. Of course the conventional and mainstream view is that the price of housing boosts wealth and hooray we are all richer. But of course much of the increase is in fact inflationary and it reduces the wealth and indeed financial position of those looking to buy a house. As I regularly point out “Help To Buy” for first time buyers is an opportunity to buy an overpriced house with real wages which have been falling. What could go wrong? Back on the 16th of March I pointed out (via BBC Womans Hour) that women do fear what might happen next.

I look around at the children who are 19 and 20 and I don’t know how they will ever be able to afford a mortgage?

 

I would prefer the housing market to halve in all honesty and let people get in on the market even though I would lose money. But I don’t see it as losing money…..

 

Young people won’t get a chance with landlords snapping up every available property….

 

However there is another factor in the situation which is to look at the implications of the current situation for those who rent rather than buy. If we look at the last quote above we are reminded of the Buy to Let boom and the fact that more people are either choosing or being forced to rent. They also are having a hard time of it as I pointed out on the 27th of March. From Your Move

Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010……This is faster than inflation. Over the same period since
May 2010, consumer price inflation (CPI) has amounted to
11.6%. This leaves a 3.6% increase in rents after the
effects of inflation – or the equivalent of a 0.7% real terms
increase each year over the last Parliament.

I compared that increase to an 8% increase in average wages over the same period or a 7.2% decline. So yet another form of real wage squeeze has been in process for those who rent. Or as Gwen Guthrie so aptly put it.

Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Friday saw more bad news for both actual and prospective renters from Your Move research.

Rents driven to new all-time record by

divergent south-eastern regions….. Residential rents up 4.5% year-on-year across England and Wales, powered by three southeast regions.

In case you are wondering how much..

As of May 2015, the average residential rent across England and Wales now stands at £778 per month.

As ever London leads with £1207 per month. But it does not lead the annual increases as the leader is the East of England at 13%. Does anybody have any detail or insight to this?

exceptional economic expansion in the Cambridge area,

A rentier society?

The Your Move report goes on to measure returns for landlords.

Total annual returns, on the other hand, have continued to cool. Across England and Wales, returns came to 9.5% in May 2015 – down from 9.8% in April and 11.8% in January.

If you compare that to a Bank Rate of 0.5% or a ten-year Gilt yield of 2% that looks hot hot hot to me rather than cool. There are of course costs (maintenance etc.) but in these times 9% + looks like nectar does it not?

An international perspective

Renters who note that rents are rising at a solid lick when you consider that we are supposed not to have any inflation will not be cheered up by the fact that they are still rising faster than wage growth. Even its recent spurt falls short. But adding to their pain is the fact that the UK is very expensive when compared to its peers as the UK Housing Federation points out.

In fact, private renters in the UK pay the highest price for housing in the entire European Union. With an average monthly rent of 902 Euros per month (the equivalent of around £730), private renters in the UK pay almost double the amount of the European average, which is 481 Euros.

If we look to compare with our peers then we are in fact still considerably more expensive.

Even when compared to other Western European countries with similar income levels, the PRS in the UK remains expensive. For example, private rents in the UK are around 50% higher than in Germany (600 Euros) or the Netherlands (625 Euros), both countries with a large share of privately rented households.

There will have been an effect here from the rise in the UK Pound £ against the Euro especially at the 1.41 it has reached this morning. However that still leaves a fair-sized gap to explain as we mull concepts such as “rip-off Britain” and the fact that our whole economy has been tilted towards the housing sector.

Existing mortgage holders have their problems too

I have written in the past about how big a deal credit rating is on an individual basis and we got a hint of this yesterday from the RBS announcements. From its chairman (h/t Investis)

Around half of all mortgage customers in the UK are still on Standard Variable Rates.

You see that is at 4% which is rather different to the headline rates for new customers.

Martin Weale

Dr.Weale has been quoted in the Financial Times today.

The FT reported that Weale, a member of the BoE’s  Monetary Policy Committee who voted for rate rises last year, believed the central bank should be ready to raise rates as soon as August.

Perhaps rather than speaking to newspapers he should actually vote for such a thing. We know he did not in June as the vote was 9-0 against. Of course Dr.Weale was voting for a Bank Rate increase up until January. Actually he now has two sequences of voting for a rise then changing his mind.

Comment

It is increasingly pointed out that the UK has strong elements of a rentier society. Today we see that rents are not only on the rise to record levels but are very high in international terms. We also know that as fewer people can afford to buy and the stock of housing for public-sector renting falls – especially under the new Right To Buy plans – then more will find themselves privately renting. They find themselves doing so just as the terms and costs move against them. How very credit crunch! We live in a world where official claims that there is no inflation clash with the fact that quite a few things are more expensive.

So renters are likely to be mulling the thoughts of Dido.

If my life is for rent and I don’t learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine

Is the true crisis in the UK housing market a rental one?

Analysis of the UK housing market often begins and ends with a consideration of house prices. There has been plenty to discuss in that area since the Bank of England pushed the start button for rises back in July 2012 with its Funding for (Mortgage) Lending Scheme which conveniently for the UK establishment provided a subsidy for the banking-sector too. Indeed the coalition government joined in with various policies under the Help To Buy banner which claimed to help first time buyers. This morning has seen another part of the UK political establishment join this particular party as Labour have announced this. From the BBC.

First-time buyers would be exempt from stamp duty when buying homes for less than £300,000 under a Labour government, Ed Miliband will say.

This concept of “helping” first time buyers has troubled me all along because we are “helping” them to buy what are in my opinion over-priced houses. What other area would regard paying too much as helping someone?Should there be a future housing bust these first time buyers will be dreadfully exposed in financial terms. One impact of such policies can be seen in the house price data where prices for first time buyers have risen even faster than for others. If we take the start date for Help To Buy as April 2013 then (mix-adjusted) house prices have risen by 16.6% since then. Accordingly “help” makes its way into my financial lexicon for these times as we wonder if first time buyers will be singing along to Lennon-McCartney.

Help me if you can, I’m feeling down
And I do appreciate you being round
Help me, get my feet back on the ground
Won’t you please, please help me, help me, help me, ooh

What about rental sector then?

If we step back for a moment and consider the broad trends sweeping the UK economy then it is hard to escape the thought that it is growing. If we look at the other side of the balance sheet so to speak we see that buy-to- let lending is seeing something of a boom again. If MoneyFacts are correct then that looks likely to be encouraged by the data below.

Average buy-to-let fixed rates have fallen by up to 50 basis points over the past year, according to Moneyfacts.co.uk.

Data shows the average buy-to-let two-year fixed rate has fallen from 3.94 per cent a year ago to 3.45 per cent now. Two years ago the average was 4.44 per cent.

Apparently it is not only price (via lower mortgage rates) which has improved.

Buy-to-let mortgages are experiencing a renaissance, becoming not only more widely available but cheaper, too.

Oh and ahem, UK pension reform……

With more five-year fixed rate deals charging below 5 per cent than ever before, it is little wonder that the newly emancipated pensioners are genuinely considering buy-to-let as a retirement option.

Indeed a MoneyFacts review back in March pointed out how good that last couple of years has been for this sector.

Buy-to-let lending has grown by 32 per cent in each of the last two years, rising from £15.7bn to £20.7bn between 2012 and 2013 and to £27.4bn last year.

They expect £30 billion this year and if we move back to the other side of the balance sheet here is the forecast impact.

The panel were unanimous that the private rented sector will account for one in four properties by 2020, up from 19.4 per cent now.

The mainstream media has caught onto this and this from the Guardian from Saturday reads rather like cheerleading.

Buy-to-let looks tempting as rates tumble

Should you be thinking about putting your pension savings into property?

For now I will move on except to point out a social consequence pointed out by MoneyFacts.

Whereas in the 1970s as a lower-income family you were likely to find social housing – those people now are being forced into private renting.

What about rents?

If we go back to the last election then last weeks data release from Your Move and Reeds Rains was eye-catching.

Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010……This is faster than inflation. Over the same period since
May 2010, consumer price inflation (CPI) has amounted to
11.6%. This leaves a 3.6% increase in rents after the
effects of inflation – or the equivalent of a 0.7% real terms
increase each year over the last Parliament.

Now we know that wages have grown more slowly than inflation in the UK since the last General Election. So the consequence is that renters have been increasingly squeezed.

If we do the number crunching then the official data for average wages tells us that they have risen by 8% over the course of this Parliament from £449 a week in May 2010 to £485 a week in February this year. So we have a familiar decline compared to official inflation of 3.6% but one of double that or 7.2% if we look at rents alone. The real wage squeeze has seen another turn of the screw for those who rent.

These trends do seem to be continuing as the official inflation measure is conveniently at 0% but on Friday we were told this about rents.

Private rental prices paid by tenants in Great Britain rose by 2.1% in the 12 months to March 2015.

Total wages in the year to February rose by 1.3% so it would appear that even the current economic boom has done little or nothing about this relationship.

Comparing the UK to the Euro area

The total numbers hide quite a bit of variation as Wales saw rises of 0.8% and London of 3.2%. For a true comparison we would need to investigate wage growth numbers we do not have but imagine this was the Euro area and the debate which would ensue…..

Existing renters and home owners

We find today that the credit crunch era has seen another exchange of wealth and indeed income. Those who rent have found themselves paying not only higher nominal rents but ones higher than inflation adjusted ones and indeed higher than wage growth. Accordingly in real terms they have seen a drain on their finances.

Whereas home owners have seen their finances boosted in two separate respects. Firstly we saw a succession of Base Rate cuts followed by further attempts to reduce mortgage rates such as £375 billion of QE (Quantitative Easing) and the FLS scheme I described above. This means that for a mortgage with a 25% deposit the typical mortgage rate according to the Bank of England has fallen from 3.05% at the last General Election to 1.56% now so nearly halved. There are caveats of course around criteria but monthly payments for many have fallen. Since the summer of 2012 the pedal was pushed too on house price rises so in general there are lower funding costs and higher house prices.

Renters must be reading that paragraph between gritted teeth because there has been both an income and a wealth transfer here.

New buyers and renters

Here there is a difference because whilst the monthly or annual cost of renting has risen relative to mortgage costs that is only one aspect. The capital aspect is much tougher for new buyers as lower real wages try to finance higher house prices. Anyway you do not need to take my word for it as otherwise our political establishment would not be promising so much “help” for first time buyers would they?!

Comment

The situation in the UK housing market achieved joke status a long time ago and is now well past that! However reviewing the period since the last General Election gives us a clear set of winners and that is the landlord or rentier sector. They have seen their costs fall as mortgage rates have dropped, they have seen their income rise as rents rise faster than both inflation and wages. They must wonder why work for a living when rents rise faster?! Also they have seen substantial rises in the value of their housing stock since the summer of 2012. No wonder it is seen as a good investment and (perhaps) we are seeing another rush into it via pension freedoms rising. The clear and present danger is that this relies on the UK establishment continuing to regard this sector as being “the precious” which of course it shares in an interrelated way with the banking-sector.

Next come home owners as a group as obviously some individuals did lose out. Lower mortgage costs for many and higher house prices since late 2012.

The losers are a clearly defined group. I have long argued that first time buyers were likely to be in this group and today I add those who rent. Of course some have rented whilst saving up to buy in something of a double-whammy. Who could save enough to merely stand still?! As these are generally younger than house owners we are observing also yet another example of the generation game taking place where the young lose out every time. They must think they live on the planet Giedi Prime from the novel Dune.In such a world it would not be a coincidence that a growing group (renters) found itself being punished economically.

As to our political class well they want to return to the 1980s (Right To Buy) or the 1970s (Rent Controls) it would appear. But as ever they appear to find themselves in a “Westminster Bubble” which has burst before it even travels the 2.6 miles to where I am typing this.

Jobs For Life

Today saw the release of the latest quarterly report on the Bank of England Asset Purchase Facility and it made me wonder if we have found a modern-day example of a job for life?

Do women have a different perspective to men on the UK house price boom?

Today has seen some rather familiar news on the UK house price situation from Rightmove. Let us get straight to it.

Price of property coming to market up by 1.0% (+£2,748), a more muted rise at this time of year.

 

This has resulted in a reduction of the year-on-year rate of increase to 5.4%.

 

So on their measure we continue to see house price growth and in terms of the month just gone some acceleration whilst the year on year increase has been trimmed. This in a way reflects the multitude of official influences on the UK housing and mortgage markets. For example the explicit impact of the Bank of England’s Funding for (Mortgage) Lending Scheme (FLS) is over. Also Rightmove try to trumpet the influence of the Mortgage Market Review but end up in a mass of contradictions.

The MMR introduced in April 2014 laid out a much-needed longer-term framework for responsible lending, but within a year its dampening effects have been muted by high demand outstripping supply.

 

On the other side of the equation has been the Help To Buy Scheme which has helped over 88,000 households to buy what I consider to be overpriced housing. Added to this came an additional effort earlier this month.

The plans will allow young first time buyers the opportunity to secure a new Starter Home at a 20% discount to the market price.

 

This begs so many questions. For example in a new estate, what is the market price?! If it is so easy why not 25% or 30% off? Backing this up comes from thinking if as clearly implied prices are too high for first-time buyers then why has the government and Bank of England put so much effort into pushing them higher?

Next we have seen an upwards push on house prices from lower mortgage rates. Back on the 9th of February I discussed what were and indeed remain extraordinary changes. From the Council of Mortgage Lenders.

Last November, the average new tracker mortgage rate fell to 1.96%, according to our regulated mortgage survey – the first time that it has ever dipped below 2%. For fixed-rate borrowers, it’s the same picture, with some lenders offering the lowest long-term rates the market has ever seen.

 

This has been driven partly by international influences as for example the continuing fall in bond yields in Europe and the fact that Bank of England policy still supports lower mortgage rates just not so explicitly.

What about Buy To Let?

In itself buying a house to rent it out may provide a service for the economy. The catch is that in the UK this morphed into a type of investment/pension plan based around capital gains and “easy money”. Thereby it crowds out investment to other sectors and degrades our economic performance. Well here is Rightmove’s view on the current position.

controls limiting buyer affordability appear not to be restraining the more cash-rich buy-to-let sector. This active area of the market, with mortgage loan numbers up by 23% in 2014 compared to 20131, is set to receive a further injection of investment as the new pension rules come into force next month.

 

So Buy To Let is booming as we wonder if the other part of FLS is putting money into the property market via companies? Also we do not yet know the full details of the changes but we do know that we expect to see more pension liberalisation and those with lump-sums will if the past is any guide tend to put it into the already overpriced UK property market.

What does this mean?

If we move away from the Rightmove numbers partly because their weakness is that they use asking or selling prices rather than actual trading prices we can look at Friday’s LSL/Acadata report.

At £273,528, home values now £34,192 higher than at height of the housing boom in February 2008

 

So house prices are now some 14% higher than at the peak which helped to cause the credit crunch many of us are still suffering from. Also whilst we get plenty of hype around the issue of affordability because of the fact that mortgage-rates are as low as they have ever been there is an elephant in the room. This is of course if we compare rising house prices with the level of inflation adjusted or real wages. As real wages have been falling in the credit crunch era any such analysis provokes quite a problem and indicates a strong degree of stress in the system. Back in 2013 the UK Office for National Statistics produced some eye-catching numbers and of course in spite of a recent improvement the situation has seen an overall deterioration.

In real terms, the average earnings of UK employees in 2012 were at roughly 2003 levels, a new article from ONS has shown. After three decades of strong growth, real wages peaked in 2009. Since then inflation has outstripped wage increases in cash terms.

 

An index which compared house prices to wages would be truly terrifying right now. In a way the UK authorities have confirmed this by the way that they have provided subsidy after subsidy or what they call “help”. Of course it may turn out to be this version of Help.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

 

Woman’s Hour

With thanks to NicTrades for pointing this out to me I would like to refer to Woman’s Hour on BBC Radio Four. Here is a flavour of the topics discussed by the focus group as we move from the XY to the XX.

I look around at the children who are 19 and 20 and I don’t know how they will ever be able to afford a mortgage?

 

I would prefer the housing market to halve in all honesty and let people get in on the market even though I would lose money. But I don’t see it as losing money…..

 

When everybody was talking about house prices going up it made everyone very greedy and led to the sort of conversation I don’t like.

 

Young people won’t get a chance with landlords snapping up every available property….

 

I feel insecure for everybody else especially kids as it is much tougher than it was.

 

Where now you know it is just crazy…

I think that they have pretty much nailed it don’t you? As we wonder if Destinys Child provided something of a template in  terms of attitude.

The shoes on my feet
I’ve bought it
The clothes I’m wearing
I’ve bought it
The rock I’m rockin’
‘Cause I depend on me
If I wanted the watch you’re wearin’
I’ll buy it
The house I live in
I’ve bought it
The car I’m driving
I’ve bought it
I depend on me
(I depend on me)

 

Comment

Well done to Women’s Hour for hosting for what can only in these times be considered something of a subversive discussion. But sadly the presenter Dame Jenni Murray embarrassed herself with this about the woman who wanted house prices to halve.

It seems to me that she is living in Cloud Cuckoo land…

 

Many of us would prefer what she considers to be Cloud Cuckoo land. On the other side we have official policy so aptly described by the purple one.

Let’s go crazy

Are we gonna let the elevator bring us down
Oh, no let’s go!
Go crazy

I said let’s go crazy (Go crazy)
Let’s go, let’s go
Go
Let’s go