Does money supply growth feed straight into house prices?

I thought that I would look at things today from a slightly different perspective or to quote the French man in The Matrix series we shall investigate some cause and effect. Let me give you the latest news on the effect.

In Q3 2020, the rise in prices of second-hand dwellings in France (excluding Mayotte) weakened: +0.5% compared to Q2 2020 (provisional seasonally adjusted results), after +1.4% in Q2 and +1.9% in Q1 2019.

Over a year, the rise in prices continued: +5.2%, after +5.6% and +4.9%. As observed since the end of 2016, this increase was more important for flats (+6.5% over the year) than for houses (+4.2%). ( Insee)

The reality of the situation arrives when you look at the overall pattern. We saw negative interest-rates introduced by the ECB in June 2014 and large-scale QE begin in March 2015. After several years of falling house prices we then saw French annual house price growth move into positive territory towards the end of 2015. Since then the rate of growth has tended to rise and is now above 5%. The ECB and Bank of France will of course be noting this down as Wealth Effects a plan which is aided and abetted by the Euro area measure of inflation which conveniently omits owner-occupied housing completely. Apparently the twenty odd years they have had to do something about this is not long enough or something like that.

If we bring this right up to date I am nit especially bothered by the decline in quarterly growth in house prices. After all the background environment is for house price falls and the monetary easing we are about to look at has prevented them so far. Or in an amusing irony we can quote the word “counterfactual” back at the central bankers.

Money Supply

The growth here remains stellar as we look at the measure most affected by all the easing.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 13.8% in October, unchanged from previous month.

This is a consequence of buying some 25.5 billion Euros of bonds under the original QE programme ( PSPP) and some 62 billion under the new emergency pandemic one or PEPP. Just to mark you cards looking ahead the latter seems to have accelerated recently from around 15 billion per week to around 20 billion in a possible harbinger of the ECB December decision.

This is a game the ECB has been playing since 2015 when it got M1 growth as high as 11.7% which was part of the push on house prices we looked at above. Annual growth had fallen to around 7% before the last act of Mario Draghi last autumn pushed it back above 8% and now the pandemic response pushed it into double-figures. There is another issue here which was described by Kate Bush.

Be running up that road
Be running up that hill
Be running up that building

The 13.8% growth in October is on a much larger amount. Indeed M1 passed 10 trillion Euros in size in October.

Broad Money

If we go wider in monetary terms we see a similar picture.

Annual growth rate of broad monetary aggregate M3 stood at 10.5% in October 2020, after 10.4% in September 2020

The pattern here is different as the previous moves had struggled to get annual growth much above 5% and now well you can see for yourself.Something of a wall of broad money going somewhere but not into the real economy. As you might expect some of this is the tsunami of narrow money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 9.4 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.4 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (up from 0.6 percentage point).

The ECB will be pleased with the last component of marketable instruments on two counts. Firstly it can point to it as a response to its actions. Secondly growth in such markets will no doubt lead to a growth in sinecures for past central bankers.

Things then get more awkward because it was only the day before yesterday we noted a  savings ratio of 13.5% in Germany on the third quarter. Well from the numbers below it looks as though businesses are saving too and doing it via their bank accounts.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 7.9% in October from 7.7% in September, while the annual growth rate of deposits placed by non-financial corporations decreased to 20.5% in October from 21.1% in September. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 7.3% in October from 8.2% in September.

It might be more accurate to say they have received money they cannot spend yet as we see a shift in monetary transmission. This is one of the clearest examples of what in economics is called excess money balances I have ever seen. Except right now neither supposed consequence of growth and inflation can happen much.

Credit

With the various support schemes in place it is hard to know what these numbers are really telling us. We do get a pointer to something we know is happening.

The annual growth rate of credit to general government increased to 20.3% in October from 18.9% in September, while the annual growth rate of credit to the private sector stood at 4.9% in October, unchanged from the previous month.

Credit is flowing to governments and some of it is being passed on.

Comment

We can now look more internationally and see examples of monetary policy affecting asset prices. The United States has given us two examples this week alone.

US home prices climbed the most on record in the third quarter as historically low mortgage rates drove outsized demand, the Federal Housing Finance Agency said in a Tuesday report.

Prices gained 3.1% from their prior-quarter levels, according to the report. The jump also places prices 7.8% higher than their year-ago levels. A seasonally adjusted monthly index of prices gained 1.7% in September. ( Business Insider)

And this.

The Dow Jones Industrial Average hit 30000 for the first time on Tuesday, after a rally of more than 60% from its March lows. ( WSJ)

We can also look to Japan where this morning’s Nikkei 225 close at 26,537 compares with more like 8,000 when the Abenomics experiment began.

The catch is that in terms of money supply there are lots of leads and lags in the system. So we can see some things clearly such as the rise in French house price growth but in other areas the rain has not yet gone. For example the CAC-40 has surged in response to the monetary easing but like the UK FTSE 100 is well below past peaks. Of course another asset market which is French sovereign bonds has gone through the roof such that France is being paid to borrow ( ten-year yield -0.34%) in an example of a direct impact.

Switching to the real economy there will be greater lags right now as the Covid-19 restrictions and lockdowns crunch economies regardless of monetary growth. But if you think about it that only raises the inflationary risks and it is not only the Euro area that puts a Nelsonian blind eye to likely developments.

“The government’s plan to replace RPI with CPIH is a clear case of using the wrong tool for the job…” Our CEO @stianwestlake on the news that the RPI will be aligned to the CPIH in 2030 ( Royal Statistical Society)

Happy Thanksgiving.

The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

A feature of these times is that we see so many official attempts to hide the truth. In the UK at the moment one of the main efforts is around the inflation numbers and next week on the 25th we will get an announcement about it. The official documentation shows the real reason for the change albeit by accident.

Since 2010, the measured rate of RPI annual inflation has been on average one percentage point per annum above the CPIH.

They want to get rid of the RPI for that reason that it gives a reading some 1% higher as they can then tell people inflation is 1% higher at a stroke. The “independent” UK Statistics Authority and National Statistician have  thoroughly embarassed themselves on this issue. There have been 2 main efforts to scrap the RPI both of which have crumbed under their own inconsistencies and now the plan is to neuter it by applying some Lord of the Rings style logic.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them.

In the future we will only have one inflation measure and it will be the one that has been widely ignored since its introduction in spire of desperate attempts to promote it.

The Authority remains minded to address the shortcomings of the RPI by bringing the methods and data sources from the National Statistic, the CPIH, into the RPI. In practice this means that, from the implementation date, the RPI index values will be calculated using the same methods and
data sources as are used for the CPIH. Monthly and annual growth rates will then be calculated directly from the new index values.

So the “improvement” will involve including rents which do not exist and they comprise quite a bit of the index.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 16% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

For those unaware if you own your own home you are assumed to pay yourself rent and then increases in the rent you do not pay are put in the inflation numbers. Even worse they have little faith in the numbers used ( from actual renters) so they “smooth” them with an average lag of about 9 months. So today’s October rent numbers reflect what was happening around January and are therefore misleading. Putting it another way if you wish to have any idea of what is happening in the UK rental sector post pandemic do not look here for clues.

The supposedly inferior RPI uses house prices via a depreciation component ( a bit over 8%) and mortgage interest-rates ( 2.4%). Apparently using things people actually pay is one of the “shortcomings”. Meanwhile back in the real world if I was reforming the RPI I would put house prices in explicitly.

I find myself in complete agreement with the TUC on this.

Nobody is claiming the RPI is perfect. But it remains the best measure for living costs and would be straight forward to modernise.

As has been shown across Europe it would be perfectly possible to have RPI existing in parallel to CPIH (​or CPI) and have the latter measure focus on guiding monetary policy.

We are disappointed that expert calls to retain the RPI have been repeatedly ignored. The Royal Statistical Society and House of Lords Economic Affairs ​Committee have both presented compelling evidence for keeping it.

The basic issue is that the inflation numbers will be too low.In addition measures of real wages will be distorted too. These things echo around the system as for example when RPI was replaced by CPI in the GDP data the statistician Dr. Mark Courtney calculated that GDP was then higher by up to 0.5% a year. If you cant change reality then change how it is presented.

Today’s Data

We see that inflation is starting to pick up.

The Consumer Prices Index (CPI) 12-month rate was 0.7% in October 2020, up from 0.5% in September.

Remember that prices are being depressed right now by the VAT cut.

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

I appreciated it last night when I bought a cooked chicken which has become cheaper. In terms of the inflation numbers we do have measures which allow for this. They are at 2.3% ( if you exclude indirect taxes called CPIY) and 2.4% ( if you have constant indirect tax rates or CPI-CT). We do not know exactly how prices would have changed without it but we do know that inflation would be a fair bit higher and would change the metric around Bank of England policy and its 2% inflation target.

The major movers were as follows.

Clothing; food; and furniture, furnishings and carpets made the largest upward contributions (with the contribution from these three groups totalling 0.16 percentage points) to the change in the CPIH 12-month inflation rate between September and October 2020………These were partially offset by downward contributions of 0.06 and 0.04 percentage points, respectively, from the recreation and culture, and transport groups.

You may note they have sneaked CPIH in there as it is the only way they can get it a mention as it is so poor it is widely ignored.

Another point of note is that the inflation measured by CPI is in services at 1.4% whereas good inflation is 0%.

If we look at the RPI we see another reason why it is described as having “shortcomings”. It has produced a higher number as it has risen from 1.1% in September to 1.3% in October.

The trend

In terms of the 2 basic measures we see that opposite influences are at play. The UK Pound £ has been reasonably firm and is just below US $1.33 as I type this so mo currency related inflation is on the way and maybe a little of the reverse. However the price of crude oil has been picking up lately with the January futures contract at US $44.27. Whilst this is around 30% below a year ago the more recent move this month has been for a US $7 rise.

In terms of this morning’s release there was a hint of a change.

The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020……The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.

So less negative and at this point crude oil was still depressing the prices so we can expect much more of a swing next time around if we stay at present levels.

Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.

House Prices

I think you can see immediately why they want to keep house prices out of the official inflation measures.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

They much prefer to put this in.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020.

Just as a reminder home owners do not pay rent so this application of theory over reality conveniently reduces the headline inflation number called CPIH.

As ever there are regional differences in house price growth.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%)….London’s average house prices hit a record high of £496,000 in September 2020.

Comment

Next week we will get the result of the official attempt to misrepresent inflation in the UK. All inflation measures have strengths and weaknesses but the UK establishment is trying to replace what is a strong measure (RPI) with a poor one ( CPIH). I think it is particularly insidious to keep the name RPI but in reality to make it a CPIH clone. A group that will be heavily affected is first time buyers of property who will be told there is little inflation because of a theoretical manipulation involving imputed rents but face a reality of much higher house prices.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter )

If you set out to destroy trust in national statistics then they are on the right road.

The UK house price boom is facing higher mortgage rates

This morning will have brought sounds of high excitement and smiles to the Bank of England. It would have been too early to raid its excellent wine cellar but a liveried flunkey will have brought its best coffee to Governor Andrew Bailey as he peruses the latest news from the Halifax on UK house prices.

The average UK house price now tops a quarter of a million pounds (£250,547) for the first time in history, as annual
house price inflation rose to 7.5% in October, its highest rate since mid-2016. Underlying the pace of recent price
growth in the market is the 5.3% gain over the past four months, the strongest since 2006.

Governor Bailey will no doubt issue a satisfied smile and may mimic the end of the television series Frasier which had an “I did that” at the end. He may even be pleased that he has helped to do this without getting a mention from the Halifax.

This level of price inflation is underpinned by unusually high levels of demand, with latest industry figures showing
home-buyer mortgage approvals at their highest level since 2007, as transaction levels continue to be supercharged
by pent-up demand as a result of the spring/summer lockdown, as well as the Chancellor’s waiver on stamp duty for properties up to £500,000.

I find the “pent-up demand” bit curious as surely there will also have been pent-up supply? Bur we do see signs of a an active market.

HMRC Monthly property transactions data shows a fifth consecutive monthly rise in UK home sales
in September. UK seasonally adjusted residential transactions in September 2020 were 98,010 – up by
21.3% from August. The latest quarterly transactions (July-September 2020) were approximately 63.6%
higher than the preceding three months (April-June 2020). Year on year, transactions were 0.7% lower than
September 2019 (2.4% higher on a non seasonally adjusted basis). (Source: HMRC, seasonally-adjusted
figures)

Although I do note that whilst we have seen high rates of monthly growth it only brings us back to around what were last years levels. The picture on mortgage approvals is more clear-cut.

Mortgage approvals rose in September to the highest level seen in 13 years. The latest Bank of England figures show the number of mortgages approved to finance house purchases, rose by 7% from August to 91,454, down from a rise of 27% reported in August. Year-on-year, the September figure was 39% above September 2019.

Monetary Policy

We can now switch to what I call the Talking Heads question. From Once In A Lifetime.

And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well… how did I get here?”

The Bank of England’s role in us getting here started with the interest-rate cuts in response to the credit crunch. Then as they realised how interest-rates actually worked they added on bond buying in the form of what is called QE to reduce longer-term interest-rates too. It is easy to forget now but this did not do the trick for house prices so in the summer of 2012 we got what the then Chancellor George Osborne called credit easing. This was the Funding for Lending Scheme where the Bank of England channeled cheap cash ( Bank Rate was 0.5%) to the banks so that they did not have to indulge in the no doubt tiresome business of competing for depositors.

This was a crucial change in 2 respects. The first is access to funds at Bank Rate but in many ways more crucial is the access to large amounts of funds. So a quantity issue. This allowed banks to reduce mortgage-rates and I recall pointing out that mortgage-rates fell by 0.9% quite quickly and the Bank of England later claimed they fell by up to 2%.

Bringing this up to now we have the Term Funding Scheme operating that role and in its original form it has supplied £70.6 billion and the new pandemic era version has supplied some £49.6 billion. So as you can see the Bank of England keeps the banks supplied with cash and these days it can get it as cheap as the present Bank Rate of 0.1%. On this road we see that the cut in Bank Rate is not especially significant in itself these days but comes more into play via the Term Funding Scheme.

Next as more people moved to mortgages with fixed interest-rates ( around 92% of new mortgages last time I checked) QE also came back into play as an influence on mortgage rates via its impact on UK bond or Gilt yields. So this part of yesterday’s announcement matters.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

There are issues with the stock but for our purposes today in looking at the mortgage market it is the flow ( presently £4.4 billion a week) that matters. It has helped keep my proxy for fixed-rates, which is the five-year bond yield negative since mid June now apart from one brief flicker. As I type this it is -0.06%.

Comment

So the theme starts singing along with Steve Winwood for house prices.

I’ll be back in the high life again
All the doors I closed one time will open up again

However all the government and Bank of England pumping has the problem that it means that they are ever more socially distanced from wages and earnings. So many are on 80% wages from the furlough scheme and real wages have been falling. There has to be some sort of reckoning here in the end. As well there are signs that the pumping system is creaking.

As you can see mortgage rates for those with lower amounts of equity or if you prefer high loan to value numbers have risen quite sharply. So the heat is on especially for those with only 5% equity where they have gone above 4% which really rather contradicts all the official rhetoric of low interest-rates.  So I see trouble ahead which to be frank I welcome. I do not wish anyone ill in financial terms but we do need lower house prices to help first-time buyers.

Meanwhile something I have long warned about looks to have come true this week.

The Bank of England is investigating a potential leak of Thursday’s QE announcement ( @fergalob)

I do like the description of it being in The Sun as a “potential leak”……

Australia cuts interest-rates again

This morning as the world waits on tenterhooks for news on the US election there was yet another move in one of the longest running themes of my work. For that we need to travel to what is often called a land “down under” or more recently the South China Territories. So let me hand you over to the Reserve Bank of Australia.

The elements of today’s package are as follows:

  • a reduction in the cash rate target to 0.1 per cent
  • a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
  • a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
  • a reduction in the interest rate on Exchange Settlement balances to zero

So we see yet another interest-rate cut in this instance from 0.25% to 0.1% which means that we have gad around 770 in total now since the credit crunch began. There is something very curious about this action because you see that apparently things are going really rather well.

Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.

Indeed you might also think that as this rate cutting cycle began in June last year when the rate was cut from 1.5% to 1.25% you might wait for its impact to hit, at least if you believe it will have any. After all there were cuts two months in a row meaning a 0.5% cut which should be impacting now. If they do not work how will one of less than a third of the size?

The theme above has become something of a central banking standard where they tell us things are better than expected but cut interest-rates anyway! But I do not see others calling them out for it. After all if you are the South China Territories then this is rather bullish.

The global economy has been recovering from the initial virus outbreaks, with the recovery most advanced in China.

Quantitative Easing

I am sure you have spotted that the trend to more QE is in force as well. It always goes longer in time in line with my “To Infinity! And Beyond!” theme.

Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split. These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian Government securities.

As well as going longer there is always “More! More! More!” as a theme too as the extra 100 billion Australian Dollars is only a starting point.

The Bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program.

Of course if you are going longer and presumably feel that is a good idea then why bother keeping the 3-year yield target? But the central planners never seem to give anything up once they have gained control.

The Aussie Dollar

We do get a bit of a divergence from the central bankers rule book with the bit I have highlighted below.

The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets.

So we have an actual attempt at devaluation or more strictly exchange-rate depreciation. Of course President Trump may be about to depart but should he stay will he be looking at Australia as looking for an economic advantage via a weaker exchange-rate?

If we look at the Trade Weighted Index it’s recent peak was at 65.7 at the end of January 2018. It then gently declined towards 60 and then plunged to around 50 as the pandemic hit. So there was a substantial depreciation,although with economies plunging any economic gains were likely to be small. The index then bounced to a bit above 62 in August and was 59.5 yesterday.So there was and indeed is no clear case for needing a depreciation especially if you are benefiting from some re-stocking by China.

So far this year, Australian exports of iron ore and liquefied natural gas to China have increased by eight percent and nine percent respectively year on year, according to Wood Mackenzie. China’s coal imports from Australia also far exceeded the levels before the pandemic. ( CGTN from the 28th of July).

Housing Market

I see that the Australian Broadcasting Corporation has been on the case already.

Adelaide homeowners Mark and Verity Riessen are eagerly waiting to see how much of the rate cut will be passed on to them by their lender.

“The last rate cut the RBA passed through, was not passed on to us by our lender,” Mr Reissen said.

So the banks have behaved like well banks in not passing on the previous interest-rate cut and that is a theme. What do I mean by that? As interest-rates have approached and then in some places gone below zero the responsiveness or delta of the mortgage-rate changes has clearly declined. It always was important to check the terms of your mortgage but the ones saying linked to Cash Rate ( of the RBA) will be in prime position today.Also you need to check for exemptions as some around the world have (sneakily) imposed a minimum interest-rate.

According to the RBA the Reissen’s are at 3.2% paying what is pretty much the average rate with new mortgages being at 2.69% on average.

House Prices

We only have numbers up until the end of June but here is Australia Statistics.

Weighted average of the eight capital cities Residential Property Price Index:

  • fell 1.8% this quarter.
  • rose 6.2% over the last twelve months.

The total value of residential dwellings in Australia fell $98.2b to $7,138.2b this quarter.

The idea that the number above is any sort of value is pretty much laughable as has there been a bid for the lot? But we see that the RBA may have been triggered by house price falls which central bankers hate.

The index is at 143.2 as opposed to the 100 of 2012.

Comment

Let us look at the reality of the situation. Starting with interest-rates if you are wondering what is the point of a 0.15% cut after so many you are on the right track and the psychobabble continues with this.

Given the outlook, the Board is not expecting to increase the cash rate for at least three years.

So more meaningless Forward Guidance although some seem fooled by it. From ABC.

Dr Hunter said the bank outlining it did not expect to raise the cash rate over the next three years would “provide households and businesses with some certainty over their individual borrowing rates in the near term”.

Perhaps someone should tell Dr.Hunter about the existence of fixed interest-rates! Also as the last interest-rate rise was a decade ago today who exactly expects any sort of interest-rate rise? The fact it was to 4.75% provides plenty of food for thought.

The reality is that central banks have two aims now and that is why we are seeing so much QE and credit easing. Aim one is to help government fiscal policy by keeping the rate at which it can borrow very low and also pumping house prices by reducing mortgage rates.

Meanwhile I know Halloween was a few days ago but this still chills the spine.

Dr Lowe also said the cash rate was very unlikely to drop below zero.

 

 

 

 

Hard times for the economy and banks of Spain

We have an opportunity to peer under the economic bonnet of one of the swing states in the Euro area. We have seen Spain lauded as an economic success followed by the bust of the Euro area crisis and then it move forwards again. But 2020 has proven to be another year of economic trouble and that theme has been added to by this morning’s data release.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI)
at constant prices between the months of September and August, stood at −0.3%. This rate was 1.7 points lower than the previous month. ( INE)

So we have a fall when if we follow the official view of recoveries from the pandemic we should be seeing the opposite. Then we note that relative to August there has been a much larger decline. The breakdown is below.

By products, Food remained the same (0.0%) and Non-food products declined by 0.6%. If the latter is broken down by type of product, Household equipment decreased the most (−3.7%).

The one category which rose was personal equipment which was up 2.3%.

If we switch to the annual picture we see this.

In September, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of −3.3% as compared with the same month of the previous year. This rate was four tenths lower than the one registered in August.

In a by now familiar pattern car fuel sales are down by 9.2% and after them the breakdown is as follows.

If these sales are broken down by type of product, Food
decreased by 2.7%, and Non-food products by 3.1%.

So unlike in the UK the Spanish are not eating more. After the news we have looked it sadly it is no surprise that jobs are declining.

In September, the employment index in the retail trade sector registered a variation of −3.0%
as compared to the same month of 2019. This rate was three tenths above that recorded in August. Employment decreased by −4.9% in Service stations.

If we look at the structure of the sales we see that small chain stores have been hit hard with sales down 14.3% on a year ago meaning they are only 88.3% of what they were in 2015. There has been a switch towards large chain stores who are 2.4% up in September on a year ago and some 17% up on 2015.

Looking at the overall picture the “Euro Boom” has pretty much been erased as we note that retail sales in September are only 2.2% above 2015. These numbers are not seasonally adjusted and may give the best guide because if there has been a year not fitting regular patterns this is it. We get another clue from the numbers from the Canary Islands where volumes are 13.5% below a year ago and the overall index is at 87,5. I am noting that because it gives us a proxy for the tourism effect, or in this instance the lack of tourism effect. Regular readers will recall we feared that this would be in play when the Covid-19 pandemic started and we can see that it has.

Housing Market

The Bank of Spain and the ECB would of course have turned to these figures first.

The number of mortgages constituted on dwellings is 19,825, 3.4% less than in August 2019. The average amount is 134,678 euros, an increase of 4.0%.

They will have been disappointed to see the number of mortgages lower but pleased to see an increase in mortgage size which offers the hope of more business for their main priority which is the banks and may even offer a hint of house price rises.

One factor of note is that if we look at the remortgage figures we see a different pattern in terms of fixed to floating mortgage rates than we have become used to.

After the change of conditions, the percentage of mortgages
fixed interest increases from 19.0% to 31.2%, while that of variable rate mortgages decreases from 80.4% to 59.7%.

As to house prices these are the most recent numbers.

The annual rate of the Housing Price Index (HPI) decreased one percentage point in the
second quarter of 2020, standing at 2.1%.
By housing type, the rate of new housing reached 4.2%, almost two points below that
registered in the previous quarter

So we still have growth and the central bankers will be happy with an index that is at 126.8 when compared with 2015. Their researchers will be busy enhancing their career prospects by finding Wealth Effects from this whilst nobody asks why all the emails from first-time buyers saying they cannot afford anything keep ending up in the spam folder.

Looking Ahead

Last month the Bank of Spain told us this.

Under these considerations, the economy’s output would fall by 10.5% on average in 2020 in scenario 1, and by up to 12.6% in the event that the less favourable epidemiological situation underlying the construction of scenario 2 were to
materialise. That said, the pickup in activity projected for the second half of this year, following the historic collapse recorded in the first half, would have a positive carry-over
effect on the average GDP growth rate in 2021, which would reach 7.3% in scenario 1, while remaining at 4.1% in scenario 2,

With the pandemic storm clouds gathering around Europe we look set for scenario 2 of a larger decline in GDP followed by a weaker recovery. Also if you are in an economic depression then how long it lasts matters as much as how deep the fall is.

In any event, at the end of 2022, GDP would stand some 2 percentage points (pp) below its pre-crisis level in
scenario 1, a gap that would widen to somewhat more than 6 pp in scenario 2.

It is a bit like wars which are always supposed to be over like Christmas and like a banking collapse where we are drip fed bad news. Speaking of the banks there is plenty of bad news around. We can start with the Turkish situation.

Turkish debt held by European banks via BIS – $64 billion in Spanish banks. – $24 billion, in French banks. – $21 billion, in Italian banks. – $9 billion, in German banks. ( DailyFX )

Then there was also this earlier this week. The Spanish consumer association took th banks to court over past mortgage fees.

Those affected do not need to initiate an individual lawsuit, with the costs and time that this entails, but can directly benefit from the success of the Asufin class action lawsuit.

So, as previously indicated, those 15 million mortgages may recover up to an average of 1,500 euros without the need to litigate. ( El Economista)

I doubt that is the end of the story but it is where we presently stand.

Comment

The situation looks somewhat grim right now and it has consequences.If we look at the labour market we have learned that unemployment as a measure is meaningless so here is a better guide.

Total hours worked would fall very sharply on average in 2020: by 11.9% in scenario 1 and 14.1% in scenario 2. Although the rise in this variable, which began
with the easing of lockdown, would continue over the rest of the projection horizon, the total number of hours worked at the end of 2022 would still be 4.5% and 8.3% lower than before the COVID-19 crisis under scenarios 1 and 2, respectively. ( Bank of Spain)

Also the public finances will be doing some heavy lifting.

.As regards public finances, it is estimated that the general government deficit will increase sharply in 2020, to stand at 10.8% and 12.1% of GDP in each of the two scenarios considered…….Public debt, meanwhile, would increase in 2020 by more than 20 pp in scenario 1 and by
some 25 pp in scenario 2, to stand at 116.8% and 120.6% of GDP, respectively.

Of course debt affordability fears are much reduced when some of your bonds can be issued at negative yields and even the ten-year is a mere 0.17%.

As to the banks the eyes of BBVA and Banco Santander will be on developments in Turkey right now.

Me on The Investing Channel

The Netherlands continues to see house prices surging

Today gives us the opportunity to look at several issues. Sadly the initial opening backdrop is this.

Dutch prime minister Mark Rutte announced yesterday that the Netherlands is going into “partial lockdown”, due to the sharp rising numbers of coronavirus infections. From Tuesday evening, all bars and restaurants will be closed for at least one month. Buying alcohol after 10PM is forbidden. Hotels remain open, as well as bars and restaurants in the airport, after the security check. ( EU Observer).

So we see that another squeeze is being put on the economy To put this another way the Statistics Netherlands report below from Monday now looks rather out of date.

The economic situation according to the CBS Business Cycle Tracer has become less unfavourable in October. However, the economy is still firmly in the recession stage. Statistics Netherlands (CBS) reports that, as of mid-October, 10 out of the 13 indicators in the Business Cycle Tracer perform below their long-term trend. Measures against the spread of coronavirus have had a major impact on many indicators of the Tracer.

If we look at the situation we see that it was a pretty stellar effort to have a reading of 0.56 in April but the number soon plunged to its nadir so far of -1.95 and the latest reading is -1.21.

The picture for trade, investment and manufacturing is as you might expect.

In August 2020, the total volume of goods exports shrank by 2.3 percent year-on-year. Exports of petroleum products, transport equipment and metal products decreased in particular. Exports of machinery and appliances declined as well.

The volume of investments in tangible fixed assets was 4.5 percent down in July 2020 relative to the same month last year. This contraction is smaller than in the previous three months and mainly due to lower investments in buildings and machinery.

In August 2020, the average daily output generated by the Dutch manufacturing industry was 4.0 percent down on August 2019. The year-on-year decrease is smaller than in the previous four months.

Along the way we see how this indicator was positive in April as some of it is lagged by around 3 months. That is also highlighted by the consumer numbers.

In July 2020 consumers spent 6.2 percent less than in July 2019. The decline is smaller than in the previous four months. Consumers again spent less on services but more on goods.

Unemployment

Yesterday’s official release told us that the unemployment data in the Netherlands are as useless as we have seen elsewhere.

In September 2020, there were 413 thousand unemployed, equivalent to 4.4 percent of the labour force. Unemployment declined compared to August and the increase seen in recent months has levelled off. In the period July through September, the number of unemployed increased by a monthly average of 3 thousand. From June to August, unemployment still rose by 32 thousand on average per month, with the unemployment rate going up to 4.6 percent.

There is a clear case for these numbers to be suspended or better I think published with a star combined with an explanation of the problem.

We do learn a little more from the hours worked data although as you can see they are a few months behind the times.

Due to government support measures, job losses were still relatively limited in Q2 at -2.7 percent, but the number of hours worked by employees and self-employed fell significantly and ended at a total of 3.2 billion hours in Q2 2020. Adjusted for seasonal effects, this is 5.7 percent lower than one quarter previously.

GDP

This was better than the Euro area average in the second quarter.

According to the second estimate conducted by CBS, gross domestic product (GDP) contracted by 8.5 percent in Q2 2020 relative to the previous quarter. The decline was mainly due to falling household consumption, while investments and the trade balance also fell significantly. Relative to one year previously, GDP contracted by 9.4 percent.

House Prices

Here we have something rather revealing and ti give you a clue it will be top of the list of any morning meeting at either the Dutch central bank or the ECB.

In August 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 8.2 percent higher than in the same month last year. This is the highest price increase in over one and a half years.

Yes house prices are surging in a really rather bizarre sign of the times.

House prices peaked in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. The index reached a new record high in August 2020; compared to the low in June 2013, house prices were up by 51 percent on average.

This gives us a new take on the “Whatever it takes” speech by ECB President Mario Draghi in July 2012. Because if we allow for the leads and lags in the process it looks as though it lit the blue touchpaper for Dutch house prices. It puts Dutch house prices on the same timetable as the UK where the Bank of England acted in the summer of 2012 and the house price response took around a year.

The accompanying chart will also warm the cockles of any central banking chart as the house price index of 107.2 in September 2016 ( 2015 = 100) becomes 143.4 this August. Actually in the data there is something which comes as quite a surprise to me.

According to The Netherlands’ Cadastre, the total number of transactions recorded over the month of August stood at 19,034. This is almost 3 percent lower than in August 2019. Over the first eight months of this year, a total of 148,107 dwellings were sold. This represents an increase of over 5 percent relative to the same period in 2019.

More transactions in 2020 than 2019? I know such numbers are lagged but even so that should not be true surely?

Inflation

One might reasonably think that with all that house price inflation that inflation full stop might be on the march.

In September, HICP-based prices of goods and services in the Netherlands were 1.0 percent up year-on-year, versus 0.3 percent in August.

the answer is no because the subject of house price rises is ignored on the grounds that they are really Wealth Effects rather than price rises.That, of course throws first-time buyers to the Wolves. In fact if I may use the numbers from Calcasa first-time buyers can be presented as being better off.

On average, 13.6% of net household income was required to service housing costs in the second quarter of 2020, compared to mid-2008 when housing costs represented 27.0% of net income.

Such numbers have the devil in the detail as averages hide the fact that first-time buyers are being really squeezed.

Comment

The Netherlands is an economic battleground of our times.If we start with the real economy we see that there was a Covid-19 driven lurch downwards followed by hints of recovery. Sadly  the recovery now looks set to be neutered by responses to the apparent second Covid wave. The last quarter of 2020 could see another contraction.

Yet if we switch to the asset prices side the central bank has been blowing as much hot air into them it can. Bond prices have surged with bond yields negative all the way along the spectrum ( even the thirty-year is -0.21%), So we start with questions for the pensions and longer-term savings industry. Then we arrive at house prices which are apparently surging. You almost could not make that up at this time! The inflationary impact of this is hidden by keeping the issue out of the official inflation measure or if really forced using rents for people who do not pay rent. Meanwhile their other calculations include gains from wealth effects boosting the economy.

If we look forwards all I can see is yet another easing move by the ECB with more QE this time maybe accompanied by another interest-rate cut. I fail to see how this will make things any better.

 

The perversion of Inflation Targeting is accelerating

Today my topic is a subject which may seem like shuffling deck chairs on The Titanic but in fact turns out to be very important. This is because it affects workers, consumers and savers ever more because of the way that both wage growth and interest-rates head ever lower. For the latter we often see negative interest-rates and for the former the old text book concept of “sticky wages” has been in play but pretty much one way as rises are out of fashion but falls do happen. Indeed we have seen more than a few cases of wage cuts recently with the airline industry leading the way for obvious reasons. So we can afford inflation if I may put it like that much less than previously as it more quickly affects living-standards.

The Fantasy World

Central bankers have become wedded to the idea of inflation targeting but have not spotted that there is a world of difference between applying it when you are trying to reduce inflation and trying to raise it. In the former you are looking to raise living-standards via real wages and in the latter you end up trying to reduce them. Hoe does this happen? In spite of over a decade of evidence to the contrary they hang onto theories like this.

If the anchor for inflation is the inflation aim, the Phillips curve – the link between the real economy and inflation – plays a central role in allowing central banks to steer inflation towards that aim. But in the low inflation environment, prices appear to have become less responsive to the real economy. ECB research suggests that the empirical Phillips curve remains intact, but it may be rather flat. ( ECB President Christine Lagarde yesterday )

It can be any shape you like according to them which means it is useless. Accordingly it follows that they have been unable to steer inflation towards its target and for reasons I shall explain later they may well have been heading in the wrong direction. But let us move on with the Phillips curve being described by Lewis Carroll.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

’The question is,’ said Alice, ‘whether you can make words mean so many different things.’

The next issue is that they have got away with defining price stability as something else entirely. Back to Christine Lagarde of the ECB.

Since 2003, the ECB has used a double-key formulation to set our objective, defining price stability as a year-on-year increase in inflation of “below 2%”, while aiming for inflation of “below, but close to, 2%”.

This misrepresentation was exposed back around 2016 when measured inflation fell to approximately 0% but there were price shifts because the inflation fall was driven by a large fall in the price of crude oil. We saw it in another form as goods inflation fell to zero and sometimes negative where services inflation continued and in the case of my country was little affected. So the bedrock of the 2% inflation target crumbled away.

But they cannot stop clinging to the Phillips Curve.

The intuition behind the first factor is that the Phillips curve is alive and well, but the euro area faced a series of large shocks that made it harder to measure economic activity relative to potential. ( Lagarde)

Let me give you an example where this failed utterly in my home country the UK. Back in 2013 the then new Bank of England Governor Mark Carney established his Forward Guidance based on a 7% Unemployment Rate. Within six months that was crumbling and we went in terms of a “full employment” estimate 6%,5.5%,5%, 4.5% and lastly 4.25%. I would argue it was worse than useless as it was both actively misleading and an attempt to claim he was on the verge of raising interest-rates without having any real intention of doing so.

How much difference does it make?

Central bankers live in a world like this.

Broadly speaking, three factors might explain why inflation responded so weakly to improvements in the economy in the run-up to the pandemic.

One of the reasons is that the economy did not improve that much. The previous peak for Euro area GDP was 2.47 trillion Euros at the start of 2008 which rose to 2.68 trillion at the end of 2019 on 2010 prices. The increase of around 8.5% is not a lot and compares badly with the previous period.

Next comes the fact that central bankers inflate their own efforts and policies according to Chicago University. From Bloomberg.

However, they also find that, on average, papers written entirely by central bankers found an impact on growth at the peak of QE that was more than 0.7 percentage points higher than the effect estimated in papers written entirely by academics. (This is a sizable difference considering the effect found on average across all studies was 1.57% at the peak.) In the case of inflation, the difference in the effect of QE at its peak between the two sets of papers was more than 1.2 percentage points. Central bankers also tended to use more positive language in summarizing their results in abstracts.

They have discovered a point I have been making for some years now.

They suggest that career concerns may have played a role and provide some evidence that central bank researchers who found the largest impact of QE had a better chance of receiving a promotion.

Measuring Inflation

An issue here is the way that official inflation indices have been designed to avoid measuring inflation. I noted this yesterday with reference to the Christine Lagarde speech.

We need to keep track of broad concepts of inflation that capture the costs people face in their everyday lives and reflect their perceptions, including measures of owner-occupied housing.

This continues a theme highlighted by Phillip Lane back in February.

I think we at the ECB would agree that there should be more weight on housing – but there is a difficulty and this has been looked at several times before.

Just for clarity they completely ignore owner-occupied housing which Mr,Lane admitted was up to 33% of people’s spending in a different speech. In other matters ignoring such a large and significant area would get you laughed out of town but as most are unaware it just means they do not believe the inflation numbers.

a lot of households think it is higher. ( Phillip Lane)

I wonder why they might think that? From UBS.

Use our interactive Global Real Estate Bubble Index to track and compare the risk of bubbles in 25 cities around the world over the last three years. Munich and Frankfurt top our list in 2020. Risk is also elevated in Toronto, Hong Kong, Paris, and Amsterdam. Zurich is a new addition to the bubble risk zone.

So the ECB has topped the charts and has four of the top seven. Makes them sound like The Beatles doesn’t it?

Comment

The situation here is an example of institutional failure. Central banks had a brief period of relative independence because politicians failed to get a grip on high inflation and so they sub-contracted the job. Whether they thought it would work or whether they wanted simply to shift the blame off themselves is a moot point? Either way it had its successes as inflation did fall as highlighted by the description of that phase as the NICE decade by the former Bank of England Governor Baron King of Lothbury.

The problems in the meantime are as follows

  1. Inflation is now below target partly due to the miss measurement of it. We are also in “I cannot eat an I-Pad” territory.
  2. They believe that 2% inflation is causal rather than something which was picked at random.
  3. They believe that they can influence it much more than the evidence suggests.
  4. Most breathtakingly of all they believe that raising the inflation target will make people better off via the wages fairy ( where wages growth will rise even faster).

Or you can take the view that this is all about keeping debt costs low for government’s and all of the above is simply a front.

Let me now address further the issue of how things have been made worse. Firstly there is the psychological impact of so-called emergency measures persisting and all the policy moves. Next has come the Zombification of many times of business as models which should have failed get bailed out. Also the use of negative interest-rates cripples much of the pensions and longer-term savings and insurance industry.

On the this road the 2% inflation which they cannot achieve and anyway would make you poorer seems likely to become 3% which is even worse….

 

UK House Prices are on the march again

Today has brought news that we cannot say is a shock because we have had various hints and data points along the way. But it is against quite a few types of logic for us to be seeing rising house prices in a Covid-19 pandemic which has produced this.

UK gross domestic product (GDP) is estimated to have contracted by 19.8% in Quarter 2 (Apr to June) 2020, revised from the initial estimate of a 20.4% fall.

This is the largest quarterly contraction in the UK economy since quarterly records began in 1955 and marks the second consecutive quarterly decline after a fall of a revised 2.5% in the previous quarter.

Compared with the same quarter a year ago, the UK economy fell by a revised 21.5%.

In such an environment one would expect retrenchment across a wide range of areas such as asset prices. Except these days any fall in asset prices is anathema to the establishment who do everything they can to stop it. My old boss used to talk of a “Plunge Protection Team” but even he had little idea of the scale of measures that we have seen deployed.

So we find ourselves mulling this which has been reported by the Nationwide.

UK house prices increased by 0.9% month-on-month in
September, after taking account of seasonal effects, following a 2.0% rise in August. As a result, there was a further pick up in annual house price growth from 3.7% in August to 5.0% in September – the highest level since September 2016.

As we noted yesterday there has been quite a pick-up in activity in the housing market which has happened in spite of mortgage availability being restricted in some areas.

Housing market activity has recovered strongly in recent
months. Mortgage approvals for house purchase rose from
c66,000 in July to almost 85,000 in August – the highest
since 2007, well above the monthly average of 66,000
prevailing in 2019

In terms of the factors at play the Nationwide thinks this.

The rebound reflects a number of factors. Pent-up demand
is coming through, with decisions taken to move before
lockdown now progressing. The stamp duty holiday is adding to momentum by bringing purchases forward. Behavioural shifts may also be boosting activity as people reassess their housing needs and preferences as a result of life in lockdown.

Is there a flight from London and the cities?

There have been anecdotal mentions of this sort of thing but the numbers from the Nationwide do not back it up.

Annual house price growth in London continued to edge
higher, with prices up 4.4% in Q3. Average prices in the
capital hit a record high of £480,857 and are now 57%
above their 2007 levels (UK prices are 21% higher than their 2007 peak).

I find that to be somewhere between amazing and insane. But it is the world in which we live and as a Battersea resident literally in my case. The Financial Times looked at what it calls prime London property a few days ago and tucked in with the free advertising for several estate agents was a suggestion of moving within London.

In anticipation of future lockdowns, buyers are looking for access to parks (for all those quarantine dog purchases) and good high streets. “Buyers might only move 2km in search of a better environment, and more space, for the same budget,” she says. Now, they might opt for a house in St John’s Wood in north London, rather than a flat in Marylebone in central London; or a four-bedroom house in west London’s Fulham with a garden, in preference to a two-bedroom flat in South Kensington.

In case of any moral hazard let me point out I do live near a park.

Switching to the regions it looks as though the South West has outperformed.

The South West was the strongest performing region, with
annual price growth rising from 2.3% to 5.5%

However the situation in Northern Ireland has never recovered from the credit crunch in stark contrast to much of the rest of the UK.

 Northern Ireland was the weakest performing region, with prices up 1.5% year-on-year. Average prices in the province are still 36% below their 2007 peak.

That puts its relative performance well below that of Ireland with the issues around Brexit no doubt a factor.

Savings

The rise in savings may well be a factor in what is going on and according to today’s GDP release it has been quite a surge.

The households saving ratio hit a record high of 29.1% in the same period, which is likely to reflect voluntary and involuntary savings  Recent analysis has highlighted how households have been reducing their spending on social and work-related consumption, but that incomes have been relatively maintained. This reflects an increase in the ability of individuals to work from home, or that there has been a large number of individuals who have been furloughed. It is also possible that households have chosen to increase their savings in response to the higher levels of uncertainty around their future employment prospects.

It would be bizarre if the increased worry and uncertainty highlighted in the last sentence above led to higher house prices. But as I have pointed out before these are amalgamations of the picture as some will be worried and concerned about prospects. But others will have more savings and will consider their personal position to be secure so they may well have looked at the housing market.

Maybe it is a shift in the market as well

As Christopher Moir has suggested on Twitter a market change may be flattering the indices.

What is yet to be seen is if the average is moving higher because the cheaper and often high LTV starter homes are not being financed. 2yr Fix 95% LTV has gone from 3.02 -> 3.9% 2020 as of Aug 30th data. ~30% increase in interest expense.

Official Policy

This could not be a lot more house price friendly. Stamp Duty Cuts tend to feed straight into house prices and there are the many efforts of the Bank of England as well. This includes some pretty extraordinary claims from its Chief Economist Andy Haldane this morning.

Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third
quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having
fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in
the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising,
on average, by around 1.5% per week.

Comment

We find ourselves on uncharted ground yet again. The economy shifts ever more towards assets and away from real activity. The central bankers will cry “Wealth Effects” but as I have argued many times before for first time buyers this is inflation and for those where wages have fallen the effect is magnified. Who is going to be able to afford this stuff without the economic equivalent of a ball and chain.

There was a small flicker of light from the Euro area this morning as ECB President Christine Lagarde said this.

 We need to keep track of broad concepts of inflation that capture the costs people face in their everyday lives and reflect their perceptions, including measures of owner-occupied housing.

Let us hope that the work on house prices which was summarily ended in 2018 can start again.

On the other side of the coin it is a little chilling to read a central banker discussing an interest-rate as low as this.

For example, ECB research finds that without the use of large-scale asset purchases since 2015, our deposit facility rate would have had to fall to around -2% to achieve the same path of inflation we observed. This is a level that would probably have triggered “reversal rate” dynamics, a situation where a rate cut would become contractionary because it harms the business models of financial intermediaries and disrupts monetary policy transmission.

In my opinion they hit the reversal rate some time ago.

 

 

Why I still expect UK house prices to fall

This morning has brought another example that to quote Todd Terry “there’s something going on” in the UK housing market. Of course there is an enormous amount of government and Bank of England support but even so we are seeing a curious development.

House prices rebound further to reach record
high, challenging affordability.

That is from the Halifax earlier who are the latest to report on this trend where the initial effect of the Covid-19 pandemic has been not only to raise recorded house prices, but to give the rate of growth quite a shove. Indeed prices rose by nearly as much this August on its own as in the year to last August.

“House prices continued to beat expectations in August, with prices again rising sharply, up by 1.6% on a
monthly basis. Annual growth now stands at 5.2%, its strongest level since late 2016, with the average
price of a property tipping over £245,000 for the first time on record.”

I would not spend to much time on the average price per see as each house price index has its own way of calculating that. But the push higher in prices is unmistakable as we look for the causes.

“A surge in market activity has driven up house prices through the post-lockdown summer period, fuelled
by the release of pent-up demand, a strong desire amongst some buyers to move to bigger properties, and
of course the temporary cut to stamp duty.”

I think maybe the stamp duty cut should come first, but the desire for larger properties is intriguing. That may well b a euphemism for wanting a garden which after the lock down is no surprise, but at these prices how is it being afforded? Wanting if one thing, be able to afford it is another.

Bank of England

It’s combination of interest-rate cuts. QE bond buying, and credit easing has led to this.

The mortgage market showed more signs of recovery in July, but remained weak in comparison to pre-Covid. On net, households borrowed an additional £2.7 billion secured on their homes. This was higher than the £2.4 billion in June but below the average of £4.2 billion in the six months to February 2020. The increase on the month reflected a slight increase in gross borrowing to £17.4 billion in July, below the pre-Covid February level of £23.7 billion and consistent with the recent weakness in mortgage approvals.

As you can see it has got things on the move but both gross and net levels of activity are lower and especially the gross one. That may well be a lock down feature as there are lags in the process.  But if the approvals numbers are any guide they are on their way

The number of mortgages approvals for house purchase continued recovering in July, reaching 66,300, up from 39,900 in June. Approvals are now 10% below the February level of 73,700 (Chart 3), but more than seven times higher than the trough of 9,300 in May.

Michael Saunders

It seems that the Monetary Policy Committee may have further plans for the housing market.

Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two
and a longer period of excess supply than the forecast in the August MPR. If these risks develop,
then some further monetary loosening may be needed in order to support the economy and prevent
a persistent undershoot of the 2% inflation target. ( MPR = Monetary Policy Report )

Seeing as interest-rates are already at their Lower Bound and we are seeing QE bond buying as for example there will be another £1.473 billion today. it does make you wonder what more he intends? Although in a more off the cuff moment he did say this.

Review of negative rates is not finished: Not theologically oppsed to neg rates. ( ForexFlow)

He seems genuinely confused and frankly if he and his colleagues were wrong in August they are likely to be wrong in September as well! Oh and is this an official denial?

But I wouldn’t get too carried away by this prospect of money-fuelled inflation pressures.

He did however get one thing right about the money supply.

In other words, the crisis has lifted the demand for money
– the amount of deposits that households and businesses would like to hold – as well as the rise in the
supply of money described above.

That is a mention of money demand which is more of an influence on broad money than supply a lot of the time. Sadly though he fumbled the ball here.

All this has been backed up by the BoE’s asset purchase programme, which (to the extent that bonds have
been bought from the non-bank private sector) acts directly to boost broad money growth.

It acts directly on narrow money growth and affects broad money growth via that.

Another credit crunch

Poor old Michael Saunders needs to get out a bit more as this shows.

And, thanks to the marked rise in their capital ratios during the last decade, banks have been much better
placed than previously to meet that demand for credit.

Meanwhile back in the real world there is this.

Barclays has lowered its loan to income multiples to a maximum of 4.49 times income.

This applies to all LTVs, loan sizes and income scenarios except for where an LTV is greater than 90 per cent and joint income of the household is equal to or below £50,000, and where the debt to income ratio is equal to or above 20 per cent.

In these two cases the income multiple has been lowered to 4 times salary. ( Mortgage Strategy)

There has been a reduction in supply of higher risk mortgages and such is it that one bank is making an offer for only 2 days to avoid being swamped with demand.

Accord Mortgages is relaunching it’s 90 per cent deals for first-time buyers for two days only next week. ( Mortgage Strategy)

Also according to Mortgage Strategy some mortgage rates saw a large weekly rise.

At 90 per cent LTV the rate flew upward by 32 basis points, taking the average rate from 3.22 per cent to 3.54 per cent…….Despite the overall average rate dropping for three-year fixes there was one large movement upwards within – at 90 per cent LTV the average rate grew from 3.26 per cent to 3.55 per cent.

Comment

If we start with the last section which is something of a credit crunch for low equity or if you prefer high risk mortgages then that is something which can turn the house price trend. I would imagine there will be some strongly worded letters being sent from the Governor of the Bank of England Andrew Bailey to the heads of the banks over this. But on present trends this and its likely accompaniment which is surveyors reducing estimated values will turn the market. Indeed even the Halifax is btacing itself for falls.

“Rising house prices contrast with the adverse impact of the pandemic on household earnings and with
most economic commentators believing that unemployment will continue to rise, we do expect greater
downward pressure on house prices in the medium-term.”

What can the Bank of England do? Short of actually buying houses for people there is really only one more thing. Cut interest-rates into negative territory and offer even more than the current £113 billion from the Term Funding Scheme ( to save the banks the inconvenience of needing those pesky depositors and savers). Then look on in “shock” as the money misses smaller businesses as it floods the mortgage market. But these days the extra push gets smaller because it keeps pulling the same lever.

Also can HM Treasury now put stamp duty back up without torpedoing the market?

Podcast

 

Can the Bank of England pull UK house prices out of the bag again?

Whilst the UK was winding up for a long weekend the Governor of the Bank of England was speaking about his plans for QE ( Quantitative Easing) at the Jackson Hole conference. He said some pretty extraordinary stuff in a somewhat stuttering performance via videolink. Apparently it has been a triumph.

So what is our latest thinking on the effects of QE and how it works? Viewed from the depth of the Covid
crisis, QE worked effectively.

Although as he cannot measure it so we will have to take his word for it.

Measuring this effect precisely is of course hard, since we cannot easily identify what the counterfactual would have been in the absence of QE.

He seems to have forgotten the impact of the central bank foreign exchange liquidity swaps of the US Federal Reserve. By contrast we were on the pace back on the 16th of March.

But QE clearly acted to break a dangerous risk of transmission from severe market stress to the macro-economy, by avoiding a sharp tightening in financial conditions and thus an increase in effective interest rates.

The next bit was even odder and I have highlighted the especially significant part.

QE is normally thought to work through a number of channels: including signalling of future central bank
intentions and thus interest rates; so called ‘portfolio balance’ effects (i.e. by changing the composition of
assets held by the private sector); and improving impaired market liquidity.

As he has cut to what he argues is the “lower bound” for UK interest-rates how can he be signalling lower ones? After all that would take us to the negative interest-rates he denies any plans for.

Fantasy Time

Things then took something of an Alice In Wonderland turn. Before you read this next bit let me remind you that the Bank of England started QE back in 2009 and not one single £ has ever been repaid.

First, a balance sheet intervention aimed solely at market
functioning is likely to be more temporary, in terms of the duration of its need to be in place.

Also the previous plan if I credit it with being a plan was waiting for this.

and once the Bank Rate
had risen to around 1.5%, thus creating more headroom for the future use of Bank Rate both up and down.

Whilst it was none too bright ( as you force the price of the Gilts held down before selling them) it was never going to be used. This was clear from the way Nemat Shafik was put in charge of this as you would never give her that important a job. Even the Bank of England eventually had to face up to her competence and she left her role early to run the LSE. This meant that she was part of the “woman overboard” problem that so dogged the previous Governor Mark Carney.

The new plan for any QE unwind is below.

We need to work through what lessons this may have for the appropriate future path of central bank balance sheets, including the pace and timing of any future unwind of asset
purchases.

How very Cheshire Cat.

“Alice asked the Cheshire Cat, who was sitting in a tree, “What road do I take?”

The cat asked, “Where do you want to go?”

“I don’t know,” Alice answered.

“Then,” said the cat, “it really doesn’t matter, does it?”

The only real interest the Governor has here is in doing more QE and he faces a potential limit ( if we did not know that we learn it from his denial). So he thinks that one day he may unwind some QE so he can do even more later. For the moment the limit keeps moving higher as highlighted by the fact that the UK issued another £7.4 billion of new bonds or Gilts last week alone.

Today’s Monetary Data

Let me highlight this referring to the Governor’s speech. He tells us that QE has been successful.

The Covid crisis to date has demonstrated that QE and forward guidance around it have been effective in a
particular situation.

Meanwhile borrowers faced HIGHER and not LOWER interest-rates in July

The interest rate on new consumer credit borrowing increased 22 basis points to 4.64% in July, while rates on interest-charging overdrafts increased 1.6 percentage points to 14.84%.

This issue is one which is a nagging headache for Governor Bailey this is because he had the same effect in his previous role as head of the Financial Conduct Authority. It investigated unauthorised overdraft rates in such a way they have risen from a bit below 20% to 31.63% in July. Some have reported these have doubled so perhaps the data is being tortured here.There is a confession to this if you look hard enough.

Rates on interest-charging overdraft rose by 1.6 percentage points to 14.84% in July. Between April and June, overdraft rates have been revised up by around 5 percentage points due to changes in underlying data.

Oh and just as a reminder the FCA was supposed to be representing the borrowers and not the lenders.

QE

As the Governor trumpets his “to “go big” and “go fast” decisively” action we see a clear consequence below.

Private sector companies and households continued increasing deposits with banks at a fast pace in July. Sterling money (known as M4ex) rose by £26.3 billion in July, more than in June (£16.8 billion), but less than average monthly increase of £53.4 billion between March and May. The increase in July is strong relative to the £9.4 billion average of the six months to February 2020.

This means that annual broad money growth ( M4) is at a record of 12.4%. Care is needed as I can recall a previous measure ( £M3) so the history is shorter than you might think. But there has been a concerted effort by the Bank of England to sing along with Andrea True Connection.

(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?

Or perhaps Britney Spears.

Gimme, gimme more
Gimme more
Gimme, gimme more
Gimme, gimme more
Gimme more

Consumer Credit

The sighs of relief out of the Bank of England were audible when this was released.

Net consumer credit borrowing was positive in July, following four months of net repayments (Chart 2). An additional £1.2 billion of consumer credit was borrowed in July, around the average of £1.1 billion per month in the 18 months to February 2020.

Although there is still this to send a chill down its spine.

 Net repayments totaled £15.9 billion between March and June. That recent weakness meant the annual growth rate remained negative at -3.6%, similar to June and it remains the weakest since the series began in 1994.

Comment

Quite a few of my themes have been in play today. For example QE looks ever more like a “To Infinity! And Beyond!” play. Governor Bailey confirms this by repeating the plan for interest-rates. They were only ever raised ( and by a mere 0.25% net in reality) so they could cut them later. So QE will only ever be reduced ( so far net progress is £0) so that they can do more later. He does not mention it but any official interest-rate increase looks way in the distance although as we have noticed the real world does see them. That was my first ever theme on here.

Next let me address the money supply growth. The theory is that it will in around 2 years time boost nominal GDP by the same amount. We therefore will see both inflation and growth. That works in broad terms but we have learnt in the past that the growth/inflation split is unknown as are the lags. Also of course which GDP level do we start from? I can see PhD’s at the Bank of England sniffing the chance to produce career enhancing research but for the rest of us we can merely say we expect inflation but much of it may end up here.

House prices at the end of the year are expected to be 2% to 3% higher than at the start.

The annual rate of UK house price growth slowed to 2.5% in July, from 2.7% in June. ( Zoopla )

I find that a little mind boggling but unlike central banking research we look at reality on here.

Finally let me cover something omitted by the Governor and many other places. This is the strength of the UK Pound £ which has risen above US $1.34. Whilst US Dollar weakness is a factor it is also now above 142 Yen ( and the Yen has been strong itself). I would place a quote from the media if I could find any. In trade-weighted terms from the nadir just below 73 as the crisis hit it will be around 79 at these levels. Or if you prefer the equivalent according to the old Bank of England rule of thumb is a 1.5% rise in Bank Rate. Perhaps nobody has told the Governor about this…..

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