Are London house prices set for more falls?

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

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

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

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

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

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

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

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

There have been falls elsewhere too.

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

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

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

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

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

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

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

Looking wider

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

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

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

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

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

Up up and away

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

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


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

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

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

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

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

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

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

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

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







Portugal hopes to end its lost decade later this year

It is time for us once again to head south and take a look at what is going on in the Portuguese economy? The opening salvo is that 2017 was the best year seen for some time. From Portugal Statistics.

In 2017, the Portuguese Gross Domestic Product (GDP) increased by 2.7% in real terms, 1.1 percentage points higher than the rate of change registered in 2016, reaching, in nominal terms, around 193 billion euros. In nominal terms, GDP increased 4.1% (3.2 in 2016),

So both economic growth and an acceleration in it from 2016. In essence the performance was an internal thing.

The contribution of domestic demand to GDP growth increased to 2.9 percentage points (1.6 percentage points in 2016), mainly due to the acceleration of Investment. Net external demand registered a negative contribution of 0.2 percentage points (null in 2016),  with Imports of Goods and Services accelerating slightly more intensely than Exports of Goods and Services.

It is hard not to feel a slight chill down the spine at the latter section as it has led Portugal to go cap in hand to the IMF ( International Monetary Fund) somewhat regularly over the past decades. But to be fair the last quarter was better on this front.

The contribution of net external demand to GDP quarter-on-quarter growth rate shifted from negative to positive, due to the significantly higher acceleration of Exports of Goods and Services than of Imports of Goods and Services.

Indeed the last quarter was good all round.

Comparing with the previous quarter, GDP increased by
0.7% in real terms.

Also whilst it fell from the heady peaks of earlier in the year investment had a good year.

Investment, when compared with the same quarter of
2016, increased by 5.9% in volume in the last quarter of
2017, a 4.4 percentage points deceleration from the
previous quarter.

This was particularly welcome as it needed it as I pointed out on the 6th of July last year the economic depression Portugal has been through saw investment collapse.

 A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.


The national accounts brought a hopeful sign on this front too.

In the fourth quarter of 2017, seasonally adjusted
employment registered a year-on-year rate of change of
3.2%, (3.1% in the previous quarter)

Of course this does not have to mean unemployment fell but in this instance as we learnt at the end of last month the news is good.

The December 2017 unemployment rate was 8.0%, down by 0.1 percentage points (p.p.) from the previous month’s
level, by 0.5 p.p. from three months before and by 2.2% from the same month of 2016…………The provisional unemployment rate estimate for January 2018 was 7.9%.

This means that the statistics office was able to point this out.

only going back to July 2004 it
is possible to find a rate lower than that.

The one area that continues to be an issue is this one.

The youth unemployment rate stood at 22.2% and
remained unchanged from the month before,

Is Portugal ending up with something of a core youth unemployment problem?

The latest Eurostat handbook raises another issue as it has a map of employment rate changes from 2006 to 2016. For Portugal this was a lost decade in this sense as in all areas apart from Lisbon (+1.1%) it fell from between 2.5% and 3,8%. Rather curiously if we divert across the border to a country now considered an economic success Spain it fell in all regions including by 7.2% in Andalucia. So whilst both countries will have improved in 2017 we get a hint of a size of the combined credit crunch and Euro area crises.

Is Portugal’s Lost Decade Over?

No it still has a little way to go and the emphasis below is mine. From the Bank of Portugal economic review.

economic activity will maintain
a growth profile over the projection horizon,
albeit at a gradually slower pace (2.3%, 1.9%
and 1.7% in 2018, 2019 and 2020 respectively)
. At the end of the projection horizon,
GDP will stand approximately 4% above the level
seen prior to the international financial crisis.

So it will be back to the pre credit crunch peak around the autumn. We will have to see as the Bank of Portugal got 2016 wrong as I was already pointing out last July that the first half of 2016 had the economic growth it thought would arrive in the whole year. Maybe its troubles like so many establishment around the world is the way it is wedded to something which keeps failing.

Projected growth rates are above the average
estimates of potential growth of the Portuguese
economy and will translate into a positive output
gap in coming years.

Actually that sentence begs some other questions so let me add for newer readers that the economic history of Portugal is that it struggles to grow at more than 1% per annum on any sustained basis. In fact compared to its peers in the Euro area 2017 was a rare year as this below shows.

interrupting a long period of negative annual
average differentials observed from 2000
to 2016 (only excluding 2009).

This is unlikely to be helped by this where like in so many countries we see good news with a not so good kicker.

The employment growth in the most recent
years, which was fast when compared with activity
growth, has resulted in a decline in labour
productivity since 2014, a trend that will continue
into 2017. ( I presume they mean 2018).

House Prices

It would appear that there is indeed something going on here. From Portugal Statistics.

In the third quarter of 2017, the House Price Index (HPI) increased 10.4% in relation to the same period of 2016 (8.0% in the previous quarter). This rate of change, the highest ever recorded for the series starting in 2009, was essentially determined by the price behaviour of existing dwellings, which increased 11.5% in relation to the same quarter of 2016………….The HPI increased 3.5% between the second and third quarters of 2017

The peak of this was highlighted by The Portugal News last November.

Portugal’s most expensive neighbourhood is, perhaps unsurprisingly, the heart of Lisbon, where buying a house along the Avenida da Liberdade or Marquês de Pombal costs around €3,294 per square metre; up 46.1 percent in 12 months.

Time for the Outhere Brothers again.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

The banks

Finally some good news for the troubled Portuguese banking sector as their assets ( mortgages) will start to look much better as house prices rise. If we look at Novo Banco this may help with what Moodys calls a “very large stock of problematic assets” which the Portuguese taxpayer is helping with a recapitalisation of  3.9 billion Euros. Yet there are still problems as this from the Financial Times highlights.

Portuguese authorities last year launched a criminal investigation into the sale of €64m of Novo Banco bonds by a Portuguese insurance firm to Pimco that occurred at the end of 2015. A week later, the value of the bonds sold to Pimco were in effect wiped out by the country’s central bank.

This is an issue that brings no credit to Portugal as Novo Banco as the name implies was supposed to be a clean bank that was supposed to be sold off quickly.


So we have welcome economic news but as ever in line with economics being described as the “dismal science” we move to asking can it last? On that subject we need to note that an official interest-rate which is -0.4% and ongoing QE is worry some. Also Portugal receives quite a direct boost in its public finances from the QE as the flow of 489 million Euros  of purchases of its government bonds in February meaning the total is now over 32 billion means it has a ten-year yield of under 2%. Not bad when you have a national debt to GDP ratio of 126.2%.

To the question what happens when the stimulus stops? We find ourselves mulling the way that Portugal has under performed its Euro area peers or its demographics which were already poor before some of its educated youth departed in response to the lost decade as this from the Bank of Portugal makes clear.

The population’s ageing trend partly results from
the sharp decrease in fertility in the 1970s and

So whilst some may claim this as a triumph for the “internal competitiveness” or don’t leave the Euro model 2017 was in fact only a tactical victory albeit a welcome one in a long campaign. Should some of the recent relative monetary and consumer confidence weakness persist we could see a slowing of Euro area economic growth in the summer/autumn just as the ECB is supposed to be ending its QE program and considering ending negative interest-rates. How would that work?





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

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

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

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

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

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

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

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


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

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

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

The economic depression

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

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

The official response

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

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

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

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

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

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

House Prices

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

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

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


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

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

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

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

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

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

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

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

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

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

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



The Netherlands house price boom is yet another form of bank bailout

It has been a while since we have taken a look at the economic situation in what some call Holland but is more accurately called the Netherlands. On a cold snowy morning in London – those of you in colder climes are probably laughing at the media panic over the cold snap expected this week – let us open with some good news. From Statistics Netherlands.

According to the first estimate conducted by Statistics Netherlands (CBS), which is based on currently available data, gross domestic product (GDP) posted a growth rate of 0.8 percent in Q4 2017 relative to Q3 2017. Growth is mainly due to an increase in exports. With the release of data on Q4, the annual growth rate over 2017 has become available as well. Last year, GDP rose by 3.1 percent, the highest growth in ten years.

Indeed the economic growth was something of a dream ticket for economists with exports and investments to the fore.

GDP was 2.9 percent up on Q4 2016. Growth was slightly smaller than in the previous three-quarters and is mainly due to higher exports and investments.

The trade development provides food for thought to those who remember this from 2015.

In a bid to boost trade links with Europe, on the back of the ‘One Belt, One Road’ initiative, the Port of Rotterdam has established a strategic partnership with the Bank of China,  (jpvlogistics )

The idea of Rotterdam being a hub for a latter-day Silk Road is obviously good for trade prospects although in terms of GDP care is needed as there is a real danger of double-counting as we have seen in the past.

Exports of goods and services grew by 5.5 percent in 2017……….Re-exports (i.e. exports of imported products) increased slightly more rapidly than the exports of Dutch products.

If we look back for some perspective we see that the Netherlands is not one of those places that have failed to recover from the credit crunch. Compared to 2009 GDP is at 112.7 which means that if we allow for the near 4% fall in that year it is 8/9% larger than the previous peak. Although of course annual economic growth of around 1% per annum is not a triumph and reflects the Euro area crisis that followed the credit crunch.

Labour Market

The economic growth is confirmed by this and provides a positive hint for the spring.

In January 2018, almost 8.7 million people in the Netherlands were in paid employment. The employed labour force (15 to 74-year-olds) has increased by 15 thousand on average in each of the past three months.

Unemployment is falling and in this area we can call the Netherlands a Germanic style economy.

There were 380 thousand unemployed in January, equivalent to 4.2 percent of the labour force. This stood at 4.4 percent one month previously………, youth unemployment is now at a lower level than before the economic crisis; last month, it stood at 7.4 percent of the labour force against 8.5 percent in November 2008.

After the good news comes something which is both familiar and troubling.

Wages increased by 1.5 percent in 2017 versus 1.8 percent in 2016. There was less difference between the increase rates of consumer prices and wages in 2017 than in the two preceding years.

Wage growth fell last year which of course is more mud in the eye for those who persist with “output gap” style economics meaning real wages only grew by 0.1%. 2016 was much better but driven by lower inflation mostly. So no real wage growth on any scale and certainly not back to the levels of the past. One thing that stands out is real wage falls from 2010 to 14 in the era of Euro area austerity.

House Prices

There were hints of activity in this area in the GDP numbers as we note where investment was booming.

In 2017, investments were up by 6 percent. Higher investments were mainly made in residential property.

Later I noted this.

and further recovery of the housing market.

So what is the state of play?

In January 2018, prices of owner-occupied houses (excluding new constructions) were on average 8.8 percent higher than in the same month last year. The price increase was the highest in 16 years. Since June 2013, the trend has been upward.

So much higher than wage growth which was 1.5% in 2017 and inflation so let us look deeper for some perspective.

House prices are currently still 2.0 percent below the record level of August 2008 and on average 24.8 percent higher than during the price dip in June 2013.

One way of looking at this is to add something to the famous Mario Draghi line of the summer of 2012 “Whatever it takes” ( to get Dutch house prices rising again). What it means though is that house prices have soared compared to real wages who only really moved higher in 2016 due ironically to lower consumer inflation. Tell that to a first time buyer!

Wealth Effects

This view has been neatly illustrated by Bloomberg today as whilst the numbers are for Denmark we see from the data above that they apply in principle to the Netherlands as well.

Danes have another reason to be happy: they’re richer than ever before………After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.


The last time Denmark enjoyed a similar boom was in 2006

If we switch back to the Netherlands its central bank published some research in January as to how it thinks house price growth has boosted domestic consumption.

From 2014 onwards, house prices have been steadily climbing again. The coefficient found for the Netherlands implies that some 40% of cumulative consumption growth since 2014 (i.e. around 6%) can be attributed to the increase in real house prices.

We can take the DNB research across national boundaries as well at least to some extent.

The first group comprises the Netherlands, Sweden, Ireland, Spain, the United States and the United Kingdom, and the second group includes Italy, France, Belgium, Austria and Portugal.

In economic theory such a boost comes from a permanent boost to house prices which is not quite what we saw pre credit crunch.

Between 2000 and 2008, average real house prices went up by 24% in the Netherlands. Between 2008 and 2014, as a result of the financial crisis, they went down again by 24%.


This is an issue in the Netherlands.

 As gross domestic product (GDP) rose more sharply than debts, the debt ratio (i.e. debt as a percentage of GDP) declined, to 218.8 percent. Although this is the lowest level since 2008, it is still far above the threshold of 133 percent which has been set by the European Commission.

If we look at household debt.

After a period of decline, household debts started rising as of September 2014, in particular the level of residential mortgage debt. The latter increased from 649 billioneuros at the end of September 2014 to 669 billion euros at the end of June 2017.

There is also this bit highlighted by the DNB last October.

Almost 55% of the aggregate Dutch mortgage debt consists of interest-only and investment-based mortgage loans, which do not involve any contractual repayments during the loan term. They must still be repaid when they expire, however. Such loans could cause frictions, for example if households are forced to sell their home at the end of the loan term.


There are a litany of issues here as we see another example of procyclical monetary policy where and ECB deposit rate of -0.4% and monthly QE meet economic growth of around 3%. This means that in spite of the fact that real wages have done little house prices have soared again. The problem with the wealth effects argument highlighted above is that much if not all of it is a wealth distribution and who gave the ECB authority to do this?

Those who own homes in a good location have it made. While other people – especially people who rent their homes and people with bought homes in less favorable locations – fall behind. ( NL Times)

Those who try to be first time buyers are hit hard but a type of inflation that does not appear in the CPI numbers.

The truth is that the biggest gainers collectively are the banks. Their asset base improves with higher house prices and current business improves as we see more mortgage borrowing both individually and from the business sector. We moved from explicit bank bailouts to stealth ones as we see so many similar moves around the world. Banks do not report that in bonus statements do they? This time is different until it isn’t when it immediately metamorphoses into nobody’s fault.






The Swedish monetary experiment faces the decline of both cash and house prices

It is time to take a look again at the policies of the world’s oldest central bank as we remain in the Baltic region. From the Riksbank of Sweden.

In 1668, the Riksdag, Sweden’s parliament, decided to found Riksens Ständers Bank (the Estates of the Realm Bank), which in 1867 received the name Sveriges Riksbank. The Riksbank is thus the world’s oldest central bank. In 2018, the Riksbank will celebrate its 350th anniversary.

Yesterday brought news which will cheer the Swedish government as it received something of a windfall from this creation mostly due to a revaluation of its gold reserves. It has some 125.7 tonnes much of which is in London ( or not if you believe the conspiracy theories).

The General Council proposes that SEK 2.3 billion be transferred to the Treasury.

However the last bit of the 350 years has seen the Riksbank break new ground proving that you can teach an old dog new tricks.

In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent.

This was announced last week and technically applies from tomorrow although of course it is a case of what might be called masterly inaction. We see that the world of negative interest-rates not only arrived in Sweden but continues and in fact if we look deeper we see that it has an interest-rate of -1.25% on bank reserves which is the lowest to be found anywhere.

Also we see that the Riksbank surged into the world of Quantitative Easing bond buying.

The Riksbank’s net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon
payments will be reinvested in the bond portfolio.

As you can see policy is now set to maintain the stock of QE with any maturing bonds reinvested. So our old dog learnt two new tricks which does provide food for thought when we note a 350 year history after all why was it not necessary before. Also as we look ahead we see signs of a third new trick.

Economic outlook

This seems set fair.

Indicators for the fourth quarter suggest that GDP growth
picked up at the end of last year………Monthly indicators for demand and output also indicate that GDP growth at the end of last year was stronger 
than normal. Both industrial and services production have increased………. 
The model forecasts indicate GDP growth of 3.9 per cent during the fourth quarter, compared with the previous quarter and
calculated at an annual rate.

So economic growth has been good as this would be added to this.

 GDP increased 2.9 percent, working-day adjusted and compared to the third quarter of 2016.

If we look back we see that GDP is around 16% larger than at the pre credit crunch peak of the last quarter of 2007. Looking ahead the Riksbank expects economic growth of the order of 3% annualised at the opening of 2018 with growth slowing a little in subsequent years.


As you might expect with strong economic growth seen the situation here has been positive too.

Last year, the number of redundancy notices reported to
Arbetsförmedlingen (the Swedish public employment agency) was at the lowest level since 2007 and the level of 
newly reported vacant positions was very high . The strong demand meant that both the employment 
rate and the labour force participation rate reached historically high levels.

Yet in spite of other signs of what has been in the past come under the category of overheating ( resource allocation is at its highest ever) we seem something very familiar.

 Estimates indicate that the definitive outcome for short‐term wages in the economy as a whole for the full year 2017 will, on average, increase by 2.5 per cent, 
which entails a downward revision compared with the forecast in December.

These days wage growth nearly everywhere we look in what we consider to be the first world is around 2% and seems to have completely disconnected itself from many factors which used to drive it. Is this another side effect of the QE era? In Sweden we see that businesses seem reluctant to pay more.

the preliminary rate of wage increase is significantly higher in the public sector than in the business sector. 
recent outcomes indicate that wage increases at the start of 2018 will also be lower than in the Riksbank’s 
assessment from December.


The overall rate of unemployment has fallen less than you might think due to this.

The large increase in the labour force led to

Which is further explained here as we wonder what “weaker connection to the labour market” means.

 Unemployment has not fallen further among those born abroad 
partly because the inflow of labour in this group has been large, 
but also primarily because people born outside Europe, on average,
 have a lower education and a weaker connection to the labour market.

So in reality there are two labour markets here where the Swedish born one is at what was considered to be full employment. Bringing them both together gives us this for January.

Smoothed and seasonally adjusted data shows an increase in the employment rate and a decrease in the unemployment rate, which was 6.5 percent.


This morning’s update from Sweden Statistics told us this.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.6 percent in January 2018, down from 1.7 percent in December 2017. The HICP decreased by 0.9 percent from December to January.

The inflation number above is using the same methodology as in Europe and the UK and as you can see there is not a lot of inflation for an “overheating” economy. The Swedish measure called CPIF fell from 1.9% to 1.7% leading some to seemingly lose contact with reality.

Is Sweden’s inflation shortfall – short-term core trend below 1% versus 2% target – a serious concern? ( SRSV )

Not for Swedish consumers nor for workers as we note that in the past at least Sweden can have inflation.

The CPI for January 2018 was 322.51 (1980=100).

Those who follow my specialist interest in inflation measurement may have a wry smile at the cause of the fall.

 In January 2018, the basket effect contributed -0.2 percentage point to the monthly change in the CPI, which is close to the historical average.


There is a lot to consider here and the first is a familiar one of how will the Riksbank exit from its negative interest-rates and QE? It was promising interest-rate rises later this year but we have seen those before and the dip in the inflation rate puts it between a rock and a hard place which is before we get to this. From Bloomberg last month

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

This may be a response to new rules that have been imposed in recent times on interest-only mortgages in response to this reported by Reuters.

Currently, around 70 percent of Swedish home owners have interest-only mortgages, meaning they do not pay off any of the principal of the loan they have borrowed.

Care is needed with the house price data as the official numbers show rises continuing but as 2018 progresses it too should be picking up ch-ch-changes. This leaves the Riksbank in something of a pickle of its own making as many of its members from the last 350 years would recognise but not apparently those in charge now. Especially as the economic growth in the credit crunch era does not look quite so good when we note the population has increased by around 9%.

Meanwhile we have yet another fail for economics 101 as I note this from Bloomberg earlier.

Last year, the amount of cash in circulation in Sweden dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record.

With negative interest-rates one might have expected cash demand to rise but it has not returning me to me theme as yet untested that around 1.5% will be the crucial level. Still if nothing else Kenneth Rogoff will be delighted at the sight of Swedes waging their own war on cash. What could go wrong?

UK Inflation looks set to fall as 2018 progresses

Today brings us face to face with the UK context on what many are telling us has been the cause of the recent troubled patch for world equity markets. This is because a whole raft of inflation data from the consumer producer and housing sector is due. The narrative that inflation has affected equities markets has got an airing in today’s Financial Times.

The inflation threat has simmered for months, but the missing link had been wage growth, which made the rise in the US jobs figures for January so important, fund managers say. Indeed, the yield on the 10-year Treasury is 40 basis points higher this year, driven almost entirely by inflation expectations. Strong global economic data, coupled with sweeping tax cuts and the recent expansionary budget deal in Washington, should stir price pressures.

Actually that argument seems to be one fitted after the events rather than before as the rise in bond yields could simply be seen as a response to the expansionary fiscal policy in the US combined with interest-rate increases and a reduction albeit small in the size of the Federal Reserve balance sheet. Actually as the FT admits inflation is often considered to be good for equities!

While faster inflation would typically be good for stocks, lifting companies’ pricing power and suggesting economic growth is accelerating.


There is also a theme doing the rounds about wage inflation. Yesterday Gertjan Vlieghe of the Bank of England joined this particular party according to Reuters.

 a pick-up in wages ……..signs of a pick-up in wages

The problem for the Bank of England on this front is two-fold. Firstly it has been like the boy ( and in some cases) girl who has cried wolf on this front and the second is that the official data has picked up no such thing so far. Thus we are left essentially with one higher wages print of 2.9% for average hourly earnings in the United States. So the case is still rather weak as we wonder if even the current economic recovery can boost wages in any meaningful sense.


The first trend which should first show in the producer price numbers is the strength of the UK Pound versus the US Dollar over the past year. It was if we look back about 14 cents lower than the current US $1.388. Also the price of crude oil has dipped back from the rally which took it up to US $70 in terms of the Brent benchmark to US $62.47 as I type this. This drop happened quite quickly after this.

Goldman Sachs has held one of the most optimistic views on the rebalancing of the oil market and oil prices in the near term, and the investment bank is now growing even more bullish, predicting that the oil market has likely balanced, and that Brent Crude will reach $82.50 a barrel within six months. (

The Vampire Squid is building up quite a track record of calling the market in the wrong direction as back in the day it called for US $200 a barrel and when prices fell for a US dollar price in the teens. I will let readers decide for themselves whether it is simply incompetent or is taking us all for “muppets”.

Today’s data

The good news was that the trends discussed above are beginning to have an impact.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to January 2018, down from 3.3% in December 2017…….Prices for materials and fuels (input prices) rose 4.7% on the year to January 2018, down from 5.4% in December 2017.

Tucked away was the news that the worst seems to be passing us as this is well below the 20.2% peak of this time last year.

The annual rate of inflation for imported materials and fuels was 3.5% in January 2018 (Table 2), down 1.7 percentage points from December 2017 and the lowest it has been since June 2016.

It is a little disappointing to see the Office for National Statistics repeat a mistake made by the Bank of England concentrating on the wrong exchange rate.

The sterling effective exchange rate index (ERI) rose to 79.0 in January 2018. On the year, the ERI was up 2.6% in January 2018 and was the fourth consecutive month where the ERI has shown positive growth.

Commodities are priced in US Dollars in the main.

Consumer Inflation

This showed an example of inflation being sticky.

The all items CPI annual rate is 3.0%, unchanged from last month.

However prices did fall on the month due to the January sales season mostly.

The all items CPI is 104.4, down from 104.9 in December

The inflation rate was unaffected because they fell at the same rate last year.

There was something unusual in what kept annual inflation at 3%.

The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year.

I will put in a complaint when I pass Battersea Park Childrens Zoo later! More hopeful for hard pressed budgets was this turn in food prices.

This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.

My friend who has gone vegan may be guilty of bad timing.

An ongoing disaster

The issue of how to deal with owner-occupied housing remains a scar on the UK inflation numbers. This is the way they are treated in the preferred establishment measure.

The OOH component annual rate is 1.2%, down from 1.3% last month. ( OOH = Owner Occupied Housing).

Not much is it, so how do they get to it? Well this is the major player.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

If you are thinking that owner occupiers do not pay rent as they own it you are right. Sadly our official statisticians prefer a fantasy world that could be in an episode of The Outer Limits. They have had a lot of trouble measuring rents which means their fantasies diverge even more from ordinary reality.

If they had used something real then the numbers would look very different.

UK house prices rose 5.2% in the year to December 2017, up from 5.0% in November 2017.

This makes inflation look much lower than it really is and is the true purpose in my opinion. A powerful response to this at one of the public meetings pointed out that due to the popularity of leasing using rents for the car sector would be realistic ( they do not) but using it for owner-occupied housing is unrealistic ( they do).

If you want a lower inflation reading thought it does the trick.

The all items CPIH annual rate is 2.7%, unchanged from last month.


The underlying theme is that UK consumer inflation looks set to trend lower as 2018 progresses which is good news for both consumers and workers. The initial driving force of this was the rally of the UK Pound £ against the US Dollar and as it has faded back a little we have seen lower oil prices. We also get a sign that prices can fall combined with annual inflation.

The all items CPI is 104.4, down from 104.9 in December…..The all items RPI is 276.0, down from 278.1 in December…….The all items CPIH is 104.5, down from 105.0 in December.

One issue that continues to dog the numbers is the treatment of housing and for all the criticisms levelled at it a strength of the RPI is that it does have house prices ( via depreciation).

The all items RPI annual rate is 4.0%, down from 4.1% last month.

Meanwhile the Bank of England seems lost in its own land of confusion. It cut interest-rates into an inflation rise and then raised them into an expected fall! This is of course the wrong way round for a supposed inflation targeter. Now they seem to be trying to ramp up the rhetoric for more increases forgetting that they need to look 18 months ahead rather than in front of their nose. Perhaps they should take some time out and listen to Bananarama.

I thought I was smart but I soon found out
I didn’t know what life was all about
But then I learnt I must confess
That life is like a game of chess



What is happening in the UK housing market?

This morning has brought news to bring the current winter chill into today’s policy meeting for the Bank of England. This is that there are more signs of declines in London house prices as the Financial Times reports.

High-end homes in central London are selling at the biggest discounts in more than a decade as sellers continue to set ambitious prices even as the market declines.

Let us look further as of course for most of the period even the concept of a discount was a mirage.

In 2017 homes in the most exclusive postcodes were sold at an average discount of 10 per cent or more on their initial asking price, according to figures from LonRes, a research company. The gap between what buyers will pay and what sellers ask for their homes in this segment of the market is now greater than it was in either 2008 or 2009, following the financial crisis.

The areas most affected are shown below.

LonRes’s data cover London’s most exclusive districts, including Kensington and Chelsea, as well as prime parts of the capital extending from Canary Wharf in the east to Richmond in the west and Hampstead in north London.

Actually though if we look further we see that the position seems rather similar now across London.

Outside the most expensive “prime central” areas, discounts to initial asking price stood at just over 9 per cent — the highest level since 2009.

As ever we see that estate agents have their own language as we note “prime central” is a further refinement to “prime”. Also whilst the situation is now similar so far the more exclusive areas have been hit harder.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Also there are fewer transactions taking place.

Transaction volumes fell across central London in 2017, with the number of properties sold down 3.6 per cent over the year as fewer homes were put to the market.

Although care is needed as how many homes are sold in central London as a 3.6% fall may not be that many. It would appear that there is one remaining source of demand.

Foreign buyers, who are attracted by favourable exchange rates between sterling and most currencies, were an exception.

So presumably not Americans then if we look at the exchange-rate.

Ghost towns?

This issue reminds me of this from the Guardian at the end of January.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

If you are wondering what ultra-luxury means?

The swanky flats, complete with private gyms, swimming pools and cinema rooms.

Cinema rooms are a new one on me. But as to the problem I don’t know about you but the £3 million price tag gives quite a clue.

Builders started work last year on 1,900 apartments priced at more than £1,500 per sq ft, but only 900 have sold, according to property data experts Molior London. A typical high-end three-bedroom apartment consists of around 2,000 sq ft, which works out at a sale price of £3m.

I guess such numbers distort your view of reality as I note the definition of affordable being used here from Steven Herd.

“We need ‘affordable’ one- or two-bedroom apartments priced at £500,000.

What we are getting seems instead to be more of the same old song.

Molior says it would take at least three years to sell the glut of ultra-luxury flats if sales continue at their current rate and if no further new-builds are started.

However, ambitious property developers have a further 420 residential towers (each at least 20 storeys high) in the pipeline, says New London Architecture and GL Hearn.

My personal interest in Nine Elms as it is close to me – 25 cranes now between Battersea Dogs Home and Vauxhall visible to someone on a Boris Bike – makes me read the bit below and wonder how such a good development can be made of the wrong properties?

Herd says the Nine Elms development, near the new US embassy in south London, was one of the best redevelopment schemes in Europe but consisted of “the wrong properties that Londoners don’t need”

As ever boom seems to be turning into dust as we look back to the lyrics of The Specials from three decades ago.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown


The downbeat view of the UK housing market started today from the view that London is a leading indicator or if you prefer the canary in the coalmine. It was added to by the latest data from Halifax Bank of Scotland.

On a monthly basis, prices fell for the second consecutive month in January (by 0.6% following a 0.8% decrease in December)……….House prices remained unchanged in the recent quarter (November-January) from the
previous quarter (August-October).

Thus we see that anything like the same trend will mean that we will see a quarterly decline when we get the February data. Also the year on year growth is fading away.

Prices in the last three months to January were 2.2% higher than in the same three months a year earlier, although the annual change in January was lower than in December (2.7%).

Finally it is down to a similar level to wage growth although of course we need it to be below it for quite a sustained period to see any real improvement in affordabilty as for now thinks have simply stopped getting worse.

Looking ahead there was a worrying sign for estate agents and the housing industry at the end of 2017.

Mortgage approvals for house purchases ended the year with a sharp fall. The number of
mortgage approvals – a leading indicator of completed house sales – fell by 5.7% month on
month in December to 61,039, the lowest level since January 2015. Over the year to December
2017 total mortgage approvals were 2% lower than in the same period in 2016.


There is a fair bit to consider here as we only get partial glimpses of the market. What I mean by that is that it is estimated that 30%- 40% of property purchases these days do not involve a mortgage. Thus places like the Halifax only see 60/70% of the market. It is also true that the Nationwide numbers were more upbeat last week. But we do see signs of ever more stress in London and it would be logical for lower real wages to be having an effect.

We need some falls especially in London in my opinion as prices became ever more unaffordable as intriguingly even Professor David Miles admits in VoxEU.

Average house prices in the UK have risen much faster than average incomes over recent decades. Relative to average disposable incomes, houses are not far off three times as expensive now as they were in the early 1980s; relative to median incomes, they have risen even more.

I say intriguingly because missing from the piece and his description as a Professor at Imperial College is his role in all of this . You see he was a policymaker at the Bank of England from 2009 until 2016  who could be described as an uber dove. He even wanted to ease monetary policy just as the UK economy was picking up in 2013. Yet all the monetary easing seems to be missing from his explanation of higher house prices. Is he not proud of the consequences of his actions?