What is happening to house prices and rents in Ireland?

Yesterday brought us up to date with house price changes in the Euro area at least for the start of 2018. From Eurostat.

House prices, as measured by the House Price Index, rose by 4.5% in the euro area and by 4.7% in the EU in the
first quarter of 2018 compared with the same quarter of the previous year…….Compared with the fourth quarter of 2017, house prices rose by 0.6% in the euro area and by 0.7% in the EU in the first quarter of 2018.

As you might expect there are some swings from country to country but before we get there we see some interpretation of history.

House prices in the EU up 11 % since 2010

Actually they fell for a while due to the Euro area crisis and then responded to the “Whatever It Takes” measures.

Prices started growing again in 2014.

A particular disappointment to Mario Draghi must be that his home country Italy has ignored all his efforts to pump up house prices as they fell there by 0.4% over the last year and are down 15% since 2010. Meanwhile my attention was drawn to Ireland with its 12.3% rise in the latest year.

This is because the boom and then bust in Irish house prices took much of the banking system with it.  This meant via the usual privatisation of profits but socialisation of losses with respect to the banking system the Irish taxpayer found themselves in this situation described by its national debt agency NTMA.

That may bring Ireland’s high stock of debt – which at €213bn is more than four times its 2007 level – into sharp focus. Whilst our debt ratios are improving, our total nominal debt is still rising as we continue to borrow to pay interest.

This means that whilst the interest-rate or yield on Ireland’s bonds has fallen a lot mostly due to the bond buying or QE of the ECB (European Central Bank) there is a tidy bill to pay each year.

Almost irrespective of the external interest rate environment, we still expect Ireland’s annual interest bill to fall towards €5bn in the near term, from €6.1bn in 2017 and a peak of €7.5bn in 2014.

Ireland now only has an interest-rate of 0.81% on its ten-year benchmark bond so a fair bit lower than the UK which represents quite a change when we borrowed money to lend to theme to help them out.

House prices

The Irish statistics office or CSO brings us more up to date.

In the year to April, residential property prices at national level increased by 13.0%. This compares with an increase of 12.6% in the year to March and an increase of 9.5% in the twelve months to April 2017.

As you can see the pace has been picking up although it is no longer being quite so led by Dublin.

In Dublin, residential property prices increased by 12.5% in the year to April. Dublin house prices increased 11.7%. Apartments in Dublin increased 15.9% in the same period.

The reason why I raise the Dublin issue is that it has seen the widest swings as it had the biggest bubble then fell the most and then for a while picked back up more quickly. Or as it is put here.

From the trough in early 2013, prices nationally have increased by 76.0%. Dublin residential property prices have increased 90.1% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 69.9% higher than the trough, which was in May 2013.

That is quite a surge is it not? Whilst the Dublin recovery started earlier nearly all of this fits with the “Whatever It Takes” policies and timing of the ECB, Of course it raises old fears as well although we are not back to where the bubble burst.

Overall, the national index is 21.1% lower than its highest level in 2007. Dublin residential property prices are 23.3% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 26.1% lower than their May 2007 peak.

Oh and maybe another issue is having an impact.

The Border region showed the least price growth, with house prices increasing 9.3%.

Rents

We can track these down via the consumer inflation numbers and we get a hint here.

Housing, Water, Electricity, Gas & Other Fuels rose mainly due to higher rents and an increase in the price of home heating oil and electricity.

Looking into the detail we see that rents have risen by 7.4% over the past year and by 0.5% in May. The larger private-sector market is currently seeing a faster rate of rise but there must have been quite a chunky rise in public-sector rents at some point in the last year as they are up by 10.6% over that period.

Mortgage Interest-Rates

I found these hard to track down as the Central Bank of Ireland changed its reporting system but the Irish Consumer Price Index gives us a guide. It must have been designed in a similar way to the UK RPI as it includes mortgage interest-rates. The index for this was 143 when Mario Draghi was giving his “Whatever It Takes” ( to reduce mortgage rates) speech whereas in May it was 99.1.

Although rather curiously the Irish Independent reports that many have not bothered to switch to lower mortgage-rates.

KBC Bank is due to tell the Oireachtas Finance Committee it has 36,000 residential customers paying variable rates, which are its most expensive home-loan option, when they could get a lower priced deal from a bank.

It comes after it emerged that more than 100,000 homeowners at Bank of Ireland and Permanent TSB are paying up to €3,000 more a year on their mortgages than they need to at the two banks.

Perhaps they do not realise they can get them as I recall Ireland having a situation where many could not switch due to the house price falls.

Comment

There is a fair bit to consider here and let me open by agreeing to some extent with Mario Draghi.

European Central Bank chief Mario Draghi has linked the current spike in Irish property prices to “the search for yield by international investors”.

Mr Draghi said the real estate market in the Republic and several other EU states was “overstretched” and vulnerable to “repricing”. ( Irish Times yesterday).

He cannot bring himself to say falls nor to acknowledge his own role in them being overstretched but he does have time to bring up the fall guy which is of course financial terrorists.

 being fuelled by cross-border financing and non-banks, and that it would be important to investigate whether new macro-prudential instruments should be introduced for non-banks, especially in relation to their commercial real estate exposures.

We can’t have banks losing profitable business can we? Speaking of macro-prudential so the 2015 measures did not work then which is not a surprise here but perhaps a suggestion from the UK might help.

Under such a target the Bank of England should aim to keep nominal house price inflation at (say)
zero per cent for an initial period – perhaps five years – to reset expectations, ( IPPR)

So the organisation which has pumped them up has the job of controlling them? Whilst the central planners would love this sadly it would not work and I say that as someone who thinks we badly need lower house prices and switching back to Ireland because of this sort of thing. From the Irish Examiner.

The scramble to find a home in the crisis-hit rental sector has led to people queuing to view a €900-a-month one-bedroom apartment on Cork’s Tuckey Street……..

Piet said last week they were the first people in a 50-person queue on MacCurtain Street and were refused the apartment because they did not have a reference letter with them.

Piet said the rental sector is a lot more expensive than it was a few years ago.

The average rental property in Cork has soared to above €1,210 a month — up almost 10% on last year.

“We pushed the boat out to €900 a month just to get somewhere nice. That is the very end of our budget,” said Piet.

Or to put it another way with both house prices and rents soaring the rentiers are quids ( Euros) in.

 

 

 

 

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Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.

UK house price growth continues to slow

Yesterday we looked at a house price bubble which is still being inflated whereas today we have a chance to look at one where much of the air has been taken out of the ball. Can a market return to some sort of stability or will it be a slower version of the rise and fall in one football match demonstrated by Maradona last night? Here is the view from the Nationwide Building Society.

Annual house price growth fell to its slowest pace for five
years in June. However, at 2% this was only modestly below the 2.4% recorded the previous month.

As you can see the air continues to seep out of the ball as we see another measure decline to around 2% reaching one of out thresholds on here. Or to put it another way finally house price growth is below wage growth. Of course that means that there is a long way to go to regain the lost ground but at least we are no longer losing it.

The Nationwide at first suggests it is expecting more of the same.

Indeed, annual house price growth has been confined to a
fairly narrow range of c2-3% over the past 12 months,
suggesting little change in the balance between demand and supply in the market over that period.
“There are few signs of an imminent change. Surveyors
continue to report subdued levels of new buyer enquiries,
while the supply of properties on the market remains more of a trickle than a torrent.

Although I note that later 1% is the new 2%

Overall, we continue to expect house prices to rise by
around 1% over the course of 2018.

Every measure of house prices has its strengths and weaknesses and the Nationwide one is limited to its customers and tends to have a bias towards the south but it is reasonably timely. Also there is always the issue of how you calculate an average price which varies considerably so really the best we can hope for is that the methodology is consistent. According to the Nationwide it was £215,444 in June.

The Land Registry is much more complete but is much further behind the times as what is put as April was probably from the turn of the year..

As of April 2018 the average house price in the UK is £226,906, and the index stands at 119.01. Property prices have risen by 1.2% compared to the previous month, and risen by 3.9% compared to the previous year.

As you can see the average price is rather different too.

Bank of England

It will be mulling this bit this morning.

Annual house price growth slows to a five-year low in June

This is because that covers the period in which its Funding for Lending Scheme ( replaced by the even more friendly Term Funding Scheme) was fully operative. When it started it reduced mortgage rates by around 1% and according to the Bank of England some mortgage rates fell by 2%. I think you can all figure out what impact that had on UK house prices!

Or to put it another way the house price falls of 2012 and early 2013 were quickly replaced by an annual rate of house price growth of 11.8% in June 2014 according to the Nationwide. So panic at the Bank of England changed to singing along with Jeff Lynne and ELO.

Sun is shinin’ in the sky
There ain’t a cloud in sight
It’s stopped rainin’ everybody’s in a play
And don’t you know
It’s a beautiful new day, hey hey

Some of them even stopped voting for more QE as it has mostly been forgotten that nearly a quorum wanted more of it as the economy was kicking through the gears.

Although some at the Bank of England will no doubt have their minds on other matters.

Simon Clarke MP said the figures had “disturbing echoes” of the MPs’ expenses scandal. “One of the most important aspects of the culture of any public institution is of course that it provides value for money to the taxpayer,” he added.

“In the last two-and-a-half years two members of the FPC, Mr Kohn and Mr Kashyap, have incurred £390,000 in travel expenses, which is simply a staggering sum.”  ( The Guardian).

Regular readers will recall I did question a similar situation regarding Kristin Forbes on the Monetary Policy Committee who commuted back and forth from the US. I do not know if she benefitted from the sort of largesse and excess demonstrated below though.

The pair are based in the US and Clarke said the £11,084.89 flight for Kashyap from Chicago to London would leave his constituents “gobsmacked”.

Kohn spent £8,000 on a flight from Washington to London and £469 on taxis as part of expenses for a single meeting.

As ever a sort of Sir Frank ( h/t Yes Prime Minister ) was brought forward to play a forward defensive stroke.

“Having seen these committees in action, and seen the contributions they’ve made, as high as their expenses have been, also staggering has been their contribution,”

I was hoping for some enlightenment as the their “staggering contribution” as I do not recall ever hearing of them. The man who thinks this also submitted this about his role as a bank CEO so I guess he might also believe in fairies and the earth being flat.

The key, I always found, was to begin the process by
considering life from the customer’s perspective and then to build products and services that responded to real needs – whilst taking utmost care to build the TCF principles into every operational step in the firm’s business model.

Oh and I have promoted Bradley Fried the chair of the Court to a knighthood although of course those of you reading this in a couple of years or so are likely to be observing his K.

Looking ahead

Yesterday’s mortgage data from UK Finance had a two-way swing. Let us start with the positive.

Estimated gross mortgage lending for the total market in May is £22.2bn, 8.8 per cent higher than a year earlier. The number of mortgage approvals by the main high street banks in May has also risen, increasing by 3 per cent compared to the same month a year earlier.

Except that the latter sentence was not so positive when broken down.

 As in April, increased approval numbers were driven by remortgaging, some 18 per cent more than a year earlier.  In contrast, approvals for house purchase were 3.8 per cent lower than the same period a year earlier.

In case you are wondering about who or what UK Finance represents it is the new name for the BBA. The title of British Bankers Association became so toxic that they decided to move on.

Comment

So the winds of change are blowing and not only at the O2 where the Scorpions played the weekend before last. The era of Bank of England policy moves to push asset price higher is over at least for now although of course the stock as opposed to the flow remains. If it stays like that we could see house prices for once grow at a similar rate to rents and wages but I doubt it because the Bank of England is a serial offender on this front.

And when the electricity
Starts to flow
The fuse that’s on my sanity
Got to blow
System addict
I never can get enough
System addict
Never can give it up ( Five Star and I mean the pop combo not Beppe Grillo)
In the shorter-term will Mark Carney fire things up again or spend his last year here thinking about his legacy and some Queen?
Because I’m easy come, easy go
A little high, little low
Anyway the wind blows, doesn’t really matter to me, to me

The China housing crisis builds up steam

This morning has brought news of something which would bring a chill to the heart of any central banker. It comes from China as we note this from Reuters.

 So far this year, the Shanghai stock index is down 14 percent, the CSI300 has fallen 12.4 percent while China’s H-share index listed in Hong Kong is down 4.8 percent. Shanghai stocks have declined 8.1 percent this month……The Shanghai stock index is below its 50-day moving average and below its 200-day moving average.

Not much sign of any wealth effects there at least not positive ones and there were signs of trouble in another area of asset prices too.

An index tracking major developers on the mainland slumped 4.4 percent following a near 5 percent drop the previous session, as a weakening yuan raised fears of capital outflow that could weigh on asset prices.

Actually they have missed something that Will Ripley of CNN did not.

China’s benchmark Shanghai Composite slid into bear market territory Tues, closing down more than 20% below its January high. Chinese stocks have come under pressure in recent weeks from concerns over the strength of the country’s economic growth & an emerging trade war w/ the US.

Of course the definition of a bear market is somewhat arbitrary and Chine’s stock market does tend to veer from boom to bust. But in  these times of easy monetary policy central bankers place a high emphasis on asset prices. This will be reinforced by the falls in the share price of developers as it reminds of the housing market and debt issues.

The Housing Market

Over the weekend the South China Morning Post offered an eye-catching view from Christopher Balding.

Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product.

There is something for Mark Carney to aim at as those of us in the UK have time to mull a familiar issue.

Keeping housing prices buoyant and development robust is thus an overriding imperative for China – one that is distorting policymaking and worsening its other economic imbalances.

At first I was not sure about his definition of a bubble.

Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot.

However suddenly it looks very bubbilicious.

That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Not surprisingly, this has put home ownership out of reach for most Chinese.

More than out of reach you would think as it must be multiples of out of reach. Also countries way beyond China’s borders face the issue below.

 Politically, homeowners have come to expect their property values to rise continually in a one-way bet;

There is a rather familiar response at least for UK readers.

Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals.

My first thought is that there is a clear opportunity for Gwen Guthrie to translate her hit into Mandarin.

Bill collector’s at my door
What can you do for me, oh?……

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

Or to put it more formally.

Wages in China simply aren’t high enough to keep up with the credit fuelled rise in asset prices, and thus developers can’t earn a reasonable rate of return by renting out units.

In terms of the numbers the circle seems to be something of a rectangle.

 In big cities, such as Beijing and Shanghai, yields are hovering around 1.5 per cent (compared to an average of about 3 per cent in the US and 4 per cent in Canada). ……Worse, developers are heavily weighted down with debt, much of it short-term. Many are paying out 7 to 8 per cent bond yields, with debt-to-equity ratios of around 380 per cent.

So the circus requires house price rises of at least 6% per annum to keep the show on the road. But wait there is more and something which to western eyes seems rather extraordinary.

Typically, renters borrow from banks to make an upfront, one-time payment to developers that covers, say, five years.

A rental mortgage is a little mind-boggling. Perhaps though we should have a sweep stake for predict how long it is before we get those in the UK?! Also it is a case of the familiar establishment response to trouble which is to give that poor battered can another kick.

The upfront payment from the bank to the developer provides some short-term cash-flow relief. But otherwise, all it does is delay debt repayments attached to the unit and shrink the loss on unsold inventory.

On a deeper level I wonder how many ( well paid) jobs rely on can kicking and relate to operations which are unviable in profit/loss or balance sheet terms but generate cash for now. How many banks for example or shale oil?

At this stage it all looks rather like the cartoon characters which have to run ever harder just to stand still.

 New starts and land purchases have grown strongly through the first five months of 2018. Investment in residential real estate is up 14 per cent and development loans are up 21 per cent. Far from reducing leverage, banks are jumping back into the speculative bubble: Mortgage growth is now at 20 per cent.

A response

On Sunday, the People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for what some banks must keep in reserves by 50 basis points (bps), releasing $108 billion in liquidity, partly to spur lending to smaller firms. (Reuters)

The PBOC operates under a model where it adjusts quantity rather than price or interest-rates. It mostly leaves the latter to influence the value of the Yuan although of course interest-rate moves affect the domestic economy as well. In terms of time you could argue the UK moved away from that in 1973 but anyway the Thatcherite changes of 1979 ended it. In essence it is allowing the banks to raise what is called the money supply ( as it is really money demand) and no doubt some and maybe much of it will be heading in the direction of the housing market in spite of the claim that it is for business lending. In that they are very much like us western capitalist imperialists so shall we call it lending to small businesses in the property sector?

Oh and speaking of the Yuan.

The dollar bought 6.5240 yuan at the close of trading in China, meaning the yuan fell 0.4% on the day, reaching its lowest level since Dec. 28, according to Wind Info. The Chinese currency weakened further on Tuesday morning in Asia, hitting 6.5409 against the U.S. dollar. ( Wall Street Journal)

Care is needed though as whilst the Yuan has slipped over the past week it has still done better against the US Dollar in 2018 than the Euro or the UK Pound £

Comment

There is much to consider here. After all there have been scare stories about the Chinese economy before but it has managed to carry on regardless. The catch is that the western economies did this in 2005, 2006 and some of 2007 before it all went wrong. The size of the housing and development sector invokes thoughts of what took place in Spain and Ireland although of course China is much more systemic.

Meanwhile interestingly China seems to have spotted a way of making debt work in its favour. It started well.

Every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes. ( New York Times)

But only really ended well for China.

Mr. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December.

Rather like the UK and Hong Kong?

 

 

 

Can the Bank of England improve productivity?

This morning has brought a reminder of a challenge to the Bank of England,

Labour has said it will set the Bank of England a new 3 per cent target for productivity growth but refused to specify when this should be achieved. John McDonnell, shadow chancellor, will on Wednesday launch Labour’s final report on the UK’s financial system. ( Financial Times)

Reading this raised a wry smile as of course the reforms of Governor Carney reduced productivity by changing the output of the Monetary Policy Committee from 12 meetings a year to 8. But I think we all know they are likely to overlook that one.

Why?

The interim report was published in December and hammered out a familiar beat about UK productivity.

UK productivity has stagnated since the financial crisis of 2007/08. Real output per hour worked rose
just 1.4% between 2007 and 2016 . Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan.

Also there is this.

In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and
its pre-crisis trend – is minus 15.8%. The productivity gap for the G7 ex-UK countries is minus 8.8%.

I have been consistently dubious about “productivity gap” type analysis for several reasons. Firstly some economic activity and hence productivity before the credit crunch was just an illusion or a type of imagination. Otherwise we would not have had a credit crunch. Also the simple reality is that we have ups and downs not just ups.

Added to that is the problem of international comparisons. Let me illustrate that with some official data from the Office for National Statistics.

The UK’s long-running nominal productivity gap with the other six G7 economies was broadly unchanged in 2016: falling from 16.4% in 2015 to 16.3% in 2016 in output per hour worked terms.

Yet there are clearly problems with this as I note we are doing better than Japan which is a strong exporting nation.

On a current price gross domestic product (GDP) per hour worked basis, UK productivity in 2016 was: above that of Japan by 8.7%, with the gap narrowing from 10.0% in 2015

Also we have apparently done much better than Italy in the credit crunch era by getting worse relative to them!

lower than that of Italy by 10.5%, with the gap widening from 9.6% in 2015

Or if you prefer I think the comparison with France tells us the most if we recall that our economies are much more similar than we often like to admit and yet we are.

lower than that of France by 22.8%, with the gap widening from 22.2% in 2015

Thus we can only conclude that the numbers are not giving us the full picture. For example I think it is the UK’s success with employment that has to some extent worsened recorded productivity.

Also the Financial Times is in error on the data.

Productivity growth has never exceeded 3 per cent a year in Britain.

I think there is a clue in the phrase Industrial Revolution which challenges that! Or more recently there was over 6% in 1940 and 41 or 5% in 1968 in terms of total factor productivity according to FRED the database of the St.Louis Fed.

How would this happen?

A basic problem is identified which I agree with.

UK banks have helped to create a distorted economy. Lending is flowing into unproductive sectors.

This goes further.

As a central bank sitting at the heart of
the UK financial system, the Bank of England needs to be playing an active, leading role, ensuring banks
are helping UK companies to innovate. Flow of funds analysis shows that banks are diverting resources
away from industries vital to the future of this country.

Here I depart a little as I think that the Bank of England should set an environment to help banks change but it is not its role to centrally direct. I do agree with the last sentence as for example I have written many times about how the Funding for Lending Scheme pumped up UK mortgage lending rather than business lending.

One way this occurs is that banks have to put much more capital aside for business lending than they do for mortgage lending or unsecured lending. Also on the demand side for business lending there is a feature which my late father ( who was a small business owner) really,really,really,really ( h/t Carly Rae Jepson)  hated. Here is Dan Davies on Medium pointing out the reality here.

Because, historically, a very high proportion of business lending in the British market has been mortgage-lending-in-disguise. The business loan is usually secured, and usually additionally secured by a charge over the owner’s house.

He hints at some hope for the future but have I clearly pointed out yet that my father hated this feature with a passion? Changes though will need to be throughout the Bank of England infrastructure as the Bank Underground blog has in my view lost the plot as well.

Combining this with firm accounting data, we estimate that a £1 rise in the value of the homes of a firm’s directors leads the average firm in our sample to invest 3p more and increase their total wage bill by 3p.

Yes house prices raise both investment and wages. You might wonder with house prices soaring in recent years compared to almost any other metric it did not trouble anyone that investment and wages are not following it! But instead taking the numbers above with the ones below mean it is apparently a triumph.

This is because the homes of firm directors are worth £1.5 trillion………..Combined with the microeconometric evidence that firms invest 3p more for every £1 increase in the value of their director’s homes, this implies that nominal business investment would rise by around £4.5 billion (0.03*150); an increase of about 2.8%.  By a similar calculation, a 10% increase in real estate prices would increase the total nominal wages paid by firms by 0.8% due to the homes of firm directors.

Thus the answer to life the universe and everything is not 42 as one might reasonably argue especially on international towel day but it is at least according to all echelons of the Bank of England higher house prices. It is time for some PM Dawn to cool us down.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “Why?” is the question that’s on your mind
But reality used to be a friend of mine

Comment

There is a lot to consider here as there is a fair bit of nuance. You see there are areas which can be improved I think. Firstly there are the barriers to business lending around supply ( risk capital requirements) and demand ( having to pledge your home). Next there are changes caused ironically by the higher house prices the Bank of England is so keen on. From Dan Davies again.

we’ve got a generation of young adults coming through who neither own houses, nor have any realistic aspirations to do so. Residential housing as an asset has been more or less completely financialised, and now needs to be seen as part of the pension savings industry .

So the future for millennials is very different and as banks are unlikely to be accepting avocados on toast or otherwise as security this is on its way.

And if you have a generation of businesspeople who don’t own houses, and who therefore can’t be fit into the historic template of British small business lending, then you’ve got the impetus for a total reinvention of small business finance in the UK.

Thus the Bank of England does need to get in tune with Tracy Chapman.

Don’t you know
They’re talkin’ bout a revolution
It sounds like a whisper.

Can it under its present leadership? I very much doubt it but for all the hot air it produces there is an opportunity under the new Governor next year to really drive things forwards. After all he or she hopefully will not be connected to a policy like QE which via its support of zombie banks in particular has worsened productivity.

Meanwhile on a lighter note Financing Investment also suggests this.

Moving some Bank of England functions to Birmingham.

This would help justify HS2 to some extent. But I also recall this from Yes Prime Minister. Here is the Chief of the Defence Staff on relocation.

You can’t ask senior officers to live permanently in the North!  The wives would stand for it for one thing. Children’s schools. What about Harrods? What about Wimbledon? Ascot? Henley? The Army & Navy club? I mean civilisation generally, it is just not on…….Morale would plummet.

Mind you there was some hope

I suppose other ranks can be, junior officer perhaps

 

London House Prices are falling on one measure and also rising!

This morning has seen Rightmove update us on the UK property market and in response we have learnt where Bloomberg journalists live.

London house prices fell the most since the beginning of the year in June as the capital’s property market continued to lag behind the rest of the country.

The price of property coming to market in London dropped by 0.9 percent, bringing the average price to 631,737 pounds ($838,000), property-website operator Rightmove said in a report Monday. Values fell 1 percent from a year earlier, marking the 10th negative month in a row.

The rest of the country only gets a brief look in.

Nationally, prices grew 0.4 percent on the month and 1.7 percent on an annual basis.

Then it is time to get back to the heart of the matter.

In London, “new-to-the-market sellers recognize that the traditionally busier spring selling season is drawing to a close,” said Rightmove Director Miles Shipside.

Oh and as it is Bloomberg there is a consistent scapegoat for pretty much all seasons.

London’s property market has been hit particularly badly by uncertainty surrounding Britain’s impeding exit from the European Union.

Actually we get a reminder of what Rightmove really say from property industry eye.

New asking prices have bounced up to another record, averaging £309,439.

This morning Rightmove said asking prices for properties new to the market are 0.4% up on last month, and 1.7% up on June last year.

The Rightmove data is not for the price at which property is sold it is what sellers are asking for the property or trying to get. In terms of a rising price by this measure then it is a northern thing as the stock available has declined.

From the west midlands northwards, stock has fallen away since a year ago, by between 2.2% and 10.4% in Scotland.

Stock has also dwindled in Wales, by 10.3%.

Whereas prices are under pressure from something of a wave of more housing stock coming onto the market in the south.

By contrast, the amount of available stock has shot up almost 25% on a year ago in the east of England; by 20% in the south-east; by 16.4% in London; 8.2% in the south-west; and by 4% in the east midlands.

Land of Confusion

I am using the Genesis lyric because if we move to LSL/Acadata we get told something very different about London house prices.

Despite the lack of movement in prices, there is one big change in the market this month: London and the South East are no longer a brake on the market. Taking into account these two regions, there was a 2.2% annual price growth – taking them out of the equation, the growth rate is lower – at 2.1 %. It reverses the trend of most of last year.

Although we have learnt from past experience to feel something of a chill when we read something like this.

This is partly due to a change in methodology, which better captures sales of new build properties. These tend to cost more than existing homes and have a particularly strong impact on the average price in London.

In fact the major impact from this is on flats in London.

This was particularly pronounced for flats, where new build flats sold at an average premium of almost
a third (32.3%). They also made up a substantial proportion of sales of all flats, accounting for more than a quarter (26.4%), whereas new builds accounted for just 2.4% of sales of detached properties.

Once you have done that you get this.

The revised figures in London, taking into account new build properties, show annual growth of 2.9%, the lowest since March 2012. Prices also fell on a monthly basis, down 0.3%, taking the average house price in the capital to £636,947.

In case you are no aware the issue of how to treat new builds is a difficult one and is one where the official Office for National Statistics series has had trouble too. Obviously a brand new property cannot have a price rise per se but you can calculate an index based on say quantity like size or number of bedrooms. Much more difficult and perhaps impossible is to allow for the quality of the property.

Also treating London as one market gets a bit of a critique from reality below.

A number of London boroughs are recording big falls over the 12 months to April 2018. They include the City of London (down 24.9%, albeit on a small number of sales), Southwark, down 19.1% (largely as a result of high value properties sold the year before); and Wandsworth, down 13.1%. Growth has been more modest, with only Kensington and Chelsea, the most expensive borough, recording double-digit growth, up 10.4% to £2.17 million. The next highest increase over the year was Lambeth, where prices increased 5.8%.

The issue at this level is that you are down to a small number of sales in some cases leading to large swings. For obvious reasons people like to view the data for Kensington and Chelsea but if it is based on only a handful of sales it is to say the least problematic. Although sometimes just one sale can be crystal clear at least for it.

For those wondering if the previous owners had overpaid back in 2013 I did ask.

Number Crunching

Moving on here is some Monday morning humour from the British Chambers of Commerce.

The British Chambers of Commerce (BCC) has today (Monday) slightly downgraded its growth expectations for the UK economy, forecasting GDP growth for 2018 at 1.3% (from 1.4%) which, if realised, will be the weakest calendar year growth since 2009, when the economy was in the throes of the global financial crisis. The BCC has also downgraded its GDP growth forecast for 2019 from 1.5% to 1.4%.

Yes they think they can forecast GDP growth to 0.1%!

Next come courtesy of those suffering from a type of amnesia.

Households could be left up to £1,000 a year worse off because of Brexit trade barriers, a report will suggest.

Global consultancy firm Oliver Wyman will say that under the most negative scenario of high import tariffs and high regulatory barriers the cost to the economy could total £27bn.

The problem here is the authors so with the help of FT Alphaville let me show you how their crystal ball has worked out in the past.

It has long been known that consulting firm Oliver Wyman crowned Anglo Irish the world’s best bank in 2006 — just when Anglo was actually… well, you know the story.

Sadly, the report that bestowed this fateful distinction has (quite unaccountably!) vanished from the Oliver Wyman corporate site.

Or this.

North American Investment Bank – Bear Stearns (SPI 230) is the best-performing company in this year’s most improved sector, investment banking.

Comment

After a barrage of contradictory numbers let us step back and take stock. We see that the background for UK house prices is not what it was. For example the Term Funding Scheme of the Bank of England ended in February and whilst it still represents some £126.6 billion of cheap liquidity for the banks it is now gently declining. Other factors such as a 0.5% Bank Rate and £435 billion of QE have been at play in raising prices but that has worn off now. Perhaps we are still seeing the influence of the Help To Buy scheme in the North but unless prices fall more in London many are still above its cap of £600,000.

A welcome development is that house price growth seems to have fallen back in line with wage growth although of course the official numbers still disagree (3.9%). Even that development has the issue of course that it does not help with prices being much too high in many parts of the country. As to detail all we can honestly say is that house price inflation has fallen and some parts of London especially in the centre are seeing falls.

Moving onto my new measure which refers to a block of around 80 flats near the US Embassy in Nine Elms there was an improvement this week, There were signs of life (open windows etc) in 12 as opposed to 8.

 

 

Putting rents which do not exist in a consumer inflation measure is a disgrace

Yesterday the Economic Affairs Committee took a look at the Retail Price Index measure of consumer inflation in the UK. An excellent idea except as I have contacted them to point out.

Accordingly I am making contact for two reasons. Attending the event would give your members exposure to a much wider range of expertise on the subject of the RPI than the limited group you have today. Also it will help you with the subject of balance as the four speakers you will be listening too today are all against the RPI with some being very strongly so. This gives a very unbalanced view of the ongoing debate on the subject.

The event I refer too is this evening at the Royal Statistical Society at which I will be one of those who reply to the National Statistician John Pullinger.

I intend to point out that the RPI does indeed have strengths and it relates to my letter to Bank of England Governor Mark Carney from February.

“. I am not sure what is a step up from known error but I can say that ignoring something as important to the UK as that sector when UK  house prices have risen by over 29% in your term as Governor when the targeted CPI has only risen by more like 7% is exactly that.”

This is because it makes an effort to reflect this.

This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.

This compares for example with the Consumer Price Index which completely ignores the whole subject singing “la,la,la” when it comes up. There has been a newer attempt to reflect this issue which I look at below.

Also it means that the influence is much stronger that on the only other inflation measure we have which includes house prices which is CPI (NA). In it they only have a weighting of 6.8%. So the RPI is already ahead in my view and that is before you allow for the 2.4% weighting of mortgage interest-rates.

As you can see the new effort at least acknowledges the issue but comes up with a lower weighting. This is because they decided that they only wanted to measure the rise in house prices and not the land. This is what they mean by Net Acquisitions or NA.

Now with 8.3% ( 10.7%) and 6,8% in your mind look what happens with the new preferred measure CPIH.

Now let me bring in the alternative about which the National Statistician John Pullinger and the ONS are so keen. This is where rather than using house prices and mortgages of which there are many measures we see regularly in the media and elsewhere, they use fantasy rents which are never actually paid. Even worse there are all sorts of problems measuring actual rents which may mean that this is a fantasy squared if that was possible.

But this fantasy finds itself with a weight of 16.8% or at least it was last time I checked as it is very unstable. Has our owner-occupied housing sector just doubled in size?

As you can see whilst you cannot count the (usually fast rising ) value of land it would appear that you can count the ( usually much slower rising) rent on it. That is the road that leads to where we are today where the officially approved CPIH gives a lower measure than the alternatives. Just think for a moment, if there is a sector in the UK with fast rising inflation over time it has been housing. So when you put it in the measure you can tell people it is there but it gives a lower number. Genius! Well if you do not have a conscience it is.

Yet the ordinary man or woman is not fooled and Bank of England Governor Mark Carney must have scowled when he got the results of his latest inflation survey on Friday.

After all when asked ( by the Bank of England) they come up with at 3.1% a number for inflation that is closer to the RPI then the alternatives.

Just because people think a thing does not make it right but it does mean you need a very strong case to change it . Fantasy rents are not that and even worse they come from a weak base as illustrated below.

The whole situation gets even odder when you note that from 2017 to this year the weighting for actual rents went from 5.6% to 6.9%.

Who knew that over the past year there was a tsunami of new renters? More probably but nothing like a 23% rise. This brings me back to the evidence I gave to the UK Statistics Regulator which was about Imputed Rents which relies on essentially the same set of numbers. I explained the basis for this was unstable due to the large revisions in this area which in my opinion left them singing along to Fleetwood Mac.

I’m over my head (over my head)
Oh, but it sure feels nice

Today’s data

Let me start with the number which was much the closest to what people think inflation is according to the Bank of England.

The all items RPI annual rate is 3.3%, down from 3.4% last month. The all items RPI is 280.7, up from 279.7 in April.

So reasonably close to the 3.1% people think it is as opposed to.

The all items CPI annual rate is 2.4%, unchanged from last month. The all items CPI is 105.8, up from 105.4 in April

When we ask why? We see that a major factor is the one I have been addressing above.

Average house prices in the UK have increased by 3.9% in the year to April 2018 (down from 4.2% in March 2018). This is its lowest annual rate since March 2017 when it was 3.7%.

In spite of the slow down in house price inflation it remains an upward pull on inflation measures. You will not be surprised to see what is slowing it up.

The lowest annual growth was in London, where prices increased by 1.0% over the year.

Now let me switch to what our official statisticians,regulators and the economics editor of the Financial Times keep telling us is an “improvement” in measuring the above.

The OOH component annual rate is 1.1%, down from 1.2% last month.

Which is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to May 2018; unchanged from April 2018.

So they take rents ( which they have had all sorts of trouble measuring and maybe underestimating by 1% per annum) and imagine that those who do not pay rent actually do and hey presto!

The all items CPIH annual rate is 2.3%, up from 2.2% in April.

I often criticise the media but in this instance they deserve praise as in general they ignore this woeful effort.

Comment

Today has been a case of me putting forwards my views on the subject of inflation measurement which I hold very strongly. This has been an ongoing issue since 2012 and regular readers will recall my successful battle to save the RPI back then. I take comfort in that because over time I have seen my arguments succeed and more and more join my cause. This is because my arguments have fitted the events. To give a clear example I warned back in 2012 that the measure of rents used was a disaster waiting to happen whereas the official view was that it was fine. Two or three years later it was scrapped and of course we saw that the Imputed Rent numbers had a “discontinuity”. The saddest part of the ongoing shambles is even worse than the same sorry crew being treated as authorities about a subject they are consistently wrong about it is that we could have spent the last 6 years improving the measure as whilst it has strengths it is by no means perfect.

Let me give credit to the Royal Statistical Society as it has allowed alternative views an airing (me) and maybe there is a glimmer from the House of Lords who have speedily replied to me.

Staff to the Committee will be in attendance this evening, and we have emailed the details to the members: the unfortunate short notice and the busy parliamentary schedule currently means it may be unlikely for them to attend. We will report back to them on the event nevertheless.

I hope the event goes well for you.

Returning to today’s we now face the risk that this is a bottom for UK inflation as signalled by the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.

This has been driven by the rise in the price of oil where Brent Crude Oil is up 56% on a year ago as I type this and the recent decline in the UK Pound £. This will put dark clouds over the Bank of England as the wages numbers were a long way from what it thought and now it may have talked the Pound £ down into an inflation rise. Yet its Chief Economist concentrates on matters like this.

Multiversities ‘hold key to next leap forward’ says ⁦⁩ Chief Economist Andy Haldane ( @jkaonline)

Isn’t that something from one of the Vin Diesel Riddick films?