Victory on the Retail Prices Index! And it feels good!

This morning I have some good news to report which is the result of the around 7 year campaign I have conducted in support of the Retail Price Index or RPI. I have given regular readers a sense of deja vu with the headline and let me add to that with something I wrote for Mindful Money back on the 10th of January 2013.

I am pleased to report that today’s update will be very upbeat and will contain sections which I hoped to be able to write but felt were certainly far from favourite to take place. Regular readers will be aware that the subject of inflation is a specialist subject for me and a sub-section is the official attempts to “improve” ( in my financial lexicon such an “improvement” equals a lower number). Accordingly when the National Statistician decided to have a consultation to “improve” the UK Retail Price Index I feared the worst. However I hoped and worked for the best as I not only attended the public meeting and explained my view but responded to the consultation both in my own name and as part of the RPI CPI User Group at the Royal Statistical Society.

Those who have followed the saga will recall that last summer I noted a new review of the Retail Prices Index this time by the House of Lords Economic Affairs Committee ( EAC). I feared another establishment stitch-up so I invited the EAC to a meeting on the subject at the Royal Statistical Society to expose them to other points of view, including mine as I was one of the speakers.

In case you are wondering what this is about I will go through the technical points below but it can be summarised in the theme that the establishment invariably finds reasons to object to inflation measures which give higher numbers and favour ones with lower numbers. In terms of UK inflation that means attacking the RPI (2.7%) and proposing the measure called CPIH (2%). From the point of view of HM Treasury such a gap if compounded over time on matters such as pensions and benefits saves it a lot of money, and the gap has usually been larger than that recently. Thus whilst I have battled the Office for National Statistics, the Office for Statistics Regulation and for long periods the economic editor of the Financial Times Chris Giles the main opponent in my opinion has been HM Treasury.

What has happened here?

The official campaign was publicly pushed as being due to what has been called the “Formula Effect” which is much of the gap between RPI and the various CPI variants. I have long thought that much of the force behind the argument came from the fact that the RPI has house prices in it as well, leading to usually higher readings. But there was a way of investigating and then (hopefully) fixing this Formula Effect.

We heard evidence that the Carli formula, as used in the RPI, produces an upward bias. But expert opinion on the shortcomings of the RPI differs……. There is however broad agreement that the widening of the range of clothing for which prices were collected has produced price data which, when combined with the Carli formula, have led to a substantial increase in the annual rate of growth of RPI.

The Formula Effect has been driven by a problem in the clothing sector and particularly fashion clothing triggered by a change made in 2010. My argument all along has been let’s fix that as the Formula Effect would then be much smaller. The estimates are that the Formula Effect would be halved and maybe a bit more. We do not of course absolutely know this although there was some official research ( which was rather suspiciously abandoned) back in 2012 which gives some clues. If we get the Formula Effect more than halved then this can return to one for statistical purists rather than being at the forefront of the UK inflation debate.

given the properties of the Carli formula that may lead to upward bias have long been evident, yet expert opinion still differs, it may be a perpetual debate.

Putting it another way a major influence in this has been price collection on women’s strappy tops. The statistician Simon Briscoe was very powerful on this point.

We have to bear in mind that strappy tops are one-thirtieth of one per cent of the RPI. I can think of no other area of life or public policy where if one three-thousandth of something was wrong, we would discard the whole lot. We would simply mend it.

Housing Costs

Those who have followed my work on this subject will know that I can only type, yes yes yes! To this next bit.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

This has been a long battle against the UK establishment and for most of this period against the Financial Times as well. For example the Paul Johnson Inflation Review of 2015 supported the use of the inflation measure CPIH which uses rental equivalence or imputed rents. These do not exist in real life and are an entirely fictional concept as opposed to the house prices ( via a depreciation component) and mortgage interest-rates which not only exist but are widely understood that the RPI uses.

If it was left to me I would improve the RPI by having an explicit house price component rather than the implicit depreciation one. Maybe the EAC will get around to that.

Comment

There is much to welcome here from the EAC as if its recommendations are implemented two major problems with UK inflation measurement will be improved at worst and fixed at best.However the statistics establishment comprising the Office for National Statistics and the Office for Statistics Regulation have seen their reputation badly damaged by the frankly spiteful decision to do this and then for the latter to rubber stamp it.

given its widespread use, it is surprising that the UK Statistics Authority is treating RPI as a ‘legacy measure’. The programme of periodic methodological improvements should be resumed.

I gave evidence to the OSR and frankly I was left with the view that it is the equivalent of a chocolate teapot and should be scrapped. Just to be clear the EAC does not go that far.

Also it is welcome that other areas have come round to more like my point of view as I see that the Financial Times and Paul Johnson have been willing to look to correct past mistakes. It is never easy to do that so we should welcome it.

On the downside I see two main problems with the Review.

In future there should be one measure of general inflation that is used by the government for all purposes. This would be simpler and easier for the public to understand.

I see the point of trying to stop the government from “inflation shopping” but the truth is that we need different measures for different purposes. For example a cost of living index for wage negotiations is not the same as one for the national accounts.

The idea that we should use CPI for now and then later use a new number that includes owner occupied housing later has various problems.

The government should begin to issue CPI-linked gilts and stop issuing RPI-linked gilts. We heard evidence to suggest there was sufficient demand to make a viable market

That seems silly as we would end up with 3 types of index-linked Gilts ( RPI, CPI, and the new measure likely to be the improved RPI). Also we were supposed to put owner occupied housing in CPI back in 2003 but somehow it got “forgotten” for over a decade.

So my suggestion is to get on with improving the RPI and give the work a twelve month deadline. Then in a year’s time we could issue index-linked Gilts based on the new measure. We might be able to update some of the existing Gilts on the new basis as well but that is a matter for the Bank of England but some we would not as there were explicit rules in their documentation.

Me on The Investing Channel

 

Advertisements

Lower UK inflation provides some welcome good news for real wages

This morning allows us to take a deep breath and move from last night’s excitement which rapidly turned to apparent stalemate to a whole raft of UK inflation data. As we stand the UK Pound has rallied a bit to US $1.288 and 1.129 versus the Euro but in inflation terms that represents a drop as it was around 7% higher versus the US Dollar a year ago. So that is what is around the corner as today the influence will be a bit more than that as the UK Pound was weaker in December versus the Dollar which is the currency in which commodities are priced.

Moving to the price of crude oil there will be a downwards influence on today’s numbers from it as we note a March futures price which peaked at US $84.58 and was more like US $56 around the time the UK numbers are collected. If we look at the weekly fuel prices we see that petrol prices dropped from being around 12 pence per litre dearer than a year before to more like 2 pence. However this gain has been offset to some extent by the way that diesel has become much more expensive than petrol with the gap between the two being around 4 pence in December 2017 but more like 10 pence in December 2018. Does anybody have a good reason for this?

Inflation Targeting

Bank of England Governor Mark Carney answered some online questions on the 9th of this month at what is called the Future Forum. Let me open with a point of agreement.

On your question about the level of the inflation target, long and varied experience has shown that price stability is the best contribution monetary policy can make to the public good.

The problem is that whilst I mean price stability he is being somewhat disingenuous as that is not what he means. Let me highlight with this.

There are good reasons why central banks around the world, including the Bank of England, target a low, positive rate of inflation not no inflation.

As you can see he talks the talk but does not walk the walk and here is his explanation.

 A little inflation ‘greases the wheels’ of the economy, for example by helping inflation-adjusted wages adjust more smoothly to changes in companies’ demand for labour and facilitating shifts in resources between sectors in response to changes in supply and demand. Moreover, a positive inflation rate gives monetary policy space to deliver better outcomes for jobs and growth

So it helps him to look like a master of the universe and helps wages adjust. Seeing as wages have adjusted downwards I hope he was challenged on that point. But there is more.

From a more technical point of view, the official rate of inflation might also over-estimate the true rate at which prices are rising because it is hard to strip out increases that reflect improvements in the quality of goods and services on offer. Aiming for a 0% inflation target would risk forcing the economy into deflation in the medium term.

That is really rather breathtaking! Let me explain why by comparing his “might” by the reality that UK consumer inflation has since the change to CPI as the inflation target in 2003 consistently under recorded inflation via the way that owner occupied housing is ignored completely. They always meant to get around to it but somehow forget until they managed to find a way ( imputed rent) of having one of the fastest areas of inflation recorded as one of the slowest in the new “comprehensive” CPIH measure.

At least he has dropped the effort to claim that relative prices could not move with a 0% inflation target. This is because I kept pointing out that when we had around 0% around 3 years ago there was a big relative price shift via the much lower price of crude oil which had driven it. So it is good that this particular fantasy had its bubble burst but not so good that the Ivory Towers responsible carry on regardless.

Also if we return to the quality issue a powerful point was made by the statistician Simon Briscoe who stood up and stated that each time he bought a new I-Pad it cost him more than a thousand pounds. But whilst he realised each one was better how does that work if he neither needs nor uses the additions or only uses a few of them?

Inflation

As we had been expecting the consumer inflation numbers provided some good news this morning.

The all items CPI annual rate is 2.1%, down from 2.3% in November……..The all items RPI annual rate is 2.7%, down from 3.2% last month.

The main driver here was transport costs as we expected because if we throw in the whole sector then annual inflation was cut by a bit more than 0.2% due to it. Actually slightly more for the RPI as it has a higher weight for air fares. Also the RPI was affected by something a little embarrassing for a Bank of England which had raised Bank Rate in November by 0.25%.

Mortgage interest payments, which decreased the RPI 12-month rate by 0.09 percentage points between November and December 2018 but are excluded from the CPIH.

Of course they are excluded from the woeful CPIH which essentially only includes things which do not exist in its calculations about owner occupied housing and ignores things which are paid. Here is its major player.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to December 2018, up from 0.9% in November 2018.

As you can see even at the new overall lower trend for house price growth (which was previously around 5% per annum ) it way undershoots the number.

Average house prices in the UK increased by 2.8% in the year to November 2018, up slightly from 2.7% in October 2018 (Figure 1). Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 0.7% over the year to November 2018, unchanged from October 2018.

 

Comment

There are two entwined elements of good news here as we note first the fact that the annual rate of inflation has fallen and done so quite sharply if we look at RPI. The next is that it has helped UK real wage growth into positive territory on a little more clear-cut basis. Should total pay growth continue to exceed 3% ( it was last 3.3%) then it is hardly a boom but hopefully we will see a sustained rise. At a time when the economic outlook has plenty of dark clouds this is welcome especially as the outlook seems set fair.

The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

Inflationary pressure in the system has slowed.

Moving to measurement I have some hopes for this from the House of Lords Economic Affairs Committee.

Next Thursday 17 January we will publish “Measuring Inflation”, our report on the use of RPI.

It did appear that something of a stitch-up was underway but efforts were made to provide an alternative view as for example I invited them to a debate at the Royal Statistical Society on the subject. They then became quite critical of the way that our official statistician have refused to update the RPI even for changes which would be simple. So fingers crossed! Although of course the establishment is a many-headed hydra.

Sticking with the RPI I referred yesterday to an article in the Financial Times about index-linked Gilts and here is the most relevant sentence.

 This implies inflation of about 3.2 per cent — well above current levels and the Bank of England’s 2 per cent target.

So it implies inflation of 3.2% which was well above the 3.2% the RPI was at the time the piece was written?!

 

 

How long will it be before the Bank of England cuts interest-rates?

This morning has opened with some good news for the UK economy and it has come from the Nationwide Building Society. So let us get straight to it.

Annual house price growth slows to its
weakest pace since February 2013. Prices fell 0.7% in the month of December,after taking account of seasonal factors.

I wish those that own their own house no ill but the index level of 425.7 in December compares with 107.1 when the monthly series first began in January of 1991, so you can see that it has been a case of party on for house prices. If you want a longer-term perspective then the quarterly numbers which began at 100 at the end of 1952 were 11.429.5 and the end of the third quarter of 2018. I think we can call that a boom! Putting it another way the house price to earnings ratio is 5.1 which is not far off the pre credit crunch peak of 5.4.

The actual change is confirmed as being below both the rate of consumer inflation and wage growth later.

UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017.

Also the Nationwide which claims to be the UK’s second largest mortgage lender is not particularly optimistic looking ahead.

In particular, measures of consumer confidence weakened
in December and surveyors reported a further fall in new
buyer enquiries towards the end of the year. While the
number of properties coming onto the market also slowed,
this doesn’t appear to have been enough to prevent a
modest shift in the balance of demand and supply in favour
of buyers.

Although they then seem to change their mind.

It is likely that the recent slowdown is attributable to the
impact of the uncertain economic outlook on buyer
sentiment, given that it has occurred against a backdrop of
solid employment growth, stronger wage growth and
continued low borrowing costs.

The economic environment is seeing some ch-ch-changes right now but let us first sort out some number-crunching where each UK country has done better than the average.

Amongst the home nations Northern Ireland recorded the
strongest growth in 2018, with prices up 5.8%, though
Wales also recorded a respectable 4% gain. By contrast,
Scotland saw a more modest 0.9% increase, while England
saw the smallest rise of just 0.7% over the year.

They have I think switched from the monthly to the quarterly data here as that average was up by 1.3%.

The UK economy

We have now received the last of the UK Markit Purchasing Manager Index surveys so let us get straight to it.

At 51.6 in December, the seasonally adjusted All Sector
Output Index was up slightly from 51.0 in November.
However, the latest reading pointed to the second-slowest
rate of business activity expansion since July 2016.

I am a little surprised they mention July 2016 so perhaps they are hoping we have short memories and do not recall how it turned into a lesson about being careful about indices driven by sentiment. This was mostly driven by the manufacturing sector which had Markit looking for a scapegoat.

December saw the UK PMI rise to a six-month high,
following short-term boosts to inventory holdings and
inflows of new business as companies stepped up their
preparations for a potentially disruptive Brexit.
Stocks of purchases and finished goods both rose
at near survey-record rates, while stock-piling by
customers at home and abroad took new orders growth
to a ten-month high.

So preparation is bad as presumably would be no preparation. It is especially awkward for their uncertainty theme which was supposed to be reducing output. But let us move onto the main point here which is that the UK is apparently managing some economic growth but not a lot. This matters if we now switch to the wider economic outlook.

The world economy

As I have been typing this the Chinese cavalry have arrived. Reuters.

China’s just cut bank reserve requirement ratios by 100 bps, releasing an estimated RMB1.5t in liquidity by Jan 25. expected this, but argues the central bank can do a lot more – like cutting benchmark guidance lending rates.

Reuters are understandably pleased about finding someone who got something right. But the deeper issue is the economic prognosis behind this which we dipped into on Wednesday and is that the Chinese economy is slowing. For those wondering about what the People’s Bank of China is up to it is expanding the money supply via reducing the reserves banks have to hold which allows them to lend more. So they are acting on the quantity of money rather than the price or interest-rate of it. This relies on the banks then actually lending more. Or more specifically not just lending to those in distress.

Then there is the Euro area which according to the Markit PMIs is doing this.

The eurozone economy moved down another gear
at the end of 2018, with growth down considerably
from the elevated rates at the start of the year.
December saw business activity grow at the
weakest rate since late-2014 as inflows of new
work barely rose……….The data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December.

We need to rake these numbers as a broad sweep rather than going for specific accuracy as, for example, Germany is described as being at a five-year low which requires amnesia about the 0.2% GDP contraction in the third quarter of this year.

Comment

If we switch to our leading indicator for the UK which is money supply growth we see a by now familiar pattern. The two signals of broad money growth have diverged a bit but neither M4 growth at 2.2% in November or M4 lending growth at 3.5% are especially optimistic. That only gets worse once you subtract inflation from it. Or to put it another way in ordinary times we would be in a situation where a bank rate cut would be expected.

What does the Bank of England crystal ball or what is called Forward Guidance in one of Governor Mark Carney’s policy innovations tell us?

The MPC had judged in November that, were the economy to develop broadly in line with its Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a
limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So “I agree with Mark” seems to be the most popular phase which should make taxpayers wonder why we bother with the other 8 salaries? Indeed one of them will be in quite a panic now as back in May Deputy Governor Ramsden told us that 8.8% consumer credit growth was “Weak” so I dread to think what he makes of the current 7.1%. Although @NicTrades has a different view.

that’s China fast!

So that is how a promised Bank Rate rise begins to metamorphose into a Bank Rate cut which will be presented as “unexpected” ( as opposed to on here where we have been watching the journey of travel for nearly a year) and a “surprise”, just like the last time this happened just over 2 years ago.

Let me finish by welcoming the addition of two women to the Financial Policy Committee as there is of course nothing like a Dame.

Dame Colette Bowe and Dame Jayne-Anne Gadhia have been appointed as external members of ‘s Financial Policy Committee (FPC)

So sadly the diversity agenda only adds female members of the establishment to the existing list of male establishment appointees. That went disastrously with the Honorable Charlotte Hogg who proved that even being the daughter of an Earl and a Baroness cannot allow you to avoid family issues, especially when you forget you have a brother.

Weekly Podcast

Including my answer to this question from Rob Wilson.

How can economies such as Italy and Japan endures decades of virtually zero growth and yet the general population don’t seem to be suffering compared to other economies with growth?

 

 

 

 

 

 

How will the house price boom in the Netherlands respond to an economic slow down?

It has been a while since we have gone Dutch and taken a look at the economic situation in the Netherlands. The first point to note is that it has followed the Euro area trend for lower growth.

According to the first estimate conducted by Statistics Netherlands (CBS) based on currently available data, gross domestic product (GDP) expanded by 0.2 percent in Q3 2018 relative to the previous quarter. The growth rate was the lowest in over two years. Growth in Q3 was due to increased household consumption and international trade.

There is a difference here in that it managed to find some growth in trade as opposed to Germany where a decline pushed it into contraction in the latest quarter.  But in essence we are seeing yet again a consequence of the slow down of the Euro area monetary data feeding into economic activity. In the case of the Netherlands this came from a high base.

According to the first estimate, GDP was 2.4 percent up on the same quarter in 2017. Growth was mainly due to higher consumption. Investments in fixed assets and international trade also contributed, but less than in the previous quarter.

So we see that annual growth remains strong for now at least and that there has been a consumption boom.

In Q3, consumers spent over 2 per cent more than in Q3 one year previously. For 18 quarters in a row, consumer spending has shown a year-on-year increase.

A driver of this will be the strong employment situation.

Between August and October 2018, the number of people aged 15 to 74 in paid employment grew by an average of 20 thousand per month. Total employment stood at more than 8.8 million in October. Unemployment declined by an average of 4 thousand per month to 337 thousand.

Statistics Netherlands is harsh relative to others as it counts up to the age 75 got these purposes. Also it looks like the underemployment situation has improved too.

 The total unused labour potential in Q3 2018 comprised nearly 1.1 million people. This was almost 1.3 million one year previously.

This is not leading to a trade problem though although part of the good performance is not in line with the times.

Statistics Netherlands (CBS) reports that the total volume of goods exports grew by 5.1 percent in October relative to October 2017. Relative growth was higher than in September. In October 2018, exports of transport equipment, metal products, machinery and appliances increased most notably. The volume of imports was 4.4 percent up on October 2017.

The Netherlands must be the only place where transport equipment sales are up. Also not so many have trade volumes up right now. In terms of context we do need to note this though.

On balance, the Netherlands enjoys a goods trade surplus, i.e. exports exceeding imports. Re-exports play a significant role in the Dutch goods trade surplus. In 2016, approximately 36 percent of the surplus was caused by re-exports.

Looking Ahead

Yesterday the central bank the De Nederlandsche Bank (DNB) gave us its view.

While the economic boom is sustained, growth of the Dutch economy will slightly decelerate in the next few years. Growth in gross domestic product (GDP) is estimated at 2.5% for 2018, followed by 1.7% in 2019 and 2020.

Unlike in some Euro area countries that does qualify as a boom in these times. If we look back we see that since the 99.9 of the second quarter of 2013 GDP has risen to 112.2 where 2010=100. That also tells us that the Netherlands was pulled back by the Euro area crisis which preceded that.

The next bit is rather more uncomfortable, however.

Despite slightly lower growth figures, the Dutch economy will be running at full steam in the years ahead, with actual output exceeding its potential. Unemployment is set to remain very low. Households should benefit from a pick-up in wage growth, which will boost real disposable income in 2019 and 2020

It looks good but how is 1.7% growth “full steam” compared to this?

GDP growth peaked at 3.0% in 2017  and is estimated at 2.5% for 2018.

This is because central banks like to travel in a pack as we observe what is now their way of spinning their rather depressing view of our future.

It will recede to 1.7% in both projection years 2019 and 2020, approximating potential growth of around 1.6%, with the output gap widening from 0.3% in 2017 to 1.0% in 2018.

Sadly they never get pressed on this. After all they have interfered in so much of economic life with in this instance enormous QE and negative interest-rates but they seem to get a free pass on the issue of economic growth now being regarded as being likely to be lower than before. Even when Mario Draghi opens both the door and the window.

but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Also even the slower growth future relies on something which has to now be in doubt.

In 2018, gross remuneration per employee in the business sector is set to regain momentum, growing by 2.3%. Our projections show that it will be 3.0% in 2019 and 3.8% in 2020, assuming the usual wage-price dynamics.

The emphasis was mine to highlight that no matter how often the output gap theory fails it comes back to life. No silver bullet seems to be pure enough to kill this vampire! Whereas if we continue to see an economic slow down then after a lag wage growth will presumably slow too rather than continue to pick-up. Although it would appear that should something like that happen an excuse is in place, what is Dutch for Johnny Foreigner please?

An alternative scenario featuring a downward correction in international financial markets sees the growth rate for emerging market economies – including China – deteriorate. This also affects the Dutch economy due to increasing risk aversion, slowing global growth and reduced confidence. Compared with our projections, this could send annual GDP growth 0.4 percentage points lower on average in 2019-2020.

House Prices

This will be on the video screens at the DNB and ECB Christmas parties,

In September 2018, prices of owner-occupied dwellings (excluding new constructions) were on average 9.3 percent higher than in the same month last year. The price increase was the same as in the previous month. This is according to the price index of owner-occupied dwellings, a joint publication by Statistics Netherlands (CBS) and the Land Registry Office (Kadaster).

This will raise a cheer and then boos.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013.

Before the party really gets going again!

In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time; prices continued to rise and are at their highest level since the start of this price index in 1995. Compared to the low in June 2013, house prices were up by over 32 percent on average in September 2018.

Or in twitter terms 🍾👍

Comment

The economic going has been good in the Netherlands. Well unless you are a first-time house buyer watching prices accelerate away from you. But now even it must be wondering what 2019 will bring and how much of an economic slow down it will see? Just a continuation of the 0.2% quarterly economic growth just seen will tighten things up a bit and that happens with negative interest-rates and a ten-year bond yield of only 0.4%.

Yet some continue to churn out the line that interest-rates are going to be raised in the Euro area. I just do not get it.

 

 

 

 

 

 

What is happening at Battersea Power Station and Nine Elms?

It is time for us to drop in again on what is an enormous redevelopment project in London and my part of South West London in particular. This runs in geographical terms from Chelsea Bridge to Vauxhall Bridge where the barrier is the MI 6 building. It has laid waste to a broad sweep though here such that when my mother was staying with me after my father’s demise in early 2015 my attempt to take her to her favourite supermarket faced a South Park style “And it’s gone” moment. In terms of scale if you cycle along Nine Elms you can count 40 cranes which is upon the 25 when I began counting as a measure of construction activity.

Nine Elms

JLL is a big developer here and describe it thus.

Evolution is well underway in Nine Elms & Vauxhall with residential and commercial development centre stage. While there is still some way to go, it’s clear that the next three years will see the greatest advancement.

The restaurants and bars around Circus West Village and the riverfront attract plenty of visitors, and have made Nine Elms a vibrant neighbourhood, whilst the employees of the newly opened workplaces, such as the new US Embassy, are an additional boost.

I must have missed the vibrant neighbourhood bit on my journeys through the area and according to the Wandsworth Guardian President Trump was somewhat harsher.

He said: “They go out and they buy a horrible location. And they build a new embassy. That’s the good news. The bad news is it cost over a billion dollars.”

Mr Trump, a billionaire who made his fortune as a property magnate, cancelled a planned trip to London to open the embassy earlier this year, complaining the move to an “off location” south of the Thames had been a “bad deal”.

Returning to the JLL view there are these highlights.

 Nine Elms sales market active with 852 sales taken place within the last year

• 2,438 of the 3,698 units at Battersea Power Station are close to completion

• 7,051 units in the planning pipeline in Nine Elms

• A number of large scale developments are in the pipeline for Vauxhall that will improve the area as a whole

• C.1,900 residential units set for completion in Oval.

It makes me wonder at what price those 852 units were sold at? Especially if you head north from the power station and cross the Thames you very quickly come across the Chelsea Barracks development some of which looks if not completed very near to it to me. Still JLL are keen to add to the numbers with this helpful message if you visit their website.

Welcome to JLL Residential. Would you like our experts to assist you with your property requirements in the UK?

General Trends

This morning’s Rightmove update tells us that the boom is over according to Estate Agent Today.

Asking prices of homes coming to the market have fallen for the second month in a row – and Rightmove says it’s more than just the usual seasonal slowdown.

They have dropped 1.5 per cent in the past month: that’s an average of £4,496 for each home coming to the market in the past four weeks.

Combined with November’s drop that means the average asking price is now 3.2 per cent lower than two months ago – that’s a hefty £9,719 for the typical UK home.

This is the biggest fall over two consecutive months since 2012, when asking prices dropped by £11,836 over the same period.

They have London asking prices some 1.1% lower than a year ago. Whereas the LSL Acadata survey tells us this.

The annual rate of change in London remains at 0.8%, the same level as seen in the previous month. Prices have risen by £4,865 over the last twelve months, taking the new average price to £622,508.

Their report does take us down to the borough level where we see that Wandsworth saw a 2% rise in house prices in October but that still left it some 10.8% lower than a year before. So we have an idea of the Nine Elms effect but as ever it is a broad sweep rather than pinpoint accuracy as this bit of detail informs us.

The average price in Lambeth has been marginally assisted
(+£7k) by the purchase of an apartment named “Parliament View” in October 2018 for £1.1 million.

Battersea Power Station Problems

The Financial Times reported at the weekend that there has been a rinse and repeat cycle over the past couple of decades or so.

Since Battersea power station stopped generating electricity in the 1980s, development proposals for one of London’s biggest landmarks have included a theme park, a football stadium and a shopping centre with an ice rink on top. Each time, developers ran out of cash.

Actually that is harsh on the football stadium plan as for all the faults and issues with Roman Abramovich cash rarely seems to be a problem. But yes the various displays at the Millennium Arena have merged into each other over time. The current plan is being built but seems to have run into what might be called, trouble,trouble,trouble.

A refinancing arrangement between its Malaysian owners has been delayed for the third time; the cost of labour and materials is increasing; the developers have more than halved their expected returns and there are disputes with Transport for London over the cost of the Northern Line Underground extension to the area.

By the standards of HS2 or the Smart Meter programme this doesn’t seem too bad.

This has already seen the price of the renovation rise from £750m in 2012 to at least £1.15bn in 2017.

But there are other issues.

There are other signs of financial pressure. A first phase of the broader redevelopment, called Circus West, has been completed, with 855 flats sold and occupied. But Carillion, the bankrupt contractor, made a loss on the work, contributing to its demise. At the power station itself — known as phase 2 — a long-running dispute over the contract with Skanska led to the company being replaced by Mace last year.

It is hard not to wonder if the news concerning one Vampire Squid is in play here. From the New York Times.

Malaysia filed criminal charges against three subsidiaries of Goldman Sachs on Monday, accusing the Wall Street bank of making false and misleading statements.

The Malaysian authorities also charged several individuals in connection to a multibillion-dollar international scandal, which has ensnared Goldman and led to the ouster of Malaysia’s former prime minister, Najib Razak.

The government said it would seek criminal fines in excess of $2.7 billion related to the charges.

But if we return to the FT we have another question which is how has more value and revenue been created please Mr.Murphy?

Simon Murphy, who took over as the company’s chief executive in May, insisted the project would be completed on time and that the financial strain had been resolved. “We’ve generated more value and revenue to compensate for the costs going up,” he said. Indeed, he said the biggest risk was that, with some European labourers deterred by Brexit and the weak pound, “the workers will go home for Christmas and won’t come back again” — although he doesn’t expect this to happen.

Comment

There are clear signs of indigestion as we look at developments in the Nine Elms area. Some things have gone well as the Circus West development mentioned earlier now has shops and restaurants and some of my friends live there and like the place. Along Nine Elms some of the riverside developments are have a delightful location by the river. But regular readers may recall the Sunday I counted how many apartments appeared to actually have someone living there in a particular block and if we are generous it was circa 10%. Now maybe some were more acclimatised to heat than a Londoner like me and kept their windows and french doors closed during a long hot summer or were embarrassed to admit they lived in a place described as “lousy” and “horrible” by the US President, but not all surely.

But supply is rising and prices are falling leading to something of an oncoming crunch. Looking ahead we see that developments can be reborn. There was a time when Canary Wharf was associated with bankruptcy and failure. Now though. if social media is any guide, we see people celebrating the O2 after feeling lucky enough to have seen Ringo Starr and Ronnie Wood join Paul McCartney on stage last night as opposed to the disastrous Dome it once was. But for now Nine Elms is facing plenty of challenges.

 

 

 

ECB monetary policy can inflate house prices at least….

Tomorrow the European Central Bank meets for what has become a crucial policy meeting. There is a lot for it to discuss on the economic front and let us open with an element of deja vu.

Bank Of Spain Governor De Cos: No Signs Of New Property Bubble In Spain – RTRS ( @LiveSquawk )

It is hard not to think of the “Never believe anything until it is officially denied” by the apocryphal prime minister Jim Hacker at this point. He is responding to this covered by El Pais yesterday.

The International Monetary Fund (IMF) is calling on Spain to monitor the price of real estate following a rebound of the property market after years of crisis. After analyzing late 2017 statistics, the global agency has detected early signs of “a slight overvaluation,” although it stressed that there is still nothing like a new housing bubble in Spain.

Here is a reminder of the state of play which is that Spain is a nation of home owners.

The IMF finds that house prices increased by around 15% between 2014 and 2017, but that sales are being driven by existing housing stock rather than new housing. Another change from pre-crisis days is that the home ownership rate has dropped from 80% to 77% as people increasingly turn to the rental market.

Let us bring the numbers up to date via INE from the end of last week.

The annual variation of the Housing Price Index (IPV) in the third quarter of 2018 increases four tenths and stands at 7.2%……The quarterly variation of the general IPV in the third quarter of 2018 is 2.2%.

The IMF seems to have missed that the pace of house price growth has picked up in Spain. Not only the 2.2% quarterly rise but the fact that the overall index set at 100 in 2015 is now at 120.5. Returning to the role of the ECB a typical mortgage rate (over 3 years) is 1.93%.

Ireland

Last time around a housing boom and later bust in Spain was accompanied by one in Ireland so let us check in on yesterday’s official update.

Residential property prices increased by 8.4% nationally in the year to October. This compares with an increase of 8.5% in the year to September and an increase of 11.7% in the twelve months to October 2017.

As you can see the heat is on again and is heading towards levels which caused so much trouble last time around.

Overall, the national index is 17.6% lower than its highest level in 2007. Dublin residential property prices are 20.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 22.7% lower than their May 2007 peak.

Also they have got there rather quickly.

Property prices nationally have increased by 83.8% from their trough in early 2013. Dublin residential property prices have risen 98.0% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 77.9% higher than at the trough, which was in May 2013.

Now that it has got the central banking holy grail of higher house prices the ECB seems to have, for some reason got cold feet about putting them in the consumer inflation index.

The ECB concludes that the integration of the OOH price index would deteriorate the current
frequency and timeliness of the HICP, and would introduce an asset element. Against this
background, it takes the view that the OOH price index is in practice not suitable for
integration into the official HICP.

It has turned into a classic bureaucratic move where you promise something have a committee formed to do it which concludes so sadly that it will not do it. The reasons stated were known all along.

Economic growth

Whilst house price developments will put a smile on the faces of Governing Council members other economic developments may wipe that smile away. One possible bright spot has gone a bit dark. From France24.

 

The Bank of France said the Eurozone’s second-biggest economy would eke out growth of only 0.2% in the three months to December, down from 0.4% in a previous estimate and from that rate in the third quarter.

“Services activity has slowed under the impact of the movement. Transport, the restaurant and auto repair sectors have gone backwards,” the bank said in its latest company survey.

The forecast is well short of the 0.8% that would be needed to meet the government’s 2018 growth target of 1.7%.

That was reinforced by the production and manufacturing data for October which was up on the month but 0.1% lower than a year ago. The growth shortfall will only make the next French problem worse. From Reuters.

Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday to defuse discontent, leaving his government scrambling to come up with extra budget savings or risk blowing through the EU’s 3 percent of GDP limit.

That is especially awkward considering how vocal the French government had been about the Italian budget plans which in percentage terms was set to be a fair bit smaller.

Italy

The perennial under performer in economic terms seems to be in yet another “girlfriend in a coma” style phrase. From the latest monthly economic report.

In Italy, the GDP decreased marginally in the third quarter due to a contraction in both gross fixed investments and private consumption. On the contrary, the net exports contributed positively to growth.

The employment stabilized on past months levels recording a re-composition, which favored full time employees. Unemployment rate increased and was complemented by a reduction in inactive persons.

Italian inflation continued to be lower than the Eurozone average but the gap is closing.
In November, both the consumer confidence and the composite indicators decreased. The leading indicator stabilized on past months minimum values confirming the business cycle weakness.

There is a genuine danger of what some of the media have decided to call a technical recession. I get the point about it being within the margin of error and applaud their sudden conversion to this cause. But missing from this is the fact that this is an ongoing depression in Italy which shows not only no sign of ending but may be getting worse.

Comment

This will be a meeting of two halves. The awkward part is that after all the extraordinary monetary action involving negative interest-rates, QE and credit easing the Euro area economy has slowed from a quarterly growth rate of 0.7% to 0.2%. If we were not where we are the ECB would be discussing a stimulus programme. Except of course the plan is to announce the end to monthly QE bond purchases. Some places are suggesting a delay to future interest-rate increases as they catch up with my long-running view that Mario Draghi has no intention of raising them on his watch.

The second half will be the one emphasised which is that the ECB has hit its inflation target.

Euro area annual inflation is expected to be 2.0% in November 2018, down from 2.2% in October 2018, according to a flash estimate from Eurostat.

Okay not the 1.97% level defined by the previous President Jean-Claude Trichet but close enough. I wonder if any of the press corps will have the wit to ask about the U-Turn on including house prices in the inflation measure and whether that is because monetary policy can inflate house prices?

 

 

 

 

 

What can we expect next from UK house prices?

A feature of the credit crunch era has been the way that central banks have concentrated so much firepower on the housing market so that they can get house prices rising again. Of course they mostly hide under the euphemism of asset prices on this particular road. For them it is a win-win as it provides wealth effects and supports the banking sector via raising the value of its mortgage book. The increasingly poor first time buyer finds him or herself facing inflation via higher prices rather than wealth effects as we note the consumer inflation indices are constructed to avoid the whole issue.

This moves onto the issue of Forward Guidance which exists mostly in a fantasy world too. Let me give you an example from the Bank (of England) Underground Blog.

 It is reasonable to suppose that the more someone knows about a central bank and how it conducts policy, the more confidence they will have that the central bank will act to bring inflation back to target.

Really? To do so you have to ignore the two main periods in the credit crunch era when the Bank of England “looked through” inflation above target as real wages were hit hard. Yet they continue to churn out this sort of thing.

 And Haldane and McMahon, using the institutional knowledge score discussed above, show that for the UK, higher knowledge corresponds to greater satisfaction with the Bank, and inflation expectations closer to 2% at all horizons.

So according to the Bank of England you are none to bright if you disagree with them! I think it would have been better if Andy Haldane stuck to being a nosy parker about others Spotify play lists.

The area where the general public has I think grasped the nettle as regards central banking forward guidance is in the area of house prices. The Bank of England loudspeakers have been blaring out Yazz’s one hit.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now

Indeed even if things go wrong then we can apparently party on.

But if we should be evicted
Huh, from our homes
We’ll just move somewhere else
And still carry on

Where are we now?

If we switch to the current state of play we are in a situation where the new supply of moves to boost house prices have dried up. For example the Term Funding Scheme ended in February and after over four years of dithering the Bank of England raised Bank Rate to 0.75% in August. Combining this with the fall in real wages after the EU leave vote led to me expecting house prices to begin to fall but so far only in London has this happened. One factor in this has led to a blog from the National Institute of Economic and Social Research or NIESR last week.

The key point is that although the political turmoil was of great concern, the impact on bond prices followed a pattern we have seen before in which risk rises but expectations of a policy response militate against the risk.

The politics may be of great concern to the NIESR but the UK Gilt market has been driven by the intervention of the Bank of England. Not only has it already bought some £435 billion of it but its behaviour with the Sledgehammer QE of August 2016 has led to expectations of more of it in any setback. The irony is that good news may make the Gilt market fall because it makes extra QE less likely. The impact of this has been heightened by the way the Bank of England was apparently willing to pay pretty much any price for Gilts in the late summer of 2016. For the first time ever one section of the market saw negative yields as the market picked off the Bank of England’s buyers.

Mortgage Rates

This is where the Gilt yield meets an economic impact. If we think about mortgage rates then they are most driven by the five-year yield. On the day of the August Bank Rate it was 1.1% and of course according to the Bank of England the intelligent observer would be expecting further “limited and gradual rises” along the lines of its forward guidance. Yet it is 0.96% as I type this and the latest mortgage news seems to be following this. From Mortgage Strategy.

TSB has reduced interest rates by up to 0.35 per cent on mortgages for residential, home purchase and remortgage borrowers.

Changes applied include reductions of up to 0.35 per cent on five-year fixed deals up to 95 per cent LTV in its house purchase range; reductions of up to 0.25 per cent on two-year fixes up to 90 per cent LTV; and up to 0.30 per cent on five-year fixes up to 90 per cent LTV for remortgage borrowers.

That was from Friday and this was from Thursday.

Investec Private Bank has announced cuts to a series of its fixed and tracker mortgages.

Reductions total up to 0.50 per cent, and all within the 80 per cent – 85 per cent owner-occupier category.

Specifically, the variable rate mortgage has been cut by 0.50 per cent, the three-year fixed rate product by 0.10 per cent, the four-year by 0.15 per cent, and the five-year fixed rate by 0.20 per cent.

So the mortgage rates which had overall risen are in some cases on the way back down again. We will have to see how this plays out as Moneyfacts are still recording higher 2 year mortgage rates ( 2.51% now versus the low of 2.33% in January). I am placing an emphasis on fixed-rate mortgages because of the recent state of play.

The vast majority of new mortgage loans – 96% – are on fixed interest rates, typically for two or five years.

Currently half of all outstanding loans are on fixed rates, equating to about 4.7 million households.  ( BBC in August).

Lending

According to UK Finance which was the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield this is the state of play.

Gross mortgage lending across the residential market in October was £25.5bn, some 5.6 per cent higher than last October. The number of mortgages approved by the main high street banks in October was 4.1 per cent lower than last October; although approvals for house purchase were 3.6 per cent higher, remortgage approvals were 13.5 per cent lower and approvals for other secured borrowing were 1.3 per cent lower.

If they are right this seems to be a case of steady as she goes.

Comment

The situation so far is one of partial success for my view if the monthly update from Acadata is any guide.

House prices rebounded in October, up 0.4% – the first increase since February. The annual rate of price increases
continued to slow, however, dropping to just 1.0%.
Despite this, most regions continue to show growth, the exceptions being both the South East and North East, which show modest falls on an annual basis. The average price of a home in England and Wales is now £304,433, up from £301,367 last October.

So no national fall as hoped ( lower house prices would help first time buyers) but at east a slowing of the rise to below the rate of growth of both inflation and wages. There is also plenty of noise around as one official measure is still showing over 3% growth whilst the Rightmove asking prices survey shows falls. As ever the numbers are not easy to wade through as for example I have my doubts about this.

In London annual price growth has slowed substantially in the last month, falling to just 1.8%, yet there has still been an increase of £10,889 in the last twelve months with the average price in London now standing at £620,571.

The noose around house prices is complex as for example we have seen today in the trajectory of mortgage rates and reporting requires number-crunching as this from Politics Live in the Guardian shows.

GDP per head would fall by 3% a year, amounting to an average cost per person a year of £1,090 at today’s prices.

I would like to see an explanation of why it would fall 3% a year wouldn’t you? Much more likely the NIESR suggests a 3% fall in total and just for clarity it is against a rising trend. Of course if we saw falls as reported in the Guardian we would see the 18% drop in house prices suggested by some before the EU referendum whereas so far we have seen a slowing of the rises. But the outlook still looks cloudy for house prices and I still hope that first time buyers get some hope in terms of lower prices rather than help to borrow more.

Podcast