Why I still expect UK house prices to fall

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

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

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

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

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

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

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

Bank of England

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

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

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

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

Michael Saunders

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

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

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

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

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

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

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

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

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

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

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

Another credit crunch

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

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

Meanwhile back in the real world there is this.

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

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

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

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

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

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

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

Comment

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

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

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

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

Podcast

 

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

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

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

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

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

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

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

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

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

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

Fantasy Time

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

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

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

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

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

The new plan for any QE unwind is below.

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

How very Cheshire Cat.

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

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

“I don’t know,” Alice answered.

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

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

Today’s Monetary Data

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

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

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

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

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

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

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

QE

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

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

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

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

Or perhaps Britney Spears.

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

Consumer Credit

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

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

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

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

Comment

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

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

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

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

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

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

Podcast

 

 

Is the US economy slowing again?

Yesterday brought news that upset something of a sacred cow of these times. And no I do not mean the fact that Lionel Messi not only still has in his possession but actually uses a fax machine. That perhaps trumps even his transfer request. Across the Atlantic came news which challenged the growing consensus about economies soaring up, up and away after the Covid-19 pandemic. So let me hand you over to the Conference Board.

The Conference Board Consumer Confidence Index® decreased in August, after declining in July. The Index now stands at 84.8 (1985=100), down from 91.7 in July. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – decreased sharply from 95.9 to 84.2. The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – declined from 88.9 in July to 85.2 this month.

As the consumer is a large part of the US economy a further decline in August poses a question for the recovery we are being promised. Indeed those promising such a recovery forecast it would be 93 so they seem to be inhabiting a different universe. They managed to miss consumers reporting that things had got substantially worse in August. The expectations index decline was more minor but it is on the back of a much lower current reading.

The accompanying explanation put some more meat on the bones.

“Consumer Confidence declined in August for the second consecutive month,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month. Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

That made me look into the detail for the jobs market which confirmed why consumers think that things have got worse.

Consumers’ appraisal of the job market was also less favorable. The percentage of consumers saying jobs are “plentiful” declined from 22.3 percent to 21.5 percent, while those claiming jobs are “hard to get” increased from 20.1 percent to 25.2 percent.

The change in the “plentiful” number is within the margin of error but the “hard to get” shift is noticeable. There was a similar shift in business conditions where there was what seems a significant increase in the “bad” category.

The percentage of consumers claiming business conditions are “good” declined from 17.5 percent to 16.4 percent, while those claiming business conditions are “bad” increased from 38.9 percent to 43.6 percent.

As you can see below this is a long-running series and so it comes with some credibility.

In 1967, The Conference Board began the Consumer Confidence Survey (CCS) as a mail survey
conducted every two months; in June 1977, the CCS began monthly collection and publication. The CCS
has maintained consistent concepts, definitions, questions, and mail survey operations since its
inception.

The alternative view was provided by MarketWatch.

What they are saying? “I have to admit that I do not take this latest reading at face value,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “If you believe the number, then consumers are feeling worse in August than they were in the depths of the lockdown. I can’t imagine that anyone believes that.”

Perhaps he was one of those who thought it would be 93.

The Housing Market

We can now shift to a look at the market which will have every telescope at the US Federal Reserve pointing at it.

Sales of new single-family houses in July 2020 were at a seasonally adjusted annual rate of 901,000, according to
estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.
This is 13.9 percent (±20.0 percent)* above the revised June rate of 791,000 and is 36.3 percent (±27.4 percent)
above the July 2019 estimate of 661,000.

There may well have been a cheer at the Fed as the news was released. In absolute terms the main rise was in the south but in percentage terms it was the Mid-West that led with a more than 50% rise on the previous average for this year.

However there is a catch.

For Sale Inventory and Months’ Supply
The seasonally-adjusted estimate of new houses for sale at the end of July was 299,000. This represents a supply of
4.0 months at the current sales rate.

That does not add up until we remind ourselves that like the GDP data the numbers are annualised. If you check the actual data sales rose from 75,000 in June to 78,000 in July compared to a nadir of 52,000 in April.

So we see that for all the hype actual new homes sales rose by around 40,000 in response to this reported by Yahoo Finance.

The weekly average rates for new mortgages as of 20th August were quoted by Freddie Mac to be:

  • 30-year fixed rates increased by 3 basis points to 2.99% in the week. Rates were down from 3.56% from a year ago. The average fee remained unchanged at 0.8 points.
  • 15-year fixed rates rose by 8 basis points to 2.54% in the week. Year-on-year, rates were down from 3.03%. The average fee fell from 0.8 points to 0.7 points.
  • 5-year fixed rates increased from 2.90% to 2.91% in the week. Rates were down by 41 points from last year’s 3.32%. The average fee fell from 0.4 points to 0.3 points.

House Prices

Our central bankers would also be scanning for house price data.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 4.3% annual gain in June, no change from the previous month.

Actually it is a 3 month average so if you prefer it is a second quarter number so apparently as the economy plunged house prices rose. Some detail as to what happened where is below.

“June’s gains were quite broad-based. Prices increased in all 19 cities for which we have data, accelerating in five of them. Phoenix retains the top spot for the 13th consecutive month, with a gain of 9.0% for June. Home prices in Seattle rose by 6.5%, followed by Tampa at 5.9% and Charlotte at 5.7%. As has been the case for the last several months, prices were particularly strong in the Southeast and West, and comparatively weak in the Midwest and (especially) Northeast.

Comment

The consensus view is along the lines of this from the end of last week.

  • The New York Fed Staff Nowcast stands at 14.6% for 2020:Q3.
  • News from this week’s data releases decreased the nowcast for 2020:Q3 by 0.2 percentage point.
  • Negative surprises from the Empire State Manufacturing survey and housing starts data drove most of the decrease.

A strong rebound in the economy is the expectation but the consumer confidence report poses a question about some of that. Then we note that the housing data looks less positive once we allow for the annualisation and indeed seasonal adjustment in a year which is anything but normal.

That provides some food for thought for the US Federal Reserve as it gets ready to host its annual “Jackson Hole” symposium. I have put it in quote because this year the trip is virtual rather than real. Should they announce as they have been hinting that the new policy will be to target average inflation – which will be a loosening as the measure of official inflation is below target – we are left wondering one more time if Newt from the film Aliens will be right again?

It wont make any difference

The Investing Channel

UK inflation measurement is a case of lies damned lies and statistics

This morning has brought us up to date with the latest UK inflation data and we ae permitted a wry smile. That is because we have been expecting a rise whereas there was a load of rhetoric and panic elsewhere about deflation ( usually they mean disinflation). The “deflation nutters” keep being wrong but they never seem to be called out on it. The BBC report put it like this.

The rise was a surprise to economists, said Neil Birrell, chief investment officer at money manager Premier Miton. “It’s a bit early to call the return of inflation, but it does show that there is activity in the economy,” he said.

Perhaps they should find some better economists. Also only last night they were reporting on inflation were they not?

Manctopia: Billion Pound Property Boom……..Meet the people living and working in the eye of Manchester’s remarkable housing boom. ( BBC 2 )

Indeed it has been right in front of them as they now operate from Salford so at least they did not have to travel to do their research. Indeed this is how the BBC 5 live business presenter Sean Farrington tweeted the data.

Happy inflation day, by the way. Prices up 1% in 1yr FYI Inflation that everyone talks about came in at 1% (CPI) Inflation the @ONS prefers came in at 1.1% (CPIH) Inflation used for capping rail fares came in at 1.6% (RPI)

Down pointing backhand index

Here’s @ONS‘s view on RPI (tl;dr – it’s rubbish)

At least he bothered to say what the numbers for the Retail Price Index or RPI were and he gets credit for reporting numbers which the economics editor Faisal Islam has ignored but it touched a raw nerve with me and let me explain why below.

You might think with the BBC launching a flagship programme on property that you might mention that the RPI looks to measure housing inflation whereas CPI completely ignores it and CPIH uses fantasy imputed rents that are never paid. For those unaware the RPI includes owner-occupied housing ( it uses house prices via a depreciation component and mortgage costs). Whereas CPI has intended to include them for around 20 years now and been in a perpetual situation of the dog eating its homework. CPIH is based on the view that the truth ( rises in house prices) is inconvenient as they tend to rise too fast so they invented a fantasy where home owners charge themselves rent and use that to get a lower reading. Oh and the rents themselves are not July’s rent they are based on rents over the past 16 months or so because the series needs to be “smoothed” as it is so unreliable. I would say you really could not make it up but of course they have!

Where I agree is on the bits he goes onto which is the way that RPI is used for rail fares ( and student loans) which is a case of cherry-picking as we find ourselves paying the higher RPI but only receiving the lower CPI.

Today’s Numbers

The rises noted above were driven by several factors but one will be no surprise.

prices at the pump have started to increase as movement restrictions eased. Between June and July 2020,
petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre, to stand at 116.7 pence per litre. In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre.

I doubt anyone except the economists referred to above will have been surprised by that as negative oil price futures have been replaced by ones above US $40. Also there was this.

As government travel restrictions were eased, there were upward contributions from coach and sea fares, where prices rose between June and July 2020 by more than a year ago.

I have pulled those numbers out because this is going to be a complex and difficult area going forwards. Why? Well I was passed by several London buses yesterday and the all had “only 30 passengers” on the side so in future there is going to be a lot less output and higher inflation in that sector. Not easy to measure as the inflation will likely be in higher subsidies rather than bus,coach or rail fares. I am reminded at this point that the GDP data showed National Rail use at a mere 6%. That will have improved in July but even if we get to 50% we have a lot of inflation hidden there.

Another reason for the fall was that the summer clothing sales have been less evident so far.

Clothing and footwear, where prices overall fell by 0.7% between June and July 2020, compared with a fall of 2.9% between the same months in 2019.

Actually clothes for kids saw a price rise, do parents have any thoughts on what is going on?

prices for children’s clothes rose by 0.1% between June and July 2020 but fell by 2.6% between June and July 2019, with the stand out movements coming from clothes for children aged under four years old and from T-shirts for older boys.

There was bad news for smokers and drinkers too.

Alcoholic beverages and tobacco, where overall prices across a range of spirits increased by 0.6% between June and July 2020, but fell by 1.4% in 2019.

On the other side there was some good news.

Food and non-alcoholic beverages, with food prices falling by 0.3% this year, compared
with a rise of 0.1% a year ago

What is coming next?

Perhaps rather similar numbers.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to July 2020, unchanged from June 2020.

There is ongoing upwards pressure but it is also true that the stronger UK Pound £ ( US $1.32 as I type this ) is offsetting it.

Comment

Let me explain how we should measure inflation and the problems in the current approach. The text books say it is a continuous rise in prices which does not help much as even the actively traded oil price struggles to do that. So we measure price changes and we should do this.

  1. Measure as many as we can to represent as best we can the impact of price rises on the ordinary consumer. The use of consumer is important as it prevents a swerve I shall explain in a moment.
  2. Use mathematical formula(e) that works as best as possible and head towards using direct weights as much as we can.
  3. Do not make numbers up that do not exist ( Yes the made up fantasy rents in the officially approved CPIH I am looking at you).

The use of consumer matters because if we stay with housing costs we see Phillip Lane of the ECB recently estimate them as a third of consumer spending which is similar to the US CPI shelter measure. Yet if we use the officially approved word consumption then house price changes are an asset and go in it 0%. Do you see the problem? It is one that fantasy rents that are never paid make worse and not better and is why I spend so much time on this issue.Just for clarity rents for those who pay rent are the right measure although the UK effort at this has so much trouble they smooth it over 16 months to avoid embarrassing themselves too obviously.

Next comes the issue of the maths formula used which are Carli,Jevons and Dutot. Each have strengths and weaknesses and regular readers will have seen Andrew Baldwin and I debate them on here. In a nutshell he prefers Jevons and I Carli although you would also have seen us note that we could sort that sharpish as opposed to the 8 years going nowhere that the official UK bodies have done. The RPI now gets 43% of its data via direct weights and more of this would help to make things better. This was represented at the recent discussion at the Royal Statistical Society.

I believe, and I’m fairly similar to Tony here, that the RPI only has one real flaw. That
is the combination of the Carli index with the way that clothing prices are collected. And that could
be mended………………………Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot
more opportunity to use weighted indices and that should come on-stream in the next few years.  ( Jill Leyland)

I will simply point out that there has been a decade now to sort this out.

I hope that that gives you a picture of a debate that has gone on for a decade and have been dreadfully handled by our official bodies. I will not bore you with the details just simply point out they have lost every consultation so the latest one only involves the timing of changes which have kept being rejected ( by 10 to 1 back in 2012). It is very 1984.

Inflation measurement is not easy and let me give you an example of a problematic area from today’s numbers.

The effect came almost entirely from private dental examinations and non-NHS physiotherapy sessions, where price collectors reported that prices had risen, in part, as companies make their workplace COVID-secure;

Regular readers will know I have a big interest in athletics and sport and as part of that I have been noting reports of physiotherapy being ineffective due to Covid-19 changes. So the service is inferior. That is not easy to measure but we should measure steps backwards as well as forwards. As my dentist is able to inflict pain on me, may I point out that I am sure that is not true of her and the service will be superb…….

Meanwhile the inflation measure in the GDP numbers ( deflator) picked up inflation of 6.2% in the quarter and 7.9% for the year. Now the gap between that and the official consumer inflation measure is something for the UK Statistics Authority to investigate.

 

Another survey says UK House Prices are rising

This morning there will have been scenes at the Bank of England. Indeed there will have been jostling amongst the staff as they rush to be the one who presents the morning meeting. Whoever grabbed the gig will be facing a Governor who has a wide beaming smile as his mind anticipates raiding the well-stocked wine cellar later. Perhaps the cake trolley will be filled with everyone’s favourites as well. What will cause such happiness?

Sharp increase in July pushes house prices to
highest ever levels ( Halifax )

Unwitting passers-by may hear a murmur which sounds like “The Wealth Effects! The Wealth Effects!” because that is exactly what it is. This mentality has seeped its way through the UK establishment now as the Deputy National Statistician Jonathan Athow parroted such a line during a recent online conference on how he plans to neuter the Retail Price Index.

What are the numbers?

The Halifax reported quite a surge last month.

Following four months of decline, average house prices in July experienced their greatest month on month
increase this year, up 1.6% from June and comfortably offsetting losses in 2020. The average house price
in July is the highest it has ever been since the Halifax House Price Index began, 3.8% higher than a year
ago.

If we look at levels we get a context to the house price boom the UK has seen in recent decades as we note that an index set at 100 in 1992 was at 416.6 in July. Putting that another way the average price is now £241,604. Care is needed with such averages because they vary between different organisations quite a but partly because as you can see the numbers come in for some torture.

The standardised average price is calculated using the HPI’s mix adjusted methodology………The standardised index is seasonally adjusted using the U.S. Bureau of the Census X-11 moving-average method based on a rolling 84-month series. Each month, the seasonally adjusted figure for the same month a year ago and last month’s figure are subject to revision.

84 months!

Why?

As we switch to the question posed by Carly Simon we are told this.

The latest data adds to the emerging view that the market is experiencing a surprising spike post lockdown. As pent-up demand from the period of lockdown is released into a largely open housing market, a low supply of available homes is helping to exert upwards pressure on house prices. Supported by the government’s initiative of a significant cut in stamp duty, and evidence from households and agents
suggesting that confidence is currently growing, the immediate future for the housing market looks brighter
than many might have expected three months ago.

So we see that the Stamp Duty cut is in play so once the Chancellor has completed this morning’s round of media interviews he will receive a call from Governor Andrew Bailey to say “Well played sir!”. I have to confess that this bit has me a little bemused.

that confidence is currently growing

That is hard to square with the wave of job and pay cuts we are seeing.

Mortgages

We looked at the approvals data last week but there is also the data from the tax register.

Monthly property transactions data shows a rise in UK home sales in June. UK seasonally
adjusted residential transactions in June 2020 were 63,250 – up by 31.7% from May following the lifting
of COVID-19 lockdown measures. Quarter-on-quarter transactions were approximately 47% lower than
quarter one 2020. (Source: HMRC, seasonally-adjusted figures)

I find it odd that so many organisations continue with seasonal adjustment at a time when we are not acting as usual. But we have to suspect higher numbers again in July if we also note the trends below.

Results from the latest (June 2020) RICS Residential Market Survey point to a recovery emerging
across the market, with indicators on buyer demand, sales and new listings rallying following the
lockdown related falls. New buyer demand has moved to a net balance of +61% (compared to -7% and
-94% in April and May respectively). New instructions also rose firmly to a net balance of +42%
(compared with -22% in May). Newly agreed sales net balance has moved into positive territory for the
first time since February, with a net balance of +43% (from -34% in May)

Care is needed as that is a sentiment index with spin in play and maybe as much as the Pakistan cricket team which has picked two spinners.

If we switch to mortgage rates then the Bank of England tells us this.

The effective rates on new and outstanding mortgages were little changed in June. New mortgage rates were 1.77%, an increase of 3 basis points on the month, while the interest rate on the stock of mortgage loans was 2.16%, unchanged from May and 0.2 percentage points lower than in February.

As you can see the rate for new mortgages is quite a bit below that on the existing stock meaning that a combination of new draw downs and remortgaging is pulling the overall position lower.

Bringing this up to date we have a story of two halves where remortgages remain at extraordinary low levels but the first time buyer has to pay quite a bit more.

This week has seen several rate increases for mortgages, particularly at higher loan-to-values (LTV). Halifax, TSB, Skipton Building Society, Virgin Money and Nationwide Building Society all increased their rates during the week on 85% LTV mortgages. HSBC increased its rates on 90% LTV mortgages, but they remain among the top rates for those with a smaller mortgage deposit. ( Moneyfacts )

The organisations above may well be getting a phone call from Governor Bailey along these lines.

Whose side are you on, son?

Don’t you love your country?

Then how about getting with the program? Why don’t you jump on the team and come on in for the big win?

( Full Metal Jacket)

Indeed the whole Monetary Policy Committee seems to have mortgage rate news on speed dial.

The Committee discussed the various factors affecting the price of new mortgage lending.

They also took some time to applaud themselves.

But other factors had been pushing in the opposite direction, such that it was possible that, in the absence of the MPC’s policy action, mortgage rates would have risen somewhat at all LTV ratios.

Comment

So we see a rather surprising development which backs up what we looked at on the 29th of July from Zoopla. I think we are seeing a bit of delayed action or if you prefer something which is in fact in the ( often derided) rational expectations models where prices can rise to prepare for a larger fall.

Why? Well in the short term the efforts of the government looked at above and the Bank of England via its new Term Funding Scheme ( over £21 billion now) can work. So we have lower costs and continued pressure on mortgage rates, But as time passes the higher levels of unemployment and wages cuts have to come into play in my opinion.

Meanwhile at the upper end of New York.

Two years after selling a three-storey penthouse for $59 million, one of the most expensive sales in Manhattan at the time, the developer of a luxury building on the High Line in Manhattan has steeply discounted the remaining four apartments, with the price of one full-floor unit overlooking the elevated park dropping by more than 50%.

The units at The Getty Residences in Chelsea, designed by architect Peter Marino, had been on the market for the last three years.

The units range from a 3,312-square-foot, three-bedroom, 3 1/2-bathroom that had its price cut about 42% to $9.4 million to a 3,816-square-foot, three-bedroom, 3 1/2-bathroom apartment with a balcony dropping 43% to $13.8 million.  ( Forbes )

 

 

Are UK house prices rising again?

Today we get to look at the money supply and credit situation in the UK  But before we get there yesterday brought news to warm a central banker’s heart. From Zoopla.

The annual rate of growth edged up to 2.7% in June, after rising 0.2% on the month. Price growth is highly localised, but there is little evidence of material declines at regional or city levels, although a small proportion of local areas are seeing price declines of up to -0.2%.

If the Bank of England had any bells they would be ringing right now with Governor Bailey stroking a cat whilst smiling. As to why? We are told this.

Buyer demand has risen strongly since housing markets reopened, as shown on the purple bar in the chart below. Although the number of new homes being listed for sale has also risen, it hasn’t increased by the same margin. This creates an imbalance of low supply and high demand – and contributes to house price growth.

So simply more buyers than sellers then. To be specific the purple bar in their chart shows a 25.3% imbalance.

This imbalance is most stark in cities in the North of England, including Manchester, Liverpool and Sheffield, and it is notable that these are in the top six cities for levels of annual house price growth.

I note a mention of Gloucestershire seeing a mini boom. The 20 cities sampled show the nearest ( Bristol) being one of the weaker areas albeit having more demand than 2019 unlike Belfast and Edinburgh. Interestingly London looks quite strong and is fifth on the list. Another house price rally in London would be a turn up for the books and here is Zoopla’s explanation.

The biggest change in the market spurred by the Chancellor’s announcement of a stamp duty holiday for England and Northern Ireland has been seen in London. Sales jumped by 27% in the weeks after the change. Given the higher average house prices in London and the South East, these are where the largest benefits from the stamp duty holiday will be felt. The stamp duty holiday will continue to support demand in these higher value markets.

Have they managed to bail it out again? Well it would appear that they intend to keep trying. From the Financial Reporter.

The Government is reportedly drawing up plans to extend the Help to Buy scheme due to Covid-19 delays.

According to the FT, ministers have been asked to extend the Scheme beyond its planned December deadline to support buyers whose purchases have been delayed by the pandemic.

The scheme is due to end in April 2021 and a new version of the scheme will run from April 2021 to March 2023, for first-time buyers only. If the original scheme ends when planned, sales transactions will need to be agreed by December 2020.

Help to Buy seems to be covered by The Eagles in Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

There is another route funded by the Bank of England and Nicola Duke or @NicTrades has kindly highlighted it.

I got my first mortgage in 1997 and the 2 yr fixed rate was 7.7% Today I got a fixed rate at 1.13% Amazing………..2yrs – the 5 yr is 1.3 and 10yr 1.44

As the band Middle of the Road put it.

Ooh wee chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Mortgages

This morning’s Bank of England release would also have cheered Governor Andrew Bailey.

On net, households borrowed an additional £1.9 billion secured on their homes. This was higher than the £1.3 billion in May but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected both more new borrowing by households, and lower repayments. Gross new borrowing was £15.8 billion in June, below the pre-Covid February level of £23.4 billion.

Since the introduction of the Funding for Lending Scheme in the summer of 2012 they have been targeting net mortgage lending in my opinion. This time around they have kept is positive and as you can see it appears to be rising again. It is much less than earlier this year but after the credit crunch we saw negative net lending for some time. Even when the FLS was introduce it took until 2013 for there to be a return to positive net mortgage lending.

Approvals still look weak.

The number of mortgages approved also increased in June. The number of mortgage approvals for house purchase increased strongly, to 40,000, up from 9,300 in May. Nevertheless, approvals were 46% below the February level of 73,700 (Chart 3). Approvals for remortgage (which capture remortgaging with a different lender) have also increased, to 36,900; but they remain 30% lower than in February.

At these levels remortgage if you can is my suggestion, although not advice as that has a specific meaning in law.

Consumer Credit

The Governor will be chipper about these numbers as well and presenting them at the monthly morning meeting will not have been potentially career ending unlike the last few.

Household’s consumer credit borrowing recovered a little in June, following three particularly weak months (Chart 2). But it remains significantly weaker than pre-Covid. On net, people repaid £86 million of consumer credit in June following repayments totalling £15.6 billion over the previous three months. The small net repayment contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows in recent months meant that the annual growth rate was -3.6%, the weakest since the series began in 1994.

We have discovered ( via large revisions) that these numbers are not accurate to £86 million so substantial repayments have been replaced by flatlining and the junior at the meeting would do well to emphasise this.

The smaller net repayment compared to May reflected an increase in gross borrowing. Gross borrowing was £17.7 billion, up from £13.6 billion in May, but this was still below the average £25.5 billion a month in the six months to February 2020. Repayments on consumer borrowing were broadly stable in June, at £18.1 billion, below their pre-Covid February level of £24.6 billion.

So gross borrowing is picking up.

As a point of note it is the credit card sector which really felt the squeeze.

Within total consumer credit, on net there was a further small repayment of credit card debt (£248 million) and a small amount of additional other borrowing (£162 million). The annual growth rate for both credit cards and other borrowing fell back a little further, to -11.6% and 0.2% respectively.

Maybe it is because in a world of official ZIRP (a Bank Rate of 0.1%) the reality is this.

The cost of credit card borrowing fell from 18.36% in May to 17.94% in June, also the lowest rate since the series began in 2016.

By the way if we switch to the quoted series the overdraft rate is 31,53%. Mentioning that at the Bank of England will be career ending as it was an enquiry at the FCA ( boss one Andrew Bailey) that was so poor it drove them higher as opposed to lower.

Comment

Can the UK housing market leap Lazarus style from its grave one more time? Well the UK establishment are doing everything that they can to prop it up. Meanwhile the business lending that the policies are supposed to boost is doing this.

Overall, PNFCs borrowed an additional £0.4 billion of loans in June. Strong borrowing by small and medium sized businesses (SMEs) was offset by repayment by large businesses.

The borrowing by smaller businesses would ordinarily be really good except we know a lot of it will be out of desperation and of course as the bit I have highlighted shows is nothing to do with the Bank of England.

Small and medium sized businesses continued borrowing a significant amount from banks. In June, they drew down an extra £10.2 billion in loans, on net, as gross borrowing remained strong. This was weaker than in May (£18.0 billion), but very strong compared to the past. Before May, the largest amount of net borrowing by SMEs was £0.6 billion, in September 2016. The strong flow in June meant that the annual growth rate rose further, to 17.4%, the strongest on record (Chart 5). This strength is likely to reflect businesses drawing down loans arranged through government-supported schemes such as the Bounce Back Loan Scheme.

This bit is really curious.

Large non-financial businesses, in contrast, repaid a significant amount of loans in June. The net repayment, of £16.7 billion, was the largest since the series began in 2011 and followed a net repayment of £13.0 billion in May.

So we see a complex picture in an economy which is now awash with cash. If we switch to the money supply then it ( M4 or Broad Money) has risen by 11.9% over the past year. Of this around £174 billion has come in the last four months.

Me on The Investing Channel

How far will UK house prices fall?

Sometimes you spot something that you cannot let pass and that has happened this morning. There is an interesting article in the Financial Times Alphaville section by a couple of portfolio manager’s at Man Group suggesting inflation is coming. So far so good with the only issue being they are a couple of months or so behind us on here. But there is a catch as I have replied.

Thank you for the article. However I do have an issue with this.

“We are unprepared for inflation and few of us alive have ever experienced what it’s like to trade in an inflationary environment”

Anyone who has bought a house in the UK and quite a few other places has learned to do this as prices rose so much.  It is simply that (supported by the FT economics editor)it was decided by the establishment to exclude such things from the inflation data. Then when forced to try to reflect it they use fantasy imputed rents which are never paid.

In the Euro area they continue to ignore this subject in their inflation measure CPI ( HICP) as even some ECB policy makers have noted recently.

So yes there has been inflation it is just that the major inflation indices have been designed to look away now.

This is an issue which I would shout from the rooftops if I could as it explains why so many feel that inflation indices do not reflect their own circumstances. As an example ECB policy maker Phillip Lane pointed out that when asked people thought that housing costs were 33% of their expenditure but that the Euro area consumer inflation measure (HICP) only counted 6% or so ( actual rents). This has different impacts as Italy has seen very little house price growth but the Netherlands had an annual rate of 8% in May compared to this.

In May, HICP-based prices of goods and services in the Netherlands were 1.1 percent up year-on-year, versus 1.0 percent in April.

Even Statistics Netherlands points it out.

Unlike the CPI, the HICP does not take into account the costs related to home ownership.

UK House Prices

After years and indeed decades of house price rises in the UK ( there were some falls in 2008/09 but the last major fall was 1990-92). We now face a situation which will send a chill down the spine of the Bank of England so let me hand you over to The Nationwide from earlier this week.

UK house prices fell by 1.4% in the month of June, after
taking account of seasonal effects, following a 1.7% fall in
May. On a seasonally adjusted basis, house prices in June
were 3.2% lower than in April.

That will cause scenes at the Bank of England and that is before we get to this.

Annual house price growth slowed to -0.1%, from 1.8% in
May. This is the first time that annual house price growth has been in negative territory since December 2012.

There is significance in that timing because that was the time the Funding for Lending Scheme was introduced. It was badged as being for smaller businesses for deflection but quickly saw mortgage rates fall around 0.9% by my calculations and later the effect went as high as 2% according to the Bank of England. By that route net mortgage lending went positive in the summer of 2013 and the house price carousel started to build again.

London

As a London boy ( lives in Battersea, born at Waterloo) this especially caught my eye in the Nationwide report.

Annual house price growth in London edged higher, with
prices up 2.1% in Q2. Average prices in the capital are now
just 3% below the all-time highs recorded in Q1 2017 and
55% above their 2007 levels (UK prices remain 19% higher
than their 2007 peak).

Not only do we get an idea of the scale of the house price move that our official statisticians have turned their blind eye too.But then we have the claim that there is annual house price growth in London. I am rather dubious based on this from Daniel Farey-Jones who has been looking at actual rents as shown below.

Bloomsbury, down 30% to £1,517………Belgravia, down 20% to £4,312…………Mayfair, down 31%

We are in the Des Res zone so let us have some examples from more “street” areas.

Elephant (& Castle), down 20%………Marylebone, down 20%……..Borough Market, down 33%…….Fitzrovia, down 25%……Clerkenwell, down 20%

I think we get the idea and there is even something for Gerry Rafferty fans.

Baker Street, down 28%
You used to think that it was so easy
You used to say that it was so easy
But you’re trying, you’re trying now
Another year and then you’d be happy
Just one more year and then you’d be happy
But you’re crying, you’re crying now.

These are to some extent anecdotes and there will be bias in the selection but even so there is a clear message which does not sit well with the Nationwide claim about house price rises in London. At a minimum some renters may be looking at selling. That of course has its own issues with as we noted with the Bank of England data on Monday.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

The Bank of England

There have been several speeches this week and one from Jonathan Haskel was rather downbeat.

and in my view, risks skewed to the downside
concerning employment and more medium-term economic adjustments

That is a rather curious response to the data being better than he expected but remember he was called from an Ivory Tower. But for out house price purpose today there was this.

in March we also revived our term funding
scheme to reinforce the pass-through of lower interest rates by temporarily allowing banks access to loans from
the Bank of England at close to Bank Rate.

Ah “temporarily!” We know what that means. I have spared you the section on small business lending as I covered that earlier. The reality will be that this will turn up in the mortgage market. So we have a push me pull me situation with moves like this and on the other side banks restricting credit for more risky ( lower equity or if you prefer higher loan to value) mortgage lending.

Another policy maker Chief Economist Andy “loose cannon on the decks” Haldane put it like this.

This would take the Bank’s balance sheet to around 45% of (2019) UK GDP by the
year-end, more than double its previous high-water mark . It would take the Bank’s balance sheet
to almost double its highest-ever previous level relative to the Government’s net debt stock (Chart 17).

Comment

We see a familiar situation of economic circumstances pushing UK house prices lower with the Bank of England desperately trying to resist it. There are also other factors at play as we note this from the Jonathan Haskel speech.

Whilst the pandemic has caused hardship for many, I suspect there are at least some who, perhaps secretly, are
rather enjoying working from home………..On the employer side, for firms whose workers can largely work
from home, I’m sure many are now asking themselves: what’s the point of paying sky-high rents simply in order
to be located next door to another firm who is paying sky-high rents?

As to this bit many will be doubtful.

Coming to work however does have quite a bit of value.

Oh and here is one of the clearest cases I can think of covering “He would say that wouldn’t he?”

I want to join my colleagues
on the MPC in saying a few words about why quantitative easing (QE) is not a threat to central bank
independence.

Back to house prices there is a possible ace in the pack especially for London from this.

London (CNN)The United Kingdom said Wednesday it would offer a path to citizenship for eligible Hong Kong residents and condemned China’s new security law as a threat to the city’s freedom.

Apart from that I would expect house prices to shift around 10% lower as we wait to see what happens next.

 

The ECB bails out the banks yet again, the Euro area economy not so much

One of the battles in economics is between getting data which is timely and it being accurate and reliable. Actually we struggle with the latter points full stop but especially if we try to produce numbers quickly. As regular readers will be aware we have been observing this problem in relation to the Markit Purchasing Manager Indices for several years now. They produce numbers which if this was a London gangster movie would be called “sharpish” but have missed the target on more than a few occasions and in he case of the Irish pharmaceutical cliff their arrow not only missed the target but the whole field as well.

Things start well as we note this.

The eurozone economic downturn eased markedly
for a second successive month in June as
lockdowns to prevent the spread of the coronavirus
disease 2019 (COVID-19) outbreak were further
relaxed, according to provisional PMI® survey data.
The month also saw a continued strong
improvement in business expectations for the year
ahead.

As it is from the 12th to the 22nd of this month it is timely as well but then things go rather wrong.

The flash IHS Markit Eurozone Composite PMI rose
further from an all-time low of 13.6 seen back in
April, surging to 47.5 in June from 31.9 in May. The
15.6-point rise was by far the largest in the survey
history with the exception of May’s record increase.
The latest gain took the PMI to its highest since
February, though still indicated an overall decline in
business output.

Actually these numbers if we note the Financial Times wrong-footed more than a few it would appear.

The rise in the eurozone flash Composite PMI in June confirms that economic output in the region is recovering rapidly from April’s nadir as restrictions are progressively eased. ( Capital Economics )

Today’s PMI numbers provide further evidence of what initially looks like a textbook V-shaped recovery. As much as more than a month of (full) lockdowns had sent economies into a standstill, the gradual reopenings of the last two months have led to a sharp rebound in activity. ( ING Di-Ba)

The latter is an extraordinary effort as a number below 50 indicates a further contraction albeit with a number of 47.5 a minor one. So we have gone enormous contraction , what would have been called an enormous contraction if they one before had not taken place and now a minor one. But the number now has to be over 50 as the economy picks up and this below is not true.

Output fell again in both manufacturing and
services, the latter showing the slightly steeper rate
of decline

On a monthly basis output rose as it probably did at the end of last month, it is just that it is doing so after a large fall. The one number which was positive was still way too low.

Flash France Composite Output Index) at 51.3
in June (32.1 in May), four-month high.

For what it is worth the overall view is as follows.

We therefore continue to expect GDP to slump by over 8% in 2020 and, while the recovery may start in the third quarter, momentum could soon fade meaning it will likely
take up to three years before the eurozone regains
its pre-pandemic level of GDP.

Actual Data

From Statistics Netherlands.

In May 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 7.7 percent up on the same month last year. This price increase is higher than in the previous months.

Well that will cheer the European Central Bank or ECB. Indeed ECB President Lagarde may have a glass of champagne in response to this.

 In May 2020, house prices reached the highest level ever. Compared to the low in June 2013, house prices were up by 47.8 percent on average in that month.

Staying with the Netherlands and switching to the real economy we see this.

According to figures released by Statistics Netherlands (CBS), in April 2020 consumers spent 17.4 percent less than in April 2019. This is by far the largest contraction in domestic household consumption which has ever been recorded by CBS. Consumers mainly spent less on services, durable goods and motor fuels; on the other hand, they spent more on food, beverages and tobacco.

If we try to bring that up to date we see that if sentiment is any guide things have improved but are still weak.

At -27, the consumer confidence indicator in June stands far below its long-term average over the past two decades (-5). The indicator reached an all-time high (36) in January 2000 and an all-time low (-41) in March 2013.

Moving south to France we were told this earlier today.

In June 2020, the business climate has recovered very clearly, in connection with the acceleration of the lockdown exit. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 18 points, its largest monthly increase since the start of the series (1980).

The jump is good news for the French economy although the rhetoric above does not match the detail.

At 78, the business climate has exceeded the low point reached in March 2009 (70), but remains far below its long-term average (100).

The situation is even worse for employment.

At 66, the employment climate still remains far below its May 2009 low (73), and, a fortiori, its long-term average (100).

Oh and staying with France I know some of you like to note these numbers.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Just as a reminder the UK measuring rod is different and tends to be around 4% of GDP lower. But of course both measures will be rising quickly in both France and the UK.

Comment

Let me now switch to a speech given earlier today by Philip Lane of the ECB.

 Euro area output contracted by a record 3.6 percent in the first quarter of the year and is projected to decline by a further 13 percent in the second quarter. While growth will partially rebound in the second half of this year, output is projected to return to the level prevailing at the end of 2019 only at the end of 2022.

In fact all of that is open to doubt as the first quarter numbers will be revised over time and as discussed above we do not know where we are right now. The forecasts are not realistic but manufactured to make other criteria such as the debt metrics look better than otherwise.

Also there is a real problem with the rhetoric below which is the cause of the policy change which was the Euro area economy slowing.

Thanks to the recalibration of our monetary policy measures announced in September 2019 – namely the cut in our deposit facility rate, enhanced forward guidance, the resumption of net asset purchases under the asset purchase programme (APP) and the easing of TLTRO III pricing – sizeable monetary accommodation was already in place when Europe was confronted with the COVID-19 shock.

As that was before this phase he is trying to hide the problem of having a gun from which nearly all the bullets have been fired. If we cut through the waffle what we are seeing are yet more banking subsidies.

The TLTRO programme complements our asset purchases and negative interest rate policy by ensuring the smooth transmission of the monetary policy stance through banks.

How much well here was @fwred last week.

ECB’s TLTRO-III.4 : €1308bn The Largest Longer Term Refinancing Operation ever………Banks look set to benefit, big time. All TLTRO-III will have an interest rate as low as -1% between Jun-20 and Jun-21, resulting in a gross transfer to banks of around €15bn. Most banks should qualify. Add tiering and here you are: from NIRP to a net transfer to banks!

So the banks get what they want which is interest-rate cuts to boost amongst other things their mortgage books which is going rather well in the Netherlands. Then when they overdose on negative interest-rates they are bailed out, unlike consumers and businesses. Another sign we live in a bankocracy.

Apparently the economy will win though says the judge,jury and er the defence and witness rather like in Blackadder.

An illustrative counterfactual exercise by ECB staff suggests that the TLTRO support in removing tail risk would be in the order of three percentage points of euro area real GDP growth in cumulative terms over 2020-22.

Austria

I nearly forgot to add that Austria is issuing another century bond today and yes I do mean 100 years. Even more extraordinary is that the yield looks set to be around 0.9%.

The Investing Channel

 

 

Can US house prices bounce?

The US housing market is seeing two tsunami style forces at once but in opposite directions. The first is the economic impact of the Covid-19 virus pandemic on both wages (down) and unemployment (up). Unfortunately the official statistics released only last week are outright misleading as you can see below.

Real average hourly earnings increased 6.5 percent, seasonally adjusted, from May 2019 to May 2020.
The change in real average hourly earnings combined with an increase of 0.9 percent in the average
workweek resulted in 7.4-percent increase in real average weekly earnings over this period.

We got a better idea to the unemployment state of play on Thursday as we note the scale of the issue.

The advance unadjusted number for persons claiming UI benefits in state programs totaled 18,919,804, a decrease of 178,671 (or -0.9 percent) from the preceding week.

The only hopeful bit is the small decline. Anyway let us advance with our own view is that we will be seeing much higher unemployment in 2020 although hopefully falling and falling real wages.

The Policy Response

The other tsunami is the policy response to the pandemic.

FISCAL STIMULUS (FEDERAL) – The U.S. House of Representatives passed a $2.2 trillion aid package – the largest in history – on March 27 including a $500 billion fund to help hard-hit industries and a comparable amount for direct payments of up to $3,000 to millions of U.S. families.

That was the Reuters summary of the policy response which has been added to in the meantime. In essence it is a response to the job losses and an attempt to resist the fall in wages.

Next comes the US Federal Reserve which has charged in like the US Cavalry. Here are their words from the report made to Congress last week.

Specifically, at two meetings in March, the FOMC lowered the target range for the federal funds rate by a total of 1-1/2 percentage points, bringing it to the current range of 0 to 1/4 percent.

That meant that they have now in this area at least nearly fulfilled the wishes of President Trump. They also pumped up their balance sheet.

The Federal Reserve swiftly took a series of policy actions to address these developments. The FOMC announced it would purchase Treasury securities and agency MBS in the amounts needed to ensure smooth market functioning and the effective transmission of monetary policy to broader financial conditions. The Open Market Desk began offering large-scale overnight and term repurchase agreement operations. The Federal Reserve coordinated with other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements and announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with additional central banks.

Their explanation is below.

 Market functioning deteriorated in many markets in late February and much of March, including the critical Treasury and agency MBS markets.

Let me use my updated version of my financial lexicon for these times. Market function deteriorated means prices fell and yields rose and this happening in the area of government and mortgage borrowing made them panic buy in response.

Mortgage Rates

It seems hard to believe now but the US ten-year opened the year at 1.9%, Whereas now after the recent fall driven by the words of Federal Reserve Chair Jerome Powell it is 0.68%. Quite a move and it means that it has been another good year for bond market investors. The thirty-year yield is 1.41% as we note that there has been a large downwards push as we now look at mortgage rates.

Let me hand you over to CNBC from Thursday.

Mortgage rates set new record low, falling below 3%

How many times have I ended up reporting record lows for mortgage rates? Anyway we did get some more detail.

The average rate on the popular 30-year fixed mortgage hit 2.97% Thursday, according to Mortgage News Daily……..For top-tier borrowers, some lenders were quoting as low as 2.75%. Lower-tier borrowers would see higher rates.

Mortgage Amounts

CNBC noted some action here too.

Low rates have fueled a sharp and fast recovery in the housing market, especially for homebuilders. Mortgage applications to purchase a home were up 13% annually last week, according to the Mortgage Bankers Association.

According to Realtor.com the party is just getting started although I have helped out with a little emphasis.

Meanwhile, buyers who still have jobs have been descending on the market en masse, enticed by record-low mortgage interest rates. Rates fell below 3%, to hit an all-time low of 2.94% for 30-year fixed-rate loans on Thursday, according to Mortgage News Daily.

Mortgage demand is back on the rise according to them.

For the past three weeks, the number of buyers applying for purchase mortgages rose year over year, according to the Mortgage Bankers Association. Applications shot up 12.7% annually in the week ending June 5. They were also up 15% from the previous week.

Call me suspicious but I thought it best to check the supply figures as well.

Mortgage credit availability decreased in May according to the Mortgage Credit Availability Index (MCAI)………..The MCAI fell by 3.1 percent to 129.3 in May. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.

So a decline but still a lot higher than when it was set at 100 in 2012. The recent peak at the end of last year was of the order of 185 and was plainly singing along to the Outhere Brothers.

Boom boom boom let me here you say way-ooh (way-ooh)
Me say boom boom boom now everybody say way-ooh (way-ooh)

What about prices?

As the summer home-buying season gets underway, median home prices are surging. They shot up 4.3% year over year as the number of homes for sale continued to dry up in the week ending June 6, according to a recent realtor.com® report. That’s correct: Prices are going up despite this week’s announcement that the U.S. officially entered a recession in February.

Comment

As Todd Terry sang.

Something’s goin’ on in your soul

The housing market is seeing some surprises although I counsel caution. As I read the pieces about I note that a 4.3% rise is described as “shot up” whereas this gives a better perspective.

While that’s below the typical 5% to 6% annual price appreciation this time of year, it’s nearly back to what it was before the coronavirus pandemic. Median prices were rising 4.5% in the first two weeks of March before the COVID-19 lockdowns began. Nationally, the median home list price was $330,000 in May, according to the most recent realtor.com data.

But as @mikealfred reports there is demand out there.

Did someone forget to tell residential real estate buyers about the recession? I’m helping my in-laws buy a house in Las Vegas right now. Nearly every house in their price range coming to market sees 40+ showings and 5+ offers in the first few days. Crazy demand.

Of course there is the issue as to at what price?

So there we have it. The Federal Reserve will be happy as it has created a demand to buy property. The catch is that it is like crack and if they are to keep house prices rising they will have to intervene on an ever larger scale. For the moment their policy is also being flattered by house supply being low and I doubt that will last. To me this house price rally feels like trying to levitate over the edge of a cliff.

Podcast

 

 

 

Where next for UK house prices?

Today we are going to start by imagining we are central bankers so we will look at the main priority of the Bank of England  which is UK house prices. Therefore if you are going to have a musical accompaniment may I suggest this.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me…  ( Yazz0(

In fact it fits the central banking mindset as you can see below. Even in economic hard times the only way is up.

Now we may not know, huh,
Where our next meal is coming from,
But with you by my side
I’ll face what is to come.

From the point of view of Threadneedle Street the suspension of the official UK house price index is useful too as it will allow the various ostriches to keep their head deep in the sand. This was illustrated in the Financial Stability Report issued on the 7th of May.

As a result, the fall in UK property prices incorporated in
the desktop stress test is less severe than that in the 2019 stress test.

Yes you do read that right, just as the UK economy looked on the edge of of substantial house price falls the Bank of England was modelling weaker ones!

Taking these two effects together, the FPC judges that a fall of 16% in UK residential property prices could be
consistent with the MPR scenario. After falling, prices are then assumed to rise gradually as economic activity in the
UK recovers and unemployment falls in the scenario.

Whether you are reassured that a group of people you have mostly never heard of forecast this I do not know, but in reality there are two main drivers. The desire for higher house prices which I will explain in the next section and protection of “My Precious! My Precious!” which underpins all this.

Given the loan to value distribution on banks’ mortgage books at the end of 2019, a 16% house price fall would not be likely to lead to very material losses in the event of default.

So the 16% was chosen to make the banks look safe or in central banking terms “resilient”

Research

I did say earlier that I would explain why central bankers are so keen on higher house prices, so here is the latest Bank Underground post from yesterday.

Our results also suggest that the behaviour of house prices affects how monetary policy feeds through. When house prices rise, homeowners feel wealthier and are more able to refinance their mortgages and release housing equity in order to spend money on other things. This can offset some of the dampening effects of an increase in interest rates. In contrast, when house prices fall, this channel means an increase in interest rates has a bigger contractionary effect on the economy, making monetary policy more potent.

Just in case you missed it.

Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

So even the supposedly independent Bank Underground blog shows that “you can take the boy out of the city but not the city out of the boy” aphorism works as we see it cannot avoid the obsession with house prices. The air of unreality is added to by this.

 we look at the response of non-durable, durable and total consumption in response to a 100bp increase in interest rates.

The last time we had that was in 2006/07 so I am a little unclear which evidence they have to model this and of course many will have been in their working lives without experiencing such a thing. Actually it gives us a reason why it is ever less likely to happen with the present crew in charge.

When the share of constrained households is large, interest rate rises have a larger absolute impact than interest rate cuts.

Oh and is that a confession that the interest-rate cuts have been ineffective. A bit late now with Bank Rate at 0.1%! I would also point out that I have been suggesting this for some years now and to be specific once interest-rates go below around 1.5%.

Reasons To Be Cheerful ( for a central banker )

Having used that title we need a part one,two and three.

1.The UK five-year Gilt yield has gone negative in the last week or so and yesterday the Bank of England set a new record when it paid -0.068% for a 2025 Gilt. As it has yet to ever sell a QE bond that means it locked in a loss. But more importantly for today’s analysis this is my proxy for UK fixed-rate mortgages. So we seem set to see more of this.

the average rate on two and five year fixed deals have fallen to lows not seen since Moneyfacts’ electronic records began in July 2007. The current average two year fixed mortgage rate stands at just 2.09% while the average rate for a five year fixed mortgage is 2.35%. ( Moneyfacts 11th May)

2. The institutional background for mortgage lending is strong. The new Term Funding Scheme which allows banks to access funding at a 0.1% Bank Rate has risen to £11.9 billion as of last week’s update. Also there is the £107.1 billion remaining in the previous Term Funding Scheme meaning the two add to a tidy sum even for these times. Plus in a sign that bank subsidies never quite disappear there is still £3 billion of the Funding for Lending Scheme kicking around. These schemes are proclaimed as being for small business lending but so far have always “leaked” into the mortgage market.

3. The market is now open. You might reasonably think that a time of fears over a virus spreading is not the one to invite people into your home but that is apparently less important than the housing market.  Curious that you can invite strangers in but not more than one family member or friend.

News

Zoopla pointed out this earlier.

Buyer demand across England spiked up by 88% after the market reopened, exceeding pre-lockdown levels in the week to 19th May; this jump in demand in England is temporary and expected to moderate in the coming weeks

Of course an 88% rise on not very much may not be many and the enthusiasm seemed to fade pretty quickly.

Some 60% of would-be home movers across Britain said they plan to go ahead with their property plans, according to a new survey by Zoopla, but 40% have put their plans on hold because of COVID-19 and the uncertain outlook.

Actually the last figure I would see as optimistic right now.

Harder measures of market activity are more subdued – new sales agreed in England have increased by 12% since the market reopened, rising from levels that are just a tenth of typical sales volumes at this time of year.

Finally I would suggest taking this with no just a pinch of salt but the full contents of your salt cellar.

The latest index results show annual price growth of +1.9%. This is a small reduction in the annual growth rate, from +2% in March.

Comment

So far we have been the very model of a modern central banker. Now let us leave the rarified air of its Ivory Tower and breathe some oxygen. Many of the components for a house price boom are in place but there are a multitude of catches. Firstly it is quite plain that many people have seen a fall in incomes and wages and this looks set to continue. I know the travel industry has been hit hard but British Airways is imposing a set of wage reductions.

Next we do not know how fully things will play out but a trend towards more home working and less commuting seems likely. So in some places there may be more demand ( adding an office) whereas in others it may fade away. On a personal level I pass the 600 flats being built at Battersea Roof Garden on one of my running routes and sometimes shop next to the circa 500 being built next to The Oval cricket ground. Plenty of supply but they will require overseas or foreign demand.

So the chain as Fleetwood Mac would put it may not be right.

You would never break the chain (Never break the chain)

We should finally see lower prices but as to the pattern things are still unclear. So let me leave you with something to send a chill down the spine of any central banker.

Chunky price cut for Kent estate reports
@PrimeResi as agent clips asking price from £8m to £5.95m (26%). (£) ( @HenryPryor)

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