Where next for UK house prices?

This week has opened in what by recent standards is a relatively calm fashion. Well unless you are involved in the crude oil market as prices have taken another dive. That does link to the chaos in the airline industry where Easyjet has just grounded all its fleet. Although that is partly symbolic as the lack of aircraft noise over South West London in the morning now gives a clear handle on how many were probably flying anyway. So let us take a dip in the Bank of England’s favourite swimming pool which is UK house prices.

Bank of England

It has acted in emergency fashion twice this month and the state of play is as shown below.

Over recent weeks, the MPC has reduced Bank Rate by 65 basis points, from 0.75% to 0.1%, and introduced a Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME). It has also announced an increase in the stock of asset purchases, financed by the issuance of central bank reserves, by £200 billion to a total of £645 billion.

If we look for potential effects then the opening salvo of an interest-rate cut has much less impact than it used to as whilst there are of course variable-rate mortgages out there the new mortgage market has been dominated by fixed-rates for a while now. The next item the TFSME is more significant as both its fore-runners did lead to lower mortgage-rates. Also the original TFS and its predecessor the Funding for Lending Scheme or FLS lead to more money being made available to the mortgage market. This helped net UK mortgage lending to go from being negative to being of the order of £4 billion a month in recent times. The details are below.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 10% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).

We have seen this sort of hype about lending to smaller businesses before so let me give you this morning;s numbers.

In net terms, UK businesses borrowed no extra funds from banks in February, and the annual growth rate of bank lending to UK businesses remained at 0.8%. Within this, the growth rate of borrowing from SMEs picked up to 0.7%, whilst borrowing from large businesses remained at 0.9%.

It is quite unusual for it to be that good and has often been in the other direction.

In theory the extra bond purchases (QE) should boost the market although it is not that simple because if the original ones had worked as intended we would not have seen the FLS in the summer of 2012.

Today’s Data

It is hard not to have a wry smile at this.

Mortgage approvals for house purchase (an indicator for future lending) had continued to rise in February, reaching 73,500 . This took the series to its highest since January 2014, significantly stronger than in recent years. Approvals for remortgage also rose on the month to 53,400. Net mortgage borrowing by households – which lags approvals – was £4.0 billion in February, close to the £4.1 billion average seen over the past six months. The annual growth rate for mortgage borrowing picked up to 3.5%.

As you can see the previous measures to boost smaller business lending have had far more effect on mortgage approvals and lending. Also there is another perspective as we note the market apparently picking up into where we are now.

In terms of mortgage rates in February the Bank of England told us this.

Effective rates on new secured loans to individuals decreased 4bps to 1.81%.

So mortgages were getting slightly cheaper and the effective rate for the whole stock is now 2.36%.

The Banks

There is a two-way swing here. Help was offered in terms of a three-month payment holiday which buys time for those unable to pay although in the end they will still have to pay but for new loans we have quite a different situation. From The Guardian on Thursday.

Halifax, the UK’s biggest mortgage lender, has withdrawn the majority of the mortgages it sells through brokers, including all first-time buyer loans, citing a lack of “processing resource”.

In a message sent to mortgage brokers this morning, Halifax said it would no longer offer any mortgages with a “loan-to-value” (LTV) of more than 60%. In other words, only buyers able to put down a 40% deposit will qualify for a loan.

Other lenders have followed and as Mortgage Strategy points out below there are other issues for them and prospective buyers.

Mortgage lenders are in talks with ministers over putting the housing market in lockdown and transactions on hold, according to reports.

Lenders have been withdrawing products and restricting loan-to-values as they are unable to get valuers to do face-to-face inspections.

Property transactions are failing because some home owners in the chain are in isolation and unable to move house or complete on purchases.

Removals firms have been advised by their trade body not to operate, leaving movers in limbo.

So in fact even if the banks were keen to lend there are plenty of issues with the practicalities.

Comment

The next issue for the market is that frankly a lot of people are now short of this.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh ( The Adventures of Stevie V )

I have been contacted by various people over the past few days with different stories but a common theme which is that previously viable and successful businesses are either over or in a lot of trouble. They will hardly be buying. Even more so are those who rent a property as I have been told about rent reductions too if the tenant has been reliable just to keep a stream of income. Now this is personal experience and to some extent anecdote but it paints a picture I think. Those doing well making medical equipment for example are unlikely to have any time to themselves let alone think about property.

Thus we are looking at a deep freeze.

Ice ice baby
Ice ice baby
All right stop ( Vanilla Ice)

Whereas for house prices I can only see this for now.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Podcast

A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

What will happen to house prices now?

I thought that I would end this week with a topic that we can look at from many angles. For example the first question asked by the bodies that have dominated this week, central banks, is what will this do to house prices? Well in ordinary times this weeks actions would have quite an impact and I am including in this expectations of future action by the Bank of England and European Central Bank (ECB). For newer readers this is because bond yields and their consequent impact on mortgage rates move these days ahead of policy action and sometimes well ahead. Of course, maybe one day central banks will fail to ease but such beliefs rely on ignoring the history of the credit crunch so far where such events were described rather aptly by Muse with supermassive black hole and monetary tightening was described by Oasis with Definitely Maybe,or perhaps better still by Rod Stewart with I Was Only Joking.

Bond Yields

The world has moved on even since I looked at this yesterday. Perhaps even faster than I suggested it might! Well played to any reader either long bonds or long a bond fund as you have had an excellent 2020. Sadly those on the other side of the balance sheet looking for an annuity are in the reverse situation. Not many places will put it like this but the US Federal Reserve has completely lost control of events this week and has learnt nothing from the mistakes of the Bank of Japan and ECB.

What I mean by this is that the US ten-year yield is now 0.78%. It was only this week that they went below 1% for the first time ever and last week we were looking at it hitting new lows like 1.3%. It started the year at 1.9%. This has been added to by the US Long Bond which has soared overnight reducing the thirty-year yield to 1.36% or 0.21% lower. What this means is that the already much lower US mortgage rates are going much lower still and I would quote some but I am afraid they simply cannot keep up with the bond market surge. Although I do note that Mortgage Daily News is wondering if things will be juiced even more?!

One of them suggested mortgage rates have more room to move lower if the Fed decides to start reinvesting its first $20bln a month of MBS proceeds again (which it currently allows to “roll off” the balance sheet). ( MBS = Mortgage Backed Securities )

As I am typing this events are getting even more extraordinary so let me hand you over to Bloomberg.

U.S. 10-year Treasury yield drops below 0.7%

I have experienced these sort of moves with bond markets falling but cannot recall them ever rallying like this so it is a once in a lifetime move.

You may ask yourself
What is that beautiful house?
You may ask yourself
Where does that highway go to?
And you may ask yourself
Am I right? Am I wrong?
And you may say yourself
“My God! What have I done?” ( Talking Heads )

So I now expect another sharp move lower in US mortgage rates and I expect this to be followed by much of the world. For example in my home country the UK mortgages are mostly fixed-rate these days ( in fact over 90%) so the five-year Gilt yield gives us a marker on what is likely to happen next. It has fallen to 0.14% this morning and so UK mortgages will be seeing more of this from Mortgage Strategy.

Vida Homeloans has announced a series of rate cuts to its residential and buy-to-let mortgage ranges……

Still in the residential range, Vida’s 75 per cent LTV five-year fix has gone down from 5.39 per cent to 4.99 per cent, and its 65 per cent LTV five-year fix from 5.49 per cent to 5.04 per cent.

In the BTL range, the 75 per cent LTV five-year fix has been cut from 4.64 per cent to 4.04 per cent.

I have picked them out because they are specialist lenders for non standard credit. You know the sort of thing we were promised would never happen again. Also we read about turning Japanese but we seem to be turning Italian as payment holidays appear.

Lenders are “ready and able” to offer help to borrowers affected by the Coronavirus outbreak, UK Finance has pledged.

The trade body says this may come in the form of repayment relief to customers whose earnings have been hit or costs increased as a result of contracting the virus or  because of the measures imposed to stop it spreading.

It comes after a number of lenders including TSB, Natwest and Saffron Building Society offered payment holidays to borrowers who had been severely affected by recent flooding.

So we can see that this particular tap is as wide open as it has ever been and as we look around the world we can expect similar moves in many places. In terms of exceptions there is one maybe because Germany is returning to previous bond yield lows ( -0.74% for the benchmark ten-year) and via its policy of yield curve control the Bank of Japan is stopping much of this happening. The latter is another in quite a long list of events from the lost decade era in Japan and I am pointing it out for three reasons.The first is that it is raising rather than reducing bond yields as intended. The second is that therefore we will not see a housing market boost. The third is that I am alone in pointing such things out as the “think tanks” continue to laud yield curve control. After all copying Japan has worked so well hasn’t it?

Mortgage Lending

We can also expect a boost from here. There are plenty of rumours of credit easing especially from the ECB as frankly it has few other options. I would expect much trumpeting of this going to smaller businesses but by some unexplained and unexpected event ( except by some financial terrorist writers) it will go straight into the mortgage market. My home country had an example of this with the Funding for Lending Scheme where the counterfactual needed to be applied to business lending bit was not required for mortgage lending. Japan also had a scheme for smaller businesses where large companies immediately set up subsidiaries and claimed.

Comment

So far I have given these for those expecting a house price rally.

Reasons to be cheerful, part three
1, 2, 3 ( Ian Dury)

For newer readers this is not something I welcome as it is inflation for first-time buyers.

Now let me look at the other side of the coin and there are two main factors. The first is what John Maynard Keynes called “animal spirits” or the film Return to the Forbidden Planet called “monsters of the id”. With worries about jobs and quarantine will people be willing to buy? That may lead to a lagged effect as people refinance now and buy at a later date.

The next is mortgage supply. Whilst the official taps are opening and they are building new pipes as I type there will be some banks and financial institutions that will be under pressure here and thus will not be able to lend. Some we can figure out but other are unpredictable and let me give you a symbol of a big stress factor right now, Yesterday’s 14 day Repo saw around US $70 billion of demand and only US $20 billion was supplied. So dollars are in short supply somewhere and frankly the US Federal Reserve policy of reducing Repo sizes looks pretty stupid.

 

 

 

The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

The Retail Prices Index or RPI has come in for quite a bit of official criticism over the past decade sometimes around the issue of what is called the Formula Effect and more rarely about the way it deals with the housing sector. The latter is more rare because many of the critics are not well informed enough to realise that house prices are in it as they are implicit via the use of depreciation. However to my mind this has been something of a sham and the real reason was highlighted in yesterday’s post.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%.

As you can see the RPI consistently gives a higher inflation reading hence using it real wages are lower. That is why official bodies such as the UK Statistics Authority with the dead hand of HM Treasury behind them keep trying to eliminate it. Let me illustrate by using the measures they have recommended RPI, then CPI and then CPIH as you can see from the quote above they keep recommending lower numbers. What a coincidence! This flatters real wages and GDP as consumer inflation is around 24% of the inflation measure used there so yes UK GDP has been inflated too. In fact by up to 0.5% a year,by the changes according to the calculations of  Dr.Mark Courtney.

They are back as this from the Chair of the UK Statistics Authority Sir (hoping to be Lord) David Norgrove shows.

We have been clear for a long time that RPI is not a good measure of inflation and its use should be discouraged. The proposals we put to the Chancellor are consistent with this longheld view.

That is very revealing as we have had several consultations and they have lost each one. In fact my view has gained more support over time because if you look at the facts putting a fantasy number as 17% of your inflation index as is done by putting Imputed Rents in CPIH is laughable when you can use an actual number like house prices. This is how they explain they lost. It does allow me to update my financial lexicon for these times where “wide range of views” equals “we keep losing”

There has since then been extensive consultation
and discussion about inflation measurement. All the statistical issues have been well aired. A
notable feature of these discussions was the wide range of opinions

They have lost so badly that this time around they have taken the possibility of losing out of the new plan.

The Authority’s consultation, which will
be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

As you can see it is about how and when it will be done rather than what should be done. The plan is to put Imputed Rents in the RPI so it also records lower numbers. Regular readers may have noted Andrew Baldwin asking me to support his effort to stop a change to the inflation numbers calculated, which I did. You see that change will stop people like him and me being able to calculate what the impact of changing the RPI will be. You see at this point how the deep state operates. Along the way it exterminates an inflation measure which Andrew has supported after I may note the UK statistics establishment presented it ( RPIJ) as the next best thing to sliced bread. Before behaving like a spoilt child and taking their football home with them so no-one else can play.

Let me also address the Formula Effect issue. I have just explained above how suddenly they do not want people to be able to calculate it. Suspicious eh? But it is worse than that because all of the official propaganda ignores the fact that a lot of it is due to clothing prices and fashion clothing. We could find out as the statistician Simon Briscoe has suggested by suspending some of the clothing section for a while or producing numbers with and without it. After all CPI was the official measure for over a decade and it ignored owner occupied housing which is 17% of the index when included. But apparently you cannot exclude less than 1% which leads me to believe they already know the answer which presumably would be found in the 2012 pilot scheme which has been kept a secret.

Today’s Data

There was a quirk in the series meaning a rise was likely but not this much.

The all items CPI annual rate is 1.8%, up from 1.3% in December.

The factor which was mostly expected was this.

In January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services……….However, in January 2020, its contribution increased to 0.55 percentage points (an increase of 0.19 percentage points from December 2019), as the gas and electricity price reductions from January 2019 unwound.

I was a bit slack yesterday in saying that inflation will fall to help real wage growth when I should have put it is heading lower but the impact of regulatory moves will cause bumps in the road. Apologies.

Changes to Ofgem’s energy price cap introduce some volatility — with CPI inflation expected to pick up to 1.8% in 2020 Q1, before falling back to around 1¼% in the middle of the year. The expected reduction in water bills as a result of action by the regulator Ofwat is also expected to contribute to the fall in inflation in 2020 Q2.  ( Bank of England)

As it does not happen often let us congratulate the Bank of England on being on the money so far. Returning to UK inflation it was also pushed higher by this.

Rising pump prices and upward contributions from transport services (in particular, airfares) meant transport’s contribution rose to 0.22 percentage points in January 2020.

There was also a nudge higher ( 0.07% in total) from a more surprising area as we are know the retail sector is in trouble but clothing and footwear prices saw a slightly lower sales impact. There was a similar impact on restaurants and hotels where prices fell less than last year.Meanwhile.

The all items RPI annual rate is 2.7%, up from 2.2% last month.

House Prices

Sadly there are ongoing signs of a market turn.

The latest house price data published on GOV.UK by HM Land Registry for December 2019 show that average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019 (Figure 1). Over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.

I was contacted on social media yesterday to be told that the market has really turned in Wales. The official numbers seem to have turned the other way though…

House price growth in Wales increased by 2.2% over the year to December 2019, down from 5.5% in November 2019, with the average house price in Wales at £166,000.

Maybe they will turn back in January.

Comment

A lot of today’s article has been comment via fact based opinions. Let me add two more factors. Firstly the UK establishment just as the Euro area has released it cannot get away any longer with ignoring the owner-occupied housing sector in its official inflation measure. Meaning the screams of those unable to afford housing have even penetrated the clouds around the skyscraper Ivory Towers of the ECB. Next whilst this may seem like a fait accompli it has seemed like this as every consultation has begun but each time so far I have ended up winning. If you think about it they are admitting they cannot win on the arguments by trying to eliminate them from the consultation.

As to this month’s data it is a shame to see a rise but with the UK Pound £ and the oil price where they are the trend should remain downwards. But there will be swings and roundabouts as the impact of utility price regulation comes into play.

Was the Irish election result a case of its the economy stupid?

Back in the day the presidential campaign of Bill Clinton came up with the phrase “Its the economy stupid” which worked on several levels. Firstly Bill got elected and secondly the phrase has echoed around since. But applying it to what has recently happened in Ireland is an example both of the phrase and the way we have these days to look beneath the official statistics.

Let me start the story by looking at GDP growth in Ireland.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.7 per cent for the Q3 quarter of 2019. ( Central Statistics Office or CSO)

Something for an incumbent government to trumpet you might think and this continues with the annual comparison.

Initial estimates for the third quarter of 2019 indicate that there was an increase of 5.0 per cent in GDP in real terms in Q3 2019 compared with Q3 2018.

For these times that is quite a surge which puts Ireland far ahead of the Euro area average and the breakdown starts with a hint of a modern thriving economy.

 Information & Communication made the most positive contribution to the Q3 result, rising by 22.4 per cent with Agriculture recording an increase of 15.2 per cent.

Trouble,Trouble,Trouble

The Taylor Swift lyric appears as we look at some of the detail though.

 Capital formation decreased by 55.3 per cent or €25.2 billion in Q3 compared with the previous quarter.

That is quite a drop but you see we find the cause here with a similar number popping up elsewhere.

 Imports decreased commensurately by 22.5 per cent (€24.2 billion) in Q3 2019 compared with Q2 2019.

These are not the only conventional metrics which are lost in a land of confusion as Genesis would put it.

Exports increased by 2.4 per cent which meant that overall net exports increased by €26.8 billion quarter-on-quarter.

As you can see the economic growth story starts well but then has collapsing investment which is a warning and collapsing imports which is another warning accompanied by a triumph for net exports giving a strong signal.

Now let me bring in some context which is that if we look at Gross Value Added for the Irish economy it was 49.1 billion in the final quarter of 2014 and 79.7 billion in the third quarter of last year on a chain-linked basis. How could you not be re-elected with those numbers? Well regular readers may recall early 2015 which saw a 25.6% quarterly jump.

There are two major issues here which I looked at on December 18th 2017,

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes. ( Finfacts )

Manufacturing has boomed but some of it has been the type of contract manufacturing described above. Next comes this issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

There is a large impact from intellectual property which sees money wash into and out of Ireland on such a grand scale it even affects the Euro area national account breakdown.

These have led the Central Bank of Ireland to develop this to try and help.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Wealth and Debt

According to the Central Bank of Ireland there is a strong position here.

Household net worth reached a new high of €800bn in Q3 2019, which equates to €162,577 per capita. Household debt continued its downward trend, falling by €176m in Q3 2019.

If we look into the detail I note the following and the emphasis is mine.

The increase over Q3 2019 was driven by improvements in both households’ financial assets and housing assets. Financial assets rose by €11.5bn, due primarily to increases in the value of insurance and pension schemes. Housing assets rose to €545bn, an increase of €8.2bn over the quarter, the highest it has been since Q4 2008. Household liabilities remained unchanged at €147bn.

There has been success here too.

Household debt stood at €135bn, its lowest level since Q3 2005. This equates to €27,453 per capita. Household debt has decreased by a third, or €67.8bn, since its peak of €202bn in Q3 2008.

We can see by default that Irish companies borrow quite a bit.

Private sector debt as a proportion of GDP decreased by 2.4 percentage points to stand at 239 per cent in Q3 2019

Or do they as are the companies Irish?

 It should be noted that private sector debt in Ireland is significantly influenced by the presence of large multinational corporations (MNCs) and that restructuring by these entities has resulted in extremely large movements in Irish private sector debt, particularly from 2014 onwards.

Inflation

According to the official data there essentially has not been any in Ireland over the period we are looking at. The official Euro area measure was 101.8 last December after being set at 100 in 2015 so you can see I am guilty of only a slight exaggeration. But we are reminded of its flaw ( which even ECB policy makers are presently admitting) that is highlighted by this from the Irish Times on the 5th of this month.

House price growth is obviously one part of the equation; while it may be finally easing in Dublin, half a decade of double-digit growth has nonetheless pushed the cost of owning a home out of the reach of many.

Indeed as it goes on they have become both more expensive and unaffordable.

But in Ireland, and in many other countries across the globe, rising property prices have been compounded by wage stagnation. Pay rises have only returned in recent years and continue to significantly lag house price growth.

The inflation measure of the Euro area completely ignores the area of owner-occupied housing on the grounds of whatever excuse it thinks it can get away with.

Ireland has its own measure which tried to do better by including mortgage interest-rates but that valiant effort has been torpedoed by the advent of negative interest-rates and QE.

So here we see another problem for the official view as people are told there is no inflation and yet in Dublin the Irish Times tells us this.

Dublin has experienced the third-fastest rate of house price growth in the survey over the last five years, up by a staggering 61.9 per cent.

Although it has also had a relatively strong rate of income growth over the same period – up by 13.2 per cent – that still means there is a huge gap between the rates of increase.

In terms of house purchase real wages have not far off halved. No wonder people are unhappy and should be questioning the inflation data.

The official numbers do pick up rental inflation and both have it being around 17% since 2015. So even on the official data there has been a squeeze here too.

Comment

On today’s journey we have seen that the experience of an ordinary Irish person is very different to that of the official data. They are told it is a Celtic Tiger 2.0 but face ever more expensive housing costs and the concept of buying a home has changed fundamentally. Thus we see how what are fabulous looking metrics of surging GDP and virtually no inflation are for a type of virtual Ireland which is really rather different to the real one where housing costs have surged. This impacts in other sphere as for example national debt to GDP has plunged and Ireland has moved for being a recipient of EU funds to a net payer.

Context is needed as there have been economic improvements in Ireland for example the unemployment rate this January was 4.8% as opposed to the 16% of January 2012. Improved tax revenues have helped provide a budget with a surplus although this relies a bit on higher corporation tax from guess who?

UK housing market policy is becoming an even bigger mess

Today has opened with a flurry of news on the UK housing market. So let us start with the latest from the Halifax Building Society.

House prices kicked off the year with a modest monthly increase, rising by 0.4% in January following the
stronger gains of 1.8% and 1.2% seen in December and November respectively. As a result, annual growth
remained relatively stable at 4.1%, up just a fraction from the end of 2019.

If we stay with the annual growth number we see that it has been falling last year as the 2.8% of March was replaced with the 0.9% of October. However it then picked up driven by the latest three months.

In the latest quarter (November to January) house prices were 2.3% higher than in the preceding
three months (August to October)

Those of you who follow this situation will see the irony here as the Halifax made some methodological improvements to its series because it was producing an annual number of 4-5% when the other house price indicators were much lower. Now it finds it is back at a similar number! However whilst it is again the highest some of the others have shown a similar pattern this time around.

A concerning part from my point of view is that such house price growth is above wage growth and we are losing ground at a rate of around 1% per annum here, after a period of gains, which now seem all too short.

The Halifax has a go at being upbeat.

A number of important market indicators continue to show signs of improvement. We have seen a pick-up
in transactions with more buyer and seller activity consistent with a reduction in uncertainty in the UK
economy. However, it’s too early to say if a corner has been turned.

Although they worry that it may just be a function of a Boris or if you prefer Brexit Bounce.

The recent positive figures may actually represent activity that would ordinarily have been expected to take place last year, but was delayed by economic uncertainty. So while housing market activity has undoubtedly increased over recent months, the extent to which this persists will be driven by housing policy, the wider political environment
and trends in the economy.

I see they perhaps continue to hold out hope for an interest-rate cut from the Bank of England.

The environment for mortgage affordability should
stay largely favourable.

Although there may be some self praise here because if we go to Moneyfacts we see this.

 Halifax also continued to top the five year fixed chart this week, offering a rate of 1.46% (3.2% APRC) fixed until 31 May 2025, reverting to 4.24% variable thereafter.

You need 40% equity for this and there is a fee of £995 so it particularly benefits larger mortgages. The best 5-year fix for first time buyers ( 5% equity ) is 2.75% from Barclays and has no fee.

There is an interesting swerve at the end of the Halifax piece.

However with the growth in rental costs accelerating, many first-time buyers will continue to face a significant challenge in raising necessary deposits.

Somebody needs to tell the UK Office for National Statistics who have picked up nothing of the sort.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2019, unchanged since November 2019.

I have written before about concerns that it is of the order of 1% per annum too low and thus is another reason to ignore the lead indicator called CPIH. That has not deterred the Chair of the UK Statistics Authority David Norgrove who wants to replace house prices in the RPI with imputed rents in spite of this from the Economic Affairs Committee of the House of Lords.

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

Still if he gets this through I guess he will be in the House of Lords himself!

First Homes

According to the Financial Times the government has a new plan.

Developers would have to fund the construction of more discounted homes for first-time buyers at the expense of other forms of new-build social housing under plans floated by the government on Friday. Robert Jenrick, the housing secretary, will announce a consultation on a new programme called “First Homes” today under which first-time buyers will be able to purchase new-build properties at a discount of £100,000 on average.  Military veterans and key workers such as nurses, police officers and firefighters will get priority access to the scheme.

Huey Lewis and the News sang about something like this.

I want a new drug, one that won’t spill
One that don’t cost too much
Or come in a pill
I want a new drug, one that won’t go away
One that won’t keep me up all night
One that won’t make me sleep all day
One that won’t make me nervous
Wonderin’ what to do

It is hard not to laugh at the next bit, after all what could go wrong?

The proposed scheme would lock the discount in for perpetuity. The government said this would require the owner to get a valuation from a surveyor and sell the property at 70 per cent of that figure to another first-time buyer.

I can just see some surveyors being more popular than others. Indeed other parts of this seem rather magical.

Mr Jenrick said that the initiative would mean people could buy new homes with a lower deposit and mortgage without having to move to cheaper areas.

It is a bit like the adverts for the travel company Trivago where someone has paid £150 for a hotel room whereas the rather delightful woman from Trivago has paid £100. Except in the advert they show the original customer as being unhappy with this. I can see the equivalent happening here. Other travel companies are available.

“I know that many who are seeking to buy their own home in their local areas have been forced out due to rising prices,” he said. “A proportion of new homes will be made available at a 30 per cent market discount rate, turning the dial on the dream of home ownership.”

This area is, however, ridden with what we might call slips between cut and lip.

The National Audit Office report ‘Investigation into Starter Homes’ released in November 2019, found that — despite the Conservatives’ promise to build 200,000 starter homes for first-time buyers in 2015 — not a single starter home had yet been built.

Comment

We see a situation a bit like an old fashioned railway signal box where the signaller keeps pulling another lever. We started with interest-rate cuts, then QE, then the Funding for Lending Scheme, Help To Buy,Term Funding Scheme and now this. They have reduced the price then raised the quantity of money around and these days seem to have moved onto in effect giving out “free money”. Will it be too long before some are gifted houses?

In some ways this reply to the FT article sums it up.

How does transferring wealth to a random set of a few individuals solve the housing crisis? ( MarkCats)

Also that each move makes the position even worse overall.

The average Help to Buy first-time buyer price has risen 50% since 2013 (outside of London).   As usual Government introduces a policy, and then introduces another to counter the effects of the former.

But the plan to remove house prices from the one UK inflation measure that includes them is a clear hint at the long-term establishment plan. Inflate them and then claim it as wealth effects because with wage growth struggling rents especially using the flawed official measure will likely miss it.

 

How official inflation measures are designed to mislead you

Over the past year or two even the mainstream media seems to have had flickers of realisation about the problems with official inflation measures. Perhaps their journalists wondered how things could be so expensive with recorded inflation so low? I recall even Bloomberg publishing pieces on exactly that looking at problems in the housing situation in Germany which expressed exactly that with those experiencing reality questioning the official numbers and in more than a few cases suggesting they came from a place far,far away.

Yesterday a member of the Executive Board of the ECB expressed his worries about this area, So let us look at what Yves Mersch had to say.

A prolonged loss of trust in the ECB risks undermining the broad public support that is necessary for central bank independence.

I think he is going a bit far with “broad public support” as most people will only have a vague idea about what the ECB does but let us indulge Yves for now. He goes onto ground which is about as near as central bankers get to admitting the amount of mission-creep that has gone on.

This is of particular concern when the range of non-conventional measures brings monetary policy closer to the realm of fiscal policy and the institutional effects of these policies are becoming more pronounced.

House Prices

This follows a section where he points out this.

The risks arising from strong housing price inflation extend beyond financial stability.

Indeed although the Euro area had lots of problems for financial stability as pre credit crunch house prices in Ireland, Spain and the Baltic States boomed and later bust, which also undermined many banks. However in spite of this he confesses that one way of guarding against this happening again has been ignored.

At present, owner-occupied housing costs are not included in the Harmonised Index of Consumer Prices (HICP) that is used to formulate our inflation aim of below, but close to, 2% over the medium term.

I mean why would you put in something which for many is their largest monthly expenditure? The next sentence covers a lot of ground but the latter part is very revealing.

There are a number of technical explanations for this exclusion, but it is clear that households view the cost of housing as an important part of their lifetime expenditure.

“View”?! The truth is that if we switch to describing it as shelter it is a basic human need. Of course central bankers have a track record in downplaying basic human needs in the way that food and energy are left out of so-called core inflation measures, but this takes things a step further as many of the costs of shelter are completely ignored rather than downplayed. As to the “technical explanations” let us just mark them for now as I will cover them later.

Next we get another example of the central banking obsession with rents.

 Rents represent around 6.5% of the basket used for measuring inflation.

Let me explain why. This is because in their Ivory Tower world people consume housing services whatever they do. This works for those who do rent as their (usually) monthly payment fits with that theory. Actually in practice there are more than a few problems with measuring this accurately as I noted earlier in the reference to Bloomberg Germany in particular. Also there are a lot of complaints concerning Ireland too. So even where it should work there are troubles,

But when you apply consumption of housing services to people who buy their own home be it outright or via a mortgage there is trouble. If someone is fortunate enough to buy outright then you have one large payment rather than a stream of services. Even the highest Ivory Tower should be able to spot that this simply does not work. You might think that using mortgages would work much more neatly after all a monthly payment does have some sort of fit with consuming housing services. But for a central bank there is a problem as it is the main player in what the monthly mortgage costs is these days. In the case of the ECB its negative deposit rate of -0.5% and its QE bond buying operations ( currently 20 billion Euros per month) have reduced mortgage rates substantially.

So there is the “rub”. Not only are they reducing the recorded level of inflation with their own policy which is of course trying to raise inflation! But even worse they are raising house prices to do so and thus inflation is in fact higher. It is not the misrepresentation or if you prefer lying that bother them as after all they are practised at that but even they think they may struggle to get away with it. In a way the speech from Yves reflects this because the background to all this is below.

House prices rose by 4.1 % in both the euro area and the EU in the third quarter of 2019 compared with the same quarter of the previous year.

You see why they might want to keep house prices out of the inflation index when we note that the official HICP measure recorded 1% (twice) and 0.8% in that same quarter.

Yves continues the official swerve with this.

Indeed, the United States, Japan, Sweden and Norway already integrate owner-occupied housing into their reference inflation indices.

You see both Japan and the United States use rents as a proxy for owner-occupied housing costs in spite of the fact that no rents are paid. You might think when Yves has noted the influence of house prices he would point that out. After all using fantasy rents to measure actual rises in house prices will only make this worse.

The gap between perceptions and official measures of inflation can complicate the communication of policy decisions. If households believe that inflation is rampant then they will see little justification for unconventional measures, in particular negative interest rates.

There is no little arrogance here in “believe that inflation is rampant” to describe people who have real world experience of higher prices and hence inflation as opposed to sticking your head in the sand for two decades about an important area.

Comment

Even Yves is forced to admit that the omission of owner-occupied housing costs has made a material difference to recorded inflation.

If it were to be included in the HICP, it could raise measured inflation rates in the euro area by around 0.2 to 0.5 percentage points in some periods. Taking that into consideration, core inflation would lift from its current 1.3% to its long-run trend, or even higher, thereby having a bearing on the monetary policy stance.

You can bet that the numbers have been absolutely tortured to keep the estimate that low. But this also hides other issues of which Eurostat provides a clear example below.

 the annual growth rate of the EU HPI reached a maximum of 9.8 % in the first quarter of 2007

Pre credit crunch Euro area house prices did post a warning signal but were ignored. After all what could go wrong? But more recently let me remind you that the ECB put the hammer down on monetary policy in 2015.

Then there was a rapid rise in early 2015, since when house prices have increased at a much faster pace than rents.

Or to put it another way the Euro area HICP is full of imagination.

Could it be that it’s just an illusion?
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion?
Putting me back in all this confusion?
Could it be that it’s just an illusion now?

I promised earlier to deal with the technical issues and could write pages and pages of excuses, but instead let me keep it simple. The consumer in general spends a lot on housing so they switch to consumption where purchase of assets is not included and like a magic trick it disappears. Hey Presto! Meanwhile back in the real world ordinary people have to pay it.