What is it about GDP in the first quarter these days?

The behaviour of the UK economy so far in 2017 has been something of a hot potato in debate as the numbers swing one way and then the other. Let me give you an example of a ying and yang situation . The downbeat ying was provided last week by the official data on UK retail sales.

The 3 months to March shows a decrease of 1.4%; the third consecutive decrease for the underlying 3 month on 3 month pattern……Looking at the quarterly movement, the 3 months to March 2017 (Quarter 1) is the first quarterly decline since 2013 (Quarter 4).

That was ominous for today’s GDP release as the consumer sector had been part of the growth in the UK economy. Our official statisticians crunched the numbers as to the likely effect.

The 3-month period ending March 2017 coincides with Quarter 1 (Jan to Mar) 2017 of the quarterly gross domestic product (GDP) output estimate. It marks the first negative contribution of retail sales to quarterly GDP growth since Quarter 4 (Oct to Dec) 2013, contributing negative 0.08 percentage points (to 2 decimal places).

However only yesterday there was a yang to the ying from the Confederation of British Industry or CBI.

Retail sales growth accelerated in the year to April, with volumes rising faster than expected, according to the latest monthly CBI Distributive Trades Survey.

Here is some more detail.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)…….Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%). Meanwhile sales volumes decreased in specialist food & drink (-43%) and furniture & carpets (-30%).

If we stay with the specifics of the CBI report its is fascinating to see clothing leading the charge again. Regular readers will recall that this was the state of play last autumn and at that time it was female clothing in particular. So ladies if you have rescued us yet again we owe you another round of thanks. In such a situation you would be the consumer of last resort as well as often the first!

But the issue here is how does this fit with the official data? There is one way it might work and it comes down to the timing of Easter which was later this year than last. Whilst the official data does make seasonal adjustments I have seen this miss fire before. Perhaps the clearest generic example of this is first quarter GDP in the United States which year after year has been lower than the trend for the other quarters hinting at a systematic issue.

House prices

If these have been leading the charge for UK economic growth then this morning’s news will disappoint.

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6%, the weakest since June 2013.

The date is significant as it was the summer of 2013 when the Bank of England lit the blue touch-paper for UK house prices with a new bank subsidy programme. The latest version of this called the Term Funding Scheme has risen in size to £57.5 billion.since its inception last August. Looking forwards if we allow for the obvious moral hazard this is hardly especially optimistic.

As a result, we continue to believe that a small increase in house prices of around 2% is likely over the course of 2017 as a whole.

The GDP data

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2017, the slowest rate of growth since Quarter 1 2016.

This was driven by the retail sales slow down and this.

Slower growth in Quarter 1 2017 was mainly due to services, which grew by 0.3% compared with growth of 0.8% in Quarter 4 (Oct to Dec) 2016……The services aggregate was the main driver to the slower growth in GDP, contributing 0.23 percentage points…….The main contributor to the slowdown in services was the distribution, hotels and restaurants sector, which decreased by 0.5%, contributing negative 0.07 percentage points to quarter-on-quarter GDP growth.

The services slow down will have had a big effect because it must be pretty much 80% of our economy by now. Officially it is 78.8%.

Actually much of the economy grew at this sort of rate.

Production, construction and agriculture grew by 0.3%, 0.2% and 0.3% respectively in Quarter 1 2017.

So a slowing on the end of 2016 but here is something to think about. UK GDP growth was 0.2% in the first quarter of 2016 so ironically it is better this year but also was 0.3% in 2015. Are we developing a similar problem to the US where it seems to be something of a hardy perennial situation and if so why?

Looking Forwards

As well as the more optimistic CBI retail sales report there was this from Monday.

The survey of 397 manufacturers found that domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

It is not the only body which is looking forwards with some optimism.

The UK economy slowed sharply in Q1, as signalled by PMI. March rise in PMI suggests Q1 GDP could be revised up from 0.3% to 0.4%………Note that Q1 GDP was based on a forecast of no service sector growth in March. PMI showed strengthening ( Chris Williamson of Markit ).

What about the individual experience?

We have settled on GDP per capita as a better guide and this was frankly poor this time around.

GDP per head was estimated to have increased by 0.1% during Quarter 1 2017.

This adds to an issue which the chart below highlights, guess which of the lines is our more recent experience?

For the people who think that their individual experience has not backed up the claims of improvement there is food for thought in that chart.

Is GDP underecorded?

Tim Worstall wrote a piece for CapX this week telling us this.

For it’s obvious to our own eyes, and when properly adjusted GDP shows it once again, that we’ve all got much richer these recent decades.

Okay why?

The CPI overstates inflation – and thus understates how quickly real incomes are rising……Of course the ONS and others do the best they can but the current estimate is that inflation is overstated by 1 per cent a year. Or real income rises understated by it of course.

There are some interesting points on goods which are free ( WhatsApp for example) and ignored by GDP.  However it completely misses out the cost of housing which in recent times has been a major inflationary force in my mind. Would you rather have housing or the latest I-Pad?

Care is needed as of course there were substantial gains in the past but on this logic we are all much better off than we realise. Really?

Comment

The issue with first quarter growth was also true across the channel as the expectation and then the reality show below.

with 0.6% growth signalled for both Germany and France ( Markit )…….In Q1 2017, GDP in volume terms* slowed down: +0.3%, after +0.5% in Q4 2016 ( France Insee ).

So as we note the Bank of France was correct we await the US figures wondering what it is about first quarter GDP? For France this is not yet a sequence as last year was better but the UK and US seem trapped in a mire that appears to have a seasonal reappearance.

Looking ahead we were expecting higher inflation to bite on real incomes as 2017 progressed. As we stand a little of the edge of that has been taken off that impact. What I mean by that is the rise of the UK Pound £ to above US $1.29 helps with inflation prospects as does the fall in the price of a barrel of Brent Crude Oil to below US $52 per barrel. Of course they would need to remain there for this to play out.

Some posted some Blood Sweat & Tears lyrics a while back and they seem appropriate again.

What goes up, must come down
Spinning wheel got to go round
Talkin’ ’bout your troubles, it’s a cryin’ sin
Ride a painted pony, let the spinning wheel spin

The UK housing market looks ever more dysfunctional

Today has opened with some more news on the UK housing market so let us take a look at one perspective on it from The Express newspaper.

Britain’s property market booming as house prices hit record highs
BRITAIN’S property market is booming with house prices hitting a record high – and sales at their highest level for a decade, figures show today…..
Rightmove’s director and housing market analyst Miles Shipside said: “High buyer demand in most parts of the country has helped to propel the price of newly marketed property to record highs. There are signs of a strong spring market with the number of sales agreed achieved at this time of year being the highest since 2007.”

It is hard to know what to say about this bit.

Experts last night hailed the bricks-and-mortar bonanza as a key marker of the nation’s prosperity as we head towards the General Election.

What were the numbers?

Let us first remind ourselves that the Rightmove survey is based on asking rather than actual sale prices and then take a look via Estate Agent Today.

The price of property coming to the market has hit anoher record high, up 1.1 per cent over the past month according to Rightmove.

The increase is equivalent to £3,547 and takes the average asking price for homes new to the market to £313,655, exceeding the previous high of £310,471 set in June 2016.

The £3,547 in a month is of course much more than the average person earns although if we look back we see that it is lower than last year as Rightmove points out.

This month’s 1.1 per cent rise is also weaker than the average 1.6 per cent spring-boosted surge of the last seven years.

Why might that be?

“Strong buyer activity this month has led to 10 per cent higher numbers of sales agreed than in the same period in 2016. This large year-on-year disparity should be viewed cautiously as the comparable timespan in 2016 saw a drop in buy to let activity with the additional second home stamp duty” says Shipside ( of Rightmove)

Actually the year on year rate of increase has fallen to 2.2% although as pointed out earlier first-time buyers are facing a 6.5% rise. The idea that house price growth is fading is one of my 2017 themes and adds to this from the listings website Home earlier this month.

Overall, the website claims price rises are much more subdued this year than last. In April 2016 the annualised rate of increase of home prices was 7.5 per cent; today the same measure is just 3.0 per cent.

London

Here asking prices are falling according to Rightmove.

The price of property coming to market in Greater London is now an average of 1.5% cheaper than this time a year ago, a rate of fall not seen since May 2009. The fall is mainly driven by Inner London, down by 4.2% (-£35,504), while Outer London is up 1.7% (+£9,017). Since last month, asking prices in both Inner and Outer London have fallen, though again it is Inner London with a monthly fall of 3.6% that is dragging the overall average down. Outer London remains broadly flat, down 0.2% (-£1,177) on the month.

The prices of larger houses are seeing a drop.

The fall of 11.9% this month reflects volatility in one month’s figures in a smaller section of the market, but the annual rate of fall of 7.3% is a more reliable longer-term indicator of the challenges that this sector is facing.

but first-time buyers seem to be in the opposite situation.

Typical first-time buyer properties (two bedroom or fewer) are both up for the month (+1.3%) and for the year (+0.5%).

Perhaps the house price forecasts of former Chancellor George Osborne were for the sort of houses he and his friends live in.

However before I move on we do learn something from these asking prices but as Henry Pryor shows they seem to be a long way from actual sale prices.

Record lows for UK mortgage rates

There was this from Sky News on Friday.

A building society is launching Britain’s cheapest ever mortgage deal with a rate of 0.89% as competition between lenders intensifies.

The two-year deal offered by Yorkshire Building Society requires a deposit worth at least 35% of the value of the property. There is also a product fee of £1,495……Moneyfacts said the 0.89% rate was the lowest on its records going back to 1988.

This is a variable rate and a little care is needed as whilst it is an ex ante record it is not an ex post one. What I mean by that is that there were rates fixed to the Bank of England Bank Rate which ended up below this as it slashed interest-rates in response to the credit crunch. One from Cheltenham and Gloucester actually went very slightly negative.

The Mail Online seems to be expecting even more.

Experts say lenders are so desperate for business that rates could fall to as low as 0.5 per cent……..Santander’s cuts are expected to trigger an all-out price war, and deals will be slashed over the next fortnight as the big names fight for business.

Santander has not actually cut yet and we will have to wait until tomorrow. If we look back the record low for a five-year fixed rate mortgage of 1.29% from Atom Bank lasted for about a week before the supply was all taken.

These mortgage rates have been driven by the policies of the Bank of England when it decided in the summer of 2013 that a Bank Rate of 0.5% and QE bond purchases were not enough. It began the Funding for ( Mortgage) Lending Scheme which has now morphed into the £55 billion Term Funding Scheme.  Thus banks do not need to compete for savers deposits leading to ever lower savings rates and they can offer ever cheaper mortgages. This is the reality regardless of the Forward Guidance given by Michael Saunders of the Bank of England on Friday. He gave vague hints of a possible Bank Rate rise, how did that work out last time? Oh yes they ended up cutting it!

Throughout this period we have been told that this is to benefit business lending so what happened to terms for it in February?

Effective rates on SMEs new loans increased by 11 basis points to 3.22% this month.

Also there was more financial repression for savers.

Effective rates on Individuals new fixed-rate bonds fixed 1-2 years fell by 19 basis points to 0.85%

Comment

The official view on the UK house price boom is that it has led to economic growth and greater prosperity. However that is for some as those who sell tale profits and of course there is some building related work. But for many it is simply inflation as they see unaffordable house prices and also rents. So there is a particular irony in some of the media cheerleading for higher prices for first time-buyers. With real wages now stagnating and likely to dip again how can they face rises in prices which are already at all-time highs.

The dysfunctional housing market seems to have some very unpleasant consequences foe those left out as the BBC reported earlier this month.

Young, vulnerable people are being targeted with online classified adverts offering accommodation in exchange for sex, a BBC investigation has found…….Adverts seen by BBC South East included one posted by a Maidstone man asking for a woman to move in and pretend to be his girlfriend, another publicising a double room available in Rochester in exchange for “services” and one in Brighton targeting younger men.

What are the economic prospects for France?

This weekend sees the first stage of the French Presidential elections which seem to be uncertain even for these times. A big issue will be economic prospects which will be my subject of today. But before I do let me send my best wishes to the victims of the terrorist attack which took place in Paris last night. If we move back to the economic situation we can say that the background in terms of the Euro area looks the best it has been for a while. From French Statistics.

In Q1 2017 the Eurozone economy is expected to grow at a similar pace as registered at the end of 2016 (+0.4%), then slightly faster in Q2 (+0.5%) before returning to +0.4% in Q3 2017. The main force behind the expansion in aggregate activity should be private consumption which benefits from the increase in disposable income and favourable labour market conditions and despite the upturn in inflation which is eroding household purchasing power. Moreover investment is forecast to strengthen, driven by improved expectations about near term outlook. Also investment in construction should accelerate. Finally, the positive international environment will likely reinforce external demand growth and exports.

As you can see according to them Goldilocks porridge seems pretty much exactly the right temperature as everything is expected to rise.

What about France itself?

 Some perspective

If we look back 2016 was an erratic year where quarterly economic growth was 0.6%,-0.1%,0.2% and then 0.4%. So whilst it began and ended well there was a near recession in the middle. Overall the growth at 1.1% was in fact less than the 1.2% of 2015 and it does pose a question as that is the level of economic growth which has caused such problems in both Italy and Portugal. Indeed if we look back we see that as 2011 opened quarterly economic output was 509 billion Euros whereas in the last quarter of 2016 it had only risen by 4,4% to 531.6 billion Euros ( 2010 prices).

This lack of economic growth has contributed to what is the major economic problem in France right now.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016……Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The fact so long after the credit crunch hit the unemployment rate is still in double-digits albeit only just echoes here. Also there is the issue of underemployment.

In Q4 2016, 6.2% of the employed persons were underemployed, a ratio decreasing by 0.1 percentage points quarter on quarter, and by 0.4 percentage points over a year. Underemployment mainly concerns people who have a part-time job and wish to work more.

Oh and if we return to the unemployment rate actually 10% is only a reduction because the previous quarter was revised higher. We could improve like that forever and remain at the same level!

The next consequence of slow/low economic growth can be found in the public finances.

At the end of 2016, the Maastricht debt accounted for €2,147.2 billion. It rose by €49.2 billion in 2016 after € +60.2 billion in 2015. It reached 96.0% of GDP at the end of 2016, after 95.6% at the end of 2015.

In essence this has risen from 65% pre credit crunch and the combination of an annual fiscal deficit and slow growth has seen it rise. France seems to have settled on an annual fiscal deficit of around the Maastricht criteria of 3% of GDP so to get the relative debt level down you can see how quickly it would need to grow.

What about prospects?

This morning’s business survey from Markit has been very positive.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 57.4, compared to March’s reading of 56.8. The latest figure was indicative of the sharpest rate of growth in almost six years.

The idea that elections and indeed referenda weaken economies via uncertainty may need to be contained in Ivory Towers going forwards.

The numbers provide further evidence that the French private sector remains resilient to political uncertainty around the upcoming presidential election. Indeed, business optimism hit a multi-year high in April, with a number of respondents anticipating favourable business conditions following its conclusion.

Even better there was hope of improvement for the labour market.

Moreover, the rate of job creation quickened to a 68-month peak. Both manufacturers and service providers continued to take on additional staff, with the pace of growth sharper at the former.

However a little caution is required as we were told by this survey that there was manufacturing growth in February as the index was 52.2 but the official data told us this.

In February 2017, output diminished for the third month in a row in the manufacturing industry (−0.6% after −0.9% in January). It decreased sharply in the whole industry (−1.6% after −0.2%). Manufacturing output decreased slightly over the past three months (−0.3%)…..Over a year, manufacturing output also edged down (−0.5%)

Bank of France

In a reversal of the usual relationship the French central bank is more downbeat than the private business surveys as you can see below.

In March, industrial production rose at a less sustained pace than in February.

Whilst it describes the services sector as dynamic I note that its index for manufacturing fell from 104 in February to 103 in March leading to the overall picture described below.

According to the monthly index of business activity (MIBA), GDP is expected to increase by 0,3% in the first quarter of 2017. The slight revision (-0,1 point) of last month estimate does not change the overall perspective for the year.

The cost of housing

This is very different to the situation across La Manche ( the Channel) and a world apart from the Canadian position I looked at yesterday.

In Q4 2016, house prices slightly decreased compared to the previous quarter (−0.3%, not seasonally adjusted data) after two quarters of increase. This slight downturn was due to secondhand dwellings (−0.4%). However, the prices of new dwellings grew again (+0.7%).

Indeed some more perspective is provided by the fact that an annual rate of growth of 1.9% is presented as a rise!

Year on year, house prices accelerated further in Q4 2016 (+1.9% after +1.4% in Q3 and +0.7% in Q2). New dwelling prices grew faster (+2.9% y-o-y) than second-hand dwelling prices (+1.8%).

Not much seems to be happening to rents either.

In Q1 2017, the Housing Rent Reference Index stood at 125.90. Year on year, it increased by 0.51%, its strongest growth since Q2 2014.

Just for perspective the index was 124.25 when 2013 began so there is little inflation here.

Comment

There is much that is favourable for the French economy right now. For example the European Central Bank continues with very expansionary monetary policy with an official interest-rate of -0.4% and 60 billion Euros a month of QE bond purchases. The Euro as an exchange-rate is below the level at which it started although only by 6%. So France finds that it gets a boost from very low debt costs as the recent rise in them only leaves the ten-year yield at 0.83%.

So 2017 should be a good one although there is the issue of why other countries have out-performed France. We only have to look south to see a Spain where economic growth has been strong. A couple of years of that would help considerably. But as I type that I am reminded of some of the comments to yesterday’s article especially the one saying house prices in Barcelona are on the march again. To get economic growth these days do we need booming house prices? This leads into my argument that we are calling what is really partly inflation as growth. The catch is that the numbers tell people they are better off but then they find housing ever more expensive and increasingly frequently unaffordable. As we stand France does better here but is that at the cost of higher unemployment?

 

 

 

 

House price growth in Toronto poses quite a problem for Canada

One of the economic themes of these times has been the boom in asset prices caused by ultra easy monetary policy and the way that establishment’s present this as “wealth effects” leading to economic growth when in fact some and often much of this is in my opinion inflation. For example those investing in government bonds have benefited from rises in prices and this is presented as a “wealth effect” but on the other side of the coin someone taking out an annuity faces much lower yields and much lower income from a set sum. Yet the “wealth loss” for them is not counted. There is also the issue of house prices where again rises are presented as an economic benefit which for some they are but both first-time buyers and those wishing to trade up in the market face higher prices.

The house price issue is one which has dogged economic comment about Canada and merited a substantial mention by the Bank of Canada last week. This is significant because central banks  look away from such matters until they feel they have no other choice. The emphasis is mine.

Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short-term, but a downside risk over the longer term.

What is happening to house prices in Toronto?

Canada Statistics has an index for the price of new houses.

On the strength of price increases for new houses in Toronto, the NHPI rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010.

Chart 2 Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase
The metropolitan region of Toronto posts the highest year-over-year price increase

Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase

Toronto recorded an 8.6% year-over-year price increase, the largest among the metropolitan areas surveyed, followed by Victoria (+6.3%), St. Catharines-Niagara (+6.2%), and Windsor (+6.2%). The gain for Windsor was the largest reported since January 1990.

Care is needed with such measures as for example the UK has hit trouble. So let us look further, the editorial of the Toronto Sun told us this yesterday.

house prices are skyrocketing in Toronto (the price of an average detached home is now over $1 million and has risen 33% in the past year)

The Toronto Life has something that is even more eye-catching.

Sale of the Week: The $2.7-million house that proves asking prices are meaningless in Summerhill

Ah too high eh? Nope.

The listing agents say they priced the house at what they thought was market value. Eight offers came in, after which the agents gave everyone the chance to improve. Seven did, and the sellers accepted the offer with the fewest conditions and best price, for more than $750,000 over asking. This may not have been a complete fluke: two other houses on Farnham Avenue have sold in the $2.5-million price range in the past year.

You have to question the listing agents there of course but it is an interesting price for a house which is very smart inside but does not look anything special from the front. We do get perhaps more of a realistic perspective from yesterday’s “sale of the week” as we have a comparison.

Previously sold for: $659,000, in 2007

Okay and now.

The sellers made the easy decision to go with the highest offer, at more than $400,000 over asking, $1,656,000.

Yesterday the Royal LePage house price survey told us this.

In the first quarter, the aggregate price of a home in the Greater Toronto Area increased 20.0 per cent to $759,241, while the price of a home in the City of Toronto rose 17.0 per cent to $763,875. Home prices also increased significantly in the surrounding GTA regions, with suburbs such as Richmond Hill, Oshawa,Vaughan, Markham and Oakville posting increases of 31.5 per cent, 28.2 per cent, 25.8 per cent, 23.2 per cent and 23.1 per cent to $1,209,741, $500,105, $985,534, $970,216 and $987,001

What about monetary policy?

According to the Bank of Canada it is very expansionary or loose.

The neutral nominal policy rate in Canada is estimated
to be between 2 .5 and 3 .5 per cent, 25 basis points
lower than previously estimated

If we maintain a straight face at the chutzpah and indeed fantasy that they know that to that degree of accuracy we can see that with an official interest-rate of 0.5% they are some 2.5% below neutral.

If we look at the exchange-rate then there was another boost as the trade-weighted Loonie or CERI fell from the low 120s in 2011/12 to a low of 89 as 2016 opened. It then rallied a little and over the year from March 2016 has in fact started at 95 and ended there. There are two issues here that need to be noted. Firstly this is an effective exchange rate with an elephant in the room as the US Dollar is 76.2% of it! Secondly due to its plentiful stock of raw materials the currency is often at the mercy of commodity price movements.

Moving to the money supply we see that the taps are open pretty wide. The broad measure has seen its annual rate of growth rise from the 4.5% of late 2010 to 7.7% in February of this year. There was a dip in narrow money growth in March but it is still increasing at an annual rate of 9%.

Household debt

Canada Statistics tells us this.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,028.7 billion in the fourth quarter. Consumer credit was $596.5 billion, while mortgage debt stood at $1,329.6 billion.

If we compare to incomes we see this.

Household credit market debt as a proportion of adjusted household disposable income (excluding pension entitlements) edged up to 167.3% from 166.8% in the third quarter. In other words, there was $1.67 in credit market debt for every dollar of adjusted household disposable income.

On the other side of the ledger that was something to please the Bank of Canada.

National wealth, the value of non-financial assets in the Canadian economy, rose 1.4% to $9,920.0 billion at the end of the fourth quarter. The main contributors to growth were real estate and natural resources. The value of real estate grew by $93.0 billion while the value of natural resource wealth increased $29.4 billion.

Although the rest of us will wonder how much of that $93 billion is from the Toronto area?

Comment

There is a lot to consider here as whilst the word bubble is over used it is hard to avoid thinking of it as we look at Toronto and its housing market. If we look at wages growth it has been slowing from around 3% to 0..9% in Canada in terms of hourly wages so it is not any sort of driver. The price moves are if anything even more extreme than seen in London.

If we move to the economics then if you own a property in Toronto and want to move elsewhere you have a windfall gain and good luck to you. A genuine wealth effect. But against that all new buyers are facing rampant inflation and there are clear wealth losses for them. We are back to a society of haves and have note here,

A big factor is we see another place where foreign funds are flowing in and like in the other cases we are left to mull this from Transparency International.

Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners.

Canada is of course far from alone in such worries.

Meanwhile the Bank of Canada finds itself not far off irrelevant which is awkward to say the least for a central planner. Of course where it is relevant it is making things worse.

 

 

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

What is happening in the Central London property market?

The barrage of inflation news yesterday did give us some insight into the UK property market. Consumer inflation rose to 2.3% ( CPI and amusingly CPIH ) or 3.2% (RPI) although no such doubts were available on BBC News 24 which confidently asserted several times that prices were rising at 2.3% per annum. This was considerably lower than the official house price growth data.

Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.

Regular readers will be aware that I expect consumer inflation to pass house price inflation as 2017 progresses as the impact of the higher inflation impacts and that the bellweather is often London. So far little has changed in the official data although the house prices are for January and not February with London prices rising at 7.3% per annum.

What about Central London?

Property Wire reports this.

Newly released data from Land Registry, average prices reached a new high of £1,818,262 in Central London, largely due to a rally in Q4 which saw prices increase 14% over the previous quarter.

This was apparently led ( yet again) by the borough below.

The uptick has been led, in particular, by Kensington and Chelsea which saw a 24% quarterly increase in prices

However all this is based on a rather low-level of sales.

The picture for PCL sales volumes, however, was far less positive. Compared with the previous year, sales were down 28% with only 3,330 taking place, equivalent to just 64 a week – the lowest number on record. This is half the volume registered just two years ago. ( PCL = Prime Central London).

The last quarter of 2016 did see a 19% rise on the preceding one but of course from a very low base.

However there are issues with London as a whole.

In Greater London, the fall in transactions was even more marked, down 29% in Q4 over the same period in 2015. Whilst annual price growth was more positive, up 5.7%, average prices took a hit across the year, finishing 3% lower than in January.

Bloomberg has more on the trends.

Greater London home prices will probably show their first annual decline since June 2011 when February’s data is published next month, according to Peter Williams, chairman of researcher Acadata. Prices in the city have fallen in six of the past 12 months,

The Financial Times steps in

Perhaps shaken by the possibility that London house prices might fall the FT is already on the case.

London has been cushioned from the prospects of a house price crash by the high levels of equity required to buy property in the capital and the difficulty of mortgage financing at high loan-to-value ratios for all but the biggest earners. Research by Hometrack, a housing market research group, found the average loan-to-value ratio (LTV) in the most expensive tenth of properties was 23 per cent and 40 per cent in mid-priced zones, compared with a UK average of 53 per cent.

Now if we switch that to saying that quite a bit of London property has been bought by cash rich foreign buyers the pack of cards above starts to fall. I have no idea how the fact that even very high earners cannot get a mortgage for London property supports the prices there, surely the reverse!

However, since the Bank of England limited to 15 per cent by value of a lender’s mortgage book the number of new loans it could issue at more than 4.5 times a borrower’s income, the opportunity for large LTV mortgages in the capital has dwindled.

There is another section which appears to make my case much more than theirs.

Mark Pattanshetti, mortgage manager at broker Largemortgageloans.com, said the top end of the market had “paused” after the Brexit vote but was likely to recover. “There isn’t enough supply in London, demand is still there and the top end is not so sensitive to interest rate changes.”

 

Nonetheless he said banks had reined in their lending on luxury new-build apartments in the capital — a favourite vehicle for Asian investors — after fears that this part of the market had become overheated. Average loan-to-value ratios on such flats had fallen from 70 per cent to 50-60 per cent in the past three years, he said.

Surely prices should be surging if there is not enough supply so how does “paused” work? Furthermore the fact that some Asian buyers might not be able to get mortgages does not seem especially bullish for prices. In some areas they have bought quite a bit of new property including a fair chunk at Battersea Power Station. Also if there is all this demand why did this happen? From the 7th of March.

The housebuilder ( Barratt Homes) said it had sold the units to Henderson Park for £140.5m. The portfolio includes 29 units at Aldgate Place, a joint venture with British Land, 25 in Fulham Riverside and all 118 at its Nine Elms Point tower in Vauxhall, a joint venture with L&Q.

We find as the FT article develops some more fuel for my views.

The pressure on prices in the top tenth of the market has been growing over the shorter term, with falls of 5.1 per cent in the past year. Hometrack expects further “single-digit price falls” over the course of this year at the top end. However in the middle and lower value markets, where prices are less volatile, it predicts “broadly flat” prices over the year.

As the year develops we may get the opportunity to improve the definition of “broadly flat” in my financial lexicon for these times.

I note that there is a mention of a house price crash in the headline and after yesterday’s fall in stock markets I thought this offered some perspective on hyperbole.

 

Speaking of Hyperbole

Here is Andy Haldane of the Bank of England from Monday.

This would translate into an immediate loss of around 1½ million jobs – a very significant macro-economic cost.

This is Andy slapping himself on the back for interest-rate cuts voted for by er Andy and his mates, so no danger of moral hazard there! Also Andy has issues with his number-crunching elsewhere as he seems to have a blind spot with regard to banking, he starts well but then loses his way.

It is certainly true that financial sector productivity was probably over-stated in the run-up to the crisis. Nonetheless, the subsequent sharp fall in financial services productivity is plainly not the whole story. Of the 1.7 percentage point fall in the UK’s productivity growth since 2008, less than a third can be accounted for by financial services.

Move along please, nothing to see here.

Comment

There are various factors at play here. The domestic influences come from real wages in the main as I note that the regional agents of the Bank of England have just reported this.

Settlements were clustered around 2% to 2½%.

So real wages are at best flat and in fact are now negative if we use the RPI. Other domestic influences on the housing market must be fading as even the Bank of England has not introduced anything new since last August.

If we look internationally at house prices and this is a powerful influence in Central London there are two streams which are crossing ( worrying for fans of the film Ghostbusters ). Past owners have seen prices fall in some areas and have lost money in their own currencies due to the lower level of the UK Pound £, although those who have been here for a while have profits still. Newer buyers may be tempted in by the lower Pound and some lower prices. Central London is especially open to foreign buyers with few checks made, surprising really when you look at the situation regarding bank accounts. So foreign money will at times arrive and buy properties and much of this has little to do with the UK as some will be looking to escape troubles elsewhere. But unless there is a surge of them I think the low volume levels tell an eloquent story as in markets they are often a sign of a dip in prices.