What is happening to US auto-loans?

One of the features of expansionary monetary policy has been that it misses some areas and concentrates in others. It reminds me of the word disintermediation which described a similar problem when central banks were trying to restrict the money supply rather than expand it with policies like QE ( Quantitative Easing) ,as the concept was the same albeit in a different direction. I have noted in the past the issue with auto-loans or loans for cars in the United States and am going to look at that in more detail as the situation is showing signs of bubbling under as we worry about it bubbling over.

What is the background?

Last November the Liberty Street Economics blog of the US New York Fed told us this.

The rise in auto loans has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies.

There was something of a warning tucked in there which was reinforced by this.

Originations of auto loans have continued at a brisk pace over the past few years, with 2016 shaping up to be the strongest of any year in our data, which begin in 1999……..the $1.135 trillion of outstanding auto loans by credit score and lender type, and we see that 75 percent of the outstanding subprime loans were originated by finance companies.

So there are various concerns which are the size of the market and its rate of growth which are highlighted by the way the finance companies seem to have taken over the subprime sector.

The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments.

The feeds into the theme of us “forgetting” how we got into the credit crunch or to put it another way the finance sector returning to past behaviours.

Last month it confirmed the 2016 rise.

auto debt (up $93 billion, or 8.7 percent)

Also there were some numbers to cheer any central banker’s heart.

As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt remains just 0.8% below its 2008Q3 peak of $12.68 trillion, but is now 12.8% above the 2013Q2 trough.

I note that auto-loans began their recent rise in 2013 in terms of number of loans.

Used car prices

These are of course the asset in this market as the loans are backed by the cars. We live in a world where Bank of England Governor Mark Carney calls such loans “secured” and UK radio has adverts for buy-to-let cars. But earlier this month the US National Automobile Dealers Association released this.

NADA Used Car Guide’s seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index figure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.

As you can see prices have been falling for a while and looking at the chart of prices the rate of fall rather resembles that of 2008/09 with a difference which is that we start with prices having been in the low 120s rather than ~108. Last week we saw a warning from one of the companies involved and let me switch to Ed Harrison who has been on this case for a while.

Yesterday, Ally Financial warned that profits would underperform expectations. Now, they did not say that profits would fall or that they were taking credit writedowns. Neverthless, the warning is an important marker and should be of grave concern…………So with Ally, what we are seeing is that these problems have created enough discounting to induce a profit warning at one of the major auto finance companies. Ally is really the former GMAC, the engine of a huge amount of profit for General Motors, as are all of the finance arms of the automakers in the US. So what happens at Ally will definitely pass through to GM and the other carmakers unless the impact is arrested quickly.

There are various issues here but let us start with a clear difference with the housing market where prices have risen and thus boosted the asset value of the lenders books whereas here prices were pushed higher but are now falling. Also if we look we see that in another development familiar from the past the loans were bigger than the car value. Here is an offer I looked up from a company called DCU on what they call second chance auto loans.

Borrow up to 120% of Price – Qualified borrowers can finance up to 120% of NADA retail book value or 120% of the purchase price – whichever is less,

According to the St.Louis Fed yesterday the loans are a lot cheaper than they were.

The interest rate on a 48-month loan from a commercial bank for a new automobile purchase dropped from close to 8 percent prior to the Great Recession to an average of 4.3 percent since the second quarter of 2014.⁸ Meanwhile, auto finance company rates for new car loans averaged around 5 percent during this same period.

Also it points out this.

Softened underwriting standards have raised concerns regarding the risk associated with the robust growth in auto debt………..lenders have stretched repayment terms and offered higher advance rates, resulting in greater loan-to-value ratios.

In terms of its own region it is seeing this.

Serious delinquency rates among subprime borrowers in Little Rock and Memphis have now markedly increased during two years of an economic expansion.

Asset Backed Securities (ABS)

Yes they are on the scene as we look to see what is happening in a market that Mario Draghi of the ECB is very keen on. Barrons looked into it yesterday.

While delinquencies, liquidation rates and loss severities are higher across subprime ABS deals regardless of the ABS shelf, it appears that certain issuers are seeing larger increases than others. This analysis invites a few questions. Are the capital structures of deeper subprime lenders built to handle larger losses? Which structures, if any, are more likely to take principal losses in their rated debt tranches?

Comment

There are quite a few factors to consider here. Let us start with household debt which will soon pass the pre credit crunch peak. That needs to be compared to GDP ( Gross Domestic Product) which was 12% higher in 2016 than the previous peak of 2007. Regular readers will be aware of my concerns about GDP but for now let us just note that it has grown.

If we move to auto-loans there are a lot of flashing yellow lights. The trend towards subprime lending and the lending going “in-house” for the car lenders only adds to the moral hazards at play. Securitisation of the loans send a chill down the spine and now we see falling used car prices. Even worse the Financial Times has this morning told us not to panic!

Don’t panic about auto loans just yet — tax season isn’t over, after all

This is based on the fact that this year tax refunds have been particularly slow and therefore may well have influenced the February drop but of course not the ones before it. Also there is no panic here but there is a list that is gaining a growing number of ticks on it and this has just popped up under auto loans on Twitter.

Learn How to Get Fast Approved AutoLoans with No Credit Check Requirement in Texas ( @CarLoanBadCred )

Also this.

Gone are the days when you had to wait for getting bad credit auto loans. There are many online auto financing companies who offer competitive interest rates on these loans. Internet is quickly becoming the best place to get a blank check car loans with bad credit history

https://ezautofinance.net/how_to_get_a_blank_check_auto_loan_even_with_bad_credit.html

What could go wrong?

 

 

Norway is apparently very happy but what about house prices?

Today we are taking a trip across the North Sea to what we are told is the happiest country on Earth. From the World Happiness Report.

Norway has jumped from 4th place in 2016 to 1st place this year, followed by Denmark, Iceland and Switzerland in a tightly packed bunch. All of the top four countries rank highly on all the main factors found to support happiness: caring, freedom, generosity, honesty, health, income and good governance. Their averages are so close that small changes can re-order the rankings from year to year.

As I note that Finland is 5th this seems to be a Nordic thing although of course it does make one wonder about the criteria as well as how many copies of this were sold there by Pharrell.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do

There are clear economic influences here as we note that Africa is apparently “waiting for happiness” and intriguingly China is like this.

People in China are no happier than 25 years ago

But returning to Norway there are clear economic influences at play.

Norway moves to the top of the ranking despite weaker oil prices. It is sometimes said that Norway achieves and maintains its high happiness not because of its oil wealth, but in spite of it. By choosing to produce its oil slowly, and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies.

There is a mixture of fact and PR release there so let us look further at the Norwegian economy. Oh and being the top of any list these days poses a question.

Economic growth

This from the Norges Bank last week is not especially inspiring.

In 2016, mainland GDP in Norway grew at the slowest rate recorded since the financial crisis. Growth picked up a little between Q3 and Q4 as projected earlier.

Norway Statistics tells us this.

Continued weak growth Mainland Norway: Growth in the gross domestic product (GDP) for mainland Norway was 0.3 per cent in the 4th quarter of 2016, slightly up from the 3rd quarter.

The annual rate of growth was 1.1% and if we look into the detail there was something familiar for these times.

Consumption of goods increased by 0.6 per cent, after having mostly fallen since the 3rd quarter of 2015. Increased car purchases contributed to more than half of the rise in household consumption of goods.

A hint of easy monetary policy which these days often appears in the car sector. Also something else seems rather familiar.

The declining wage growth that we have seen in recent years will continue, and estimates for 2016 show that the average annual wage growth was 1.7 per cent.

If we return to the Norges Bank report we see that real wages have fallen.

The consumer price index (CPI) rose by 3.6% between 2015 and 2016, while consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) rose by 3.0% in the same period.

A lot of the impact here has been from the oil and gas sector.

What about monetary policy then?

Here we go.

Norges Bank’s Executive Board has decided to keep the key policy rate unchanged at 0.5%. The Executive Board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

So like so many other central banks they ignore inflation being above its target ( which is 2.5%) and concentrate on economic growth.

In the wake of the decline in oil prices since summer 2014, the key policy rate in Norway has been reduced in several steps. Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy,

So far the oil price and industry has been a silent elephant in the room but if we defer that to later let us look at the dangers from low interest-rates which are domestic debt and house prices.

House Prices

Today’s data release tells us this.

On average, prices for new dwellings have increased by 10.4 per cent in the 4th quarter of 2016 compared to the same quarter in 2015…….Prices for existing flats, small houses and detached houses have increased by 15.9, 9.9 and 7.6 per cent respectively from the 4th quarter of 2015 to the 4th quarter of 2016.

If we look into the detail we see that the prices for flats ( multi dwelling apartments) are driving this move. Let us remind ourselves that this compares with wage growth of 1.7% and real wages which are falling and it comes on the back of previous rises. The flats index was at 80 in the first quarter of 2011 and has risen to approximately 117. If we look back for what has happened in the credit crunch are we see that house prices have doubled since 2005 ( to be precise the index is 199.3).

What about debt?

The Norges Bank puts it like this.

Persistently low interest rates may lead to financial system vulnerabilities. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable. By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.

Net incurrence of loans increased from NOK 167 billion to NOK 186 billion, while net investments in deposits decreased from NOK 65 billion to NOK 55 billion.

Debt growth was 5.6% in 2016 and that left the debt to income ratio at 2.35.  Back to the Norges Bank.

Growth in household debt accelerated through the latter half of 2016, and debt is still growing faster than household income. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable.

The mortgage rate series at Norges Bank was at 3.98% as 2013 ended and 2.49% as 2016 ended so we can see the pattern although the low was 2.35% last August. It is not a surprise to see money supply growth be firm.

The twelve-month growth in the monetary aggregate M3 was 6.5 per cent to end-January, up from 5.4 per cent the previous month.

The debt situation for the government is rather unique. It does have some but if you put in the sovereign wealth fund then net financial assets must be around treble annual GDP.

Comment

If we look at the elephant in the room then the oil and gas sector accounts for around 22% of Norway’s economic output. If we add in the fishing industry then Norway is especially gifted in terms of natural resources. The catch in recent times has been the fall in the price of crude oil which sees the Brent benchmark just above US $51 per barrel as I type this. In terms of an annual comparison the price is higher and Norway is one of the countries which most welcomes that but it is a far cry from the US $100+ of a couple of years ro so ago. This has been picked up in the unemployment data where the unemployment rate headed towards 5%. It has now fallen to 4.4% but there are other worries here.

the seasonally-adjusted unemployment decreased by 0.4 percentage points, or 12 000 persons………the seasonally adjusted number of employed persons decreased by 22 000 persons from September to December.

Meanwhile the central banks eases and pumps up the housing market. Maybe us Brits have set a bad example but what must first-time buyers and the younger generation think of this as a strategy?

Let me leave you with something very Norwegian.

A total of 30 800 moose were shot during the hunting year 2016/2017; a decrease of 300 animals from the previous hunting year and a decrease of 22 per cent from the record hunting year 1999/2000.

 

How many promises about Royal Bank of Scotland have been broken today?

One of the main features of the credit crunch in the UK were the collapse of Royal Bank of Scotland and the UK taxpayer bailout of it. Since then we have been regularly informed that it has recovered and that the sunlit uplands are not only in sight but have arrived. The 27th of January this year was an example of this.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

I am not sure how you can move “further and faster” on something you have supposedly fixed several times before! If we look back to September 2014 we were told something which is likely to echo later in this article.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

Back in 2012 my old employer Union Bank of Scotland was on the case sort of.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

The International Financing Review put its oar in as well.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Mind you at least someone had a sense of humour on the way.

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Royal Bank of Scotland Today

Which pack was RBS “well ahead of” here?

The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate.

The rhetoric carries on as Mark Carney is telling us “they (RBS) have made progress” in this morning’s press conference. Although there is a clear warning signal as he deflects a question about it to a colleague. This happens on difficult questions and means that the Governor cannot be quoted in future on the details for RBS.

Reuters sums up the tale of woe for RBS here.

The unexpected result underlines the litany of problems RBS is grappling with, which include a mounting legal bill for misconduct ahead of the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.

So “litany of problems” is the new “stronger,safer bank”? So what will it do about this?

The state-backed lender rushed out a statement following the announcement to say it would take a range of actions, including selling off bad loans and cutting costs to make up the capital shortfall identified by the tests of around 2 billion pounds ($2.49 billion).

“Rushed out a statement” is really rather poor when it will have been given advance notice about this but this does echo its response to the 2008 crisis. Meanwhile I guess it cannot go back to the UK taxpayer for more cash as of course it did this only in March.

Royal Bank of Scotland is paying £1.2bn to the Treasury to buy out a crucial part of its £45bn bailout in a step towards returning the bank to the private sector.

This was a way that Chancellor George Osborne massaged and manipulated the UK public finances back then. Was this from Earth Wind & Fire the backing track?

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

I do hope that he will be called in front of the Treasury Select Committee to explain this and that his diary is not too full as he collects new titles. As I suspect we can file this in the bin.

George Osborne has already said he is hoping to generate £25bn from the sale of three-quarters of its RBS shares in this parliament,

The share price is down nearly 3% at 191.5 pence as I type this and perhaps it should be another 3%. The breakeven for the UK taxpayer is just over £5.

Other UK banks

There were more technical and minor failures to be seen.

Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan…..Standard Chartered…. did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.

A confession from Mark Carney

We got yet another U-Turn as we were told that household debt is now an issue which I summarised on Twitter like this.

Mark Carney says “thanks” to a question about household debt which means of course the opposite!

The fact that the subject got a mention is extremely revealing. As nobody at the press conference had either the gumption or the courage to ask Governor Carney how his Bank Rate cut and extra QE would improve household debt we were left with a sinking feeling. Which of course is what Governor Carney had been telling us was happening to house hold debt. Also he has a pretty odd view about lending for cars and automobiles.

Does Mark Carney really think “auto lending” is secured debt as he just claimed? What about depreciation?

There used to be quite a few adverts on the radio for Buy To Let lending for cars which I always thought was bizarre. Either Governor Carney wants to boost this or he used his £250,000 a year rent allowance to have a punt. Oh excuse me, long-term investment.

We were also told that he has plenty of “tools” although when I enquired about a definition of them some were ones he may or may not agree with.

A bunch of them, they sit on the committee with me.

I have been warning about the rise of unsecured lending in the UK and my latest piece on the issue was only yesterday. Perhaps the Governor read it.

Comment

There are several issues to consider here. I think that the way Governor Carney has used it to highlight claimed concerns about the rise of household lending is revealing. It enabled him to get this on record with little chance of being challenged as the media rushes to print about RBS. I also note that he shuffled the question about Buy To Let lending to someone else.

Meanwhile RBS continues on its own private ( albeit publicly owned) Road To Nowhere. We have almost infinite inflation in false dawns but a reality of disappointment and failure. After 8 years of this is it time to file the claims of reform in the “Liars Lexicon” mentioned in the comments section yesterday.

Meanwhile we have an example of another of my themes in play. Actual helicopter money from the Indian Air Force.

India’s air force has been called in to distribute cash across the country https://t.co/425k1h81XS pic.twitter.com/SwmjkVV20i

— The Times and The Sunday Times (@thetimes) November 29, 2016

 

It is time to put Student Loans back in the UK debt numbers

This morning has seen some updated statistics for the amount of debt in the UK released by The Money Charity. In it was something to grab the headlines as this from the BBC shows.

Household debts have spiralled to a whopping £1.5tn in the UK for the first time, new statistics show.

If we go to The Money Charity itself we are told this and apologies for their enthusiasm for capitals.

PEOPLE IN THE UK OWED £1.503 TRILLION AT THE END OF SEPTEMBER 2016. THIS IS UP FROM £1.451 TRILLION AT THE END OF SEPTEMBER 2015 – AN EXTRA £1036.58 PER UK ADULT.

So we cross a threshold and indeed are given a troubling view of the future.

ACCORDING TO THE OFFICE FOR BUDGET RESPONSIBILITY’S JULY 2015 FORECAST, HOUSEHOLD DEBT IS PREDICTED TO REACH£2.551 TRILLION IN Q1 2021.

So debt has risen and is forecast to continue doing so at what must be a faster rate than we have seen. I will look at the position in a moment but we cannot move on without pointing out that the OBR ( Office of Budget Responsibility) forecasts lots of things but even so does not get many right!

Bringing this to a household and individual level

The Money Charity presents us figures for debt per UK household.

THE AVERAGE TOTAL DEBT PER HOUSEHOLD – INCLUDING MORTGAGES – WAS £55,683 IN SEPTEMBER. THE REVISED FIGURE FOR AUGUST WAS £55,523.

And also per person.

PER ADULT IN THE UK THAT’S AN AVERAGE DEBT OF £29,770 IN SEPTEMBER – AROUND 113.7% OF AVERAGE EARNINGS. THIS IS SLIGHTLY UP FROM A REVISED £29,685 A MONTH EARLIER.

It is interesting to see the numbers compared to average earnings but care is needed. A better comparison would be with net or post-tax earnings and even with that there is the issue that as a minimum one has to eat to survive and pay other essential bills.

What does this cost in terms of interest?

Lets take a look at what we are told.

BASED ON SEPTEMBER 2016 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£51.135 BILLION.

If we look at this overall we see that such a number comes from us living in an era of relatively low interest-rates although the 3.4% to 3.5% is nothing like the near zero interest-rate policy that has been applied to UK government debt.  I will break the numbers down in a moment but for now here are some daily and per household numbers.

• THAT’S AN AVERAGE OF £140 MILLION PER DAY.
• THIS MEANS THAT HOUSEHOLDS IN THE UK WOULD HAVE PAID AN AVERAGE OF £1,894 IN ANNUAL INTEREST REPAYMENTS. PER PERSON THAT’S £1,013 – 3.87% OF AVERAGE EARNINGS.

What are the interest-rates paid?

We discover that the vast amount of the debt must be secured or mortgage debt otherwise the interest-rate would not be possible. From the Bank of England.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 10bps to 2.74% in September and the new secured loans rate fell to 2.27%, a decrease of 4bps on the month. The rate on outstanding other loans decreased by 2bps to 6.76% in September and the new other loans rate decreased by 37bps to 6.65%

The fact that the numbers are decreasing will lower the monthly burden per unit of debt and no doubt would have the Bank of England slapping itself on the back.  However its effective interest-rates series somehow misses what is happening in the world of credit cards and overdrafts so let me help out from its underlying database.

The credit card interest-rate it calculates was 17.94% in October. This is a lot more awkward as you see it was around 15% as we hit the peak of the last boom in the summer of 2007. If we move to the overdraft interest-rate it calculates it was 19.7% October and if we make the same comparison with the summer of 2007 it was around 17.7% or 2% lower back then. Perhaps the soon to be closed staff accounts at the Bank of England have had quite different interest-rates and it occurred to no-one that the wider population was seeing higher as opposed to the officially claimed lower interest-rates. Of course there is an issue of bad debts here but interest-rates of 17.94% and 19.7% when Bank Rate is 0.25% seem to raise the spectre of that of fashioned word usury.

Where is the debt?

Most of it is mortgage debt but as I pointed out last Monday unsecured debt is growing quickly.

OUTSTANDING CONSUMER CREDIT LENDING WAS £188.7 BILLIONAT THE END OF SEPTEMBER 2016.

• THIS IS UP FROM £176.3 BILLION AT THE END OF SEPTEMBER 2015, AND IS AN INCREASE OF £247.10 FOR EVERY ADULT IN THE UK.

This means that the situation is currently as shown below.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

This means the following on a household level.

PER HOUSEHOLD, THAT’S AN AVERAGE CONSUMER CREDIT DEBT OF £6,991 IN SEPTEMBER, UP FROM A REVISED £6,963 IN AUGUST – AND  £462.19 EXTRA PER HOUSEHOLD OVER THE YEAR.

Also just under a third of this is one of the most expensive forms which is credit card debt.

Time for some perspective

Let us take Kylie’s advice and step back in time for some perspective. I have chosen to go back to September 2007 as it was then as Northern Rock went cap in hand to the Bank of England that warning lights of “trouble,trouble,trouble” were flashing.

Total UK personal debt at the end of September 2007 stood at £1,380bn. The growth rate increased to 10.0% for the previous 12 months which equates to an increase of £120bn. Total secured lending on homes at the end of September 2007 stood at £1,163bn. This has increased 10.9% in the last 12 months. Total consumer credit lending to individuals in September 2007 was £217bn. This has increased 5.8% in the last 12 months.

Back then they were much less keen on using capitals! Also I note that unsecured debt was growing much more slowly then.although it was in total more than now.

Now the theme that we cut our lending in this area has a problem. Let mt take you to a 2012 paper on the subject from the Bank of England.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans

Consumer credit fell from £207 billion in June 2012 to £156 billion in August. Problem solved at a stroke…oh hang on!

So yes we cut consumer credit but not as much as the unwary might think.

Student Loans

Sadly we do not have a UK series but here are the numbers for England as they are much the largest component.

The balance outstanding (including loans not yet due for repayment) at the end of the financial year 2015-16 was £76.3 billion, an increase of 18% when compared with 2014-15.

The total is growing fairly quickly as indeed we would have expected.

The amount lent in financial year 2015-16 was £11.8 billion, an increase of 11% when compared with 2014-15.

Thus if they went back into the consumer credit numbers we would see a rather different picture.

Comment

So on today’s journey we have reminded ourselves that the comforting official view on UK household and in particular unsecured credit has been strongly influenced by the removal of student loans from it in the summer of 2012. Otherwise today’s headline would be household debts are now circa £1.6 trillion. A bit like the situation with the official consumer inflation measure where the fastest growing sector of owner occupied housing costs somehow got omitted. The UK establishment has been meaning to put it back for over a decade now!

Meanwhile what to measure this against poses its own problems. Some would argue that a higher value for the housing stock via higher house prices makes the mortgage lending even more secure. The catch of course is that the house prices depend on the lending which the Bank of England fired up with its Funding for Lending Scheme in the summer of 2013. If we move to real incomes then in spite of recent growth it is hard to be reassured as according to the official figures we are still 4% below the summer of 2007.

Meanwhile something troubling for the Bank of England nirvana of higher mortgage debt and house prices emerged over the weekend.

A large house price depreciation can be good for economic growth, research finds ( World Economic Forum)

It is all about the debt for the International Monetary Fund

The International Monetary Fund has had a troubled credit crunch. A major factor in this has been the way that its Managing Directors which as it happens have both been French politicians have moved it away from its original methodology. It used to help with balance of payments problems and whilst its austerity and devaluation/depreciation policies did not always work they did have plenty of successes. However it has increasingly become an organisation which helps with fiscal problems in the Euro area which have not always come with trade problems as for example Ireland had many years of surpluses. The move into the Euro area the major problem that devaluation was replaced with “internal competitiveness” which has pushed Greece into a depression and after a brief flurry Portugal is struggling again. It of course also had the issue that the Euro area is overall wealthy and could have financed it by itself.

Also there is the issue of a lamentable forecasting record as summarised below. From @ChristianFraser.

IMF on June 18th: “Brexit will trigger UK recession”

IMF on Sept 4th: “Britain will be fastest growing G7 economy this year”.

Is it all about the debt?

This is in some ways an economic virtue and in other ways a vice and perhaps even a four-letter word. The IMF has come up with some new analysis so let us steel ourselves for the inevitable barrage of very large numbers.

The global gross debt of the nonfinancial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion in 2015. About two-thirds of this debt consists of liabilities of the private sector.

In all the analysis of public-sector debt the issue of private-sector debt is often more of a backwater so it is good to see it being looked at. Also we get an estimate of how we can compare the debt level to economic output.

Although there is no consensus about how much is too much, current debt levels, at 225 percent of world GDP , are at an all-time high.

There is the issue that we are comparing a stock (national debt) with a flow (GDP or Gross Domestic Product) but it does at least give some sort of guide. We also are taken through the problem that has been created.

The negative implications of excessive private debt (or what is often termed a “debt overhang”) for growth and financial stability are well documented in the literature, underscoring the need for private sector deleveraging in some countries.

However the IMF fails to see that this may be a feature and indeed theme rather than coincidence.

The current low-nominal-growth environment, however, is making the adjustment very difficult, setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.

There is a real swerve here which may be overlooked and this is that the “nominal growth” the IMF is apparently so keen on includes the good which is real growth but from the point of view of the ordinary worker or consumer the bad which is inflation. The more of the latter we see then an improvement in the spread sheets of the IMF will be accompanied by a deterioration in the economic experience of the ordinary person. Putting this another way we now see in my opinion the real reason why central banks want to target consumer inflation at 2% per annum and some want an even faster rate. For example my debating opponent on BBC Radio 4’s Money Box the ex Bank of England economist Tony Yates called for a 4% inflation target in March 2015. In my view that improves Ivory Tower style spreadsheets whilst harming the ordinary person.

How did we get here?

Twisting slightly the lyrics of Talking Heads we find out this.

The genesis of the global debt overhang problem resides squarely within advanced economies’ private sector. Enabled by the globalization of banking and a period of easy access to credit, nonfinancial private debt increased by 35 percent of GDP in advanced economies in the six years leading up to the global financial crisis.

So it was us although not quite everyone reading this as looking at the readership by country from yesterday Zambia was 7th and Thailand 8th. It was nice to see that I get around.

Meanwhile the situation with public-sector debt was much more restrained.

Interestingly, public debt declined across all country groups up to 2007, particularly among low-income countries—mainly as a result of debt relief under the Heav-ily Indebted Poor Countries and Multilateral Debt Relief Initiatives.

That makes the IMF switch to dealing with public-sector debt and in particular it in the Euro area even harder to explain. After all it is now in favour of fiscal stimuli which must make very hard reading in the countries in Southern Europe and particularly Greece which suffered under its fiscal yoke called austerity.

This may suggest that fiscal policy and, in particular, the early tightening in the latter (Euro area) may not have helped in facilitating the adjustment.

In essence the IMF is arguing that this was a good thing.

As private debt started to retrench, public debt picked up, increasing by 25 percent of GDP over 2008–15.

It is also true that some of this was the socialisation of what was private debt as bank debt found its way onto the ledgers of taxpayers in more than a few nations.

The good, the bad and the ugly

The IMF occupies all three positions on extra debt. First we get the implication that it would be good here.

In particular, there
is evidence that some European banks—burdened by
high levels of impaired assets and a low-growth environment—may
not be in a position to extend the necessary
credit flows to sustain normal economic activity, contributing
to a deeper economic slump

But later the implication is that it is bad in that we need to deleverage.

Private sector deleveraging in advanced economies
thus far has been much slower than previous successful
experiences, indicating that the adjustment will have to
continue.

which is repeated here.

Data for a sample of advanced economies suggest
that private debt is high in some cases, even after assets
are accounted for, a harbinger of possible deleveraging
pressures

Then we reference to Brazil and China in particular we get the view that it is getting ugly.

Meanwhile, easier financial conditions in the aftermath
of the global financial crisis have led to a private
debt boom in some emerging markets, particularly
in the nonfinancial corporate sector

Comment

The IMF here is following the FPC (Financial Policy Committee) of the Bank of England in simultaneously wanting more and less debt. I still remember Lord Turner apologising for telling banks on the one hand to deleverage and on the other to expand lending. That may work in an Ivory Tower but not in the real world.

Next we have the issue that the policies that are supposed to have helped in this such as lower interest-rates ( 102 official reductions so far this year according to @ReutersJamie) and lower bond yields via QE have not helped. The IMF points out that economic growth is still struggling relatively but fails to grasp the fact that I for example have argued from the beginning that such policies have side-effects ( as I analysed yesterday) and in some cases reduce economic growth.

Also it is hard to know whether to laugh or cry as the IMF of Euro area fiscal austerity which plunged Greece into an economic depression that is ongoing calling for this.

Premature tightening of fiscal policy in depressed economies with weakened financial systems should be avoided to the extent possible……..Targeted fiscal interventions could be used to facilitate balance sheet repair.

 

Me on TipTV Finance

Canada turns to a fiscal stimulus

It was only on Monday that I discussed the issue of fiscal stimuli where the European Central Bank in particular had shifted its mood music in favour. This of course is quite a contrast to the policies it has enforced in Greece and Italy for example. The whole debate has come about because in the junkie culture world of monetary policy they are seeing a similar situation to what is happening with antibiotics where far from being futile resistance is ongoing. Thus they need a new drug and so fiscal policy has been brought out again. Yesterday saw an example of this in Canada as the new Liberal government of Justin Trudeau announced its Budget. There is a follow through to the UK because the Bank of England Governor Mark Carney had strong links with the Liberal party so strong in fact that they invoked criticism for an “independent” Governor of the Bank of Canada.

The policy

First we got some Open Mouth Operations rhetoric and a dose of Hopium.

Today, we begin to restore hope for the middle class.

Who knew that things were so bad in a Canada that avoided much of the pain of the credit crunch via riding the commodity price boom as it resources industry cleaned up. Although of course just under 2 years ago the mood changed.

The decline in the price of oil and other commodities has hurt whole regions and provinces.

There was also a nod to a long running theme of this website.

Wages haven’t grown significantly since the 1970s.

It is rare that we get official admittals of that situation and we also get a suggestion that it might continue.

It’s no surprise that many Canadians feel they are worse off than their parents were at the same age—and that they feel the next generation will do worse than their own.

The Numbers

The speech itself was rather devoid of such details so let us turn towards the Financial Times.

Justin Trudeau has pledged C$60bn (US$46bn) in new infrastructure spending over the next 10 years, hoping to revive sluggish growth in Canada’s resource-rich economy.

It goes further with a suggestion of the economic benefits which might be provided by this.

The finance minister forecast that the stimulus would raise gross domestic product 0.5 per cent in the coming year and 1 per cent in 2017-18, creating an estimated 100,000 jobs over two years.

The particular winners were universities, green technologies, those with children ( Child Benefit increases), and poor pensioners.

Can Canada afford it?

There are changes here as the proposed fiscal deficit of around Canadian $ 10 billion has been replaced by one of this below.

The government said its deficit would deepen in 2016-17, to C$29.4bn, or 1.5 per cent of GDP,

According to the government the deficit would rapidly shrink.

but pledged to cut the deficit in half by 2020-21.

Rather oddly in the circumstances there was in the Budget speech something of a nod to the Fiscal Charter of UK Chancellor George Osborne.

By the end of our first mandate, Canada’s debt‑to-GDP ratio will be lower than it is today.

The track record of politicians making such statements is simply dreadful! However of course this cannot apply to Justin Trudeau who has only just taken office. Also the Canadian public finances are in better shape than those of the UK. The Fraser Institute summarised the numbers in January.

Combined federal and provincial net debt has increased from $834 billion in 2007/08 to a projected $1.3 trillion in 2015/16. This combined debt equals 64.8% of the economy or $35,827 for every man, woman, and child living in Canada.

Not quite as low as I was expecting but if we switch to the Statistics Canada numbers we see that central government owed Canadian $974 billion at the end of 2015 so like Spain a fair bit of borrowing is done at regional/provincial level.

Canada like so many other nations can borrow cheaply as its ten-year yield is 1.33% so for the next decade or so any borrowing can be financed at low nominal interest-rates.

Debt exists outside governments

Let me switch to an article in the Globe and Mail from Sherry Cooper of Dominion Lending Centres..

The housing industry is a strong feature of the Canadian economy right now.

In fact so strong that we see this.

Housing, particularly in the Toronto and Vancouver markets, remains one of the pillars of the Canadian economy……….Housing affordability in these two cities has been a concern

Sound familiar?

Affordable housing is a social issue for sure,…

I always enjoy this style of justification for a boom.

As well, household balance sheets have improved over all as household wealth has grown faster than indebtedness.

What she means is that house prices have risen so fast this has happened which of course hints at a trap as what happens if the growth stalls,ends or reverses?

We get a clue from the Bank of Canada.

Low interest rates and higher house prices have led to strong growth in mortgage credit, recently pushing up the year-over-year growth of overall household credit to 5 per cent.

And more from Statistics Canada.

The ratio of household credit market debt to disposable income (excluding pension entitlements) rose to 165.4% in the fourth quarter from 164.5% (revised from 163.7%) in the third quarter. In other words, households held $1.65 in credit market debt for every dollar of disposable income. Disposable income increased 0.6%, a slower pace than that of household credit market debt (+1.2%).

So we find that rather like in Ireland if one was looking for a debt problem in Canada we are more likely to find it at the household and bank level than at the national one. The housing bust in Ireland socialised a large amount of this debt and turned a strong public fiscal position into a dreadful one pretty much overnight. So the risk for Canada is concentrated in the housing and banking sectors.

Comment

If we look for the Why? of the fiscal stimulus then the Globe and Mail  pretty much gave us the rationale.

Unemployment, especially in the all-important energy sector, is reaching scary heights. Nationwide, the jobless rate hit a three-year high in February (7.3 per cent), and it could move higher.

So Canada has seen the good side of moving contracyclically with the rest of the world and is now seeing the bad. Expected growth of 1.4% this year ( Bank of Canada) would do little if anything to change that and so you can see the case for fiscal policy which has so many advocates right now. Also for the forseeable future it is cheap in bond yield terms.

The other side of the coin is what in Japan is called pork barrel politics or how well the money will be spent. Those who worry about official denials will note that one has been got in early.

smart investments and an unwavering belief

Ironically the Bank of England Underground Blog has just issued some research suggesting that it may not be all apple pie and sunny days.

Second, we revisit the magnitude of the government spending multiplier at the ZLB to document that demand-side fiscal stimulus can be much weaker than previously thought.

ZLB is the Zero Lower Bound for interest-rates which is the zone in which Canada is in at 0.5% albeit that they lower bound may get lower. Perhaps they should tell the international bodies cheerleading for a fiscal stimulus.

as governments are being urged to do by everyone from the IMF to the OECD to the G20.

Is that the same IMF that imposed a fiscal contraction on Greece, Ireland and Portugal or a different one? Remember this from 2013 when it admitted it had been wrong?

Finally, it is worth emphasizing that deciding on the appropriate stance of fiscal policy requires much more than an assessment regarding the size of short-term fiscal multipliers. Thus, our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable.

So let me leave the IMF singing along to Linkin Park.

I’ll face myself
To cross out what I’ve become
Erase myself
And let go of what I’ve done
For what I’ve done

 

Denmark teaches us some more about the impact of negative interest-rates

Today i wish to travel across the bridge which becomes a tunnel that is the engineering marvel which connects my subject of yesterday Sweden to my subject of today Denmark. There is also something else which connects these two Nordic nations which is that they have been forerunners in the central banking experiment of negative interest-rates Indeed as Bloomberg reminds us Denmark was the crash test dummy.

The DCB — or Danmarks Nationalbank — first cut its policy rate below zero in July 2012 in a bid to fulfill its sole mandate, which is to defend the krone’s peg to the euro.

This reminds us that the outbreak of negative interest-rates is driven by external influences on the economy. It is not internal economic developments as much as the exchange-rate and in particular the one with the Euro which drives matters here. This is explicit policy in Denmark which is one which the Riksbank in Sweden has chosen to copy. Actually 2015 was a year of two halves for the Nationalbanken as its latest Monetary Review informs us.

Total intervention sales of foreign exchange for kroner by Danmarks Nationalbank have amounted to kr. 230 billion since April. Net intervention purchases at the beginning of the year reached kr. 275 billion.

So up was the new down leading to not far off-balance in the end. However it looks at interest-rates like this and it is referring to the interest-rate cut by the European Central Bank in December.

This meant that the monetary policy spread between Danmarks Nationalbank’s rate of interest on certificates of deposit and the ECB’s deposit rate narrowed from -0.55 to -0.45 percentage point.

This means that in effect the Nationalbanken has mostly delegated monetary policy to Frankfurt as the ECB policies of interest-rate cuts, ever more QE and open mouth operations to lower the Euro put pressure on the exchange-rate and its mandate. That will lead to some fun Thursday week when the ECB eases again and the Danes find themselves having to join it as its version of the Beatles Yellow Submarine heads for the depths.

The impact of negative interest-rates

The Governor of the Nationalbanken Lars Rohde was interviewed in Shanghai on Sunday and Bloomberg have released this. Let me rearrange their order and start with his main priority.

Rohde warned that the longer-term impact of negative rates on the banking system and its profitability must be borne in mind.

Indeed he pointed out that there had been a plan in place to preserve the banks.

From the first use of a negative deposit rate, Denmark implemented a threshold for banks’ excess funds and required that they only pay the negative rate above that line. That didn’t diminish the effectiveness of the policy but meant bank profitability didn’t suffer unduly, he said……..Last year the Danish banking system had its most profitable year since 2008.

Sadly there were no such plans for the average Dane or as we should perhaps now call them banking serfs. There was some relief that they had not indulged in a dash for cash though.

What we didn’t know was where the boundary is, and the good news is that we haven’t found it,” Rohde said. “We haven’t seen any unusual rise in outstanding notes, the system is working the way we expected. Basically, it’s not different from having a low positive interest rate.”

The economy

Lars Rhode is keen to sing the praises of his policy.

One should acknowledge that monetary policy has supported growth and inflation to a large degree,

If it has done so then the prospects in Denmark must have been pretty grim as this is the latest outcome reported by Xinhua News.

Denmark’s gross domestic product (GDP) rose 1.2 percent in 2015 year on year, less than previous predictions, official data showed on Monday……..Moreover, the country’s GDP in the fourth quarter of 2015 increased by 0.2 percent compared to the previous quarter.

This was a disappointment compared to the 2% forecast by the central bank at the beginning of the year. It is also quite a contrast to the news from Sweden only yesterday and makes us wonder how much of the GDP growth there is due to the negative interest-rate policy which is seeing a quite different result in Denmark.

The unemployment situation is good compared to Denmark’s peers with yesterday’s update telling us that it is 4.4%. However if economic growth continues to underperform there must be doubts about this.

Employment is expected to rise by almost 65,000 from the 3rd quarter of this year to the 4th quarter of 2017,

What about debt?

On the surface the situation looks good because in terms of public debt the situation in Denmark is strong. Nonetheless it seems to be imposing a dose of austerity on itself as it again mirrors Euro area policy.

The agreed Finance Act for 2016 involves tightening of fiscal policy, which is appropriate in the current economic environment.

This gets more surprising as we note the actual situation according to the central bank.

The ratings are supported by the low government debt, which fell to 22 per cent of GDP in 2015 as a result of a government budget surplus.

Any problems are not being caused by the cost of borrowing either as it averaged 0.3% in 2015.

Also if we look to the external position then it looks strong too.

Since 1990, the current account of Denmark has shown a surplus, which is currently almost 8 per cent of GDP.

We have something awkward here because Denmark has in effect been exporting deflation for decades along the lines of the German economic model which provides another insight to an economic policy based on an exchange-rate. It would help its neighbours if it’s government borrowed a bit which it can do cheaply and it consumed and imported more.

Private debt

Here is a completely different emphasis on the so far parsimonious Danes. Here are some excerpts from the Financial Stability Report which highlight the issue.

Households have large debts, predominantly at variable rates of interest,

The accompanying chart shows a total just shy of 2 trillion Danish Kroner which is interesting as the Danish mortgage association thinks it is 2.5 trillion,still what’s 500 billion between friends? Also this is true.

The credit institutions have considerable lending to homeowners with high debt ratios. In this analysis, having a high debt ratio is defined as having debt that is larger than the value of the home and at least four times higher than the family’s annual income before tax….In 2013, the debt of homeowners with high debt ratios exceeded kr. 200 billion,

Typically the central bank is much more worried about the impact of this on the banks than it is on the borrowers or banking serfs.

Banks and mortgage banks have substantial direct exposures to the housing market. Their total domestic lending to households for housing purposes amounts to just under kr. 1,750 billion, or approximately 90 per cent of GDP.

If we move to the mortgage rate position then we see some intriguing trends. The short mortgage rate has veered as low as -0.32% but sometimes been positive but the long mortgage rate fell to 2.13% but then rose to 3.16%. No wonder the Danes have been remortgaging to lock in their position! These numbers are from the Danish mortgage association and only take us to November when there is some logic to the position as the Nationalbanken Forward Guidance was for interest-rate increases in yet another calamity for the concept. I suspect that the situation now is different.

Comment

To misquote the song there is nothing like a Dane! In central banking terms this may well prove to be true next week as they find themselves having to quickly reverse an interest-rate rise yet again! Even worse was the fact that back on the 8th of January they only had the courage to raise interest-rates by an inconsequential 0.1% where the costs of change surely outweighed the benefits. There will be no-one more interested in the news from the ECB next Thursday than the Nationalbanken in its bunker.

As to economic prospects we have seen more disappointing manufacturing surveys for the UK and the Euro area which poses a question for Denmark’s prospects. This adds to a disappointing trajectory and an odd mixture of flat-out monetary policy and the opposite in terms of fiscal policy. Even Mark Carney of the Bank of England is on the case.

Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect.

But I will leave you with two thoughts. Firstly whilst there have been some negative mortgage-rates in Denmark negative interest-rates have again coincided with some later rises in rates. Secondly they rely on the principle below that we can borrow from the future pretty much forever. How does that work exactly?

allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral.

 

 

 

 

What is the true situation about UK household debt?

The issue of debt and what to do about it was of course one of the causes of the credit crunch and has been debated constantly during it. Today as it is often misrepresented I wish to look at household debt in the UK. But before I turn to it the national debt of the United States passed another threshold on Monday so let us doff our caps to the US $19 trillion threshold and move on. Oh and in case you were wondering about the debt ceiling it has been suspended until March next year which if you consider the chaos it created for no particular sustained gain that is probably the for the best.

UK Household debt

There has been some rather chilling research on this subject released this morning so let’s get straight to it. From City-AM.

The average Brit will not pay off unsecured debt, like credit cards and certain loans, until they are 64, a survey by the Centre for Economics & Business Research (Cebr) for peer-to-peer lender Zopa found.

That rises to 69 once mortgages are included.

Well at least they are being sensible and paying off the most expensive debt first! Actually if you read it again that is not what it is saying. So it is not only the younger generation who are facing a lifetime of debt singing along to LunchMoney Lewis.

I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills

Perhaps the prospect of all this is behind this reported by the Office for National Statistics yesterday.

Ratings of life satisfaction and happiness were at their lowest, on average, for those aged 45 to 59.

On current trends they may well have to raise the ages named here.

those aged 65 to 79 tended to report the highest average levels of personal well-being

Actually for Londoners like me there may well be quite a different set of age bands.

Londoners may have to wait until they reach 77 to live debt-free, according to new research…….Londoners are saddled the longest as they typically take on more unsecured debt and secure mortgages later, despite their higher wages.

Those of you who live in the North-East can have a laugh at our expenses as you pass the threshold at 57. In fact you are the only group of people who have expectations that approach reality.

The survey also found a big gap in expectations: Britons expect to start a debt-free life when they hit 57 – 12 years earlier than they are likely to.

I am not sure if it is a good thing or a bad think that the younger generation are the most out with their view of their future.

Those aged 16 to 24 are the most optimistic – they expect to be rid of unsecured debt at just 38.

That also makes them wildly wrong: if they buy a home with a mortgage they’ll be waiting until age 74.

There are obvious caveats in such research but it does highlight existing trends.

A space oddity

There is an institutional problem in having debts at ever later ages in the UK and it has been given the oxygen of publicity this week too. From BT.com.

Peter Day wanted to extend his mortgage in order to pay for his daughter’s wedding. At the time he was 59 and close to paying off his mortgage, but asked to extend his term by five years.

However, despite having three final salary pensions ready to cover him in retirement, he was turned down for the mortgage extension by Co-operative Bank.

For foreign readers UK mortgage providers have long had rules that say that you have to have a provable income to repay it which poses problems at retirement so the state retirement age of 65 was a potential issue as was 60 for those who were lucky enough to have a pension from then. It would seem that much of the financial sector has not kept up with the times. Who da thunk it? As Turkish pointed out in the film Snatch.

That by the way is the same financial sector who requires very highly paid staff because they have such valuable skills and abilities.

Number crunching

The research quotes these numbers.

The average British debt per household was £53,904 in December including mortgages, according to the Money Charity.

That works out at £28,891 per adult, which is 112 per cent of average earnings.

Based on December’s figures, Brits each spend an average of £1,037 on interest repayments every year –four per cent of a typical salary.

The debt figure quoted is in fact including mortgages and if you want a total it comes to this.

PEOPLE IN THE UK OWED £1.455 TRILLION AT THE END OF DECEMBER 2015. THIS IS UP FROM £1.424 TRILLION AT THE END OF DECEMBER 2014 – AN EXTRA £627.09 PER UK ADULT.

Apologies for the capitals and the estimated cost of this is shown below.

BASED ON DECEMBER 2015 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£52.371 BILLION.

 The official denial

We know how to treat these and at Davos Mark Carney gave us one and the Financial Times joined it as it prepared for the first question at the next Bank of England press conference.

But household consumption has grown slower than the economy since the recovery started and the appetite for debt has fallen sharply. Households have increased their outstanding debts £5.1bn on average every quarter since 2009, nearly four times less than the £22bn rate between 1997 and 2009.

These numbers are no doubt true but miss some important points. If you argue that the amount of debt was an issue pre credit crunch then the fact it has risen since poses a question. Also yes household consumption and debt have slowed over the time period quoted but more recently they have picked up. For example retail sales were very strong in 2015 and the December lending data told us this.

The three-month annualised and twelve-month growth rates were 4.0% and 3.3% respectively.

So the economy is growing at around 2% per annum but we have no inflation so debt has risen relatively here. Also there is an important sectoral shift which matters as some groups are piling up debt as others repay creating quite different groups. This is highlighted by the mortgage data.

Gross lending secured on dwellings was £19.5 billion and repayments were £16.0 billion.

Also unsecured credit is on something of a tear.

Consumer credit increased by £1.2 billion in December, compared to the average monthly increase of £1.3 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.1% and 8.6% respectively.

The acceleration which began in late summer 2014 continues.

Comment

The Financial Times also made the point that if you look at debt you need to look at assets and here is its view.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

The point is valid but of course it is using a marginal price and I would argue an inflated one for house prices which are the biggest asset by far. As Feeling QEzy points out in the comments what could go wrong?

For example UK housing stock annual turnover is circa 4% while 30% of homes have a mortgage, and as we all know it is the marginal seller that drives the price in a weak market.

Whilst I am no fan of the projections of the Office for Budget Responsibility they do pose a question as they project rises in household debt although typically they have changed it in 2021 to 163% of income from 172%. That shows a danger in this sort of analysis.

So where do we stand? Not quite in the quicksand that some argue. But we are seeing rises in unsecured debt again and you do not have to take my word for this just check the absence of the phrase “household debt levels are falling” in recent Bank of England speeches. This poses a problem as for a start how can they raise interest-rates in such an environment? Also if you are wondering what is the big deal here the US National Bureau of Economic Research takes up the story.

In a study summarized in the January edition of The NBER Digest, researchers find that a rise in household debt relative to a nation’s GDP is often associated with a subsequent economic contraction, and that this debt ratio increased in many countries prior to the decline in global GDP growth in 2007-12.

Oh and the area which is supposed to be benefiting from Bank of England policy smaller businesses how is that going?

Net lending to SMEs was £0.0 billion ( in December 2015)

The Scandanavian house price bubble of 2015 rages on

If we look to the Nordic region then it is not just the weather that can be icy cold. The world on interest-rates has also dipped more than its toe into icy levels of interest-rates in that part of the world. Here  the acronym ZIRP (Zero Interest-Rates Policy) has mostly been found to be outdated and replaced by NIRP (Negative Interest-Rates Policy). It has been one of the themes of this blog discussing the implications on Denmark where interest-rates have been cut to -0.75%, Sweden where they are -0.35% and Finland where they are -0.2%. Even in oil rich Norway we saw this back on the 17 th of June.

Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 1.00 percent.

Of course there are plenty of ongoing issues for Norway as I note that the price of Brent Crude Oil has fallen this week to US $50 per barrel. Commodity price disinflation is no fun at all if you are one of the commodity producers. Also I note that we were also told this.

The Executive Board’s current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.

Let us now move on to analyse the impact of such low interest-rates which vary from 1% (and likely to fall further) to -0.75%.

Norway

The Norges Bank stated its concerns as it cut interest-rates.

House price inflation has moderated in recent months, but there are wide regional variations. Household debt is still rising faster than income. The low-interest rate level is contributing to sustaining the rise in house prices and debt.

You may note that they are admitting to pumping up both house prices and private debt. Let us look at the latest data.

House prices in Norway increased on average by 6.6 per cent from the 2nd quarter of 2014 to the 2nd quarter of 2015. In Bergen and Oslo, houses prices had the highest increase in this period, with 10.1 and 10.0 per cent respectively. In Stavanger, the prices fell by 3.7 per cent.

So we see something familiar in these times which is a house price surge in a capital city, in this case Oslo. I also note that the overall index is held down by the consequences of the oil price fall as the “oil town” of Stavanger sees house price falls.

If we look for context the house price index where 2005=100 started in 1992 at 34.3 and is now 185.3. So we are seeing house price rises on top of previous rises in a so far  reach for the sky style move with only a brief flicker for the onset of the credit crunch. According to the Financial Times there was a record number of dwellings sold in June so unlike the UK for example volumes are accompanying prices. Also there was this.

Anecdotal evidence backs this up. The former home of the Soviet spy Rudolf Abel in an Oslo suburb sold for NKr6.1m ($750,000) this year, well above the NKr4.2m asking price

Londoners in particular will recognise such a pattern.

Sweden

We get a clue to the state of play here from this in the Financial Times.

Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”.

The official data is up to the end of the first quarter of this year and shows the rate of increase of house prices to be 9% and the index (1981=100) to be at 619. So again we note it is a country which has already seen considerable rises in house prices.

The Riksbank is aware of the dangers here as these excerpts from the July Minutes indicate.

Mortgage lending is increasing far too much. The real economic situation will normalise by the end of next year but this will happen at the cost of ever greater risk-taking on the mortgage market.

Also we see some quotes which are blatant contradictions.

The household debt ratio (debt as a percentage of disposable income) is expected to rise somewhat faster in the short term……….However, the high level of indebtedness needs to be dealt with now.

As mortgage rates in Sweden are mostly at variable rates then there is no avoiding the fact that an official interest-rate of -0.35% accompanied by ever more QE to reduce bond yields will put downwards pressure on mortgage rates and more upwards pressure on house prices.

The Riksbank seems to have suffered some amnesia about its worries in April.

These are coupled, for instance, to household indebtedness and the rapid rise in housing prices.

What could go wrong?

Denmark

The Danish central bank posted a warning in its latest Monetary Review.

The fall in interest rates in the first part of the year boosted house prices in the spring. The level of interest rates remains low, thereby supporting house prices. Consequently, there is still reason to exert caution in relation to house prices, especially in Copenhagen, where there is a risk that price increases are self-reinforcing.

The capital city effect again which is a theme of these days and the FT explains it thus.

Apartment prices in Copenhagen have risen by a quarter in the past year and are up by about two-thirds since 2011, according to data from Danske.

That is about as bubblicious as we are currently seeing and of course in a country that saw a boom that turned to bust as the credit crunch hit then it would appear that memories are very short. With the official interest-rate at -0.75% then there is food for thought from this. As Bloomberg points out the Danes do have a taste for personal borrowing.

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…

Also it is unusual on two counts to see words and phrases like this from a central bank.

There are indications that recent developments in the Copenhagen market for project sales resemble the situation prior to the housing bubble in 2005-07 somewhat.

Firstly “housing bubble” is usually avoided like the plague and added to it is the admittal that one is happening now.

Finland

Just to cover off the area we are seeing a different situation in Finland.

In the first quarter of 2015, prices for old single-family houses fell by an average of 1.3 per cent from the previous year in the whole country. In Greater Helsinki, prices went up by 3.0 per cent from the corresponding period of the previous year, while in the rest of the country they fell by 1.8 per cent.

The capital city effect is still there but at a lower level. I guess we are seeing a combined effect here. I have written recently about the struggles of the Finnish economy in the last three years and for now they are outweighing the impact of lower mortgage-rates. So it is a case of watch this space.

Comment

International bodies are starting to look at house price developments in Scandanavia. The IMF pointed this out in May about Norway.

House prices rose rapidly over the last decade and most estimates suggest that house prices are significantly overvalued.

If we move to the OECD then its figures will be behind recent developments but even so house prices are 63.6% overvalued compared to rents and 21.9% overvalued compared to income. The numbers for Sweden are 33.8% and 22% respectively and Denmark is at 12.1% and 7.9% which means that the bust which followed the boom didn’t really have much of an impact at all on future behaviour and apparently taught few is any lessons.

In essence here the part of domestic monetary policy which relates to house prices has been subjugated to exchange rate policy in Sweden and Denmark with Norway struggling to find a way of dealing with an oil price which has more than halved. However if we return to the institutional view you may note that they would presumably be happy if the prices could rise forever as the only apparent fear is of future falls.

A significant reduction in property prices could occur.

Those who are struggling to buy as house prices accelerate away would welcome such a development! First time buyers get forgotten in all of this as house price rises blast away from both wage increases and ordinary inflation. We have another outbreak of the war of the generations as the mostly older feel wealthier and the most younger see a future either filled with debt or one where house prices are out of reach on ordinary incomes. As house prices rise the experience sooner or later is that rents tend too as well so there is little opportunity for escape.

One way of helping to stop this mess is to explicitly put house prices in the various headline consumer inflation indices. Regular readers will know that this is one of the themes of this blog. It would not solve the problem but it is one of the pieces required in my opinion. Otherwise central banks are allowed to present inflation rises as a wealth increase and we will have to keep playing Biffy Clyro.

You are creating all the bubbles at night
I’m chasing round trying to pop them all the time
We don’t need to trust a single word they say
You are creating all the bubbles at play

The extraordinary economic experiment that is going on in Sweden

One of the features of the economic environment right now is the extraordinary economic experiment being inflicted on the Swedish economy by its central bank called the Riksbank. It was not so long ago (20th April 2014) that it was being described by Paul Krugman of the New York Times in the terms below.

Whatever their motives, sadomonetarists have already done a lot of damage. In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.

Their crime? In Paul Krugman’s eyes it was to raise interest-rates as they are only for cutting. The “tale of stagnation and deflation” was an odd description for an economy which had just had an annual rate of GDP growth of 1.7% and was just about to have one of 2.7%. Some people call that solid economic growth especially as it was followed by 2.6% and then 2.6% in the final quarters of 2014.

Inflation Targeting

Here there was an issue for those like Paul Krugman who do not like lower prices as the Swedish inflation rate or CPI had fallen to -0.6% in March 2014. Amazing is it not the fear generated by small falls in inflation as opposed to the treatment of overshoots? In fact since then it has often been below 0% but by small amounts and in April was -0.2%.  The Riksbank has seized on this as a reason to cut interest-rates in a manner in which Professor Wren-Lewis whom I referred to on Wednesday would adore. I will come to that in a moment but for the moment let me point out that as the inflation index is influenced by the interest-rate changes there has been positive feedback or something of an own-goal here. The index which takes out the interest-rate cuts is running at 0.4%. It is not a perfect measure as it has indirect taxes too but you get the idea.

The Swedish worker or consumer

The ordinary Swede is likely to be confused by all this as you see for them an inflation rate of -0.2% can be compared to this.

Compared to March 2014, labour costs have increased by 1.7 percent for wage-earners and 2.7 percent for salaried employees.

Not exactly the same time period but higher wages combined with falling prices leads to what is for these times is a substantial real wage boost. If we look at the underlying data we see that much of the real wage boost has been caused by the lower oil price as elsewhere. The transport inflation index fell by almost 6% between July of last year and January of this as it followed the oil price trend.

Sadly that ended in January and we have returned to a more familiar pattern of price rises as workers and consumers frown.

The Riksbank

Now you might think that solid economic growth and real wage gains provided something to please a central bank. After all if we look south from Sweden there are quite a few places which would regard it as an economic nirvana and ask it to “come as you are”. Not the Riksbank which had cut interest-rates into negative territory on February 11th and started Quantitative Easing as well. It is hard not to have a wry smile at someone who things that cutting interest-rates by 0.1% will have any effect but it will be unprovable as they cut again in late March to -0.25%. Enough? Not quite as in what can only be described as a type of panic they keep deciding to add to the amount of QE with the latest addition in April shown below.

the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.

Actually bond yields were being driven lower by developments in the Euro area so it would be fascinating to be able to ask the Riksbank if this has made any difference at all so far. But in my view I wish that the Smiths had added Stockholm to the list below.

Panic on the streets of London
Panic on the streets of Birmingham

Today’s data

The latest economic growth numbers show little sign of the stagnation we were assured above.

Sweden’s GDP increased 0.4 percent in the first quarter of 2015, seasonally adjusted and compared to the fourth quarter of 2014. GDP increased 2.5 percent, working-day adjusted and compared to the first quarter of 2014.

Actually the annual rate of growth has been remarkably stable over the past year or so. It does not seem that there is panic in the underlying Swedish economic model either. From the Huffington Post yesterday.

Beginning in 2016, men in the country will be entitled to a third (yes, third) month of paid paternal leave based on a new government proposal.

Of course this time next year there will also be the economic boost from hosting Eurovision which Sweden has just won. If the country is in need of an economic boost via the music industry perhaps ABBA could be persuaded to reform, after all they were right about this.

It’s a rich man’s world

Side Effects

This is a clear issue in medicine so as central banks indulge in their own form of junkie culture we need to look for them in economies too. Sadly consumer inflation measures have often been neutered but such factors as household borrowing help. How has it responded to ever lower interest-rates and other monetary easing? From Sweden Statistics.

The annual growth rate for lending to households from Monetary Finance Institutions (MFIs) increased by 0.2 percentage points from 6.3 percent (revised) in March to 6.5 percent in April.

The main driver of this sort of thing is invariably the housing sector so let us drill down the numbers.

This is an increase of SEK 187 billion compared to the corresponding month last year, of which housing loans accounted for SEK 164 billion…….Households’ housing loans amounted to a total of SEK 2 541 billion at the end of April and had an annual growth rate of 6.9 percent.

The typical new mortgage interest-rate has fallen from 2.41% to 1.67% over the past year. According to The Local there has been the expected response.

Apartment prices have shot up in Gothenburg and Stockholm in recent months with one-bedroom properties in central locations regularly selling for more than three million kronor ($352,439).

Apparently even one of the Swedish banks has its concerns.

Researchers at Swedbank…. are warning that people living in the heart of the nation’s cities are facing growing “affordability problems” due to needing to fork out more than 30 percent of their post-tax salaries on mortgage payments and other related costs.

With wages up and mortgage costs down a lot we get something of a clue to what house prices must have done recently!

In May 2014 this issue troubled the Riksbank as shown below.

The analysis shows that the average debt ratio (debts in relation to disposable incomes) in July 2013 was 296 per cent for indebted individuals and 370 per cent for individuals with mortgages

If the borrowers who have reduced their debts over this period continue to reduce these debts at the same rate, on average they will be free of debt in about 100 years.

Ah free of debts in 100 years! Of course since then there has been quite a borrowing binge in Sweden (total borrowing has risen by 12.6%) mostly driven by the Riksbank. Will they now on average be free of debt in 112.6 years? What was that about inter-generational mortgages in Japan?

Even businesses seem to be getting in on the act.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.

Comment

The Riksbank seems to have taken its new policy from the lyrics of Sweden’s most famous pop music export.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny

With a narrow money annual growth rate of 13.5% it is certainly doing the central banking equivalent of splashing the cash.  The economic experiment is to do this in an economy that is growing solidly. Even the argument of low and negative inflation will fade away if the price of crude oil remains where it is now. What will be left then? Well much higher house prices I would imagine which is of course where we find inflation these days. That is also why it is officially classified as a wealth gain although I doubt that first-time buyers in Swedish cities would agree. Another inter-generational wealth transfer is in play.

Meanwhile deep underground in economic terms a tectonic plate is rumbling. So far the Swedish response to negative interest-rates seems to be to save more. Regular readers will recall my contention that interest-rate cuts can be contractionary……

Meanwhile I do hope that the swings in mood in the Riksbank do not do to Sweden what happened when they changed which side of the road they drive on.

On Sunday, 3rd September 1967, Sweden changed from driving on the left to driving on the right. This is what happened http://t.co/m2r3LBszDP—
Historical Pics (@VeryOldPics) May 26, 2015