UK house prices continue to boom

When the Covid-19 pandemic struck the UK one of my first thoughts was that we would finally see some house price falls. A sharp economic decline accompanied by lower employment and real wages seemed set to drive that. This is how I summarised the state of play on March 30th.

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

At the time the only way looked down to misquote Yazz, and yet this morning we find The Halifax reporting this.

House price growth on strongest run since 2004

I guess that comes under unexpected headlines of 2020 which has turned out to be a very contrary year, to say the least, The detail of The Halifax report is below.

House prices rose by more than 1% in November, adding almost £3,000 to the cost of a typical UK home.
At just over £253,000, the average property price has risen by more than £15,000 since June. In percentage terms that equates to 6.5% – the strongest five-monthly gain since 2004.

They are cherry-picking their measure as a five-monthly gain is hardly a metric but nonetheless it is quite a surge in the circumstances. Also the picture remains the same if we return to more conventional metrics.

On a monthly basis, house prices in November were 1.2% higher than in October
In the latest quarter (September to November) house prices were 3.8% higher than in the
preceding three months (June to August)
House prices in November were 7.6% higher than in the same month a year earlier – the
strongest growth since June 2016

So we have the strongest growth since the Leave vote which itself was supposed to bring house prices lower. Remember the official forecast?

House prices could take an 18% hit over the next two years and there will be an “economic shock” that will increase the cost of mortgages if the UK votes to leave the EU,George Osborne has warned.

The chancellor said he would publish an official analysis next week saying house prices would be lower by at least 10% and up to 18% compared with what is expected if Britain remains in the EU ( The Guardian)

If we look at the official series house prices were on average just under £213,000 in June 2016 and as of September were £244,513. So he must have been expecting quite a boom on top of that! No doubt the official excuse will be the counterfactual although they may struggle to find someone to say it without laughing aloud.

Looking ahead the picture looks bright too.

Mortgage approvals rose in October to the highest level seen in 13 years. The latest Bank of England
figures show the number of mortgages approved to finance house purchases rose by 6% to 97,532. Year-on-year, the October figure was 51% above October 2019.

We had looked at those numbers on the 30th of November.

What has caused this?

Let me open with a different factor which gets underplayed and it is the furlough scheme. Back in January there had been announcements but it was not expected to be as large nor lasting so long.

The Job Retention Scheme launched on 20 April. By midnight on 15 November there were a total of:

9.6m jobs furloughed

1.2m employers furloughing

Total claimed £43bn

The Self-Employment Income Support Scheme opened on 17 August. By midnight on 15 November there were a total of:

2.4m claims

£5.9bn claimed

Much of it will have gone to people who badly need it but some have been able to save ( partly because more than a few opportunities to spend money have been unavailable) and we have seen the consequence in both the GDP numbers and the money supply ones. From November 30th.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

This is a leakage if you can call it that which has also flowed into the housing market.

Next up is the Stamp Duty cut although if we look at it in isolation buyers are in fact worse off.

 It is interesting to note that the stamp duty saving of £2,500 on a home costing £250,000 is now far outweighed by the average increase in property prices since July.

We have seen before that such changes are used as a way to borrow more so that the house price change becomes a multiple of the tax cut.

Last but not least has been the role of the Bank of England which has changed since I posted this on the 30th March.

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

Whereas as of the end of last week the £645 billion had become £716 billion and rising ( there will be another £1.473 billion today,tomorrow and Wednesday). The new planned total is £895 billion or £875 billion of UK government bonds or Gilts plus the completed £20 billion of Corporate Bonds. I say planned because so far the Bank of England attitude has been to sing along to Luther Vandross.

Oh, my love
A million days in your arms is never too much
I just don’t wanna stop
Too much, never too much, never too much, never too much

You may note the Term Funding Scheme got a boost and surprise, surprise it was badged as being for smaller businesses. Readers have asked me in the past if even this goes into the housing market. Well of £211.1 billion as of the end of October some £78.1 billion is in the Real Estate, professional services and support activities category.

Comment

In addition to this being quite extraordinary there is another context. This comes from the fact we are using marginal prices for an average at a time of lower volumes. One group as I have been reminded today will be excluded from this because they cannot sell as at reasonable price and sometimes at any price.

I wonder how they’re accounting for the mostly below average cladding affected flats that are now out of the equation as they cannot be sold. ( @BCLMacro )

The Bank of England view was expressed by its Chief Economist Andy Haldane in the summer of 2016. Note how what is inflation for first-time buters and those trading up is described as a wealth increase.

Finally, let’s look at household wealth. As with employment, the headline gains here have been impressive,
with aggregate net wealth increasing by almost £3 trillion since 2009. Chart 9 breaks down these wealth
gains by asset type – pensions, property, financial, physical. This suggests these gains have come
principally from rises in property and pension wealth. In other words, the gains have been skewed towards
those in society who own their own home or who have sizable pension pots.

That theme has continued with the plan to gerrymander the Retail Prices Index by excluding from 2030 its use of house prices and mortgage interest-rates and replacing them with fantasy rents. They assume if you own your own home you pay rent to yourself and this adds to the issue of the fact they have struggled to measure rents which are paid accurately.

So far they have kept this house of cards going but there are hints of trouble and they come from something I noted at the end of last month. This is that mortgage rates have begun to rise. Not by much if you have a large deposit but if you have a small one you have seen quite a change. If we look at the 2-year fixed-rate data from the Bank of England this morning we see that a 5% deposit will get you a mortgage rate of 4.1% rather than the 3% of a year ago. So for all the hype about lower interest-rates we see yet another example of a higher one.

Podcast

 

 

UK interest-rates are rising in spite of another money supply surge

Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).

London’s average house prices hit a record high of £496,000 in September 2020.

These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.

As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.

“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”

You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).

Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.

If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.

Pump It Up!

This is the change seen in October.

Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.

The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.

There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.

This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.

Mortgages

Let me now switch to the part that will be emphasised at the Bank of England morning meeting.

The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.

Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.

The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.

However the road to the fast track promotion scheme will mean relegating this part to the small print.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,

Perhaps our junior could emphasise this part.

 but remain below the rate at the start of the year (1.85% in January).

Consumer Credit

This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.

Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.

A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.

Small Business Lending

For once these numbers look good.

Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .

Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.

Comment

The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.

Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.

Also there is this.

 Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.

So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.

The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Podcast

The Bank of England has pumped up the housing market again

Overnight there has been quite a shift in economic sentiment. To some extent I am referring to the falls in equity markets although the real issue is the new lockdown in France and increased restrictions in Germany. As we have been noting they were obviously on their way and the Euro area now looks set to see its economy contract again this quarter. It will be interesting to see how and if the ECB responds to this in today’s meeting and these feeds also into the Bank of England. The UK has tightened restrictions especially in Northern Ireland and Wales as we now wonder what more the central banks can do in response to this?

Still even in this economic storm there is something to make a central banker smile.

LONDON (Reuters) – Lloyds Banking Group LLOY.L posted forecast-beating third quarter profit on Thursday, lowering its provisions for expected bad loans due to the pandemic and cashing in on a boom in demand for mortgages.

Britain’s biggest domestic lender reported pre-tax profits of 1 billion pounds for the July-September period, compared to the 588 million pounds average of analysts’ forecasts.

Few things cheer a central banker more than an improvement in prospects for The Precious! But we can see that there is also for them a cherry on top of the icing.

The bank booked new mortgage lending of 3.5 billion pounds over the quarter, after receiving the biggest surge in quarterly applications since 2008.

That links into the theme of monetary easing which of course is claimed to help businesses but if you believe the official protestations somehow inexplicably ends up in the housing market every time. So let us look at the latest monetary data which has just been released. Oh and one point before I move on, what use are analysts who keep getting things so wrong?

Mortgages

Whoever was responsible for the Bank of England morning meeting today must have run there with a smile on their face and gone through the whole release word by word.

The mortgage market strengthened a little further in September. On net, households borrowed an additional £4.8 billion secured on their homes, following borrowing of £3.0 billion in August. This pickup in borrowing follows high levels of mortgage approvals for house purchase seen over recent months. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered reaching levels slightly higher than the average of £4.0 billion in the six months to February 2020. The increase on the month reflected higher gross borrowing of £20.5 billion, although this remains below the February level of £23.4 billion.

From their perspective they will see this as a direct response to the interest-rate cuts and QE they have undertaken as net mortgage borrowing has gone from £0.2 billion in April to £4.8 billion. Something they can achieve.

The outlook,from their perspective, looks bright as well.

The number of mortgage approvals for house purchase continued increasing sharply in September, to 91,500 from 85,500 in August (Chart 1). This was the highest number of approvals since September 2007, and is 24% higher than approvals in February 2020. Approvals in September were around 10 times higher than the trough of 9,300 approvals in May.

At this point we have what in central banking terms is quite an apparent triumph as they have lit the blue touch paper for the housing market. It has not only been them as there have also been Stamp Duty reductions but we see that there is an area of the economy that monetary policy can affect.

As to what people are paying? Here are the numbers.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn, and the outstanding stock of, mortgages were little changed in September. New mortgage rates were 1.74%, an increase of 2 basis points on the month, while the interest rate on the stock of mortgage loans fell 1 basis point to 2.13% in September.

Money Supply

Curiously the Money and Credit release does not tell us the money supply numbers these days although we do get this.

Overall, private sector companies and households increased their holdings of money in September. Sterling money (known as M4ex) increased by £10.8 billion in September; a significant rise from August which saw withdrawals of £1.0 billion (Chart 5). This is a continuation of the trend of strong deposit flows seen between March and July, albeit at a much weaker pace in comparison to the £40.5 billion monthly average seen during that period.

In essence this is part of the higher savings we have observed where people have furlough payments to keep incomes going but opportunities to spend them have been cut.

I have looked them up and annual M4 (broad money) growth was 11.6% in September. So we are seeing a push of the order of 12% which is more than in the Euro area.

Consumer Credit

Here the going has got a lot tougher and the monetary push seems to be fading already.

Household’s consumer credit weakened in September with net repayments of £0.6 billion, following some additional net borrowing in July (£1.1 billion) and August (£0.3 billion).

Actually the numbers have established something of an even declining trend since July. This means that the detail looks really rather grim.

Although the repayment in September was small in comparison to the £3.9 billion monthly average seen between March and June, this contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows pushed the annual growth rate down further in September to -4.6%, a new series low since it began in 1994.

In fact it is essentially repayment of credit card debt.

The net repayment of consumer credit was driven by a net repayment on credit cards of £0.6 billion

So it has an annual growth rate of -11.3% now. That is probably due to the price of it which is something of a binary situation.For those unaware there have been quite a few 0% offers in the UK for some time now but this is also true for others.

The cost of credit card borrowing was also broadly unchanged at 17.92% in September.

Although blaming the interest-rate for credit card borrowing does have the problem that overdraft interest-rates have been on quite a tear.

The effective rates – the actual interest rate paid – on interest-charging overdrafts continued to rise in September, by 3.52 percentage points to 22.52%. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Perhaps those that can have switched to the much cheaper personal loans.

Rates on new personal loans to individuals were little changed in September, at 4.78%, compared to an interest rate of around 7% in early 2020.

As you can see Bank of England policy has been effective in reducing the price of those.

Comment

The present situation gives us an insight into the limits of monetary policy and as to whether we are “maxxed out”. We see that the Bank of England interest-rate cuts, QE bond purchases (another £4.4 billion this week) and credit easing can influence the housing market and personal loans. However we have also noted the way that more risky borrowers are now wondering where all the interest-rate cuts went? For example a 2 year fixed rate with a 5% deposit was 2.74% in July as the Bank of England pushed rates lower but was 3.95% in September, or a fair bit higher than before the easing ( it was typically around 3%).

So we see that monetary policy is colliding with these times even before we get out into the real economy and a reason for this can be see on this morning’s release from Lloyds Bank. Some £62.7 billion of mortgages went into payment holidays of which £9.1 billion have been further extended and £2.2 billion have missed payments. No doubt the banks fear more of this and this is why they are tightening credit for riskier borrowers which operates in the opposite direction to Bank of England policy.

So the easing gets muted and we are left mostly with the easing of credit for the government as the instrument of policy right  now.

 

 

 

 

Are UK house prices rising again?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As the band Middle of the Road put it.

Ooh wee chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Mortgages

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

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

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

Approvals still look weak.

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

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

Consumer Credit

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

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

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

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

So gross borrowing is picking up.

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

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

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

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

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

Comment

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

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

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

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

This bit is really curious.

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

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

Me on The Investing Channel

Negative Interest-Rates cannot stop negative household credit growth in the UK

This morning has opened with something which feels like it is becoming a regular feature. This is the advent of negative bond yields in the UK as we become one of those countries where many said it could not happen here and well I am sure you have guessed it! The two-year bond or Gilt yield is -0.07% and the five-year is -0.03%. As well as the general significance there are particular ones. For example I use the five-year bond yield as a signal for the direction of travel for mortgage rates especially fixed-rate ones. If we look at Moneyfacts we see this.

Lloyds Bank had the lowest rate in the five year remortgage chart for those looking for a 60% LTV. Its deal offers 1.35% (2.8% APRC) fixed until 31 August 2025, which then reverts to 3.59% variable. It charges £999 in product fees and comes with the incentives of free valuation, no legal fees and £200 cashback.

A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?
If we switch to the two-year yield it is particularly significant as it is an implicit effect of all the Bank of England bond or Gilt buying because it does not buy bonds which have less than three years to go. So it is a knock-on effect rather than a direct result.

QE

The total of conventional QE undertaken by the Bank of England is £616.3 billion as of the end of last week. The rate of purchases was £13.5 billion which is relevant for the May money supply numbers we will be looking at today. Looking ahead to June there has been a reduction in weekly purchases to £6.9 billion so a near halving. So as you can see there has been quite a push provided to the money supply figures. It is now slower but would previously have been considered strong itself.

Also the buying of corporate bonds which now is just below £16 billion has added to the money supply and I have something to add to this element.

NEW: The Fed has posted the 794 companies whose bonds it began purchasing earlier this month as part of its “broad market index” Six companies were 10% of the index: Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon  ( @NickTimiraos )

You may recall that the Bank of England is also buying Apple corporate bonds and I pointed out it will be competing with the US Federal Reserve to support what is on some counts the richest company in the world. Make of that what you will……

Engage Reverse Gear

This morning we have been updated on how much the UK plans to borrow.

To facilitate the government’s financing needs in the period until the end of August 2020, the UK Debt Management Office (DMO) is announcing that it is planning to raise a
minimum of £275 billion overall in the period April to August 2020.

Each sale reduces the money supply and I can recall a time when this was explicit policy and it was called Overfunding. Right now it would be a sub category of QT or Quantitative Tightening, should that ever happen.

Money Supply

We see that in a similar pattern to what we noted in the Euro area on Friday there is plenty being produced.

The amount of additional money deposited in banks and building societies by private sector companies and households rose strongly again in May (Chart 1). These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £52.0 billion in May. This followed large increases in March and April, of £67.3 billion and £37.8 billion respectively. The increase was driven by households and PNFCs, and continued to be strong relative to recent history: in the six months to February 2020, the average monthly increase was £9.3 billion.

The use of PNFCs is to try to take out the impact of money flows within the financial sector. Returning to the numbers we are seeing the consequences of the interest-rate cuts and the flip side ( the bonds are bought with newly produced money/liquidity) of the Bank of England QE I looked at earlier.

Last time around I pointed out we had seen 5% growth in short order and the pedal has continued to be pressed to the metal with a growth rate of 6.7% over the past three months. Or monthly growth rates which are higher than the annual one in May last year. All this has produced an annual growth rate of 11.3%.

Household Credit

This cratered again or to be more specific consumer credit.

Households repaid more loans from banks than they took out. A £4.6 billion net repayment of consumer credit more than offset a small increase in mortgage borrowing. Approvals for mortgages for house purchase fell further in May to 9,300.

I would not want to be the official at the Bank of England morning meeting who presented those numbers to the Governor. A period in a cake trolley free basement awaits. Indeed they may be grateful it does not have any salt mines when they got to this bit.

The extremely weak net flows of consumer credit meant that the annual growth rate was -3.0%, the weakest since the series began in 1994. Within this, the annual growth rate of credit card lending was negative for the third month running, falling to -10.7%, compared with 3.5% in February. Growth in other loans and advances remained positive, at 0.7%. But this was also weak relative to the recent past: in February, the growth rate was 6.8%.

Regular readers will recall when the Bank of England called an annual growth rate of 8.2% “weak” so I guess they will be echoing Ariane Grande.

I have no words

It seems like the air of desperation has impacted the banks too.

Effective rates on new personal loans to individuals fell 34 basis points to 5.10% in May. This was the lowest since the series began in 2016, and compares to a rate of around 7% at the start of 2020.

Mortgages

A small flicker.

On net, households borrowed an additional £1.2 billion secured on their homes. This was slightly higher than the £0.0 billion in April but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected more new borrowing by households, rather than lower repayments.

Looking ahead the picture was even worse.

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

We wait to see if the advent of lower mortgage rates and the re-opening of the economy will help here.

Comment

I am sure that many reading about the UK money supply surge will be singing along with The Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Some will go further.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack
Monday morning, turning back
Yellow lorry slow, nowhere to go

Do I spot a QE reference?

But oh, that magic feeling, nowhere to go
Oh, that magic feeling
Nowhere to go, nowhere to go

There will have been some sunshine at the Bank of England morning meeting.

Small and medium sized businesses drew down an extra £18.2 billion in loans from banks, on net, as their new borrowing increased sharply. Before May, the largest amount of net borrowing by SMEs was £589 million, in September 2016. The strong flow in May led to a sharp increase in the annual growth rate, to 11.8%.

Of course it was nothing to do with them but that seldom bothers a central bankers these days. This next bit might need hiding in the smallest print they can find though.

Podcast

 

UK consumer credit collapses as the money supply soars

As we peruse the data for the impact of all the Bank of England actions in this pandemic we have also been updated on its main priority. From the Nationwide Building Society.

“UK house prices fell by 1.7% over the month in May, after
taking account of seasonal effects – this is the largest
monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8%, from 3.7% in April.”

According to them things had been going really rather well before the May reverse.

“In the opening months of 2020, before the pandemic struck
the UK, the housing market had been steadily gathering
momentum. Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop
following the general election.”

Personally I am rather dubious about the April number but we do have a large fall for May and also something of a critique for the suspended official index from the Office for National Statistics.

Mortgage activity has also declined sharply. Nevertheless,
our ability to generate the house price index has not been
impacted to date, as sample sizes have remained sufficiently large (and representative) to generate robust results.

Rents

Perhaps such news is all too much for the boomers as I note the BBC reporting this today.

Lockdown break-ups, job losses and urgent relocations are thought to have led to a surge in the rental sector.

Demand for lettings in Great Britain is up by 22% compared to last year, according to property giant Rightmove.

Experts say the lifting of lockdown restrictions has released “two months of pent-up tension” in the market.

The supply of new rents is not keeping up with demand, however, prompting fears the surge will push up costs and leave some struggling to find homes.

The article tries to give the impression that rents are rising but provides no evidence for this at all, as the data set only has demand. It seems to lack a mention of the numbers in the data set which showed larger demand declines in the pandemic. We seem back to the get in now before rents boom message that is so familiar as the media parrots what the industry wants.

“I think we were lucky really because we got in there before demand boomed.”

On a personal level some people were viewing in my block yesterday. Fair play to the viewers who put on masks, but sadly the estate agent who is more likely to spread the virus did not bother with any PPE.

Consumer Credit

Even in the hot summer weather we are seeing the spine of the Monetary Policy Committee will have seen a sudden chill as these numbers came in.

New gross borrowing fell to £11.8 billion in April, roughly half its February level. Repayments on consumer borrowing have also fallen sharply, by 19% since February, reflecting payment holidays. On net, the larger fall in gross borrowing meant people repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record repayment (Chart 3). The extremely weak net flows of consumer credit meant that the annual growth rate fell below zero in April, to -0.4%, the weakest since August 2012.

What is happening here is that each month there is a large amount of new borrowing but also repayments and the usual situation is that we see net borrowing and in recent years lots of it. In April the amount of new borrowing fell and for once the use of the word collapse is appropriate whereas the level of repayments fell by much less. Thus the net amount swung by as much as I can ever recall.

In terms of the detail the main player was credit card borrowing.

The majority (£5.0 billion) of net consumer credit repayments were on credit cards, while £2.4 billion of other loans were also repaid in April. The annual growth rate of credit card lending was negative for the second month running, falling to -7.8%, compared with 3.5% in February before borrowing fell. Growth in other loans and advances remained positive, at 3.1%.

Mortgages

There was a similar pattern to be found here although in this instance it was not enough to turn the net figure negative. Also the bit I have emphasised is a signal of the financial distress I have both feared and expected.

Lending has also fallen sharply. Gross (new) mortgage borrowing fell to £14.4 billion, 38% lower than in February (Chart 5). Repayments on mortgage lending also fell sharply, to £13.9 billion, 26% lower than in February. This reflects a sharp fall in full repayments of loans, as well as the effect of payment holidays. The sharper fall in gross lending than repayments means that net mortgage borrowing fell, and was only £0.3 billion in April compared to an increase of £4.3 billion in February. This was the lowest net increase since December 2011.

One area that I do expect to pick up is this.

Approvals for remortgage (which include remortgaging with a different lender only) have fallen by less, to 34,400, 34% lower than in February.

With my indicator for fixed mortgage interest-rates ( the five-year Gilt yield) so low and effectively around 0% I expect some cheaper mortgage rates and hence more remortgaging, for those that can. As to mortgage rates they did this.

The effective interest rate paid on the stock of floating-rate mortgages fell 46 basis points, to 2.39%, the lowest rate since this series began in 2016; and the rate on new floating-rate loans fell 35 basis points to 1.48%.

They do not often tell us the mortgage rates but I guess they wanted to emphasise their own actions.

The rate paid by individuals on floating-rate mortgage borrowing fell a little further in April, however, as the MPC’s March Bank Rate cuts continued to pass through.

Business Lending

You might like to recall as you read the bit below that all of the credit easing since the summer of 2012 has been to boost small business lending.

Private sector businesses of all sizes borrowed little extra from banks in April. Small and medium sized businesses drew down an extra £0.3billion in loans from banks, on net, a similar amount as in March. The annual growth rate of borrowing by SMEs was 1.2%, in line with the growth rate since mid 2019.

For newer the readers the central banking game is to claim you are boosting lending to SMEs and then express surprise when it is mortgage lending and unsecured credit to consumers that rises and soars respectively.

The numbers below are mostly because many businesses have been desperate for cash.

But strength in borrowing by the public administration and defence industry meant total borrowing by large businesses was £12.9 billion in April. While this total is very strong by historical standards, it is down from £32.4 billion in March. The annual growth rate of borrowing by all large businesses increased to 15.4%, much stronger than the growth rate of around 5% in late 2019.

There will be quite a complicated mixture there as we no note lower and sometime zero sales colliding with many expenses continuing.

This is an ongoing problem where big businesses get help. As you can see they can access bank loans and the various Bank of England schemes are designed for them too.

 In April, firms raised £16.1 billion from financial markets, on net, the highest amount raised since June 2009 and significantly stronger than the previous six month average of £23 million. Within this, firms issued £7.7 billion of bonds, £7.0 billion of commercial paper (including funds raised through the Covid Corporate Financing Facility), and £1.4 billion of equity.

It is not easy as for obvious reasons a central bank can help a large business in ways that it cannot help a corner shop or one (wo)man band but the truth is that they also get a bit lazy and could try much harder.

Comment

I have held back the money supply data for this section and here it is.

These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £37.3 billion in April. The strength was driven by households and PNFCs. The increase was smaller than in March, when money increased by £67.3 billion.

An interesting decline in the monthly number but the main message here is the £104.6 billion in only two months which compares to a total of £2364.4 billion. So a bit short of 5% in only 2 months! The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears. Oh and as to how this is created well some £13.5 billion of QE a week sure helps.

One other factor will be that these aggregate numbers will hide very different individual and group impacts. For example some with mortgages will be in financial distress whereas others will be using lower rates to increase repayments. The same will be true of businesses with sadly as I have explained above smaller ones usually getting the thin end of the wedge. These breakdowns are as important as the aggregate data but often get ignored.

Where next for UK house prices?

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

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

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

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

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

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

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

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

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

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

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

Research

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

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

Just in case you missed it.

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

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

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

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

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

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

Reasons To Be Cheerful ( for a central banker )

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

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

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

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

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

News

Zoopla pointed out this earlier.

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

Me on The Investing Channel

Negative GDP growth and negative interest-rates arrive in the UK

Sometimes things are inevitable although what we are seeing now is a subplot of that. What I mean is that with the people in charge some trends have been established that I have warned about for most if not all of the credit crunch era. Let us start with something announced this morning which is more of a symptom than a cause.

UK gross domestic product (GDP) in volume terms was estimated to have fallen by 2.0% in Quarter 1 (Jan to Mar) 2020, the largest fall since Quarter 4 (Oct to Dec) 2008.

When compared with the same quarter a year ago, UK GDP decreased by 1.6% in Quarter 1 2020; the biggest fall since Quarter 4 2009, when it also fell by 1.6%.

This was in fact a story essentially about the Ides of March.

The decline in the first quarter largely reflects the 5.8% fall in output in March 2020, with widespread monthly declines in output across the services, production and construction industries.

Let us look deeper into that month starting with what usually is a UK economic strength.

There was a drop of 6.2% in the Index of Services (IoS) between February 2020 and March 2020. The biggest negative driver to monthly growth, wholesale and retail trade; repair of motor vehicles and motorcycles, contributed negative 1.27 percentage points; public administration and defence was the largest positive driver, contributing 0.01 percentage points.

Well there you have it as the biggest upwards move was 0.01%! There were other factors which should be under the category that Radiohead would describe as No Surprises.

In services, travel and tourism fell the most, decreasing by 50.1%, while accommodation fell by 45.7% and air transport by 44%.

By the entirely unscientific method of looking up in the air in Battersea and noting the lack of planes it will be worse in April. Next up was this.

Construction output fell by 5.9% in the month-on-month all work series in March 2020; this was driven by a 6.2% decrease in new work and a 5.1% decrease in repair and maintenance; all of these decreases were the largest monthly falls on record since the monthly records began in January 2010.

Then this.

Production output fell by 4.2% between February 2020 and March 2020, with manufacturing providing the largest downward contribution, falling by 4.6%……….The monthly decrease of 4.6% in manufacturing output was led by transport equipment, which fell by 20.5%, with the motor vehicles, trailers and semi-trailers industry falling by a record 34.3%

So the vehicle sector which was already seeing hard times got a punch to the solar plexus.

The Problems Here

There are a whole multitude of issues with this. I regularly highlight the problems with the monthly GDP data and this time we see it is that month ( March) which is material. So we have a drop based on numbers which are unreliable even in ordinary times and let me give you a couple of clear examples of what Taylor Swift would call “Trouble,Trouble,Trouble”.

However, non-market output has long been recognised as a measurement challenge and is one that is likely to be impacted considerably by the coronavirus (COVID-19) pandemic.

What do they mean? Let me look at what right now is the crucial sector.

The volume of healthcare output in the UK is estimated using available information on the number of different kinds of activities and procedures that are carried out in a period and weighting these by the cost of each activity.

In other words they do not really know. Regular readers will recall I covered this when I looked at a book I had helped a bit with which was when Pete Comley wrote a book on inflation. This pointed out that the measurement in the government sector was a combination of sometimes not very educated guesses. Some areas have surged.

The rise in the number of critical care cases is likely to increase healthcare output, as this is among some of the most high-cost care provided by the health service.

Some have not far off collapsed.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

So the numbers will be not far off hopeless. I mean what could go wrong?

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Inadvertently our official statisticians show what a shambles the measurement of education is at the best of times.

The volume of education output is produced by weighting the number of full-time equivalent students in different educational settings by the costs of educating the students in that setting.

They miss out another factor which is people doing stuff for themselves. For example my neighbour who fixed his washing machine. I have joined that club but more incompetently as I have a machine that now works but with a leak. Another example is parents now doing their own childcare rather than using nurseries or nanny’s which make be better but reduces GDP.

Oh and it would not be me if I did not point out that the inflation estimates used may be of the Comical Ali variety.

Comment

Now let me switch to the trends which the pandemic has given a shove to but were already on play. Let me return to my subject of yesterday and apologies for quoting my own twitter feed but it is thin pickings for mentions.

Negative Interest-Rates in the UK Klaxon! The two-year UK Gilt yield has fallen to -0.04% this morning

Not entirely bereft though as this from Moyeen Islam notes.

GBP 50yr OIS swap now negative for the first time

This matters if you are a newer reader because once this starts it spreads and sometimes like wildfire. A factor in this was the fact that one of the Bank of England’s loose cannons was on the airwaves yesterday.

“The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside,” Broadbent told CNBC on Tuesday.

“Yes, it is quite possible that more monetary easing will be needed over time.”

The absent-minded professor needs a minder or two as he can do a lot of damage.

“That is not to say that we stop thinking about this question, but that for the time being is where rates have gone,” he added.

So we have a level of layers here. How did he ever get promoted for example? In some ways even worse how he was switched from being an external member to being a Deputy Governor which opens a Pandora’s Box of moral hazard straight out of the television series Yes Prime Minister. The one clear example of him standing out from the crowd was in the late summer of 2016 when he got things completely wrong.

Moving on “My Precious! My Precious!” is rarely far away.

Broadbent said the potential to stimulate demand would have to be weighed against the impact on banks’ ability to lend, adding that “this is a question that has been thought about on and off since the financial crisis.”

Today we see action on that front.

Britain’s housing market set for comeback ( Financial Times)

I hardly know where to start with that but if we clear the room from the champagne corks fired by the FT I have two thoughts for you. I did warn that all the promised small business lending would end up in the mortgage market just like last time and indeed the time before ( please feel free to add a few more examples). Next whilst some prices may look the same for a while the champagne corks will be replaced by a sense of panic as prices sing along to Tom Perry and his ( Bank of England ) Heartbreakers.

And all the bad boys are standing in the shadows
And the good girls are home with broken hearts
And I’m free
Free fallin’, fallin’
Now I’m free
Free fallin’, fallin’

The Investing Channel

 

 

Where next for UK house prices?

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

Bank of England

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

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

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

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

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

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

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

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

Today’s Data

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

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

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

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

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

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

The Banks

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

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

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

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

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

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

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

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

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

Comment

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

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

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

Thus we are looking at a deep freeze.

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

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

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

Podcast

A blog from my late father about the banks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Quantitative Easing

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

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

Ex top Treasury official @rjdhughes

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

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

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

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

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

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

Comment

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

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

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