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.

 

 

Will the new Bank of England Governor cut interest-rates like in Yes Prime Minister?

Today has brought something I have long warned about into focus. This is the so-called improvement made by Bank of England Governor Mark Carney where it votes on a Wednesday evening but does not announce the results until midday on a Thursday. With it being a leaky vessel there was an enhanced risk of an early wire for some.

The City watchdog is to investigate a jump in the pound which took place shortly before the Bank of England’s interest rate announcement on Thursday.

The rise has raised questions over whether the decision to hold the Bank’s base rate at 0.75% had been leaked.

The Financial Conduct Authority (FCA) said: “We are aware of the incident and are looking into it.”

In December, the Bank referred to the FCA a leak of an audio feed of sensitive information to traders.

The value of sterling increased about 15 seconds before midday on Thursday, when the Bank’s Monetary Policy Committee (MPC) made its announcement.

It rose from $1.3023 to $1.3089 against the dollar, and saw a similar increase against the euro.

( BBC )

Actually the Pound had been rallying from much earlier in the morning but perhaps the FCA was not up then. As to the enquiry we know from the TV series Yes Minister how they work.

That’s what leak enquiries are for.
Setting up.
They don’t actually conduct them.

In fact it gets better.

Members may be appointed, but they’ll never meet, and certainly never report.
How many leak enquiries can you recall that named the culprit? – In round figures.
– If you want it in round figures none.

For those of you who have never watched this series it described the UK system of government with both uncanny accuracy and humour. This week alone we saw the Chancellor call for expenditure cuts of 5% exactly as predicted. They will be promised and claimed but somehow wont actually happen if the series continues to be so prescient.

Press Conference

This was a classic Unreliable Boyfriend style performance proving that the Governor has not lost his touch. After hinting and not delivering an interest-rate cut he then in yet another innovation the Monetary Policy Report ( just like in Canada ) cut the expected economic growth rate.

Taken together, potential supply growth is projected to remain subdued, and weaker than expected a year ago.
The MPC judges that potential supply growth will remain subdued over the forecast period, at around 1% on average.
It initially falls a little from its current rate of around 1%, before rising to around 1½% in 2023 Q1.

The problem here was exposed by a good question from the economics editor of the Financial Times Chris Giles who asked why this had fallen so much in Governor Carney’s period of office? You always have an indicator of a hot potato when the question is quickly passed to a Deputy Governor. As ever the absent-minded professor Ben Broadbent waffled inconsequentially as he waited for the audience to lose the will to live. But there are clear underling issues here. The recent one is the fall in the speed limit form 1.5%  to 1% as implied here but as Chris highlighted it had already nearly halved. What Chris did not highlight but I will is the impact on this of the woeful “output gap” style thinking which I will illustrate by reminding you that the Governor originally highlighted an unemployment rate of 7% and now in the MPR we are told this.

The MPC judges that the long-term equilibrium unemployment rate has remained at around 4¼%

That is a Boeing 737 Max style error.

Today’s Data

It is hard not to recall Governor Carney tell us “this is not a debt-fuelled recovery” as you read the numbers below.

The extra amount borrowed by consumers in order to buy goods and services increased to £1.2 billion in December, in line with the £1.1 billion average seen since July 2018. Within this, net borrowing on credit cards recovered from a very weak November to £0.4 billion. Net borrowing for other loans and advances remained the same as in November, at £0.8 billion.

As you can see we are little the wiser as to why credit card spending fell in the way in did in the previous release ( November data). It may just be one of those things because the surrounding months were relatively strong a bit like we often see with the UK pharmaceutical sector which does not run in even months.

A consequence of this is below.

The annual growth rate of consumer credit rose to 6.1% in December, having ticked down to 5.9% in November. The growth rate for consumer credit has been close to this level since May 2019. Prior to this it had fallen steadily from an average of 10.3% in 2017.

So after rocketing it is merely rising very strongly! From. of course, a higher base. Can anybody think of anything else in the UK economy rising at this sort of rate? It is six times the rate at which the Bank of England now thinks the economy can grow at and around double wages growth.

Actually household consumption full stop picked up.

Net mortgage borrowing by households was £4.6 billion in December, above the £4.2 billion average seen over the past six months. Despite these stronger flows, the annual growth rate for mortgage borrowing remained at 3.4%. Mortgage approvals for house purchase (an indicator for future lending) also picked up in December, to 67,200, above the 65,900 average of the past six months. Approvals for remortgage rose slightly on the month to 49,700.

For newer readers this continues a trend started by the Funding for Lending Scheme which began in the summer of 2012. It took a year to turn net mortgage lending positive but over time this example of credit easing has had the effect you see above. Of course in true Yes Minister style it was badged as a policy to boost small business lending, how is that going?

Within this, the growth rate of borrowing from large businesses and SMEs fell to 4.4% and 0.8% respectively.

Actually and you have to dig into the detail to find this for some reason, smaller business borrowed an extra 0 in December which followed an extra 0 in November.

Comment

The last 24 hours have been an example of the UK deep-state in action. For example the ground was set for the new Bank of England Governor Andrew Bailey to reward the government with an interest-rate cut in return for his appointment just like in Yes Prime Minister. Meanwhile as head of the FCA he can make sure that the leak enquiry into the current Governor does not impact in his own term in a sort of insider regulation response to possible insider trading.

Meanwhile the new Governor has already lived down to his reputation for competence.

The Financial Conduct Authority (FCA) said most High Street banks had set “very similar prices”, after it demanded changes to the system.

Several big brands including Santander, Lloyds Banking Group and HSBC are set to bring in a 39.9% rate this year.

The FCA has sent a letter to banks, asking them to explain what influenced their decision.

The City regulator has also asked how the banks will deal with any customers who could be worse off following the changes.

Yep the reforms of the FCA have more than doubled overdraft rates for some. Today’s Bank of England release has picked up a bit of this as its quoted rate is now 20.69% adding to something that I have reported throughout the life of this blog. Official interest-rates may fall but some real world ones have risen.

So as we consider Bank of England Governors let me leave you with one of the finest from the Who.

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!
We don’t get fooled again

 

 

 

Slow house price growth and a fall in credit card borrowing will worry the Bank of England

2020 has only just begun to borrow a phrase from The Carpenters but already the pace has picked up. Should the oil price remain above US $68 for a barrel of Brent Crude there will be consequences and impacts. But also we can look back on the Bank of England’s priority indicator in 2019 and on the subject here is the Nationwide.

Annual UK house price growth edged up as 2019 drew to a
close, with prices 1.4% higher than December 2018, the first
time it been above 1% for 12 months.

I have put in the format that would be most sensible for whoever is presenting the Bank of England Governor’s morning meeting. That is because pointing out the rise was only 0.1% in December does not seem as good and noting that unadjusted average prices fell by £452 may rewarded with an office that neither the wifi nor the cake trolley reach.

Continuing with that theme perhaps looking north of the border will help.

Scotland was the strongest performing home nation in
2019, with prices up 2.8% over the year.

Might be best to avoid this though.

London ended the year as the weakest performing region,
with an annual price decline of 1.8%.

If you are forced into looking at London then the Nationwide has done some PR spinning of the numbers.

While this marks the tenth quarter in row that prices have fallen in the capital, they are still only around 5% below the all-time highs recorded in Q1 2017 and c50% above their 2007 levels (UK prices are only around 17% higher than their 2007 peak).

Best to avoid the fact that London is usually a leader of the pack for the rest of the country.

Affordability

Should our poor graduate find themselves in this area then perhaps a new career might be advisable as even the Nationwide cannot avoid this.

“Even in the North and Scotland, where property appears
most affordable, it would still take someone earning the
average wage and saving 15% of their take home pay each
month more than five years to save a 20% deposit. In Wales
and Northern Ireland, it would take prospective buyers nearly seven years, and almost eight years for people living in the West Midlands.
“Reflecting the trend in overall house prices, the deposit
challenge is most daunting in the South of England, where it would take an average earner almost a decade to amass a 20% deposit. Again, the pressures are most acute in the
capital, where someone earning an average income would
need around 15 years to save a 20% deposit on the typical
London property (this is even longer than was the case
before the financial crisis, when it would have taken around
ten and a half years).”

So houses are very expensive and in many cases effectively unaffordable which contradicts the official measures of inflation which somehow ( somehow of course means deliberately) miss this out. So officially you are richer it is just unfortunate that you cannot afford housing….

Consumer Credit

Our unfortunate trainee cannot catch a break today as we note this.

The net flow of consumer credit was £0.6 billion in November, the smallest flow since November 2013.

Within it was something to send a chill down the spine of a modern central banker. The emphasis is mine and it will also have stood out in capitals to the Bank of England.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.6 billion in November. This is the weakest since November 2013, and below the £1.1 billion average seen since July 2018. Within this, there was a net repayment of credit cards for the first time since July 2013, of £0.1 billion. Net borrowing for other loans and advances also weakened, to £0.7 billion.

Actually the stock of credit card borrowing fell by a larger amount from £72.4 billion to £72.1 billion. However whilst the drop stands out a little care is needed as the October flow was more than has become usual ( +£400 million) so the drop may be a bit of an aberration.

We learn more from the next bit.

These weak flows mean the annual growth rate of consumer credit fell to 5.7% in November, compared to 6.1% in October. It has now fallen 3.7 percentage points since July 2018, when it was 9.4%.

Whilst that may be true ( we recently had some large upwards revisions which reduced confidence in the accuracy of the data series) it dodges some important points. For example 5.7% is still much faster than anything else in the economy and because of the previous high rate of growth had to slow to some extent due to the size of the amount of consumer credit now ( £225.3 billion in case you were wondering). Also the other loans and advances section continues to grow at an annual rate of 6.6% which has not only been stable but seems to be resisting the impact of a weaker car market as car loans are a component of it.

Mortgage Lending

This morning’s release was a case of steady as she goes.

Lending in the mortgage market continued to be steady in November, and in line with levels seen over the past three years. Net mortgage borrowing fell marginally to £4.1 billion, and mortgage approvals for house purchase remained unchanged at 65,000.

The catch is that the push which began with the interest-rate cuts and QE bond buying after the credit crunch and was turbo-charged by the Funding for Lending Scheme in the summer of 2012 is losing its impact on house prices.

For those of you wondering what the typical mortgage rate now is another release today gave us a pointer.

Effective rates on new secured loans to individuals decreased 9bps to 1.87%.

For more general lending they seem a little reticent below so let me help out by saying it is 6.88%.

Effective rates on outstanding other unsecured loans to individuals decreased 4bps

That is another world from a Bank Rate of 0.75%. Meanwhile on that theme I would like to point out that the quoted interest-rate for credit cards is 20.3%. I have followed it throughout the credit crunch era and it is up by 2.5%. Yes I do mean up so relatively it has risen more as official interest-rates declined. This is something that has received a bit of an airing in the United States and some attention but not so here.

Comment

Let me open with two developments in the credit crunch era. The first is that even high interest-rates ( 20%) above do not seem to discourage credit card borrowing these days. I will also throw in that numbers from Sweden and Germany suggest that a combination of zero interest-rates for many and negative ones for some seem to encourage saving. That is a poke in not one but both eyes for the Ivory Towers.

Moving to our trainee at the Bank of England then I suggest as a short-term measure as the Governor is only around until March suggesting a man of international distinction is required to deal with issues like this.

Meteorologists say a climate system in the Indian Ocean, known as the dipole, is the main driver behind the extreme heat in Australia.

However, many parts of Australia have been in drought conditions, some for years, which has made it easier for the fires to spread and grow.

Returning to the economy then there was some better news from the broad money figures as November was a stronger month raising the annual rate of M4 growth to 4%. The catch is that it takes a while to impact and so is something for around the middle of 2021.

Me on The Investing Channel

 

 

Good news for the UK economy on the wages and broad money front less so on consumer credit

Today I feel sorry for whoever has to explain this at the Bank of England morning meeting.

“Annual house price growth remained below 1% for the 11th
month in a row in October, at 0.4%. Average prices rose by
around £800 over the last 12 months, a significant slowing
compared with recent years – for example, in the same
period to October 2016, prices increased by £9,100.”

That was from the Nationwide Building Society which has brought news to spoil a central banker’s breakfast. After all they have done their best.

“Moreover, mortgage rates remain close to all-time lows –
more than 95% of borrowers have opted for fixed rate deals
in recent quarters, around half of which have opted to fix for five years.”

The irony here is that they have made their own Bank Rate changes pretty impotent. I recall in the early days of this decade noting that nearly all mortgages in Portugal were fixed-rate ones and thinking we were different. Well not any more!

But unlike Governor Carney I consider this to be a good news story because of this bit.

the unemployment rate remains close to 40 year lows and real earnings growth (i.e. after taking account of inflation) is close to levels prevailing before the financial crisis.

So houses are becoming more affordable in general terms and the Nationwide is beginning to pick this up as its earnings to house price ratio has fallen from 5.2 to 5. Although the falls are concentrated in London ( from 10 to 8.9) and the outer London area ( 7.2 to 6.7). Both Northern Ireland ( now 4) and the West Midlands ( now 4.7) have seen small rises.

UK Wages

We can look at the wages position in more detail because this morning has brought the results of the annual ASHE survey.

Median weekly earnings for full-time employees reached £585 in April 2019, an increase of 2.9% since April 2018….In real terms (after adjusting for inflation), median full-time employee earnings increased by 0.9% in the year to April 2019.

So we see something of a turning in the situation for the better although sadly the situation for real wages is not that good, as it relies on the Imputed Rent driven CPIH measure of inflation. So maybe we had 0.5% growth in real wages.

Even using the fantasy driven inflation measure we are still worse off than we once were.

Median weekly earnings in real terms are still 2.9% lower (£18 lower) than the peak in 2008 of £603 in 2019 prices.

These numbers conceal wide regional variations as highlighted here.

In April 2019, the City of London had the highest gross weekly earnings for full-time employees (£1,052) and Newark and Sherwood had the lowest (£431).

Also the way to get a pay rise was to change jobs.

In 2019, the difference in growth in earnings for full-time employees who changed jobs since April 2018 (8.0%) compared with those who stayed in the same job (1.6%) was high, suggesting stronger upward pressure on wages compared with other years.

Tucked away in the detail was some good news for part-time workers.

Median weekly earnings for part-time jobs increased at a greater rate. In 2019, earnings increased by 5.2% in nominal terms, which translates to a 3.1% increase in real terms. The median weekly earnings for part-time employee jobs of £197 is 6.5% higher than in 2008 in real terms.

It seems that the changes in the national minimum wage have had a positive impact here.

Meanwhile far from everyone has seen a rise.

The proportion of employees experiencing a pay freeze or a decrease in earnings (in real terms) in 2019 (35.7%) is lower than in 2018 (43.3%) and in 2011 (relative to 2010) when it was 60.5%.

Mortgages

From the Bank of England today.

Mortgage market indicators point to continued stability in the market. Net mortgage borrowing by households was little changed at £3.8 billion in September. The stability in the monthly flows has left the annual growth rate unchanged at 3.2%. Growth rates have now remained close to this figure for the past three years. Mortgage approvals for house purchase (an indicator for future lending) were also broadly unchanged in September, at 66,000, and remained within the narrow range seen over the past three years.

As you can see this was a case of what Talking Heads would call.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

Although there is a nuance in that the longer-term objective of the Bank of England is still in play. The true purpose of the Funding for Lending Scheme of the summer of 2012 was to get net mortgage credit consistently positive. That was achieved as there have been no monthly declines since ( unlike in 2010 and 2011) and over time the amount has risen. Nothing like the £9 billion pluses of 2007 but much higher than post credit crunch.

Consumer Credit

The credit impulse provided by the Funding for Lending Scheme was always likely to leak into here.

The annual growth rate of consumer credit was 6.0% in September. This growth rate has now been falling steadily for nearly three years. Revisions to the data this month, however, mean that the annual growth rate has been revised up slightly over the past two and a half years.

Let me give you an example of how the rate of consumer credit growth has been falling from last month’s update.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%.

The “revised up slightly” means it is now being reported as 6.1%. This is really poor as we can all make mistakes but this is a big deal and needs a full explanation as something has gone wrong enough on a scale to change the narrative.

Assuming this number is correct here is the detail for September itself.

The extra amount borrowed by consumers in order to buy goods and services fell slightly to £0.8 billion in September, and for the second month in a row was below £1.1 billion, the average since July 2018.

Broad Money

There was some good news in this release for the UK economy.

Total money holdings in September rose by £10.9 billion, broadly flat on the month, and remaining above the average of the past 6 months.

The amount of money held by households rose by £5.5 billion in September, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings rose by £4.3 billion, while the amount held by PNFCs rose by £1.0 billion.

I am a little unclear how a rise of just under £11 billion is “broadly flat”! But anyway this continues the improvement in the annual growth rate to 3.9% as opposed to the 1.8% of both January and May. Individual months can be erratic but we seem to have turned higher as a trend.

Comment

There have been several bits of good news for the UK economy today. The first is the confirmation of the improvement in the trajectory for real wages and some rather good growth for those working part-time. This feeds into the next bit which is the way that houses and flats are slowly becoming more affordable albeit that much of the progress has been in London and its environs. Looking ahead we see that the improvement in broad money growth is hopeful for the early part of 2021.

The higher trajectory for consumer credit growth is mixed,however. Whilst it will have provided a boost it is back to the age old UK economic problem of borrowing on credit and then wondering about the trade gap. It is especially poor that the Bank of England has been unable to count the numbers correctly. Also it is time for my regular reminder that the credit easing policies were supposed to boost lending to smaller businesses. How is that going?

while the growth rate of borrowing by SMEs rose slightly to 1.0%.

Woeful and a clear misrepresentation of what they were really up to.

NB

I later discovered that the Bank of England revised Consumer Credit higher by some £6.1 billion in August meaning that as of the end of September it was £225.1 billion.

 

 

 

What are the prospects for UK mortgage rates?

Today I thought I would reverse things around and look at a consequence of one of 2019’s themes. So let me hand you over to Moneyfacts.

The data shows that the largest rate reduction has been recorded in the five year maximum 80% loan-to-value (LTV) tier, which has fallen by 0.09% to 2.78%, followed by the five year maximum 70% and 85% LTV tiers, which have both decreased by 0.07% to 2.99% and 2.80% respectively. In fact, the only LTV tier to see a rate increase is the two year fixed at a maximum 65% LTV, which has increased by 0.01% to 2.03% from this time last month.

Oh and remember all the rhetoric from politicians after the credit crunch about there being no future for risky mortgage lending?

Since the beginning of this year, our analysis shows that the strongest rate competition appeared to take place at the maximum 95% LTV market, with lenders attempting to attract potential first-time buyers, which are considered the lifeblood of the mortgage and property market. As a result, the two year average fixed rate at this tier was driven down from 3.46% on 1 January to 3.24% by 16 May, where this rate has relatively remained unchanged since.

However those are averages which of course contain more than a few non-competitive offers. If we look further you can borrow at 1.33% from the Post Office for 2 years and at 1,67% from it for five years. These are remortgage rates with 40% equity.

Switching now to the driver of all this let me now point out that the two-year Gilt yield is 0.37% and the five-year is 0.3%. There are two perspectives on this of which the opening one is that the five-year fixed looks a worse deal in a relative comparison. However if we look back we see that it is five-year mortgage rates which have plunged. According to Statista the five-year mortgage rate was some 2% higher in June 2014 ( 3.69%) and apart from a small blip up when Bank Rate was raised to 0.75% has essentially been falling ever since. So five-year fixed rate mortgages are tactically bad but strategically good.

Just for clarity it is not the Gilt yields themselves that directly impact fixed-rate mortgages it is the swap rates that they influence. But with things as they are I expect the downwards pressure to remain.

What about a Bank Rate cut?

I am sure many of you thinking this so let me address it. As we stand UK Gilt yields are expecting two Bank Rate cuts of 0.25% so fixed-rate mortgages are already adjusting to that. Whereas in such a scenario variable-rate mortgages would fall and may well over the next couple of years be a better deal. Of course interest-rates could rise after October 31st should we Brexit on that date but we know that Bank of England Governor Carney cuts interest-rates with the speed of Usain Bolt but raises them at the speed of a tortoise which is hibernating. So only a real calamity would cause the latter. After all this is the world in which we now live.

Danish banks now buckling under the pressure of negative interest rates, with another lender announcing it will impose fees on large retail deposits. ( h/t Tracy Alloway)

Or indeed a world where the benchmark yield in Italy fell below 1% yesterday.

Just for clarity these are my opinions and not advice. Also there is the issue raised by Robert Pearson in the comments section about the banks having higher cost of funds limiting possible mortgage-rate falls.

The Outer Limits

Time for a reminder of something which has ignored the falls in Bank Rate and everything else. The Bank of England quoted interest-rate for credit cards is 20% and has risen in the credit crunch era.

What about the Mortgage Market?

We had figures earlier this week but today the Bank of England offered a wider view.

Net mortgage borrowing by households picked up in July, rising to £4.6 billion. While this was the strongest since March 2016, it reflected a fall in repayments rather than an increase in new lending. The annual growth rate remained at 3.2%, close to the level seen since 2016. Mortgage approvals for house purchase (an indicator for future lending) increased in July to 67,300. This was the strongest since July 2017, but remains within the very narrow range seen over the past two years.

The fall in repayments is curious and amounted to £900 million on a monthly basis and repeats what happened in June. It is dangerous to extrapolate too much from a couple of months but maybe some borrowing is going through this route or at current interest-rates some think it is not worth repaying.

Overall these are better numbers but not as strong as the UK Finance ones from Wednesday.

House Prices

In spite of the favourable situation provided by falling mortgage rates as we have just looked at and improving real wages house prices are not responding. From the Nationwide.

Annual house price growth remained below 1% for the ninth
month in a row in August, at 0.6%. While house price
growth has remained fairly stable, there have been mixed
signals from the property market in recent months.

In fact the unadjusted price fell by around £1600 on a monthly basis.

Unsecured Credit

The Bank of England slips this headline in for the copy and pasters.

Net consumer credit rose by £0.9 billion in July, broadly in line with the average seen over the past year.

But this represents this.

The annual growth rate of consumer credit remained at 5.5% in July, markedly lower than its peak of 10.9% in November 2016. This slowing reflects the weaker monthly lending flows over most of the past year.

Is there anything else growing at an annual rate of 5.5% in the UK? Perhaps the Bank of England is being wistful for the days when its Sledgehammer QE drove the annual rate of growth up to 10.9%. Also care is needed here about the slowing as much of it may simply reflect a slowing in car loans about which the Bank of England mostly keeps the data to itself ( I have asked).

Broad Money

If we look further ahead ( around 18 months) there was a glimmer of sunlight for the wider economy this morning.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFC’s) and financial corporations that do not act to intermediate financial transactions (NIOFCs). In July, total money holdings rose by £18.9 billion, the largest monthly increase since May 2018. The increase on the month was driven by PNFCs, for which money held rose to £5.1 billion following a fall in June

The annual rate of growth is now 3.1% which is the best it has been since this time last year. M4 lending has also been picking up and is now 4.3% so there are some positive signs albeit from low levels.

Comment

We live in a curious world because let me add in another factor. The mortgage rates and yields we are discussing today are all strongly negative in real terms when we allow for inflation. Not only are Gilt real yields negative bit the ordinary person can borrow at negative real rates too if they have some equity. Not on a credit card though!

On current trends we may well get very low longer-term fixed-rate mortgages as presumably the ten-year fixed mortgage-rate will start to tumble too. In the uncertainty we face that could look very attractive I think. But again that is simply my opinion and not advice.

As for how low can they go? For the moment a base seems to have formed around the unwillingness/fear of banks on countries with negative interest-rates to actually impose this on the ordinary depositor. But we also know that our central planning overlords have several cunning plans in mind for this.