Rising bond yields are feeding into the real economy

Once upon a time most people saw central banks as organisations which raised interest-rates to slow inflation and/or an economy and cut them to have the reverse effect. Such simple times! Well for those who were not actually working in bond markets anyway. The credit crunch changed things in various ways firstly because we saw so many interest-rate cuts ( approximately 700 I believe now) but also because central bankers ran out of road. What I mean by that is the advent of ZIRP or near 0% interest-rates was not enough for some who plunged into the icy cold waters of negative interest-rates. This has posed all sorts of problems of which one is credibility as for example Bank of England Governor Mark Carney told us the “lower bound” for UK Bank Rate was 0.5% then later cut to 0.25%!

If all that had worked we would not be where we are and we would not have seen central banks singing along with Huey Lewis and the News.

I want a new drug
One that won’t make me sick
One that won’t make me crash my car
Or make me feel three feet thick

This of course was QE (Quantitative Easing) style policies which became increasingly the policy option of choice for central banks because of a change. This is because the official interest-rate is a short-term one usually for overnight interest-rates so 24 hours if you like. As central banks mostly now meet 8 times a year you can consider it lasts for a month and a bit but in the interest-rate environment that changes little as you see there are a whole world of interest-rates unaffected by that. Pre credit crunch they mostly but not always moved with the official rate afterwards the effect faded. So central banks moved to affect them more directly as lowering longer-term interest-rates reduces the price of fixed-rate mortgages and business loans or at least it should. Also much less badged by central bankers buying sovereign bonds to do so makes government borrowing cheaper and therefore makes the “independent” central bank rather popular with politicians.

That was then and this is now

Whilst there is still a lot of QE going on we are seeing ch-ch-changes even in official policy as for example from the US Federal Reserve which has raised interest-rates twice and this morning this from China.

Chinese press reports that the PBoC have raised interest rate on one-year MLF loans by 10bps to 3.1% ( @SigmaSqwauk)

The Chinese bond market future fell a point to below 96 on the news which raised a wry smile at a bond market future below 100 ( which used to be very common) but indicated higher bond yields. These are becoming more common albeit with ebbs and flows and are on that road because of the return of inflation. So many countries got a reminder of this in December as we have noted as there were pick-ups in the level of annual inflation and projecting that forwards leaves current yields looking a bit less than thin. Or to put it another way all the central bank bond-buying has created a false market for sovereign and in other cases corporate bonds.

The UK

Back on the 14th of June last year I expressed my fears for the UK Gilt market.

There is much to consider as we note that inflation expectations and bond yields are two trains running in opposite directions on the same track.

In the meantime we have had the EU leave vote and an extra £60 billion of Bank of England QE of which we will see some £1 billion this afternoon. This drove the ten-year Gilt yield to near 0.5%. Hooray for the “Sledgehammer” of Andy Haldane and Mark Carney? Er no because in chart terms they have left UK taxpayers on an island that now looks far away as markets have concentrated more on thoughts like this one from the 14th of October last year.

Now if we add to this the extra 1.5% of annual inflation I expect as the impact of the lower UK Pound £ then even the new higher yields look rather crackpot.

In spite of the “Sledgehammer” which was designed by Bank of England lifer Andy Haldane the UK ten-year Gilt yield is at 1.44% so higher than it was before the EU leave vote whilst his ammunition locker is nearly empty. So he has driven the UK Gilt market like the Duke of York used to drill his men. I do hope he will be pressed on the economic effects of this and in the real world please not on his Ivory Tower spreadsheet.

The Grand old Duke of York he had ten thousand men
He marched them up to the top of the hill
And he marched them down again.
When they were up, they were up
And when they were down, they were down
And when they were only halfway up
They were neither up nor down.

If you look at inflation trends the Gilt yield remains too low. Oh and do not forget the £20 billion added to the National Debt  by the Term Funding Scheme of the Bank of England.

Euro area

In spite of all the efforts of Mario Draghi and his bond-buyers we have seen rising yields here too and falling prices. Even the perceived safe-haven of German bonds is feeling the winds of change.

in danger of taking out Dec spike highs in yield of 0.456% (10yr cash) ( @MontyLaw)

We of course gain some perspective but noting that even after price falls the yield feared is only 0.456%! However it is higher and as we look elsewhere in the Euro area we do start to see yield levels which are becoming material. Maybe not yet in Italy where the ten-year yield has risen to 2.06% but the 4% of Portugal will be a continuous itch for a country with such a high national debt to GDP (Gross Domestic Product) ratio. It has been around 4% for a while now which is an issue as these things take time to impact and I note this which is odd for a country that the IMF is supposed to have left.

WILL PARTICIPATE IN EUROGROUP DISCUSSION ON – BBG ( h/t @C_Barraud)

 

The US

The election of President Trump had an immediate effect on the US bond market as I pointed out at the time.

There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.

 

As I type this we get a clear idea of the trend this has been in play overall by noting that the long bond yield is now 3.06%.  We can now shift to an economic effect of this by noting that the US 30 year mortgage-rate is now 4.06% and has been rising since late September when in dipped into the low 3.3s%. So there will be a contractionary economic effect via higher mortgage and remortgage costs. There will be others too but this is the clearest cause and effect link and will be seen in other places around the world.

Japan

Here we have a slightly different situation as the Bank of Japan has promised to keep the ten-year yield around 0% so you can take today’s 0.07% as either success or failure. In general bond yields have nudged higher but the truth is that the Bank of Japan so dominates this market it is hard to say what it tells us apart from what The Tokyo Whale wants it too. Also the inflation situation is different as Japan remains at around 0%.

Comment

We find ourselves observing a changing landscape. Whilst not quite a return of the bond vigilantes the band does strike up an occasional tune. When it plays it is mostly humming along to the return of consumer inflation which of course has mostly be driven by the end of the fall in the crude oil price and indeed its rebound. What that has done is made inflation adjusted or real yields look very negative indeed. Whilst Ivory Tower spreadsheets may smile the problem is finding investors willing to buy this as we see markets at the wrong price and yield. Unless central banks are willing to buy bond markets in their entirety then yields will ebb and flow but the trend seems set to be higher and in some cases much higher. For example German bunds have “safe-haven” status but how does a yield of 0.44% for a ten-year bond go with a central bank expecting inflation to go above 2% as the Bundesbank informed us earlier this week?

The economic effects of this will be felt in mortgage,business and other borrowing rates. This will include governments many of whom have got used to cheap and indeed ultra-cheap credit.

 

 

 

The consequences of rising UK Gilt yields on fiscal policy,pensions and mortgages

Today I wish to cover several trends of these times as they have all come together in one market. That is the UK Gilt market which is the name for UK government bonds. This is currently being influenced by quite a few factors at once but let me open with the two main factors which brought it to extraordinarily high levels in price terms and low levels in yield terms. The first is illustrated by this from Kenneth Rogoff in the Financial Times.

The mixed results from experiments with negative interest rate policy in Europe and Japan have led many to conclude that the idea is ill begotten and should be abandoned. To do so would be a serious mistake.

As you can see given a choice between reality and the view inside his Ivory Tower he much prefers the latter. This establishment view has driven interest-rates and bond yields lower around much of the world. Added to this in the UK has come the extra £60 billion of QE (Quantitative Easing) purchases of UK Gilts announced by the Bank of England in early August. Today will see it attempt to buy some £1.17 billion of long and ultra long UK Gilts as it buys ones maturing between 2032 and 2068.

A Reversal In Yields

Back in the 12 th of September I pointed out that the benchmark UK ten-year Gilt had a yield which had risen from the 0.5% it had fallen to up to 0.88%. This week it has pushed back up above 1% (1.01%  as I type this) which meant that yesterday the Bank of England found itself buying some of our 2023 Gilt at a yield some 0.25% higher than the week before. That is a lot on a yield which was 0.38%! I will be checking later what they pay for our longest dated Gilt and how that compares to the 198 they have paid to get a scale of a program which in its recent incarnation is running at a marked to market loss.

If we look for the yield most relevant to fiscal policy the thirty-year has risen to 1.7% (low 1.19%) and for fixed-rate mortgages the five-year has risen to 0.4% from a low of 0.12%.

What has caused this?

Inflation

Markets seem to have suddenly realised that inflation is going to go higher as this from the Financial Times indicates.

As a result, market expectations of UK inflation measured by the five-year break-even swap rate have jumped to 3.6 per cent — the highest level since early 2013.

Regular readers will be aware that I was expecting a rise in UK inflation as 2016 heads to a close anyway and it would have been enough to make even the new five-year yield look silly in real terms. It would also question the ten and thirty year yields. Now if we add to this the extra 1.5% of annual inflation I expect as the impact of the lower UK Pound £ then even the new higher yields look rather crackpot. Over as far ahead as we can see then we are expecting inflation adjusted or real yields to be strongly negative. Accordingly the UK Gilt market has been singing along to the Nutty Boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain

Why have they done this? This is another theme of these times as they are simply front-running the Monday, Tuesday and Wednesday purchases of the Bank of England. This manipulation of the market by it means that all the old rules for pricing Gilts have been both broken and ignore or if we are less polite a false market has been created.

Fiscal Policy

The impression that the UK government will loosen fiscal policy has gained ground and this has two components. The first is that it seems likely to spend more than the previous administration in a like for like comparison and secondly there is the impact of releases like this from the UK Treasury. This has had an impact today although it is in fact the same one released several months ago.

Cabinet ministers are being warned that the Treasury could lose up to £66 billion a year in tax revenues under a “hard Brexit”, according to leaked government papers.

GDP could fall by as much as 9.5 per cent if Britain leaves the single market and has to rely on World Trade Organisation rules for trading with the continent, compared with if it stayed within the EU, the forecasts show.

So those with short memories will be made nervous by the “scoop” in the Times. I do not know if the expected 18% fall in house prices is still in it as well.

The wider picture

We are seeing a global move towards higher yields and as an example we even now have a positive yield for ten-year German bunds albeit one of a mere 0.06%. The US 10 year Treasury yield has risen to 1.76% on the back of stories like this from Bloomberg.

Pacific Investment Management Co. says the Federal Reserve may raise interest rates two or three times by the end of 2017. Treasuries tumbled after oil prices rose.

Are those the ones that have not taken place so far in 2016? Also it is hard not to have a wry smile at the statement by Pimco that UK Gilts were on a “bed of nitroglycerine” which preceded one of the strongest rallies in history.

Not everybody is upset by this

If we move to the world of pension deficits then quite a few UK companies may welcome higher Gilt yields. This has been illustrated by this news today from Pensions World.

The aggregate deficit of the 5,945 schemes in the Pension Protection Fund (PPF) 7800 Index has decreased to £419.7bn at the end of September 2016, from a deficit of £459.4bn at the end of August 2016.

So £40 billion less to find which even in these inflated times is still a tidy sum. For those of you who would like to know the total sums at play, here they are.

Total assets were £1,449.5bn and total liabilities were £1,869.3bn. There were 4,993 schemes in deficit and 952 schemes in surplus.

Comment

Let us take a dose of perspective. If I look back over my career I can recall longer Gilt yields being 15% and more so 1.7% remains extraordinarily low and we should take advantage of it if only to improve the cost of our stock of Gilts. On that basis the recent rise is small but it also shows that we should not dilly and dally forever as events move on.

However there is another case of a false market here and it is one created in inflation-linked Gilts. They should be rising as inflation forecasts rise but whilst they are not part of the QE program their price has been driven higher by it as they are closely linked to ordinary or conventional Gilts. So we face the prospect of another false market as it is possible that higher inflation could be accompanied by lower prices for index-linked Gilts. Mind you I see that the new boy at the Bank of England is getting in his excuses early. From @LiveSquawk.

BoE’s Saunders: Expects MPC To Tolerate Modest Currency-Driven Inflation Overshoot In Next 2-3 Years

I wonder what “modest” is?

BoE’s Saunders: Expects GBP Weakness To Lift Inflation ‘Quite Substantially’

Oh and we see a clear sign of one of Carney’s cronies as we see a breathtaking attempt to shift the blame for the consequences of QE.

Saunders: Government Has Many More Tools To Resolve Distributional Effects Of Monetary Policy Than BoE

 

 

 

Are mortgage rates in Denmark part of a “mad world”?

This morning has started with a familiar drum beat for these times as we see higher bond prices in Japan and the consequent record lows in yields.

The 10-year JGB yield edged down half a basis point to minus 0.160 percent, after earlier setting a record low of minus 0.165 percent…..The 20-year JGB yield also set a fresh record low of 0.180 percent, shedding 1.5 basis points, as did the 5-year yield, dropping half a basis point to minus 0.275 percent .

As prices are going “higher and higher” and yields “Fallin’ ” we are now seeing consequences for the ordinary man and woman and the obvious place to look for this is Denmark. You see it has the longest history of official negative interest-rates with the certificate of deposit rate being cut to -0.2% on the 6th of July 2012 and being -0.65% as I type this. So we about to see four years tick up albeit with a brief spell in 2014 when the rate was raised to the apparent heights of 0.05%. Oh how the Nationalbanken must wish it could erase evidence of that move! As it was wrong footed by a policy change at the European Central Bank with more deception than any player I have seen so far at the 2016 European championships.

Such a thing is especially troubling as we mull how many central banks have started tightening cycles only to find that they cut again and in Denmark’s case to record lows. Although right now it is at -0.65% so just above the nadir of -0.75%. That is quite a contrast to the “expert” view which has had a consensus that negative interest-rates were not going to last long.

Mortgage Rates

This is one of the ways we can investigate the impact on the ordinary Dane and there are new developments in this arena.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

As you can see the Danish mortgage borrower can borrow as cheaply as the US Government and if the coupon drops to 2% well they can borrow more cheaply than the UK government over a 30 year period. So the ordinary borrower has the potential to lock in very low levels for mortgage-rates over a 30 year period in which case this particular shadow of the credit crunch era will stretch to at least 2046.  From the way the article is written 2% seems not far off a done deal if 1.5% is also in prospect,although the later feels subject to some hype.

As to whether the Danes will respond well the answer seems to be yes if last year was any guide.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float……Fixed-rate loans now make up about a third of Danish mortgage lending.

Oh and as to the below isn’t everything these days? The emphasis is mine.

The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

I do not know about you but the statement below seems to be rather tempting fate.

What’s more, borrowers can’t walk away from their debt.

Negative Mortgage Rates

There has been a lot of speculation and hype about this but the Danish Mortgage Bank Association keeps a weekly record of the yields on Danish mortgage bonds. The short-term rate for Kroner mortgage bonds was last at -0.23% and has been negative for all but two weeks in 2016. If we move to Euro mortgage bonds as we recall the Krone is pegged to the Euro then the yield on short-term mortgage bonds was last -0.13% and it has been negative for all of 2016 so far.

Back in April the Wall Street Journal was on the case.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

If only his name had been Hans Christian Anderson…

House Prices Rise

Even the IMF is on the case.

Fueled by historically-low interest rates, house prices have risen rapidly in recent periods—especially for flats and in Copenhagen……..the market bears close watching since a continuation of the uptrend would soon bring real house prices in these segments back to pre-crisis levels.

The data is delayed but the owner occupied flat index was up 9.2% in the year to March. The Nationalbanken suggests that the only way is up baby.

expectations of further positive developments in the housing market.

First-time buyers will of course have reason to disagree.

The debt problem

The IMF tried to sweep this issue under its carpet.

and the absence of an attendant rapid build-up in household debt.

That seems fine except if we note this from the Danish mortgage association.

The market value of all Danish outstanding mortgage bonds (traditional mortgage bonds, covered bonds and covered mortgage bonds) exceeds DKK 2,300bn (app. EUR 310bn). The Danish mortgage bond market is actually more than four times larger than the Danish government bond market. The market value also exceeds total Danish GDP.

Sadly it is out of date in terms of data however i helped out a bit on August 24th last year.

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

Comment

There is much to consider here but whilst the mainstream media continues of course to blame this on the Brexit referendum there is a culprit even closer to home. The Nationalbanken pegs the Krone to the Euro which means that Danish securities and an extremely close proxy for Euro area ones whilst the peg holds. The consensus view on the peg  is given by Bloomberg.

The man running Denmark’s biggest pension fund is convinced nothing can break the country’s euro peg.

This means that the 172.2 billion Euros of the third phase of the ECB’s covered bond purchases will have a strong effect on Danish covered bond prices and yields too. Odd that this is missed and of course there will also be an impact from the new corporate bond program which is doing this today.

ECB out again this morning buying more short end autos, 2-3y Chem names & 7-10y Pharma names (@creditmacro )

What could go wrong?

Also with the strong influence of the housing market on the economy of Denmark you might think that the economy would be surging, certainly economics 101 tells us that. But the last 3 quarter have gone -0.6%, 0.1% and then 0.5% so an improving trend yes but just under flat overall. If we look bank the Nationalbanken notes a credit crunch era of relative underperformance.

The low rate of growth in Denmark is to a large extent attributable to weak domestic demand.

On the other side of the coin Denmark does have substantial pension fund assets. How are they going though in a negative interest-rate world…..

Time for Tears For Fears or more recently Gary Jules.

When people run in circles it’s a very very
Mad world
Mad world
Mad world
Mad world

 

 

 

The Bank of England has squeezed disposable income by inflating housing costs

One of the features of that last 3 years or so in the UK has been the way that house prices have accelerated and left wage growth especially real wage growth way behind. The official view is that affordability is fine because mortgage rates have fallen although of course that is something of a trap as if the tactic of raising house prices is to continue then mortgage rates will have to continue to fall. That is not so easy from what are often particularly in the case of fixed-rate mortgages all time lows for rates. Also the idea that affordability is good is undermined by the fact that some much official “Help” is required via Help To Buy and other schemes. The truth is of course that first time buyers are very likely to be humming the words of John Lennon.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

A Different Perspective

The Resolution Foundation has taken a look at some longer time patterns at they pose another challenge to the its okay crew.

The analysis, which forms part of the Foundation’s forthcoming housing audit, finds that the share of income spent on housing costs was stable for most of the 1990s and early 2000s at around 17 per cent. However, a wedge opened up in the mid-2000s as rising housing costs outstripped income growth. By the eve of the financial crash, the average working age household spent around a fifth of their income on housing.

A 3% income share may not seem much but if one considers where that 3% has to come from then it gets much more difficult for many if not most budgets. Actually the impact of the credit crunch or rather the Bank of England Bank Rate cuts handed it back for a while.

This housing affordability wedge then shrank in the wake of the crash as interest rates were cut to record lows and house prices fell. For many households this fall helped soften the post-crash living standards squeeze by reducing mortgage costs.

Ah house prices fell! What a chill that will send around officialdom and the Bank of England as departmental memos fly around to explain what a house price fall is. In true Question of Sport form you are all probably wondering what happened next?

However with rising housing costs once again outstripping income growth, the Foundation warns that housing risks being a major brake on the UK’s living standards recovery.

The Foundation notes that the extra share of income being spent on housing over the last 20 years – up from 17 per cent in 1995 to 21 per cent in 2015 – is equivalent to a 10p rise in the basic rate of tax (or £1,500 per year) for a typical dual-earning couple with a child.

So we see that in percentage of income terms we are now pretty much back to the 2008 peak which makes you think. It is eye-catching to note that this is equivalent to a 10 pence rise in the basic tax rate. This was 25% back then if we ignore the lower rate of 20% on £3000k or so of income) so we have been given a basic income tax rate  5% lower but house buyers have found twice as much taken away. Oh Well as Fleetwood Mac put it. Of course the personal allowance has changed but even so the theme is clear here.

The Squeezed Middle

Is looking rather squeezed to say the least.

The analysis shows that households on low and middle incomes have been most affected by housing costs growing faster than incomes. Among these households, the share of income spent on housing has increased by almost a half over the last 20 years, from 18 per cent to 26 per cent. A far smaller increase took place for higher income households (up from 14 to 18 per cent) and the poorest households (up from 21 to 25 per cent).

We can perhaps gain a little solace from the fact that at least the poorest have not been hardest hit. But of course that ignores what 25% of their income actually gets them as we mull the pictures of rooms that seem more like cupboards that have done the rounds.

Regional Inequality

Maybe it’s because I’m a Londoner that these figures resonate but Scots have been hit by a shift here as well. The emphasis is mine.

Londoners currently spend around 28 per cent of the income on housing costs, up a third since the mid-1990s (21 per cent). Recent increases in housing costs have caused typical London households to experience the biggest post-crash fall in disposable incomes anywhere in the UK.

Scotland has seen the second sharpest increase (up from 12 per cent to 18 per cent), followed closely by the North West (up from 15 per cent to 20 per cent).

So the recovery has yet to reach disposable incomes in London? it is something of an antidote to all the “hoorah for house price rises” headlines that the media so love, after all they will be liked by one of the main advertising sectors.

Some Are Even Worse Off

Averages of course give us only some idea of the distribution and can by got by different routs and roads so this helps to nail the picture on the wall.

The Foundation warns that these increases have pushed too many households into spending a perilously high share of their income on housing. Its analysis shows that around 3.3 million households spend at least a third of their income on housing costs – up from 1.6 million in the mid-1990s.

I note that the Resolution Foundation then hammer out a beat that has been familiar to readers of my work for some time to say the least.

The analysis published today shows that private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent).

Whilst one needs to be careful about generics and stereotypes this is more of a problem for younger people than older ones as we mull the concept of a generational war.

Comment

There is much to consider here and let me open with the fact that this has been a deliberate policy driven by the Bank of England. In the summer of 2012 its Funding for Lending Scheme gave banks a subsidy ostensibly for small business lending but the real impact was via an initial impact of a 0.9% fall in mortgage rates. It’s own research suggests a total impact of 2% on mortgage rates. Whilst this did make houses more affordable for a while the subsequent surge in house prices first eroded and then according to the Resolution Foundation eliminated that on the road to making housing costs higher.

I would like to look at disposable income which is being squeezed according to this analysis by a consequence of Bank of England policy. If we go back to 2010/11 then real wages slumped in response to the Bank of England overlooking a rise in consumer inflation to over 5% per annum. Please remember that when the many “experts” tell you that such moves provided a strong stimulus as whilst it did up in the economic models to be found in Ivory Towers if we come back below the clouds it faded away.  If we put house prices in our inflation measures then some of the growth would disappear.

The situation was worse around the time of the Lawson boom in the late 1980s when around a quarter of disposable income went on housing but there are two catches. Firstly interest-rates were in double figures and on their way to a 15% peak if I recall correctly with apologies to younger readers for such a mind bending number. Secondly what happened next?

 

 

 

The Bank of England faces the consequences of pumping up Buy To Let lending

One of the features of central banking policy in the credit crunch era is that they have an asymmetric response pattern. They are ready to ease almost at the drop of a hat and at time even plunge us into negative interest-rates and yields. Yet on the other side of the coin they are slow to tighten policy or as we saw in the UK as inflation pushed to above 5% in 2011 sometimes do not tighten at all. In other words they are prone at best to doing too little to late. Even the US Federal Reserve which has begun a tightening cycle is proceeding slowly and is well behind the curve unless you believe that oil and commodity prices will continue to fall.

If we look at the UK the Bank of England has left official  interest-rates unchanged for over 7 years now. Its major effort has come via both QE and the Funding for Lending Scheme which helped both banks and the housing sector. I discuss that in more detail below. But I note that for all the hype about it acting it is even behind the government which has announced both Stamp Duty and Income Tax changes. Was not one of the points og having a committee of technocrats that they were supposed to act more quickly and decisively than politicians?

Also if we move to the Financial Planning Committee was it not created  for this sort of thing? Is all the expense of this particular Quango merely so it can use the word “vigilant” and then go to lunch. If we omit Governor Carney can anybody name a member of it? I can only because I used to work with Dame Clare Furse. I noted a while back when I retweeted a speech of hers for old times sake that it did not create much of a splash. Next time I decided not to so I could see if anybody else did and as far as I can tell nobody did. The musical reference has to be “The Sound of Silence” by Paul Simon.

Buy To Let Lending in the UK

An example of this has been the boom in UK Buy To Let lending which has help drive house prices out of the reach of first-time buyers in much of the UK. On Thursday the British Bankers Association published the latest figures.

Mortgage borrowing remained buoyant in February. It appears that borrowers are continuing to try to get ahead of the increases in stamp duty for buy-to-let and second home buyers scheduled to come into effect next month.

It was not only borrowing which was buoyant.

There were 20% more approvals for house purchase in February than in the same month of 2015. Reports suggest this is, in part, due to buyto-let and second-home buyers…….

Indeed one can make a case for UK credit standards overall being relatively lax if we look at these numbers too.

Unsecured borrowing by households is growing at around 6% per annum reflecting low interest rates and relatively strong household finances.

The BBA likes to rose-tint things as if household finances are so “strong” why do people need to borrow?

If we look back we see that any attempt to roll back on Buy To Let lending has a problem. You see back in the summer of 2012 the Bank of England panicked over the state of the UK housing market and launched the Funding for Lending Scheme. This depressed mortgage rates by up to 2% according to the Bank of England and I noted at the time that the initial effect was to reduce mortgage rates by around 0.9%. Putting it another way monthly bank lending for house purchase mortgages according to the BBA fell to £4.56 billion in July 2012 whereas this February it was £8.45 billion. The total stock of mortgages has risen from £776 billion to £845 billion over the same period. The latter number underrepresents things in my view as some have taken the opportunity of cheap finance to reduce their mortgage borrowings. We do not get enough detail from these numbers but has ordinary mortgage purchases been replaced by buy to let borrowing?

Putting that into affordability can be done by using the average house purchase mortgage size which was £161,100 in July 2012 but is £180,900 now. Wages however have only increased by some 6% leaving them well short of the change. No wonder first-time buyers need so much official “Help” these days leaving them singing along with the Beatles.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

Actually if you argue that the Funding for Lending Scheme will have taken time to impact then you eyes may alight in the average mortgage of £145,300 in January 2013 given an increase of just under a quarter in a mere 3 years and one month.

Along this road you find that the Bank of England is looking at a Buy To Let lending boom of its own creation. No wonder they have tried their best to “look away now”. They should avoid reading Property Review.

According to new data released by the National Association of Estate Agents, during February, 85% of estate agents saw an increase in the number of buy-to-let investors flooding the market to beat the stamp duty changes on second homes.

Oh and as you peruse the market it is hard to escape the “interest-only” mortgages which we were promised would be persona non grata.

The numbers

It was only on March 18th that I pointed out how Buy To Let in the UK was providing substantial gains.

Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the twelve months to February. This is up from 11.7% in the twelve months to January.

At a time of such low interest-rates and yields elsewhere no wonder people are attracted to this as an investment strategy. It was only yesterday we got more details on the amount of lump sum money taken out of UK pensions since the rules were relaxed ( £3 billion) and you have to wonder where it has gone?

The Daily Telegraph seems to keep plugging this area leading it onto all sorts of unexpected places.

Kellie Maloney: ‘Buy-to-let paid for my £100,000 sex change’

Comment

There is more than a certain amount of irony in the same Bank of England which pumped up the Buy To Let boom being responsible for puncturing any bubbles! I am sure that many reading this will be also thinking of the phrase “closing the stable door after the horse has bolted”. Indeed the FPC meeting minutes from November were rather clear.

The limited growth in mortgage lending had continued to be driven by the buy-to-let sector. In the year to 2015 Q3, the stock of buy-to-let lending had risen by 10%, compared to 0.4% for owner-occupiers.

This morning has seen the release of the awaited news on action so what do we get? Here is the Prudential Regulatory Authority.

This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts

This will not end fears that the boom will be over and out before anything happens as this is only a consultation paper. Indeed we even have use of the word “soundness” which was a favourite of the head of the civil service in Yes Minister. Should it ever be applied what will we get?

The PRA is therefore proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract……..Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%.

Oh and those who have wondered about companies doing this will be intrigued by this reference.

The proposals also include clarification regarding application of the small and medium-sized enterprise (SME) supporting factor 1 on buy-to-let mortgages.

Dear Bank of England how much small business lending has been for Buy To Let property?

As to the FPC what will it do?

the FPC remains vigilant to risks in this area.

Perhaps not as vigilant as perusing the tea-trolley or the lunch menu. But along the way we see mention of an issue we have regularly discussed on here but seems to be news to our Quangocrats.

Strong growth of consumer credit, which reached 9% in the year to January 2016, in part reflects increased use of finance secured on the purchase of vehicles.

So it will be “vigilant” “remain alert” and “monitor”. Meanwhile.

The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.

The Bank of England pushes UK mortgage rates ever lower

The situation concerning interest-rates is in quite a state of change right now. The trend towards negative interest-rates has gathered pace particularly in Japan where this morning Governor Kuroda was reported as saying this in an interview with the Asahi newspaper.

There is plenty of room to cut interest rates further. But achieving negative rates itself is not our primary purpose,

He went on to tell us how they would work.

Kuroda said the decrease in interest rates for housing and other loans has, in fact, been much larger, and the economic impact of that trend is therefore that much greater.

So great in fact that he had to introduce negative interest-rates or “More,More, More”. He also hinted at more QQE ( Qualitative and Quantitative Easing) in spite of this being the state of play.

@RANSquawk: BoJ Governor Kuroda says BoJ balance sheet is at 76% of nominal GDP vs. Fed at 25% and the ECB at 26%

Of course Governor’s Kuroda’s credibility plummeted when he introduced negative interest-rates only a week or so after denying he had any plans to introduce them. These days he is treated like this.

There is a cycle here where Japan eases policy again and this adds to the promised reduction by the European Central Bank in March. This will put quite a bit of pressure on the Bank of England to follow suit especially if the UK continues to see its economic growth fade.

Mark Carney

Yesterday the Bank of England Governor was grilled on his policies by Parliament and told them this according to the Financial Times.

We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,

You may note that this is now Forward Guidance Mark 14 as the Forward Guidance Mark 13 finds itself on the rubbish heap.

At the BoE’s quarterly inflation report a few weeks ago, Mr Carney told reporters that the next move in rates was “absolutely” more likely to be up than down, adding “the whole MPC stands by that”.

Perhaps we should summarise the Forward Guidance experience like this.

They can fly upside with their feet in the air,
They don’t think of danger, they really don’t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.

Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.

Moving back to specifics Governor Carney has plainly learned nothing from his retreat from telling us the lower bound for UK interest-rates was 0.5% as he now defines it as 0%. This requires an Alice In Wonderland style view of Switzerland, Sweden,Denmark, Japan and the Euro area! Mind you he also seems unaware of the views of someone who sits next to him as Gertjan Vlieghe confirmed my opinion that he could easily vote for a policy easing.

I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.

According to Governor Carney that means the next move is likely to be up. Perhaps Lewis Carroll was prescient about him.

How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.

A Sterling Crisis?

One thing that a Bank of England Governor should not do is talk the UK Pound down. This was either very amateurish or part of a Baron Mervyn King style plan to push it lower under the cover of the Brexit hype. Either way the UK Pound £ dipped into the US $1.39S this morning.

A lot of care is needed here as when it falls the UK Pound £ has a tendency to plummet as it is currently demonstrating. Also the fall is mostly but not entirely against the US Dollar as the fall to 1.27 versus the Euro demonstrates. So looking only at the US Dollar exacerbates the effects but the Governor should remember the World War 2 dictum.

Loose Talk Costs Lives

Lower Mortgage Rates

Bond Yields

The heat is on here as the UK ten-year Gilt yield has fallen to 1.37% this morning. As I note how extraordinarily low this is to someone like me who has followed it since the late 80s I also look to the shorter yields which influence mortgage rates. The five-year yield has dipped to 0.71% which if maintained will lead to cheaper fixed-rate mortgages.

Fixed Rate Mortgages

These have been falling as Yahoo Finance describes.

The average two year fixed-rate mortgage has dropped from 3.09pc a year ago to 2.55pc today according to Moneyfacts, continuing the overall downward trend seen since the end of the financial crisis.

Tucked away in the cheerleading is this if we go to the source Moneyfacts.

For example, the average two-year fixed rate at 90% LTV has fallen from 4.27% two years ago to just 2.99% today, which not only marks an impressive drop in its own right, but is also the first time the average for this sector has ever dipped below 3%. The average two-year fixed rate at 95% LTV has also dramatically fallen, dropping from 5.22% to 4.17% over the same period.

Ah so the loans which post credit crunch were never going to be offered again are not only back but are also seeing government encouragement and lower mortgage rates! I also note that there are issues for the banks doing this as they have a track record of piling in at the top of the market and many of them as I discussed yesterday are still troubled,

Five years ago, there were just 239 mortgages available at 90% or 95% LTV, but this had risen to 671 by this time last year – and availability has increased by 174 in the last 12 months alone, with 845 such products now on offer.

The UK taxpayer of course is the back stop vis a variety of routes. If we look more generally we see that mortgage rates overall are falling to record lows.

The figures show that the average two-year mortgage rate has fallen by 0.02% from January to stand at 2.54%, the lowest rate ever recorded,,,,,,,,, It’s a similar picture in the five-year sector, which saw the average rate fall by the same 0.02% to a new low of 3.25%

If we see more of what we have seen this week then Moneyfacts will be right about this.

Not only are mortgage rates already at record low levels, but there’s the chance for them to fall further still in the months to come.

At this point there will be some wailing and gnashing of teeth from those who followed the first ten or so versions of the Forward Guidance of Mark Carney and remortgaged to avoid higher interest-rates. He led them a sorry dance. However I completely disagree with Moneyfacts about the banks here.

The almost complete absence of risk, at least at wholesale level,

Lodger Mortgages

The last boom saw all sorts of products appear which reflected the use of the word “innovative” in the Irish banking boom and bust. Some have been less kind than me and called them liar loans. Anyway take a look at this from Bath Building Society.

What if you find your ideal home, but your income isn’t quite enough to get the mortgage you need? Well, if the property has a spare bedroom, our Rent a Room Mortgage might be just the answer.  If you rent out a spare bedroom, we will take into account the rental when deciding whether we can offer you the mortgage you need.

Apparently this will let someone borrow £160,000 with an income of £26,000 or a ratio of just over 6! If you look at this maybe you could borrow more than that.

Up to 50% of the loan amount can be covered by the rental income from letting a room in the property.

For the honest there is the risk of void periods – no rental income – for the less honest then there never was any real rental income. What could go wrong?

Comment

Over the past 3 and a half years the policy of the Bank of England has been to push mortgage interest-rates lower. The initial impetus was driven by the Funding for Lending Scheme which has an initial downwards impact of 1% and I note the Bank of England felt it headed towards 2%. This lit a light under the UK housing market which of course is not captured by the official inflation figures so as well as generating some genuine growth it also records what is inflation as economic growth. The law of unintended consequences or perhaps the phrase “be careful what you wish for” has come into play as the international trend to negative interest-rates is pushing them still lower.

Added to this as you can see above we seem to be returning to the era of easier credit which led to the credit crunch itself. All the never again promises have gone out of the window or into the lodgers bedroom. Meanwhile the Bank of England claims it is both “alert” and “vigilant” which we have learned means it is unlikely to be long before the next U-Turn.

12:45 pm update

In an intriguing example of the oddities of probability I received a letter today informing me of this.

All LendInvest loans are secured against a property, providing investors with a fixed net return of 5+% pa*.

In a world of increasingly negative interest-rate many will be tempted after all what can go wrong?

 

 

 

 

Affordability in the UK housing market has got worse and worse

Yesterday I watched the UK Prime Minister David Cameron on BBC television as he made various claims about “affordable housing”.  The BBC itself summarised it thus.

There should be both affordable housing for rent and to buy, Mr Cameron said, but “a shift towards more affordable housing to buy” was needed.

If this is to be the new government policy then it will represent an even larger U-Turn than the recent one on tax credits. This is because as I have covered frequently on here it has been government and Bank of England policy to drive house prices higher for quite some time now. Also along the way the Prime Minister contradicted the speech given by Chancellor George Osborne on Friday and which I analysed then.

I believe we are in the middle of a turnaround decade for Britain.

Mortgage terms are lengthening

This morning has seen a rather awkward development for the Prime Minister and it has been provided by research from the Halifax Building Society today which shows that mortgage terms are lengthening. From the Financial Times.

Lending figures from the Halifax on Monday showed that 26 per cent of first time buyers across the mortgage market took out a 35-year mortgage in 2015, compared with 30 per cent who had a mortgage term between 20 and 25 years. As recently as 2007, the shorter mortgage dominated with 48 per cent of loans. Only 15 per cent were for 35 years.

We have discussed before the trend towards longer mortgage terms and this is some more evidence of it. The catch for the “affordable housing” theme is two-fold from this. Firstly we have in the background the influence of the fact that we have not only record low official interest-rates or Bank Rate but we have been seeing record low mortgage-rates too. So if terms are lengthening with what are ultra-low mortgage rates we are seeing evidence of the opposite of affordable homes.

Another way of putting this has been shown by Neal Hudson of Savills.

As you can see such a change turns out to be very expensive. Or as it is put in modern official documentation for student and nursing loans an opportunity albeit one with a Orwellian falvour.

How much have mortgage interest-rates fallen?

Unfortunately the Bank of England has not kept up many of its time series on the subject but we do have the 2 year fix data for those with a 25% deposit. That entered the credit crunch at what now seems an unseemly 6%. The Bank Rate cuts (to 0.5%) took it to 4% but the QE era (£375 billion) had very little impact especially when we consider the size of it. The problem was that when we saw lots of it this mortgage rate fell to just below 3% but as it reduced and then moved towards Operation Twist we saw our mortgage-rate rise to 3.7%. So the net QE effect at this point on our mortgage rate was a minor -0.3%.

It is easy to forget now but back in 2012 the UK was facing fears of stagnation going as far as fears of a “triple-dip”. Thus as regular readers will be aware the most bank and house price friendly move appeared on the scene in the summer of 2012  called the Funding for Lending Scheme. It is applied by the Bank of England but is backed by HM Treasury in yet another apparent demonstration of what is called “independence” by many. Our mortgage rate of 3.7% fell by 1% over the next year and in fact continued to fall passing 2% this time last year and is now 1.89%. That is less than a third of what it was pre credit crunch.

There has also been a further change which is that higher risk mortgages have benefited by even more than that in the FLS era. What I mean is that the gap between the 25% equity mortgage quoted above and one with 10% equity has narrowed from over 2% to more like 1%. So higher risk mortgages have benefited by even more.

House price affordability versus wages

The data here is stark if we look at the official series.

In October 2015, the UK mix-adjusted house price index increased by 0.1% from the previous record level witnessed in September 2015 to reach a new record of 220.1 The UK index is 18.7% higher than the pre-economic downturn peak of 185.5 in January 2008.

In this sense the credit crunch was indeed just a blip before what is regarded as normal service was resumed. However real wages are still lower than what they were in spite of the improved performance last year. The peak for this series was 118 where it remained as 2007 moved into 2008, but now we reflect on a much more subdued 111.4 for October 2015. So real wages have fallen by 6% over the credit crunch era. Also we need to note that the official CPI series for consumer inflation will under record the fall in real wages when compared to the various RPI derivatives.

So the 18.7% rise in house prices and the 6% fall in real wages according to the official data poses a very eloquent challenge to concepts of “housing affordability”. It also reminds us of my argument that there is inflation in the UK economy if you bother to look.

The Halifax house price to earnings chart

You may not be surprised to learn that this has been rising inexorably higher in response to the developments above. It is now at 5.31 compared to 4.4 as FLS began. Rather chillingly for Londoners like me the Greater London number is 7.96.

For newer readers care needs to be taken with the exact numbers as the definitions have been chosen to keep the number as low as possible but the pattern is clear even if it is hard not to have a wry smile at the claim we are not yet at the pre credit crunch peak. However we can learn something from the ch-ch-changes.

What about those who rent?

These are of course an increasing number which poses its own critique for housing affordability! Your Move put it this way last week as it noted a rise in rent arrears.

Over the last decade the private rented sector has expanded at an unprecedented pace, providing homes for millions of households.

Back on April 27th last year I looked at the state of play using some Your Move data.

Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010……This is faster than inflation. Over the same period since
May 2010, consumer price inflation (CPI) has amounted to
11.6%. This leaves a 3.6% increase in rents after the
effects of inflation – or the equivalent of a 0.7% real terms
increase each year over the last Parliament.

If we bring their data up to date we see this.

Across England & Wales annual rent rises stand at 4.0%, comparing November 2015 with November 2014. Taking into account CPI inflation of 0.1%, this leaves real-terms annual rent rises of 3.9%.

The recent numbers are not as bad against wages ( up 2.4% in the year to October) but there is still a continuing affordability decline.

Landlords are doing rather well

The most recent Your Move report covers off this angle and for these times of low interest-rates and returns these are stellar numbers.

Taking into account both rental income and such capital growth, the average landlord in England and Wales has seen total returns of 10.9% over the twelve months ending November 2015 – up from 10.4% in October 2015. In absolute terms this means that the average landlord in England and Wales has seen a return of £19,668, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £11,057 while rental income made up £8,611 over the twelve months to November.

Comment

Of course you do not need to take my word for all of this because government policy confesses to it. After all if we had housing affordability why is Help To Buy necessary? This is currently being displayed in the form of two types of bribe as show below.

With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.

So we have bribe number one which with other schemes has had people speculating as to how much support you might get. Next we have bribe number two.

The new Help to Buy: ISA pays first-time buyers a government bonus. For example, save £200 a month and we’ll add £50, up to a maximum of £3,000, boosting your ISA savings of £12,000 to £15,000.

Those who have an ordinary ISA may mull an interest-rate of up to 4% also (Halifax) which compares to this reported by the BBC.

The average rate on Individual Savings Accounts (Isas) fell to 0.85% in December, down from 0.99% in November.

Ordinary savers may reasonably be wondering if they are cross-subsidisng this as will those seeing rises in bank fees too. Meanwhile first-time buyers see that apparently affordability means higher house prices and lower wages.

As to the destruction of high-rise blocks then as someone who has seen their impact in London I welcome that. Except the problem with new housing is that it is on average smaller a particular irony as we have got larger both in height and weight. I also wonder how it works that we can build more on a plot of land with a high-rise block.

RIP David Bowie

As someone who has frequently quoted his lyrics and enjoyed his music it was very sad to see that he has died this morning and to note that he took Ziggy Stardust and Aladdin Sane with him. RIP to them and my condolences to his friends and family.

Ashes to Ashes seems the most appropriate although two of the lines are wrong as he did plenty of good things and was often out of the blue.

I never done good things (I never done good things)
I never done bad things (I never done bad things)
I never did anything out of the blue, woh-o-oh
Want an axe to break the ice
Wanna come down right now