Some in the UK have experienced higher and not lower interest-rates

Today has brought more news on a long running theme of this website. This is the way that ever easier monetary policy has made home ownership increasingly unaffordable for the young. Here is the Institute for Fiscal Studies on the subject and the emphasis is theirs.

Today’s young adults are significantly less likely to own a home at a given age than those born only five or ten years earlier. At the age of 27, those born in the late 1980s had a homeownership rate of 25%, compared with 33% for those born five years earlier (in the early 1980s) and 43% for those born ten years earlier (in the late 1970s).

So in generational terms this has gone 43%, 33% and now 25% with about as clear a trend as you could see. The driving force of this will be very familiar to regular readers but it seems that more than a few elsewhere need to be reminded of it.

The key reason for the decline is the sharp rise in house prices relative to incomes. Mean house prices were 152% higher in 2015–16 than in 1995–96 after adjusting for inflation. By contrast, the real net family incomes of those aged 25–34 grew by only 22% over the same twenty years. As a result, the average (median) ratio between the average house price in the region where a young adult lives and their annual net family income doubled from 4 to 8, with all of the increase occurring by 2007–08.

That is an odd ending to the paragraph because we know house price growth began again in the UK in 2013 and yet real wage growth has been to say the least thin on the ground. But we can at least agree with the broad sweep that compared to income the affordability of houses has halved.  It is also interesting to note that over the twenty year period looked at real family income growth was only 1% per annum. The IFS then goes on to give us more of a breakdown of its analysis.

This increase in house prices relative to family incomes fully explains the fall in homeownership for young adults. The likelihood of a young adult owning their own home given how their income compares with house prices in their region is little changed from twenty years ago. But in 2015–16 almost 90% of 25- to 34-year-olds faced average regional house prices of at least four times their income , compared with less than half twenty years earlier. At the same time, 38% faced a house-price-to-income ratio of over 10, compared with just 9% twenty years ago.

If we step back for a moment this is merely the other side of the coin from the “wealth effects”  otherwise known as higher house prices that the Bank of England has been so keen on. We have had Bank Rate cut to 0.5% and even 0.25% for a while, some £435 billion of Quantitative Easing and of course the Funding for Lending Scheme which the Bank of England felt cut mortgage rates by around 2%. So if we take away the spin the problems with house price affordability were a deliberate policy move by the Bank of England and I do sometimes wonder why millennials are not picketing Threadneedle Street.

Debt

I have some thoughts for you on the report by the Resolution Foundation on the scale of the problem here.

Standing at nearly £1.9 trillion, UK household debt remains a big issue.

We get quite a bit of analysis that tells us much of this is fine but a lot of care is needed here as you see that is a line straight out of the Bank of England which has an enormous vested interest here. This phrase gets us ready for another “surprise” at a later date.

appears to have been associated with borrowing by higher income households,

Also does anyone really believe this line?

And many of the credit market fundamentals look much improved relative to the pre-crisis period, with tighter lending criteria and closer monitoring of potentially unwelcome developments.

We are always told it is better until they can tell us that no more. But even such analysis cannot avoid this.

 Increases in the base rate will inevitably increase costs for many indebted households and have the potential to further increase the debt ‘distress’ faced by some.

We then get much more Bank of England inspired spin.

The base rate is expected to rise only gradually, and to remain well below past norms.

It has been telling us that such 2014 whereas Bank Rate is still 0.5% as they of course cut it after promising increases and then put it back. But you see the position is more complex than that as whilst some borrowing got cheaper for example the mortgage rates I was looking at above and some personal loans other bits of borrowing got more expensive. These days we have a proliferation of payday lenders and the like who are on our television screens plugging loans with annual interest rates of 50% or 60% at best and in some cases far higher. What difference would a Bank Rate of say 1.5% make here?

I noted some analysis on the United States which pointed out that for consumer debt Americans were paying higher interest-rates for a given official one which raised a wry smile as that was one of my earliest themes and may even be the first one albeit I was referring mostly to the UK. Let me explain what I mean as the UK average credit card interest rate was 15.67% on the first of January 2017 pre credit crunch ( Bank of England data). So after all the Bank Rate cuts and QE it has fallen to 17.95%. Oh! The overdraft rate has responded to all the official easing by going from 17.16% to 19.71%. Oh times two!

Putting it another way for the around 4% cut in official interest-rates up is yet again the new down as the borrowers above see a rise of around 2% in what they are paying. Is this yet another bank subsidy?

Also the Bank Rate cut and £60 billion QE about which Governor Carney frequently likes to boast reduced the credit card interest-rate by 0.03% briefly and raised the overdraft rate by 0.03%. I doubt anyone noticed.

Comment

One of the features of the credit crunch era is the way that we have been broken down into different groups. For example those with a mortgage have in general seen lower interest-rates as have personal loans but those with overdrafts or ongoing credit card debt have not and even worse have seen rises. Of course some with credit card debt have been able to take advantage of 0% deals but I notice that these seem to come with fees these days. So lots of different impacts on different groups which brings me to the impact of Bank of England policy. This is yet another example of where it has benefited some groups at the expense of others as some gain but others lose. There is also a more general point that is true everywhere I look is that “the precious” otherwise know as the banks have been able to raise their margins whilst the authorities look away.

If we shift to the asset side of the equation the Bank of England has benefitted those with them by the way it has boosted house prices. But the other side of the coin is seen by the falling levels of home ownership amongst the young as they ( and others) face inflation as they see higher house prices. Next in the equation comes that some will be helped by the “bank of mum and dad” be that by cash or inheritance. How much more of a mixed soup could this be? Yet the central planners continue to meddle and these days are so confused themselves that they come out with rubbish like there will be more interest rate rises than the ones we have promised but not delivered for the last four years.

 

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What are the consequences of rising bond yields?

So far in 2018 we have seen a move towards higher bond yields across the financial world. This poses more than a few questions not least for the central banks who went to unparalleled efforts in terms of scale to try to reduce them. This as I pointed out on the 6th of December led to some changes.

The credit crunch era has brought bond markets towards the centre stage of economics and finance. Before then there were rare expressions of interest in either a crisis or if the media wanted to film a response to an economic data release. You see equities trade rarely but bonds a lot so they filmed us instead and claimed we were equities trades so sorry for my part in any deception!

At the moment they are back in the news and this morning the Bank of Japan responded. From the Wall Street Journal.

The Bank of Japan took on the market and won—for now.

As Japanese 10-year bond yields threatened to break through the 0.1% mark early Friday, the bank threw down the gantlet and offered to buy out every player in the market.

If we step back for a moment it is hard not to have a wry smile at the Bank of Japan defending a yield on a mere 0.1%!  Not much of a yield or a bear market is it? It poses the question of how strong the economic recovery might be if that is all we can take. Overall it is a consequence of this.

“Today’s action was aimed at firmly implementing the bank’s policy target of guiding the 10-year yield around zero, taking into consideration recent large increases in long-term yields,” a senior BOJ official said. For the BOJ, “around zero” essentially means up to but not including 0.1%.

I am not so sure about the “large increases in long-term yields” story as in fact the thirty and forty-year yields have been dropping. But the response was as follows.

The bank offered to buy an unlimited amount of JGBs with remaining maturities of five to 10 years at a fixed rate of 0.11%, the same level it used on two previous occasions. Yields slipped to 0.85% from 0.95%.

This poses a couple of questions. Firstly for the argument that the Bank of Japan is tapering its bond buying or QE ( which is called QQE in Japan) as offering to buy an “unlimited amount” is hardly tapering. The issue here you may note is rather like that of the Swiss National Bank defending the Swiss Franc at 1.20 which suddenly found it was intervening on an enormous scale. So what looks like tapering could morph into expansion quite easily. How very Japanese!

Also I guess if you own 40% or so of a market as the Bank of Japan does you too would be touchy and nervous about any rise in yield and fall in prices. Time for En Vogue on its tannoy loudspeakers.

Hold me tight and don’t let go
Don’t let go
You have the right to lose control
Don’t let go

Maybe our songstresses even had a view for us on how likely it is that the central banking control freaks will reverse course.

I know you think that if we move too soon it would all end

The UK

This is an intriguing one as you see the ten-year Gilt yield has risen to 1.58% this morning  Here is how Bloomberg reflects on this.

Ten-year gilt yields climbed five basis points to 1.58 percent as of 9:29 a.m. London time, after touching 1.59 percent, their highest level since May 2016. The yield has surged about 40 basis points this year.

This is considered a bear market which as someone who has definitely seen such moves in a day and maybe when we were ejected from the ERM in 1992 maybe an hour is hard to take. So let us settle on a QE era bear market. Also the QE link comes back in as the high for UK Gilts was driven by the panic buys of late summer 2016 when the Bank of England dove into the market like a kamikaze pushing the yield down to 0.5%. From time to time apologists for such moves claim that QE does not make losses but if you pay 120 for something and get back 100 at maturity what is that please?

Intriguingly at least one player may have been wondering about a real bear market. From James Mackintosh in the WSJ.

The trade goes like this: borrow £750 million ($1 billion) for 100 years at a time when money is basically free. Invest it in shares. Pocket the difference.

Okay perhaps not a real bear market as that would affect shares too and as you see below the money is cheap in historical terms but not free.

 The scale of that demand was shown Wednesday when Wellcome’s 100-year bond was more than four times oversubscribed with a coupon of just 2.517%, the lowest ever paid on a corporate century bond.

That is not likely to be much in real yield terms and I would much rather be Welcome that those who bought the bonds. They think along the lines I pointed out in my post on Monday on pensions and the distorted world there.

Wellcome Chief Investment Officer Nick Moakes says ultralong bonds are distorted by rules forcing insurance companies and pension funds to buy them at any price, creating an uneconomic demand he is happy to satisfy with a bond issue

Of course buying equities at what is something of a top after a succession of all-time highs might be a case of not the best timing.

The US

This is the leader of the pack on such matters on two counts. It is the world’s largest economy and it currently has a central bank which is in the process of raising interest-rates. It’s central bank is even reducing its stock of bonds albeit at a snail’s pace. If we stick with the domestic impact then it is led by the thirty-year yield which has nudged over 3%. This means that the thirty-year fixed mortgage rate is now 4.23% as we look for the clearest link between the financial world and the real economy.

If we look at the shorter end of the scale we see that the rate rises so far combined with the expectations of more have seen the two-year yield rise to 2.16% as opposed to the 1.2% of this time last year. So there has been a tightening of monetary conditions all round from this route.

Comment

There is a lot to consider here and let us start with the economics. A rise in bond yields tightens monetary conditions and in that sense is a logical response to the better economic environment. However it is awkward for central banks who have paid more than the 100 they will get from their treasury on maturity as politicians have got used to spending the explicit and implicit profits. If they sell their holdings then they will exacerbate the price falls and weaken their remaining stock.

Moving to the foreign exchanges we have seen something rather odd. If you buy the US Dollar you get 2.8% right now if you put the money in a ten-year US Treasury Note whereas if you buy the Japanese Yen you only get 0.9%. So the US Dollar is rising right? Eh no, as I have covered many times. Of course some may be buying now thinking that an US Dollar in the 109s is attractive combined with picking up a 2.7% relative yield. Similar arguments can be made for the Euro and UK Pound £ albeit with smaller yield differentials.

Here is another thought for you. Imagine a Swiss or German version of Wellcome if there is one and how cheaply they could borrow for 100 years. Actually with its international position it could presumably have borrowed in Euros. Perhaps it is bullish of the UK Pound £……..brave if you look back 100 years.

Meanwhile if the bond bear market and its consequences are all too much there is apparently something which can take the pain away.

 

 

What is happening to US consumer credit and car loans?

If we take a look at the US economy then we see on the surface something which looks as it is going well. For example the state of play in terms of economic growth is solid according to the official data.

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2017 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.

Looking ahead the outlook is bright as well.

The New York Fed Staff Nowcast stands at 3.9% for 2017:Q4 and 3.1% for 2018:Q1.

That would be a change as the turn of the year has tended to under perform in recent times. Also if we use the income measure for GDP the performance is lower. But if we continue with the data we see that both the unemployment rate ( 4.1% in December) and the underemployment rate ( 8.1% in December) have fallen considerably albeit that the latter nudged higher in December.

Less positive is the rate of wage growth where ( private-sector non farm) hourly earnings are currently growing at 2.5%. This is no doubt related to this issue.

In the 2007-2016 period, annual labor productivity decelerated to 1.2 percent at an annual average rate, as compared to the 2.7 rate in the 2000-2007 period.

So a familiar pattern we have observed in many places although the US is better off than more than a few as it has real wage growth albeit not a lot especially considering the unemployment rate and at least has some productivity growth.

Interest-rates are rising

Whilst wages have not risen much in response to a better economic situation interest-rates are beginning to. The official Federal Reserve rate is now 1.25% to 1.5% and is set to rise further this year. If we move to how such things impact on people then the 30 year (fixed) mortgage rate is now 4.06%. It has had a complicated picture not made any easier by the current government shutdown but in broad terms the downtrend which took it as low as 3.34% is over.

How much debt is there?

As of the end of the third quarter of 2017 the total mortgage debt was 14.75 trillion dollars. This is not a peak which was 14.8 trillion in the spring/summer of 2008 but if we project the recent growth rate we will be above that now. Of course the economy is now much larger than it was then.

If we move to consumer credit then we see the following. It was 3.81 trillion dollars at the end of November and that was up 376 billion dollars on a year before.

In November, consumer credit increased at a seasonally adjusted annual rate of 8-3/4 percent. Revolving credit increased at an annual rate of 13-1/4 percent, while nonrevolving credit increased at an annual rate of 7-1/4 percent.

So quite a surge but care is needed as the numbers are erratic and October gave a much weaker reading. So we wait for the December data. If we look into the detail we see that student loans were 1.48 trillion dollars as of September and the troubled car loans sector was 1.1 trillion dollars. For perspective the former were were 1.05 trillion in 2012 and the latter 809 billion.

In terms of interest-rates new car loans are 5.4% from finance companies and 4.8% from the banks for around a 5 year term. Credit cars debt is a bit over 13% and personal loans are 10.6%.

Credit cards

The Financial Times is reporting possible signs of trouble.

The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion……Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.

It suggests that the rise in lending that has been seen is on its way to causing Taylor Swift to sing “trouble,trouble,trouble”

Yet borrower delinquencies are outpacing rising balances. While still less than half crisis-era levels, the consultancy forecasts soured credit card loans will reach almost 4.5 per cent of receivables this year, up from 2.92 per cent in 2015.

The St.Louis Federal Reserve or FRED is much more sanguine as it has the delinquency rate at 2.53% at the end of the third quarter of 2017. So up on the 2.29% of a year before but a fair way short of what the FT is reporting.

Maybe though there have been some ch-ch-changes.

“The driving factor behind the losses is that banks are putting weaker credits on the books,” said Brian Riley, a former credit card executive and now a director at Mercator.

Car Loans

According to CNBC lenders are being more conservative in the automobile arena.

The percentage of subprime auto loans saw a big decline in the third quarter despite growing concerns that auto dealers and banks are writing too many loans to borrowers with checkered credit histories, according to new data.

In fact, Experian says the percentage of loans written for those with subprime and deep subprime credit ratings fell to its lowest point since 2012.

In terms of things going wrong then we did not learn much more.

In the third quarter, there was a slight decrease in the percentage of loans 30 days overdue and slight increase in those that were 60 days delinquent.

Although a development like this is rarely a good sign.

Meanwhile, Experian says the average term for a new vehicle auto loan hit an all-time high of 69 months, thanks in part to a slight increase in the percentage of loans schedule to be repaid over 85 to 94 months.

“We’re starting to see some spillover to loans longer than 85 months,” said Zabritski.

This morning’s Automotive News puts it like this.

Smoke expects higher interest rates and tighter credit this year will drive many consumers to buy a used vehicle instead of a new one. Most of those buying used cars will be millennials, who are often saddled with student loans and remain credit challenged, he said.

It is no fun being a millennial is it? Although I suppose much better than being one in the last century as we have so far avoided a world war.

This piece of detail provides some food or thought.

Last year, the U.S. Federal Reserve raised interest rates three times for a total of 75 basis points, and data show that auto-loan lenders have been tightening credit for six straight quarters, but auto loans for “superprime borrowers” increased by just 20 basis points, Smoke said.

Are lenders afraid of raising sub-prime borrowing rates? Not according to The Associated Press.

Subprime buyers got substantially better rates even a year ago. The average subprime rate of 5.91% last year has jumped to 16.84% today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495.

Comment

There is a fair bit to consider here as we mull how normal this is for the mature phase of an economic expansion? Also how abnormal these times have been in terms of whether the benefits of the economic growth have filtered down much to Joe Sixpack? After all wage growth could/should be much better and the unemployment figures obscure the much lower labour participation rate. We will be finding out should interest-rates continue their climb as we mull the significance of this.

Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007, according to data from S&P Global Ratings. ( Financial Times).

One thing we can be sure of is that we will be told that everything is indeed fine until it can no longer possibly be denied at which point it will be nobody’s ( in authority) fault.

Jimmy Armfield

Not only a giant in the world of football in England but in my opinion the best radio summariser by a country mile. RIP Jimmy and thank you.

 

 

 

What and indeed where next for bond markets?

The credit crunch era has brought bond markets towards the centre stage of economics and finance. Before then there were rare expressions of interest in either a crisis or if the media wanted to film a response to an economic data release. You see equities trade rarely but bonds a lot so they filmed us instead and claimed we were equities trades so sorry for my part in any deception! Where things changed was when central banks released that lowering short-term interest-rates ( Bank Rate in the UK) was not the only game in town and that it was not having the effect that they hoped and planned. Also the Ivory Towers style assumption that short-term interest-rates move long-term ones went the way of so many of their assumptions straight to the recycling bin.

QE

It is easy to forget now what a big deal this was as the Federal Reserve and the Bank of England joined the Bank of Japan in buying government bonds or Quantitative Easing ( QE). There is a familiar factor in that what was supposed to be a temporary measure has now become a permanent feature of the economic landscape. As for example the holdings of the Bank of England stretch to 2068 with no current plan to reverse any of it and instead keeping the total at £435 billion by reinvesting maturities. Indeed on Friday it released this on social media.

Should quantitative easing become part of the conventional monetary policy toolkit?

The Author Richard Harrison may be in line for promotion after this.

Though the model does not support the idea that central banks should maintain permanently large balance sheets, it does suggest that we may see more quantitative easing in the future.

So here is a change for bond markets which is that QE will be permanent as so far there has been little or no interest in unwinding it. Even the US Federal Reserve which to be fair is doing some unwinding is doing so with baby steps or the complete opposite of the way it charged in to increase QE.

Along the way other central banks joined in most noticeably the European Central Bank. It had previously indulged in some QE via its purchases of Southern European bonds and covered ( bank mortgage) bonds but of course it then went into the major game. In spite of the fact that the Euro area economy is having a rather good 2017 it is still at it to the order of 60 billion Euros a month albeit that halves next year. So we are a long way away from it stopping let alone reversing. If we look at one of the countries dragged along by the Euro into the QE adventure we see that even annual economic growth of 3.1% does not seem to be enough for a change of course. From Reuters.

Riksbank’s Ohlsson: Too Early To Make MonPol Less Expansionary

If 3.1% economic growth is “too early” then the clear and present danger is that Sweden goes into the next downturn with QE ongoing ( and maybe negative interest-rates too). One consequence that seems likely is that they will run out of bonds to buy as not everyone wants to sell to the central bank.

Whilst we may think that QE is in modern parlance “like so over” in fact on a net basis it is still growing and only last month a new player came with its glass to the punch bowl.

In addition, the Magyar Nemzeti Bank will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more. Both programmes will also contribute to an increase in the share of loans with long periods of interest rate fixation.

Okay so Hungary is in the club albeit via mortgage bond purchases which can be a sort of win double for central banks as it boosts “the precious” ( banks) and via yield substitution implicitly boosts the government bond market too. But we learn something by looking at the economic situation according to the MNB.

The Hungarian economy grew by 3.6 percent in the third quarter of 2017…….The Monetary Council expects annual economic growth of 3.6 percent in 2017 and stable growth of between 3-4 percent over the coming years. The Bank’s and the Government’s stimulating measures contribute substantially to economic growth.

We are now seeing procyclical policy where economies are stimulated by monetary policy in a boom. In particular central banks continue with very large balance sheets full of government and other bonds and in net terms they are still buyers.

The bond vigilantes

They have been beaten back and as we observe the situation above we see why. Many of the scenarios where they are in play and bond yields rise substantially have been taken away for now at least by the central banks. There can be rises in bond yields in individual countries as we see for example in the Turkish crisis or Venezuela but the scale of the crisis needs to be larger and these days countries are picked off individually rather than collectively.

At the moment there are grounds for the bond yield rises to be in play in the Euro area with growth solid but of course the ECB is in play and in fact yesterday brought news of exactly the reverse.

 

A flat yield curve?

The consequence of central banks continuing with what the Bank of Japan calls “yield curve control” has led to comments like this. From the Financial Times yesterday.

Selling of shorter-dated Treasuries pushed the US yield curve to its flattest level since 2007 on Tuesday. The difference between the yields on two-year Treasury notes and 10-year Treasury bonds dropped below 55 basis points in afternoon trading in New York. While the 10-year Treasury was little changed, prices of two-year notes fell for the second consecutive day. The two-year Treasury yield, which moves inversely to the note’s price, has climbed 64 basis points this year to 1.83 per cent.

If we look long the yield curve the numbers are getting more and more similar ironically taking us back to the “one interest-rate” idea the central banks and Ivory Towers came into the credit crunch with. With the US 2 year yield at 1.8% and the 30 year at 2.71% there is not much of a gap.

Why does something which may seem arcane matter? Well the FT explains and the emphasis is mine.

It marks a pronounced “flattening” of the yield curve, with investors receiving decreasing returns for holding longer-dated bonds compared to shorter-dated notes — typically a harbinger of economic recession.

Comment

We have seen phases of falls in bond prices and rises in yield. For example the election of President Trump was one. But once they pass we are left wondering if the around thirty year trend for lower bond yields is still in play and we are heading for 0% ( ZIRP) or the icy cold waters of negativity ( NIRP)? On that road the idea that the current yield curve shape points to a recession gets kicked into touch as Goodhart’s Law or if you prefer the Lucas Critique comes into play. But things are now so mixed up that a recession might actually be on its way after all we are due one.

For yields to rise again on any meaningful scale there will have to be some form of calamity for the central banks. This is because QE is like a drug for so many areas. One clear one is the automotive sector I looked at yesterday but governments are addicted to paying low yields as are those with mortgages. On that road they cannot let go until they are forced to. Thus the low bond yields we see right now are a short-term success which central banks can claim but set us on the road to a type of junkie culture long-term failure. Or in my country this being proclaimed as success.

“Since 1995 the value of land has increased more than fivefold, making it our most valuable asset. At £5 trillion, it accounts for just over half of the total net worth of the UK at end-2016. At over £800 billion, the rise in the nation’s total net worth is the largest annual increase on record.”

Of course this is merely triumphalism for higher house prices in another form. As ever those without are excluded from the party.

 

 

The UK housing market looks ever more dysfunctional

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

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

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

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

What were the numbers?

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

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

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

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

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

Why might that be?

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

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

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

London

Here asking prices are falling according to Rightmove.

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

The prices of larger houses are seeing a drop.

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

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

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

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

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

Record lows for UK mortgage rates

There was this from Sky News on Friday.

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

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

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

The Mail Online seems to be expecting even more.

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

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

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

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

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

Also there was more financial repression for savers.

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

Comment

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

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

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

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