The UK could borrow £25 billion or indeed more very cheaply if it wished

It would appear that one of the main features of the credit crunch era which has been turbo-charged in 2019 so far has escaped the chatting and think tank classes. This is the situation where the UK can borrow on extraordinarily cheap terms. As I type this the two-year and five-year Gilt yields are of the order of 0.46% and the benchmark ten-year is at 0.67%. The only other time we have ever seen yields down here is when Governor Mark Carney was cracking the whip over the Bank of England in late summer and autumn 2016 demanding that they buy Gilts at nearly any price. That kamikaze phase even pushed us briefly to negative yields as the market let him buy at eye watering prices.

This was on my mind as I read this from the Institute for Government which has written what it calls an explainer on whether the UK can do this.

During the election campaign, Johnson said that it “is certainly true is at the moment (that) there is cash available.  There’s headroom of about £22bn to £25bn at the moment.”

The whole concept is predicated on a complete fantasy.

This figure for headroom refers to the gap between the latest official forecast for borrowing in 2020/21 and the maximum amount that is consistent with meeting Philip Hammond’s fiscal mandate – that borrowing should be no more than 2% of GDP in 2020/21, after adjusting for the ups and downs of the economic cycle (which is typically referred to as “cyclically-adjusted” or “structural” borrowing).

Firstly no sniggering at the back please when you read “the latest official forecast for borrowing in 2020/21” as we recall that the first rule of OBR Club is that the OBR is always wrong! Next comes the “fiscal mandate” which in the ordinary course of events would have a half-life that would not reach 2021 which is of course even more likely now that the man called Spreadsheet Phil has fallen on his sword.

Oh and that is before we get to “structural” borrowing which means pretty much whatever you want it too. But finally we get a grain of truth.

Mr Hammond has bequeathed his successor a level of borrowing that is low by historical standards. The Office for Budget Responsibility’s March forecast suggested borrowing would be 0.9% of GDP (or £21bn) next year, virtually all of which would be structural.

The reliance on the number-crunching of the serially unreliable OBR is odd but there is a kernel of truth in there which is that we are currently not borrowing much. Last year it was 1.1% of GDP and the debt to GDP ratio has been falling as the economy has grown faster than the debt.

This brings me back to the piece de resistance which is that we can borrow incredibly cheaply and if we look at in terms of the infrastructure life cycle the thirty-year Gilt yield is a mere 1.33%. So we could if we chose borrow quite a large sum on very cheap terms. As to how much well into the tens of billions and maybe a hundred billion. Just in case readers think I am breaking my political neutrality I have made similar points to my friend Ann Pettifor who is an adviser to the Labour Party with the only difference being that markets would trust a Corbyn led government less. How much less is hard to say as we know that any yield ( the Greek ten-year is around 2%) tends to get hoovered up these days.

If we move to the other side of the coin which is how such funds would be spent the picture then sees some dark clouds. They are called Hinkley C, HS2 and the Smart Meter debacle although I think the latter was foisted onto out electricity bills.

Oh and before I move on real yields are much more complicated than often presented. After all none of us know what UK inflation will be over the next 30 years, but it seems more than likely that the yields above will not only be negative but significantly so.

Consumer Credit

We can continue our number crunching with this from the Bank of England this morning.

The annual growth rate of consumer credit continued to slow in June, falling to 5.5%. Annual growth has fallen steadily since its peak in late 2016, and particularly over the past year reflecting a fall in the average monthly net flow of consumer credit. Since July last year, the net flow has averaged £1.0 billion per month, compared with £1.5 billion per month in the year to June 2018.

Let me translate this a little. The annual rate of growth has fallen since they pumped it up with their “Sledgehammer QE” of August 2016. This was a change in claimed strategy as of course Governor Carney has regularly told us that “This is not a debt fueled recovery” ( BBC August 2015). Of course according to Governor Carney the August 2016 move saved around 250,000 jobs although even his biggest fans have to admit he has had a lot of problems in the area of unemployment forecasting.

Whilst 5.5% is slower than compares not only to an extraordinary surge but is for example nearly double wage growth, quadruple likely GDP growth and around five times real wage growth. Also the actual amount at £218.1 billion has grown considerably.

Mortgages

There seems to be a serious media effort going on to support the UK housing market. Here is @fastFT from earlier.

Rise in mortgage borrowing points to stabilisation in UK house market.

Does it? Here is the actual Bank of England data.

Net mortgage borrowing by households was £3.7 billion, close to the average of the previous three years. This followed a slightly weaker net flow of £2.9 billion in May. The annual growth rate of mortgage lending remained stable at 3.1%, around the level that it has been at since 2016.

The trouble for House price bulls is that those are the sort of levels which saw house price growth across the UK grind to a near halt. A similar situation exists for what seems to be coming down the chain.

Mortgage approvals for house purchase (an indicator of future lending) increased by around 800 in June to 66,400 and the number of approvals for remortgaging rose slightly to 47,000. Notwithstanding these small rises, mortgage approvals remained within the narrow ranges seen over the past three years.

Comment

I have looked at things in a different light today showing how numbers are twisted, manipulated and if that does not do the trick get simply ignored like the level of bond yields. Some of this sadly starts at the official level where we get what are in practice meaningless concepts like structural borrowing or this from Bank of England Governor Mark Carney in August 2015 via the BBC.

“The timing of a rise in interest rates is drawing nearer,” Bank of England governor Mark Carney says at the start of the Inflation Report press conference. He also says speculation about when interest rates begin to rise is a good thing and a sign of growing economic confidence.

Let me finish by referring to a campaign I have been running for seven years or so now which is over the impact of the Funding for Lending Scheme. Remember all the promises about small business lending?

and the growth of SME borrowing rose to 0.8%, its highest since August 2017.

Also as we note lending to SMEs at £167.8 billion has fallen far below unsecured credit is it rude to wonder how much of the £67.6 billion lent to the real estate sector ended up in the buy-to let bubble?

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Mark Carney claims “this is not a debt fuelled expansion” and interest-rates will rise “sooner than markets expect” yet again!

One of the features of the credit crunch era is the way that those in authority so often get given pretty much a free pass from the media, This is illustrated starkly by the BBC’s senior economics correspondent Dharshini David.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for

Perhaps Dharshini was giddy after being given the first question at the press conference. Sadly she asked a question which might have been written by Governor Carney himself and accordingly he seemed like Roger Federer as he volleyed it nonchalantly at the net.

Missing is any questioning of the assertion such as pointing out Governor Carney told us that interest-rates would rise “sooner than markets expect” in his Mansion House speech in June 2014. When this did not happen he acquired this moniker.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden. ( BBC)

The reality was that his next move was to cut interest-rates In August 2016 followed by promises of another cut that November before yet another U-Turn. Then there was another U-Turn just over a year ago which if you recall was followed by a sharp drop in the value of the Pound £.

So you can see that it is really rather extraordinary that Dharshini either ignored or is unaware of this. I am not sure what to make of the sentence below.

But that doesn’t mean that Mark Carney or his colleagues are asleep at the wheel.

She was nearer the mark with this.

Report press conference was perhaps unprecedented number of female hacks… taken a while but face of financial journalism is changing, all the better to reflect our audiences

However there was no mention of the “woman  overboard” problem at the Bank of England which was illustrated by the 100% middle-aged male make up of its panel. The press conference highlighted this as in response to a question about diversity at the Bank of England Governor Carney responded with a barrage of “ums” and “ers”.

Still we can have a wry smile at this.

Growth actually isn’t that different to what was expected a year ago……..UK growth in the first quarter is likely to have been 0.5%, double what the Bank expected just three months ago.

Governor Carney kept pointing to the former forecast as he had a rare opportunity to bathe in a correct forecast, although he was not challenged on why they then cut the growth forecast to 0.2% so recently?

Pinocchio

In response to a rather good question about the growth of fixed-rate mortgages and its effect on the responsiveness of the economy to Bank Rate changes the Governor claimed this was nothing to do with him.  Nobody pointed out that in his first phase of Forward Guidance promising interest-rate increases there were people who were listening to him as there was a shift towards foxed-rate mortgages. Sadly, they were then shafted when Governor Carney cut interest-rates.

The point above was in a way the media catching up with one of my earliest themes from 2010 as I pointed out how market interest-rates were following official ones much less closely than before. However there was an even bigger humdinger out of Governor Carney’s mouth.

This is not a debt fuelled expansion

He has said this before and there are two main issues with this. The first is that the main policy over his tenure has been the funding for lending scheme which turned net mortgage lending positive. So more debt as shown by Wednesday’s figures.

Net lending for mortgages increased to £4.1 billion in March.

In the month before Governor Carney’s arrival the net increase was £785 million and whilst the rise has not been smooth ( early 2016 saw an incredible surge due to the buy to let changes) I think the numbers speak for themselves

Also the past three years or so has seen quite an extraordinary surge in unsecured credit something which I have been regularly documenting. It was £156.4 billion and is now around 38% higher at £216.7 billion. Can anybody think of anything else that has risen that fast as wage growth and GDP have been left far behind?

A factor in this has been something we have followed closely and was highlighted by the Office of Budget Responsibility.

 Data from the Finance & Leasing Association suggest that, between 2012 and 2016, dealership car finance contributed around three-fifths of the growth in total net consumer credit flows. Within that, around four-fifths reflected strong growth in car sales, with the remainder accounted for by a higher proportion of cars bought using dealership car finance.

So “this is not a debt fuelled recovery” means we have pumped up mortgage lending and seen quite a surge in car finance.

Inflation

Sadly for those who parroted the Bank of England line there was this. From @NicTrades

Bank of England Carney signals more than 1 hike may be needed to keep inflation in Check, while at the same time he cuts inflation forecasts.

Thus according to its inflation targeting regime an interest-rate increase is less and not more likely. Even worse the absent-minded professor Ben Broadbent gave us quite a spiel on oil markets as he tried to look on the ball, but to anyone market savvy that will have backfired too as they will have been thinking that the oil price has been falling recently. The price of a barrel of Brent Crude Oil is as I type this nearly US $5 lower since President Trump indulged in his own open mouth operation on Twitter last Friday.

Comment

The era of Forward Guidance has turned out to be anything but for the Bank of England. Governor Carney seems to have set the boy who cried wolf as his role model and the fact that he has actively misled people gets mostly overlooked. Still let us hope he is right that UK GDP grew by 0.5% in the first quarter of this year. If true that will also pose a question for the Markit series of business surveys.

At 50.9 in April, up from 50.0 in March, the seasonally
adjusted All Sector Output Index revealed a return to growth for private sector business activity.

Meanwhile our supposed football fan missed an opportunity that was taken by the ECB.

Best of luck to our local team for tonight’s semi-final!

Perhaps I am more sensitive on that front as I am a Chelsea fan, but Arsenal fans may wonder too.

 

 

What is happening to the UK housing market and house prices?

The last year of two has seen something of a change in the environment for UK house prices. The most major shift of all has come from the Bank of England which for the moment seems to have abandoned its policy where the music was “Pump it up” by Elvis Costello. This meant that when around 2012 it saw that even what was still considered an emergency Bank Rate of 0.5% plus its new adventure into Quantitative Easing was not enough to get house prices rising it introduced the Funding for Lending Scheme. This reduced mortgage rates by around 1% quite quickly and had a total impact that rose towards 2% on this measure according to Bank of England research. This meant that net mortgage lending improved and then went positive and the house price trend turned and then they rose.

The next barrage came in August 2016 with the “Sledgehammer QE” and the cut in Bank Rate to 0.25%. This was accompanied by the Term Funding Scheme (TFS) which was a way of making sure banks could access liquidity at the new lower Bank Rate and it rose to £127 billion. This was something of a dream ticket for the Bank of England as it boosted both the “precious” ( the banks) and house prices in one go,

However that was then as the Bank reversed the Bank Rate cut last November and the TFS ended this February. So whilst the background environment for house prices is favourable they have risen to reflect that and for once there are no new measures to keep the bubble inflated. Also we have seen real wages fall and then struggle in response to higher inflation.

Valuations

This morning has brought news about something which has not happened for a while now but is something which is destabilising for house prices. From the BBC.

There has been a “significant” rise in homes being valued at less than what buyers have agreed to pay, the UK’s largest mortgage advisers have said.

These “down valuations”, by lenders, can mean buyers having to pay thousands of pounds extra, up front, to avoid the sale collapsing.

Estate agents Emoov said it reflected surveyors predicting a financial crash.

UK Finance said lenders, which it represents, were right to ensure property values were realistic.

The organisation said borrowers also benefited from houses having an “independent valuation”.

Emoov are an interesting firm that have recently completed a crowdfunding program and perhaps want some publicity but for obvious reasons estate agents usually stay clear of this sort of thing. If we step back for a moment we note that whilst they are mostly in the background surveyors do play a role in price swings via their role in providing a base for mortgage valuations. They should know the local market and therefore have knowledge about relative valuations but absolute ones is a different kettle of fish. If they get nervous and start to be stricter with valuations then the situation can snowball though mortgage chains. As to the numbers the BBC had more.

Emoov, one of the UK’s largest digital estate agents, said one in five of its sales now resulted in a down valuation.

Two years ago, it was fewer than one in 20, it added.

This is the highest rate since the UK’s financial crash in 2008, according to agents from 10 mortgage adviser groups contacted by the Victoria Derbyshire programme.

There is a specific example quoted by the BBC.

Phil Broodbank, from Wirral, bought his house for £180,000 a few years ago and spent up to £25,000 renovating it.

When the time came to remortgage, a surveyor valued his house at £200,000 without visiting it in person – in what is known as a “drive by”.

This valuation was £20,000 lower than a local estate agent had valued the property.

One bonus is that “drive by” in the Wirral does not quite have the same menace as in Los Angeles. Also these have been taking place for quite some time now but there were fewer complaints when the bias was upwards. The response from UK Finance is fascinating.

“Although the valuation is carried out for the lender, borrowers also benefit from a realistic independent valuation as it could help them avoid paying over the odds for the property they are buying.”

How do they know it is “realistic” especially if it was a cursory observation from the road? Also as the valuation is for the lender there are always going to be more interested in downturns that rises as of course the bank is more explicitly vulnerable then. In case you are wonder who UK Finance are they took over the British Bankers Association.

Borrowing Limits

The Guardian pointed out over the weekend that some old “friends” seem to be back.

this week Clydesdale Bank said it will grant first-time buyers mortgages of 5.5 times a borrower’s income and lend up to £600,000 – and the buyer only needs a 5% deposit.

A little care is needed as this is for the moment only available to those classed as professionals by Clydesdale Bank who earn more than £40,000 a year. Also there is a theoretical limit in that according to Bank of England rules mortgage lenders are supposed to keep 85% or more of their business using a 4.5 times times a borrower’s income. But if history is any guide these things seem to spread sometimes like wildfire and this industry has a track record that even a world-class limbo dancer would be envious of in terms of slipping under rules and regulations.

This bit raised a wry smile.

But mortgage brokers said they were relaxed about Clydesdale’s new deal.

As it is a potential new source of business they are no doubt secretly pleased. Also I did smile at this from the replies.

 5.5 times of income is nothing unusual. In Australia this is very common and goes as high as 7 to 9 times. ( GlobalisationISGood )

This Australia?

Rising global interest rates are combining with bank caution on lending, via extreme vetting of loan applications in the wake of financial services Royal Commission revelations, to generate a mini-credit crunch.

That’s putting further pressure on house prices, whose falls are gathering pace. ( Business Insider )

What this really represents if we return to the UK is another sign that houses are unaffordable for the ordinary buyer. Another factor in the list is this.

While 25-year terms were the standard in the 1990s, 30 years is now the norm for new borrowers, with many lenders stretching to 35 years to make monthly payments more affordable. ( Guardian )

 

Comment

We do not know yet how the two forces described today will play out in the UK housing market but down valuations seem to be a stronger force. After all Clydesdale will only do a limited amount of its mortgages and fear is a powerful emotion. Mind you some still seem to be partying like its 2016.

The billionaire founder of Phones4u John Caudwell has claimed his Mayfair property development will be “the world’s most expensive and prestigious apartment block”.

The entrepreneur, who turned to property after selling his mobile phone company for £1.5bn in 2006, plans to convert a 1960s multi-storey car park in the heart of Mayfair into 30 luxurious flats.  ( City-AM).

As to hype well there is this.

“I see London as the epicentre of the world and I see Mayfair as the epicentre of London. Therefore, I see my building site as the epicentre of the world,” Caudwell told City A.M. “I can’t think of anywhere better for people to live.”

Meanwhile I am grateful to Henry Pryor for drawing my attention to this. From the Independent in August 2000.

Roger Bootle, who predicted the death of inflation five years ago, says Britain has seen the last of extreme gyrations in house prices…………Nationwide, Britain’s largest building society, reported yesterday that the price of the average home fell 0.2 per cent, or £319, to £81,133 between June and July.

As of this June it was £215,844.

 

 

 

UK unsecured lending continues to surge ahead

Today we get more information on just how loose Bank of England monetary policy is. But as it happens markets signalled the state of play yesterday. From the Financial Times.

The price of 10-year UK government debt rallied to its highest since October, as the general election build-up comes more clearly into investors’ view. The yield on benchmark 10-year gilts, which moves inversely to the price, dipped below 1 per cent on Tuesday to an intra-day low of 0.978 per cent, as investors sought the safety of government bonds after the long bank holiday weekend.

So if we want a strong Gilt market all we have to do is have more bank holidays, what a curious view? There are two much more relevant issues here of which the first is the easing on UK monetary conditions as the Gilt market has rallied since late January with the ten-year yield falling from 1.51% to around 1% now. The second is that it is in my experience rather extraordinary for the latest part of the rally to be taking place in an election campaign particularly one which veers between insipid and shambolic. The polls are in an even worse place as they suggest that the Conservatives may either lose their majority ( YouGov ) or win by 100 seats! Mind you after the 2015 debacle I can see why so many now simply ignore them.

Inflation

A consequence of easy monetary conditions is rising prices and we have seen another sign of what we have been expecting today already.

Grocery inflation hit 2.9 per cent in the 12 weeks to May 21, according to Kantar Worldpanel’s latest survey of the grocery sector, ahead of the official year-on-year inflation rate of 2.7 per cent. ( FT )

I doubt many consumers will be grateful for this nor will they agree with the central banking fraternity that by being “non-core” it can mostly be ignored. But they are doing their best to avoid it in an example of rationality.

in a sign that inflation is starting to affect consumers’ spending habits, cheaper products and discount retailers saw the biggest rises……Aldi and Lidl recorded their fastest growth rates since 2015, hitting a combined market share of 12 per cent. Across the sector, sales of supermarkets’ cheaper own-label products were 6 per cent higher than the same period last year,

Unsecured Credit

On the 29th of September last year I warned that the bank of England was playing with fire with its Bank Rate cut and other monetary policy easing. In particular I was worried about the growth of unsecured credit.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

So how is that going now?

The flow of consumer credit was similar to its recent average in April, at £1.5 billion; the annual growth rate was broadly unchanged.

As you can see some months later the beat goes on. The only changed is that the Bank of England seems to have changed its policy about declaring the actual growth rate so shall we see if it has something to hide? If we check we see that the three-month annualised growth rate is 9.8% and the twelve-month growth rate is the same as last August at 10.3%.

So as the late Glenn Frey would say.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Just as a reminder the numbers were “improved” a few years ago on this basis.

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

That is what we have now and as a comparison times were very different back then.

Consumer credit excluding student loans is estimated to have contracted by 0.4% in the year to June 2012.

Whereas student loans were expected to surge.

Government projections suggest that the outstanding balance of student loans will be more than £80 billion by 2017/18.

They were pretty much right about that but what does it mean for consumer credit? Well the total is much lower than it would be with student loans in it. For example I estimate that the current level of consumer credit of £198.4 billion would have nearly £100 billion added to it. As to the monthly net growth well the current £1.5 billion or so would be somewhere north of £2.5 billion and maybe at £3 billion. The reason why I estimating is that the numbers are over a year behind where we are.

Secured Credit

This will not be regarded as such a success by the Bank of England.

Net lending secured on dwellings in April was £2.7 billion, the lowest since April 2016 …. Approvals for house purchase and remortgaging loans fell further in April, to 64,645 and 40,575 respectively

Of course the Bank of England has made enormous efforts in this beginning four summers ago with the Funding for Lending Scheme. Those efforts pushed net mortgage lending back into positive territory and also contributed to the rise in UK house prices that has been seen over the same time period. Last August yet another bank subsidy scheme was launched and the Term Funding Scheme now amounts to £63 billion. However it seems to have given more of a push to unsecured lending than secured.

Of course Governor Carney also claims that car loans are secured lending ( no laughing please) and here is the latest data on it from the Finance and Leasing Association.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016.

That meant that £3.62 billion was borrowed in March using what is described as dealership finance.

Business lending

The various bank subsidy schemes have been badged as being a boost to business lending especially for smaller ones, but have not lived up to this.

Loans to small and medium-sized enterprises decreased by £0.3 billion ( in April)

Comment

The Bank of England claims that it is “vigilant” about unsecured lending in the UK but we know that the use of the word means that it is not. Or as it moves from initial denials to acceptance we see yet again a Yes Prime Minister style game in play.

James Hacker: All we get from the civil service is delaying tactics.

Sir Humphrey Appleby: Well, I wouldn’t call civil service delays “tactics”, Minister. That would be to mistake lethargy for strategy.

But it opened the monetary taps last August with its “Sledgehammer” expectations of which pushed the UK Pound lower and now we see unsecured credit continuing to surge and broad money growing at just over 7%. The old rule of thumb would give us an inflation rate of 5% if economic growth continues to be around 2%. In fact it is if we add in the trade deficit exactly the sort of thing that has seen boom turn to bust in the past.

 

 

 

 

 

 

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

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

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

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

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

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

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

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

Bringing this to a household and individual level

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

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

And also per person.

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

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

What does this cost in terms of interest?

Lets take a look at what we are told.

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

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

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

What are the interest-rates paid?

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

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

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

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

Where is the debt?

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

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

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

This means that the situation is currently as shown below.

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

This means the following on a household level.

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

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

Time for some perspective

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

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

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

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

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

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

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

Student Loans

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

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

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

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

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

Comment

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

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

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

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

The fall and rise of the 100% mortgage in the UK

One of the features of the credit crunch era has been the way that the various establishments make all sorts of promises along the lines of “never again” and then after a delay return to past behaviour. A type of reversion to mean if you like. If we look back to the pre credit crunch era then the peak of if you prefer nadir for one type of behaviour was the 125% mortgages under the Together banner issued by Northern Rock and yes you could borrow 25% more than the value of the property the mortgage was secured on. What could go wrong? Sadly many borrowers found out.

Actually this was not the only problem with Together mortgages as this from the bad bank NRAM which holds them now shows.

For example, a Together customer with a mortgage of £100,000, a loan of £15,000 (both still with NRAM) and a current interest rate of 4.79% with 15 years term remaining would be paying £60 per month on just their £15,000 loan.

Yes they involved an unsecured loan which has mostly got forgotten over time but this added to the debt burden by being over the mortgage term rather than say the 5 years or so of a loan. The advertisers call this helping with monthly payments, but look what it does to the total debt. This is illustrated by taking a loan at a higher interest-rate but crucially for a shorter period.

Switching the £15,000 loan to a 5 year deal elsewhere with an interest rate of 5.99% would mean a new repayment of £290 per month, which does sound like a big increase.

But the loan would be paid off a whole 10 years sooner, saving a whole £16,394 in interest payments.

The return of a 100% mortgage

You might think that such a thing was not possible as back in the day there was a queue of politicians telling us that such things were a sign of irresponsibility in the system. From the Guardian in 2009 from the Liberal Democrats Treasury Spokesman.

In the current housing market, with prices falling steadily, the 100% mortgage is an insane risk for any lender……most people would surely accept that we need to restore greater responsibility to money lending.

From the BBC on the 22nd of February 2009 and the emphasis is theirs.

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Lord Myners said costly lessons had been learned worldwide “about reckless, feckless, witless lending”.

Here was the conservative party spokesman.

Shadow treasury chief secretary Philip Hammond accused the prime minister of “trying to shut the stable door on irresponsible lending long after the horse has bolted”.

Some of you are probably already singing along with Carly Simon.

But if you’re willin’ to play the game
It’s comin’ around again

Barclays Family Springboard

Let us examine the details and here is the opening pitch.

Apply for a Family Springboard mortgage of up to £500,000 on a property in the UK, without a borrower deposit.

The details remain in a world where a 5% deposit was required but the Press Association is more up to date.

Customers with an income of more than £50,000 will be able to borrow up to 5.5 times their income, up from a maximum multiple of 4.4.

I suppose that would have to raise this amount for the thing to work and the interest-rate is show below.

A buyer without a deposit could get a three-year fixed rate of 2.99% under the family springboard mortgage

Seems very cheap for a 100% mortgage does it not? But of course most interest-rate rates seem like that these days.

Bank of Mum and Dad

These are required here but only for three years and the deal is sweetened for them as shown below.

They open a Helpful Start Account with 10% of your purchase price at the same time you apply….They get their savings back after 3 years with interest, as long as you keep up the repayments.

If we start with their position they will get an interest rate of 1.5% over Bank Rate so 2% currently which is pretty good considering. Crucially they are only backing the payments for the first three years and then get their money back plus interest. Their intervention leaves us with a curious somewhat bi-polar situation where the borrower gets a 100% mortgage but the bank would argue that it only has the risk of one of more like 92% if we allow for the fact that it will have reduced during these three years. Of course we are then left with the issue of whether 92% is too high at this level of house prices.

We know that the Bank of Mum and Dad or BOMAD is rather busy these days.

Analysis by Cebr for Legal & General shows that, as of 2016, a quarter (25%) of all homeowners received help when they bought the home they live in.

Indeed the numbers below are rather eye-catching.

Based on the figures and home purchase prices, we estimate that, in total, family and friends will spend £5bn in 2016 to help support the purchase of £77bn worth of property. This puts the Bank of Mum and Dad in the top ten mortgage lenders in the UK.

There are quite a few issues here and the most obvious is this one.

The Bank of Mum and Dad is not adequate in that it fails to address the needs of those without parental wealth,

To Infinity and Beyond

Well for many of us anyway as we note this development from last month. From Hodge Lifetime.

The 55+ Mortgage is an interest-only mortgage available to borrowers aged 55 or above…….The maximum term we allow is up to when the youngest borrower reaches age 95.

Youngest borrower reaches 95? That pretty much covers everyone does this not? It also sets us further down the road which Japan travelled as it headed towards what are called intergenerational mortgages. A little care is needed as the old limits at 65 are out of date with flexible retirement terms and increasing life spans but it is hard to have any support for a mortgage which is interest-only and goes to 95. What court would enforce terms on a 95 year old……

The Bank of England

The Financial Policy Committee wants us to think this.

the FPC remains vigilant to risks in this area.

Meanwhile it peruses the Bank of England tea trolley to see what cakes are on it and dreams of the menu for luncheon.

Comment

There is much to consider here and it is typical of the times that we have a mortgage which is in one sense a 100% one as in from the borrower’s point of view whereas from the bank’s point of view it is more like a 92% one. Also on the 10% BOMAD “Helpful Start” it makes a turn by paying 2% to them but charging 2.99% on the mortgage. I also note that the mortgage borrower will be paying interest on the amortised value of the full loan rather than 90% so over time that will be expensive.

Everybody is happy? Well if house prices have gone up yes and not to bad if they have stayed the same but difficult if they have fallen. On that front I have some worrying news for you provided by Legal and General.

Of 88 economists questioned by the Financial Times to assess the impact of government policies, none expected a general fall in prices.

Oh and of course all this is happening at a much higher level of house prices compared to earnings than before.

 

 

 

 

 

The UK Money Supply numbers show rising unsecured credit and falling business lending again

Today is a day for examining the state of play of the UK monetary system as we peruse data on both lending and the money supply. But before I get to that something significant has taken place earlier this morning. The cavalry from India has arrived as this from the Reserve Bank of India indicates.

it has been decided to:reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect;

My first issue with this is the simple point that if the world economy is doing so well and is in a recovery why are so many places cutting interest-rates rates? It is almost as if they are afraid of something they are not telling us. Jeroen Blokland has put this on a map for us.

This is especially relevant in an article about UK monetary policy as the “Forward Guidance” from Mark Carney and the Bank of England is that an interest-rate rise or rises are on its/their way. If you deduct the from the countries in red on the map those who raised interest-rates because of currency falls you see that there is very little left and that the UK would be in danger of being as Brian Clough so memorably put it “in a class of one” if it raised Bank Rate. Is the UK economy that strong?

The other feature of this is that with RBI Governor Rajan India has a “Rock star” central banker just like the UK has with Mark Carney. Their “Rock star” has just cut interest-rates following a quarter where the official statistics tell us that the economy grew by 7.5% on a year before. Also I note that he thinks this of such a rate of economic growth.

Domestic economic activity remains moderate in Q1 of 2015-16.

Of course as the DnaIndia highlights there may be another issue.

Many economists suspect, however, that the government statisticians’ new way of counting GDP overstates how well India is doing.

Does anybody believe the new ways of counting Gross Domestic Product or GDP?

UK Money Supply

The UK measure of broad money supply used by the Bank of England is M4 excluding intermediate other financial corporations (OFCs). In case you are wondering about the number four we did have an M3 which became £M3 but ahem, it blew up. One of the factors back then was the way that building societies became banks for example with the word disintermediation to the fore. Returning to UK broad money it has been fairly stable for a while around the numbers below.

The three-month annualised and twelve-month growth rates were 4.0% and 4.2% respectively.

A rough rule of thumb is that this equals likely economic growth plus inflation. Currently that works much better if we use the Retail Price Index and economic growth rather than the Consumer Price Index. However for both measures we see that UK economic growth would be constrained by the pick-up in inflation which is likely with the oil price around $65 per barrel (Brent Crude). Actually if we put house prices into the CPI as I have long argued it would work really well right now but we would then have the problem that looking forwards the likely inflation pick-up (which began for example in Germany yesterday) would restrain economic growth. Perhaps that is what other central banks have been thinking as they have cut official interest-rates.

UK mortgage market

Interestingly it looks as though something is stirring again here.

The number of loan approvals for house purchase was 68,076 in April, compared to the average of 60,679 over the previous six months.

If we look for a driver of this it seems likely that the falls in mortgage interest-rates that we have been discussing are a factor here. The Bank of England has stopped driving them down so aggressively via its Funding for Lending Scheme but of course other factors such as the interest-rate cuts and monetary easing abroad have come into play. Thus we are also seeing a rise in remortgaging.

The number of approvals for remortgaging was 35,930, compared to the average of 32,308 over the previous six months.

Perhaps the overall background is a factor too. From This Is Money.

How to join the buy-to-let boom: Get started and pick the mortgage that’s right for you.

A recent report by economists showed that buy-to-let landlords have enjoyed incredible returns of nearly 1,400 per cent since 1996, beating all other investments.

If you put £1,000 into a rental property at the end of John Major’s government, it would have grown to £14,897 by last year, according to the research.

As the Outhere Brothers put it.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

Or as a current hit puts it.

Oh I think that I’ve found myself a cheerleader

With reports of “Irish Trophy Homes Are Back With the Property Bubble a Distant Memory on Bloomberg shall we misquote Prince and partly like its 2006/07?! What happened next?

Recently net mortgage lending has been stable at around £1.7/1.8 billion per month on average which compared to the past is low because whilst some have the tap open into the UK mortgage market another group are repaying as fast as they can. Repayments amounted to £15 billion in April as we mull two separate groups at play here.

Unsecured lending

The Financial Planning Committee set out to restrict the rules on risky mortgage lending via its Mortgage Market Review. Except that since in a predictable repetition of the past we seem to have got this.

Consumer credit increased by £1.2 billion in April, compared to the average monthly increase of £1.0 billion over the previous six months. The three-month annualised and twelve-month growth rates were 8.2% and 7.2% respectively.

Up until the Funding for Lending Scheme was introduced unsecured lending was falling in the UK but growth began again and as you can see recently it is picking-up with a vengeance.

Loans to businesses

The whole purpose of the Bank of England FLS these days is supposed to be to drive bank lending to businesses particularly smaller ones higher so let us see how it is doing.

Net lending – defined as gross lending minus repayments – to large businesses was -£1.6 billion in April. Net lending to SMEs was -£0.2 billion.

Loans to non-financial businesses decreased by £1.6 billion in April, compared to the average of £0.0 billion over the previous six months. The twelve-month growth rate was -0.4%. Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.3 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelvemonth growth rate was -0.8%.

Hence the use of the word counterfactual which I note is not necessary when referring to mortgage growth or unsecured lending.

Comment

An analysis of the UK money supply and credit situation provides quite a bit of food for thought. As we look forwards and inflation rises back towards its target then we face the prospect that economic growth may slow. The situation is not helped by the fact that UK credit growth has been skewed towards the housing market and more latterly towards unsecured lending. Although of course it does allow bodies to claim that there is a bonanza now and even more of one just around the corner. From Legal and General yesterday.

has quantified the size and shape of the UK’s “Last Time Buyer” (LTB) market for the first time, and in doing so has identified 5.3m under-occupied homes in the UK, with 3.3m LTBs looking to downsize. The LTB market owns 7.7m spare bedrooms and a total of £820 billion of housing wealth, set to reach £1.2 trillion in 2020.

Wow! Can we mobilise this as after all we could pay off all the unsecured debt quite easily? Sadly life is not that easy and we have the issue of the fact that in spite of all the promises to the contrary there is little sign of credit growth for smaller businesses well apart from buy to let ones.

Where on this road does one see an interest-rate rise? A bit like a solution for Greece where we have been promised so many in the last week alone it seems to be a Mirage.