Are UK house prices rising again?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As the band Middle of the Road put it.

Ooh wee chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Mortgages

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

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

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

Approvals still look weak.

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

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

Consumer Credit

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

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

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

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

So gross borrowing is picking up.

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

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

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

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

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

Comment

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

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

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

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

This bit is really curious.

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

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

Me on The Investing Channel

UK Money Supply surges as Unsecured Credit Collapses

Today brings the UK monetary situation into focus and to say it is fast moving is an understatement. Let me illustrate in terms of QE or Quantitative Easing where the current rate of purchases is £13.5 billion a week and the total by my maths is now £507 billion. This means we have seen an extra £72 billion in this Covid-19 pandemic phase. Looking at it from a money supply point of view means that in theory an extra £72 billion has been added. We have seen before that in practice QE does not always flow into the money supply data as the theory tells us but I also note that the ECB figures we looked at earlier this week were responding to its QE actions.

Next comes the other programmes where again the heat is on. The Covid Corporate Financing Facility has bought some £15.9 billion of Commercial Paper and in return supplied liquidity. Next comes the Corporate Bond programme which has bought around £2 billion so far. They do not provide much detail on the Corporate Bond purchases to avoid me pointing out that for example they are buying Apple and Maersk. Last on the list is the new version of the Term Funding Scheme supplying liquidity to banks at 0.1% and it claims to have supported £8.2 billion of new loans.

So we awash with liquidity if not actual cash. Now let us look at the impact until the end of March as we look at this morning’s data.

Money Supply

I think we can say we see an impact here! The emphasis is mine.

The amount of money deposited with, and borrowed from, banks and building societies by private sector companies and households overall rose very strongly in March. Sterling money holdings by households, non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs), known as M4ex, rose by £57.4 billion in March, a series high and far above its previous six-month average of £9.0 billion. Sterling borrowing from banks (M4Lex) rose by £55.3 billion, also a series high and up from its previous six-month average of £5.1 billion.

Or as DJ Jazzy Jeff and the Fresh Prince would say.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Tic-tic-tic-tic Boom!
Well yo are why’all ready for me yet
(pump it up prince)

Or more prosaically,

The strength in money was broad based across sectors, with the largest increases since these series began for households (first published in 1963), PNFCs (1963) and NIOFCs (1998). (  non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs))

If we switch to the money supply implications then the 2.4% rise in March was as much as not so long ago we were seeing in a year. The annual growth rate of 7.4% is the highest we have seen for some time and next month we will break the numbers posted by the Sledgehammer QE effect in the autumn of 2016 and the spring of 2017. Actually I think we will break the all-time record for M4 anyway ( yes for my sins I still recall the £M3 days) but that is for another day.

Consumer Credit

There are some numbers here which in the previous regime would be too much for the morning espresso of Governor Carney and would have him summoning a flunkey from the Bank of England bar to fetch him his favourite Martini as he would be both shaken and stirred,

The weak net flows of consumer credit meant that the annual growth rate fell to 3.7% in March, lowest since June 2013. Within this, the annual growth rate of credit card lending fell to -0.3%, the first negative annual growth since the series began. The annual growth rate of other loans and advances fell to 5.6%.

The first Governor of the Bank of England to preside over negative annual credit card growth. I guess he and the new Governor Andrew Bailey will be playing a game of pass the parcel with that one!

This is a similar effect to what we saw in the credit crunch with households battening down the hatches by repaying credit with this time around settling your credit card in the van.

Households repaid £3.8 billion of consumer credit, on net, in March, the largest net repayment since the series began . Within this, credit cards accounted for £2.4 billion of net repayments and other loans and advances accounted for £1.5 billion.

Indeed the net figures may not do the gross data full justice.

This very weak net lending reflected a larger fall in new borrowing that was partially offset by slightly lower repayments. Gross lending was £5.4 billion weaker than February, while repayments were £1.3 billion lower.

Business Lending

This is something of a bugbear of mine as back in the summer of 2012 we were promised the the Funding for Lending Scheme would boost it, especially for smaller businesses. How is that going?

Within this, the growth rate of borrowing by large businesses increased sharply, to 11.8%, and growth by SMEs rose to 1.2%, from 0.9% in February.

Looking at the numbers for smaller businesses we are seeing two failures here. First the initial failure to get cash to them and second the conceptual failure over the past 8 years as the schemes to help them have recorded very little growth at best and sometimes none at all. In fact the situation has been so bad that the word counterfactual has been deployed which has two effects. For those that do not understand what it means it sounds impressive whilst leaving those that do mulling how giving £107 billion to the banks in the TFS had so little effect. Almost as if it was designed to do that.

Of course it is much easier to lend to larger businesses.

UK businesses’ deposits rose by £34.0 billion in March. Changes in deposits and loans were closely correlated across industries.

That bit is awkward. Did those that got it, not need it?

Mortgages

We open with a bit of all our yesterdays.

Mortgage borrowing picked up a little in March, with a net increase of £4.8 billion. The annual growth rate also rose a little, to 3.6%. Mortgage borrowing tends to lag approvals, however, so this strength is likely to reflect strength in approvals in previous months.

Then we get a bit more with the current reality.

In the mortgage market, evidence of a decline in housing market activity started to become apparent in March mortgage approval statistics, which fell by just over 20% (Chart 4). This was a broad based fall across reasons for applying for a mortgage. Approvals for house purchase fell by 24% to 56,200, their lowest level since March 2013; and approvals for remortgage fell 20% to 42,600, the fewest since August 2016. ‘Other’ approvals, which includes for withdrawing equity, fell back 17%, to 12,000.

Looking ahead with Gilt yields here we are likely to see more people look at a remortgage as my indicator for fixed-rate mortgage trends the five-year Gilt yield is a mere 0.1%. Of course there is also the issue of the market essentially being frozen.

Comment

Let me remind you that the broad money numbers are supposed to be a predictor of nominal GDP growth ( economic output) around two years ahead. So if we say we will be lucky to be back to where we were at the start of 2020 in two years time we would expect inflation of the order of 7% or so. Care is needed because the impulse these days is often seen in asset markets and is in my opinion a driver behind the stock market rally we have seen. That factor is why I argue to put house prices in consumer inflation measures in spite of the fact that for them “down, down” by Status Quo is more likely than Yazz’s “The only way is up” for this year. Although some seem to have spotted an alternative universe.

Nationwide said on Friday its measure of house prices rose by 0.7% in April from March and was 3.7% higher than a year earlier, stronger than forecasts in a Reuters poll of economists in both cases. ( Reuters)

Really?

Now let me look at another alternative universe or if this was a Riddick film the Underverse. You may need reminding that the official Bank of England Bank Rate is 0.1% as you read the numbers below.

Effective rates on interest bearing credit cards fell 14 basis points to 18.4%, whilst effective rates on personal loans fell 7 basis points to 6.8%.

Also the debacle at the Financial Conduct Authority which saw many overdraft rates double to around 40% is slowly being picked up in the data. Someone at the Bank of England must be torturing the series to keep the rate as low as 24% and please Governor Bailey who of course presided over the FCA at the time.