Headline UK Inflation or CPIH is an example of official “Alternative News”

Today is inflation data day in the UK and the National Statistician is about to make a major change. Firstly there is a confession to a current omission in the CPI or Consumer Prices Index ( one which is especially important in the UK economy) and then the detail. The emphasis is mine.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property.

The new headline measure called CPIH is claimed to include owner occupied housing costs but in fact uses the same methodology as used for Imputed Rents. As the renting does not actually happen they have to estimate which as I will come to later has gone badly. The alternative is to measure real costs and prices such as mortgage costs and house prices which not only exist but are understood by most people. So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?

Sadly the UK Office for National Statistics has become an organisation which does not want debate and instead publishes propaganda or “fake news”. Here is an example.

(CPIH is…) the most comprehensive measure of inflation

As I have explained earlier it omits house prices and mortgage costs which are for many people substantial expenses and whilst I welcome Council Tax being introduced other housing costs are still missed out.

At the Public Meeting to discuss this the statistician John Wood made a powerful case against the change which was to point out why housing was being singled out to be imputed? Here are his words from the Royal Statistical Society online forum.

The CPI is based on acquisition costs, which is not the same as consumption costs for products (such as cars, furniture, electrical goods, jewellery) that are consumed over many years. I asked John Pullinger at the meeting whether ONS was going to apply the rental equivalence principle to such products and the answer was no. He accepted that they should be so treated in principle but ONS was not going to do so for “practical convenience”. So the only product in CPIH that will conform to the consumption principle will be owner occupied housing.

The problem of measurement

I argued when this saga began back in 2012 that the rental series being used was unreliable but was told our official statisticians knew better. What happened next?

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

There was an announcement that CPIH had been some 0.2% too low but the principle that the football chant “You don’t know what you are doing” applies as that series was abandoned and a new one introduced. Let me switch to the regulator’s view from last month.

This matter was considered at the UK Statistics Authority’s Regulation Committee at its meeting on 16 February 2017.

At that meeting, the Regulation Committee decided not to confer the National Statistics status of CPIH at this point in time. This is because although considerable progress has been made, ONS has not yet fully addressed some of the Requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.

I was contacted and gave evidence arguing for such a decision and just to give you a flavour I pointed out that there had just been announced a £9 billion revision to the Imputed Rental numbers which added to so many others that the series is now in my opinion a complete mess.

Also how is CPIH now the headline inflation measure when it is “not a national statistic”? Demotion was grounds for removing the RPI so why does this not apply to CPIH?


There is a further problem which is that the UK monthly rental series is erratic and would send out very different messages from month to month. Accordingly each month we do not get that month’s data but a stream from the past to “improve” the data. The first issue is that it is not that month’s data as claimed but this has another problem which is that it takes a long time for changes in the economy to show up ( around 3 years). This is two-fold and the opening effort is that rents take time to respond to economic changes in a way that house prices do not. Next the data is smoothed so it takes even longer to pick it up. What could go wrong here?

Today’s numbers

If we look at the numbers released this morning we would expect our “comprehensive” measure of inflation which now has housing costs or CPIH to push above CPI.

Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.

So CPI was?

The Consumer Prices Index (CPI) 12-month rate was  2.3% in February 2017, compared with 1.8% in January.

Should we be nervous before looking at CPIH? Er no…

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.3% in February 2017, up from 1.9% in January.

So owner occupied housing costs make no difference at all? Not only is that embarrassing it comes under the banner of Fake News in my opinion. Actually Torsten Bell of the Resolution Foundation made a good point earlier.


So what is the point of the switch other than to claim you are representing something which you are not?! If we think of the period since the early 1990s the argument that there has been little or no inflation from the housing sector is a very bad joke.

Retail Price Index

This has been dropped from the Statistical Bulletin which is very poor from the UK’s statistical bodies as after all being “not a national statistic” has been no barrier to the advancement of CPIH. Here are the numbers.

The all items RPI annual rate is 3.2%, up from 2.6% last month. • The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.5%, up from 2.9% last month.

For all the barrage of abuse it has received if you look at UK house prices it continues in my opinion to provide a better snapshot of the UK situation than CPI or CPIH.

Let me also mention the “improved” version or RPIJ which was pushed for a couple of years by our statisticians as it is now RIP for it. More than a few were led up a garden path which now is on its way to be redacted from history.


Regular readers will be aware that I have been predicting a rise in UK inflation for some time even during the phase when the “deflation nutters” were in full panic mode. Once the oil price stopped falling we were always coming back to this sort of situation and of course there has been the fall in the value of the UK Pound which in my opinion will lead to higher inflation of the order of 1.5%. If we look at today’s producer price numbers with output price rising at an annual rate of 3.7% more of that is on its way, sadly as we now face the fact that real wage growth has ended and will soon be negative even on the official inflation numbers.

Meanwhile as I have given a lot of detail today on the inflation changes let me end with something very prescient from Yes Minister.

Sir Humphrey Appleby: “If local authorities don’t send us the statistics that we ask for, than government figures will be a nonsense.”
James Hacker: “Why?”
Sir Humphrey Appleby: “They will be incomplete.”
James Hacker: “But government figures are a nonsense anyway.”
Bernard Woolley: “I think Sir Humphrey wants to ensure they are a complete nonsense.”

Update 2:45 pm

Someone has a suggestion about why there was such an official rush to include Rental Equivalence in the UK inflation numbers.

What is happening to UK house prices and rents?

Now we are a few months down the road from the vote in the UK to leave the EU we can take a look at the state of play in the housing market. For example is it on its way to an 18% drop in house prices as suggested by the former Chancellor George Osborne? Or was that forecast one of the reasons he is now a former Chancellor? Of course if so that begs a question as to how he can be earning circa £30,000 a speech. One thing we do know is that the Bank of England under the Governorship of Mark Carney did its best in August to keep the home fires burning.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

I suppose the purchases of corporate bonds are the one feature which did not help house prices, especially the frankly bizarre purchases of the bonds of foreign companies. But the rest was very house price friendly and we were also promised “more” by Governor Carney although he now tells us that he meant “more” in a “less” sort of way in the same fashion that his Forward Guidance of higher interest-rates turned into a cut in reality.

Where are we now?

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

The headline RICS price balance came in at 30% in November, it’s highest reading since April, with more respondents in most areas seeing some increase rather than a decrease. For the second consecutive month, the strongest growth was reported in the West Midlands and North West of England.

An interesting regional picture, do readers agree? Looking ahead we are told this.

The near term outlook for prices remains broadly similar to October with a net balance of 14% of surveyors expecting an increase over the coming three months, and some growth expected across most parts of the UK.

There is of course something of a moral hazard in looking at surveyors views which I think is highlighted below.

However, the largest proportion (63%) think that prices are currently around fair value. The South East contains the largest proportion (58%) of contributors who take the view that prices are above fair value at present.

Only 58% think house prices are too high in the South East?


The Halifax house price report was released yesterday although these days it is under the Markit banner and it told us this.

“House prices in the three months to November were 0.8% higher than in the previous quarter. This increase followed little movement in prices on this quarterly measure in both September and October. The annual rate of growth also increased, rising for the first time for eight months, from 5.2% in October to 6.0%.

So we see little sign of an 18% drop although we have seen a slowing in the annual rate of house price inflation from 10%. However an annual rate of 6% is still well above both ordinary inflation and is around treble growth in average earnings. So whilst we do not have the data for the earnings to house price ratio I can see on the chart provided that we are at 2006/07 levels which were supposed to be unaffordable weren’t they? Of course interest-rates are much lower now but we have also have seen real wages fall and not fully recover.

What about rents?

The official view is that the growth in rents has been slow. For example here are the latest numbers which are similar to wage growth.

Private rental prices paid by tenants in Great Britain rose by 2.3% in the 12 months to October 2016; this is unchanged compared with the year to September 2016.

As growth in rents has been much slower than house prices the UK establishment is desperate to put the former in its consumer inflation numbers. However whilst there are obvious issues with any definition of poverty this from the Joseph Rowntree Trust poses a challenge to the establishment complacency.

The number of private renters in poverty has doubled over the last decade. There are now as many private renters in poverty as social renters. Rent accounts for at least a third of income for more than 70% of private renters in poverty.

Whilst there may be a variety of causes these are worrying numbers for a recovery although they do only take us to 2014/15.

In 2010/11, the number of landlord evictions and mortgage repossessions were both around 23,000. In 2015/16, there were 37,000 landlord evictions and 3,300 mortgage repossessions. 58,000 households were accepted as homeless in 2015/16, an increase of almost 50% compared with five years earlier. The most common cause of homelessness is the end of a shorthold tenancy or rent arrears.

There is also a concluding sentence with which I can only say “Hear! Hear!”

What about London?

The Guardian reported this yesterday.

On Monday, property firm Knight Frank said prices in prime London postcodes had fallen by 4.8% in the year to November, and were set to end the year 6% down. In Chelsea, prices have dropped by 12.6% over the past year, it said, while around Hyde Park values are down by 11.2%. It forecast that across the market prices will remain flat in 2017.

An estate agent saying prices will be flat? With the obvious moral hazard in play that sounds like a fall to me. Volumes have also fallen but I note that the Guardian numbers have been challenged by Henry Pryor on Today on Radio 4 earlier. He says that one company sold 9 new-builds above £5 million as opposed to that being the total. He also argues that prices have been falling for a while.

Some agents suggest prices in parts of London have fallen 35% below their peak levels of 2014 but these are perhaps exceptions…At the very top of the central London market homes where homes cost over £5 million prices are down 11% on 2015 & 19% on 2014 levels.

If there is a trickle-down effect then it is in play right now. Although care is needed as of course these prices rose into the stratosphere and if you like we are reversing the recent pattern of Monte Paschi.


If we look for ch-ch-changes we see the clearest signs of a change is gonna come in London. Volumes have dropped and as we note that prices were falling at the top end anyway it is clear that “the only way is up baby” has been replaced on the record turntable by “Fallin'” as Alicia Keys moves Yazz on. As this has strong international influences we wait to see how they play out as existing owners have lost out from the lower UK Pound £ but new buyers can buy more cheaply. With real wages coming under pressure from higher inflation and therefore likely to fall in 2017 we should see national house price growth slow and maybe even a fall or two. That’s the best piece of new first time buyers have seen for quite some time.

As to rents I do not change my view from November 4th.

As we look forwards the UK is so far doing okay for economic growth (0.4% to 0.5% per quarter on the evidence so far) but I expect a rise in inflation in 2017 which is more likely to subtract from that via its effect on real incomes than add to it. We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Perhaps that is why they are putting imputed rents in the headline consumer inflation number from next March! Although with the establishments record on Forward Guidance maybe not…



UK rents are going to surge. Really?

The issue of rents is something which has two main drivers to attract our attention. The main one is that whilst the UK often likes to think of itself as a nation of home owners the fact is that more and more people are renting this days. Within renting there has also been a shift as fewer council houses (for foreign readers UK local authorities used to have a largish stock of housing but have much less now) are available and more people rent privately. There is of course something of an irony in the fact that in this respect we are becoming more like our European neighbours. Also there is the issue that our establishment and statisticians are trying to push a measure of inflation (CPIH) which takes owner occupied houses and imagines they are rented out and then puts that in the inflation numbers. Of course they also use such numbers to impute a rent for the income version of the GDP numbers. What could go wrong? Actually quite a lot if you go to the Royal Statistical Society to debate such issues as I do.

What is going to happen to rents?

The Financial Times has published some analysis today although you may note the last 4 words of the sentence below.

Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.

Okay by how much?

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

We then get a reminder of what is driving this according to Savills.

Efforts to damp the buy-to-let market, including a stamp duty surcharge and plans to limit tax relief on mortgage interest payments, are pushing investors towards “higher yielding, lower demand markets”, meaning the areas of highest demand, such as London, face tightening supply. Yields in cheaper areas of the country tend to be higher.

Here are their estimates for the numbers.

Savills said the number of mortgaged buy-to-let investors purchasing new homes was set to drop by a third to 80,000 by 2018, recovering slightly to 90,000 by 2021. Cash buyers, many of whom are investors, will drop by 18 per cent by 2018.

Ah “investors” some would call that rentiers. Also it would appear that estate agents in general are keen to put rising rents in our minds.

JLL, another estate agency group, predicted a 17.6 per cent increase across the UK by 2021, with London rents rising 19.9 per cent, far outstripping predicted rates of inflation.

Let me for the moment simply point out the tactical issue that if those planning to rent property are switching out of London then presumably that will put downwards pressure on rents elsewhere as the FT has missed this.

House Price Stagnation

As we mull the obvious moral hazard in the analysis above we might advance expecting house price rises to be forecast to match the rent rises.

Savills said prices would be flat in 2017 in the capital and elsewhere…….“We think sentiment will be affected as there is more of a realisation of what Brexit means for earnings, for the economy and for employment,” Mr Cook said.

Mr.Cook has just provided a critique of his own rent forecasts as of course the trends for earnings and employment will affect them too. Also there has to be some jam tomorrow to go with today’s dry toast.

Savills predicted a year of steeper growth — 5.5 per cent — in 2019 as uncertainty around the Brexit negotiation process abates, bringing total UK house price growth to 13 per cent in the next five years.

Ah so just like the Bank of England perhaps! If the numbers have gone against you claim it back in 2019 and then hope that when we get to 2019 everyone will have forgotten it.

What is happening to rents?

Last week we were updated on the official data.

Private rental prices paid by tenants in Great Britain rose by 2.3% in the 12 months to September 2016; this is unchanged compared with the year to August 2016.

It was kind of the ONS to make my case that this is flawed measure for inflation for me.

residential house price growth in Great Britain has typically been stronger than rental price growth, with an average 12-month rate of house price inflation between January 2014 and August 2016 of 7.3%, compared with 2.1% for rental prices.

But if we go back to rents there is a clear problem in the forecasts made today. If you look at the pattern of rental growth it follows the improvement in the UK economy with a lag ( of over a year which is another reason why it is a bad inflation measure) which means that it looks to be driven by improving incomes and probably real incomes rather than the underlying economy. Thus if you expect real income growth to fade (pretty much nailed on with likely inflation) or fall which seems likely then you have a lot of explaining to do if you think rents will rise. If 2017 turns into a difficult year with higher inflation then 2019 would be a rough year for rents if past patterns hold. Or up seems to be the new down yet again.

At a time like that renters are more likely to be singing along with Lunchmoney Lewis.

I got bills I gotta pay
So I’m gon’ work, work, work every day
I got mouths I gotta feed,
So I’m gon’ make sure everybody eats
I got bills!

As a technical point it is only in England that rents are rising.

Private rental prices grew by 2.5% in England, fell by 0.1% in Scotland and grew by 0.1% in Wales in the 12 months to September 2016.

Actually if we move to Mortgage Introducer the situation for rents in London seems to be seeing ch-ch-changes.

London rents fell by -0.11% in October, with major falls occurring in Westminster (-1.86%), Kensington and Chelsea (-1.81%), Richmond upon Thames (-0.99%) and Camden (-0.93%).

Actually the index here showed that there are very different situations across Scotland.

Aberdeen (-13.22%) and Aberdeenshire (-9.03%) saw the greatest rental falls  as they were both hit by the dramatic fall in oil prices since mid-2014.

But Edinburgh City rose by 5.63%.


There is a lot at play here. Sadly one of them is the increasing way that the media reproduce what are in effect not far off press releases and call it journalism, As we look forwards the UK is so far doing okay for economic growth (0.4% to 0.5% per quarter on the evidence so far) but I expect a rise in inflation in 2017 which is more likely to subtract from that via its effect on real incomes than add to it. We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Also an argument in favour of rental yields rising needs to address why in an era of negative interest-rates and bond yields they should be exempt? Oh and as to lower supply of houses for rent well the FT did not seem to think so only three weeks or so ago.

Rightmove, the property website, found rental listings had risen by 6 per cent in the three months to the end of September compared to the same period last year. The rise in supply was even more pronounced in London, where it climbed 15 per cent year on year.

These issues have increasing importance as the phrase “Generation Rent” implies as I expect millennials and those younger to increasingly rent rather than own things. This is an example of back to the future or perhaps a life cycle as I recall my grandparents and for a while my parents renting items such as TVs and later video recorders from places such as Radio Rentals. We do however have a new name for it as renting comes under the sharing economy does it not?

Meet the new boss,same as the old boss?


The problem that is the Buy to Let sector in the UK

A long running theme of this website has been that too much economic effort is put into the housing sector except in the area of building houses. This has been reinforced in the credit crunch era where a litany of economic measures have boosted the housing market. We had a Bank Rate cut to 0.5% ( one of the longest running emergency measures ever) , £375 billion of Quantitative Easing and when they did not work July 2012 saw the Funding for Lending Scheme. The latter saw mortgage rates pushed lower by up to 2% according to the Bank of England and was the trigger for the house prices to rise again. There have also been other measures under the “Help To Buy” banner. But the overall effect has been to create a put option for house prices as we seen a Baron King and then Mark Carney put in play here.

This has reinforced the long running view that investments in housing are “as safe as houses” and lead to the UK economy being tilted that way. Some of this is self-reinforcing in that as house prices rise those who buy them as a business make a profit and of course contrary to the official “Help” theme it becomes more difficult for people to afford to buy and thus more rental customers are created. As long as it lasts it is pretty much self-fulfilling.

As I pointed out on the 7th of this month the situation has gathered pace in recent times.

From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%

You may note the use of the number 8 for house price to earnings ratios. A consequence of this is that there are fewer owner occupiers these days as the numbers have fallen from 18.2 million (2008) to 17.7 million (2014). The slack has been taken up surprise,surprise by the private rented sector where numbers have risen from 3.9 million to 5.3 million over the same time period. We can only suspect and infer that those trends have continued since then.

As to the future well it looks as though it will be a rental one.

In 1991, 67% of the 25 to 34 age group were homeowners. By the financial year ending 2014, this had declined to 36%.There were also reductions in home ownership over the same period for the 16 to 24 age group (from 36% to 9%) and for the 35 to 44 age group (from 78% to 59%).

There is something of an offset from more older people being homeowners but overall the numbers are falling.

Putting this another way I noticed this in a report from the Institute of Fiscal Studies this week.

Twenty years ago over two-thirds of middle-income children lived in owner-occupied housing, compared to 40% of the poorest fifth of kids. Today only half of middle-income children are in owner-occupied housing.

Where have they gone?

But they ( the poor) have shifted away from social housing towards private rented accommodation, which – you’ve guessed it – is where those in the middle are increasingly found as well.

The Bank of England

It has weighed in on the subject this morning as it analyses whether there is a bubble here. At the risk of spoiling the suspense the answer will be no unless somebody actually wants their employment to be terminated today. However we do get more data on the subject.

Since 2008, the number of outstanding buy-to-let mortgages grew by 6.1% per annum on average, while the number of owner-occupier mortgages fell by 1.7%.

This has led to this.

Rapid growth rates in the buy-to-let market have caught the attention of policymakers.

Indeed, they have regularly told us that they are “vigilant”. Anyway let us continue.

The share of the PRS (Private Rental Sector)  as a proportion of all properties in the UK has been rising since 2002, financed in part through the expansion of buy-to-let lending.

Tenant Demand

We get an analysis of why there is more demand to rent.

Demographics matter because there are cohorts of the population, such as students, immigrants and younger people, who are more likely to rent. If these groups expand, all else equal, we expect there to be more demand for PRS properties.

There are one or two sub-plots there as of course much of the increase in students was centrally planned vis the expansion of universities as we note it missed out the implications for housing in another in the long list of central planning failures.

Then we get an enormous swerve as the Bank of England turns a Nelsonian style blind eye to the issue of affordability.

We think of affordability constraints as borrowers’ ability to secure a mortgage given a set of credit conditions…….Our analysis focuses on credit conditions, which we can quantify more readily.

This is really quite poor as we measure something regardless of it being more minor and ignore the bigger issue. However it is not without value as there was a change in credit conditions.

Our estimates suggest that, as a result of the withdrawal of high LTV mortgages, ‘frustrated’ demand for mortgages from prospective home owners meant one million additional households required PRS accommodation, accounting for 66% of the growth in PRS properties during the period

Anyway they cannot completely ignore affordability.

We believe the unexplained growth is related to housing becoming less affordable.

Actually more than that as if it was in from the beginning the whole analysis would change. Oh and I told you so.

Without concrete evidence on the impact of buy-to-let mortgages on house prices, it is not possible to say whether the gap represents a buy-to-let ‘bubble’

Looking Forwards

The Bank of England suggests there will be a slow down in demand.

Our projection suggests that additional tenant demand for PRS properties could be less than half between 2014 and 2019 compared to the post-crisis period…This translates to an average annual growth for the number of outstanding buy-to-let loans in the range of 2-7%. By comparison, average annual growth for 2014 and 2015 was 7.6%.

The problem is that the elephant in the room returns as we are told this.

The extent to which demand for PRS properties falls primarily rests on whether frustrated prospective first-time buyers from the post-crisis period eventually secure a mortgage.

You see this links us to a past piece of research which did not ignore the elephant.

For first-time buyers, we expect the issue of affordability to persist. Increased availability of low deposit mortgages could help but are easily outweighed by continued house price increases.


There are quite a few factors to consider here. The nation is changing as fewer become owner occupiers and more rent especially from private sources. As I recall my grandparent renting nearly everything ( for younger readers they rented their TV for example) it makes me wonder if we are going back to the future as more and more things are rented rather than owned. If a rentier style culture and economy is a concern well it is getting a bigger concern.

Let me be clear there is no harm in individual examples of buy to letting or renting. My issue is that it has become perceived as a road to easy profits which shifts the economy towards it and weakens other productive sectors as resources are shifted. This road has been backed and supported by government policy and the money made is invariably out of capital gains rather than the rent itself. That does not look stable to me especially as governments are heading towards the limits of what they can do.

In a way it speaks for itself that in its road to concluding that there is no bubble the Bank of England does its best to ignore the biggest issue which is affordability. But they do remind us of an important issue which is that we discuss the availability of cheap credit but that it applies to far from everyone. It is of course another theme of this website that these days there are quite different effects on different economic groups as we become ever more heterogeneous. In a way it would appear that Andy Haldane agrees with me.

So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much.

Meanwhile regrets already?

Andy Haldane has also said this today.

In my personal view, this means a material easing of monetary policy is likely to be needed,……..And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

He has been kind enough to help with a new definition of promptly for my financial lexicon for these times.

By promptly I mean next month


Affordability in the UK housing market has got worse and worse

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

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

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

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

Mortgage terms are lengthening

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

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

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

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

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

How much have mortgage interest-rates fallen?

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

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

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

House price affordability versus wages

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

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

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

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

The Halifax house price to earnings chart

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

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

What about those who rent?

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

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

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

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

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

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

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

Landlords are doing rather well

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

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


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

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

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

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

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

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

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

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

RIP David Bowie

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

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

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


Whatever happened to the concept of price? how has it changed and what does it mean?

Today I wish to return to what was my earliest theme when I stepped into the online world nearly 6 years ago. Back on the 17th of November 2009 I argued that there were problems with the simple concept of what is a price and used some examples from my own shopping bag to demonstrate this.

For example own brand wine gums have varied between 27 pence and 85 pence. On Sunday a 300 gram tin of garden peas cost 25 pence whilst a 142 gram tin cost 30 pence. So what is the price of these two articles and what level of inflation would we get from them? As the world has changed as a nation we shop more at supermarkets. Everybody who does so will realise that they manipulate prices quite a lot.

This was on my mind the other day when I noticed that the price of a supermarket own brand pot of yoghurt seems to bounce backwards and forwards between 90 pence and £1.10 for no apparent reason.

I pointed out that if we were struggling at times with what is a price or more formally price discovery then we were on dodgy ground when we tried to calculate inflation. I will go further now and say it is one of the reasons why we get caught out more often by inflation numbers and it was nice of Bavaria statistics to illustrate my point on cue this morning by publishing an inflation number  rising by 0.5% and catching the “experts” out (again).

Subsequently I went onto other areas where modern life had made price discovery ever more difficult.

Now if we leave the supermarket who has recently compared mobile phone tariffs? How easy are they to compare? I can confirm that domestic energy prices (electricity and gas) are very difficult to compare even on websites that are supposed to help you. Suppliers are clearly making comparisons difficult. There are many other examples of this. This is quite a serious market failure.

Bringing this up to date the TalkTalk scandal which may cover me as a customer poses its own questions as my custom got sold on from AOL to Carphone Warehouse and now maybe whoever! But the truth is I lost touch a bit with both what was happening and the price. Here is another awkward bit as one of the reasons I did that was because internet service reliability is important to me.

This brings me one of the fundamental credit crunch issues which is that as price discovery was failing pre credit crunch so was much economic theory. We had no equilibrium or if we briefly did we were unaware of it. However it has got much worse in the credit crunch era


This time it is the official bodies which have failed to discover price and inflation numbers as the UK Office for National Statistics have reminded us this morning.

We have designated the IPHRP (Rents) as experimental statistics. The results presented in this article are subject to revisions if improvements in the methodology are identified.

You see they had a series which did so badly it found itself stopped and redacted and sent to whatever place you find abandoned and friendless statistics. It did not stop the UK economics establishment (Consumer Prices Advisory Committee and others) from recommending it. So everyone – apart from those who read my blogs – were sent in the wrong direction on rental and indeed owner occupied inflation. Of course nobody is to blame and indeed many of those responsible have been promoted! But the point is that we were misled as to another price.


These are another form of price and we have seen an emergency interest-rate of 0.5% in the UK for over 6 years now. This has been accompanied by QE and other measures to drive down longer-term interest-rates as well. So in terms of Bank Rate we have no signal of a recovery from the price.

What we do have though is plenty of hype and I note that Bloomberg classify Mark Carney as a “hawk” ignoring the fact that he has yet to actually cast a vote for an interest-rate hike. So let me through in something more subtle. As we struggle to know what a price is central bankers are acting on expectations of price changes via Forward Guidance and expecting that to work. What could go wrong?

Also there was the Li(e)bor scandal.

Market manipulation

Bond  Markets

One can debate the issue over control of short-term interest-rates as central banks have of course intervened in them for decades and decades. Although driving them negative is a new venture. However the advent of large-scale QE and the way that government bond prices and yields have been influenced is new outside of Japan. Let me show you something which illustrates this. From the Financial Times

Italy has sold two-year debt at a negative yield for the first time………Investors accepted a guaranteed loss to buy €1.75bn of Italian debt at a yield of minus 0.023 per cent .

I pointed out last week that such bonds were trading at negative yields but Tuesday was the first time that the Italian Treasury and taxpayer had a guaranteed profit from it.

Now back as 2012 began the ten-year yield in Italy was popping above 7% and back then the national debt had been 116% of GDP (Eurostat 2011). Now the national debt is 136% of GDP and the yield is 1.4%. We need also to factor in the economy but it shrank by 2.8% in 2012 then 1.7% in 2013 and by 0.4% in 2014 followed by growth of 0.9% so far in 2015. So as you can see but for the fact there has been some recent growth everything is worse! Accordingly we see that the “everything it takes speech” and subsequent actions of Mario Draghi have driven this. There is no price discovery here beyond what the European Central Bank wishes us to see.

Only yesterday Sweden announced another effort in this long-running game as it announced another 65 billion Krona of government bond purchases. After that Swedish bond yields went negative out to the five-year maturity chasing Germany (6 years) and Switzerland (15 years). The FT puts it like this.

Sub-zero club now encompasses €2.6tn of debt, up from €2tn in a week.

In a recovery? How is the price discovery system working right now then?

Exchange Rates

Here we obviously have the issue of currency wars. In the last week we have had the Open Mouth Operations of Mario Draghi followed by an interest-rate cut in China, more QE in Sweden and “next time” promises from Janet Yellen and the US Federal Reserve. So we have had some action but mostly talk. But my point is that exchange-rates follow central banking pronouncements like dogs on a short lead. The Euro fell for Draghi and the US Dollar rose for Yellen making a win double of course for the former. Does anybody believe that either of these two individuals have any idea where the equilibrium or market-clearing exchange-rate is? Actually we could go deeper and argue that it is a bit like Heisenberg Uncertainty Theorem but that is for another day.

For now let me just point out that as exchange-rates are a zero-sum game then as a total the effort is pointless unless of course Blondie were prescient here.

And out comes a man from Mars

Rather than “we come in peace” I fear we would try to devalue our currencies against the Martian currency even quicker than Paul Krugman would be able to ask him/her for a fiscal boost.


I am reminded of the 1983 Yes Minister episode which discussed manipulation of numbers so some of this has been going for a long time. But my contention is that it has got worse and just as we would hope to know more via price discovery we in fact know less as they are manipulated. This leads us to Goodhart’s Law.

When a measure becomes a target, it ceases to be a good measure.

Prices? inflation? Interest-Rates? Bond Yields? Exchange-Rates? Oh and I have not even got onto how the QE era and the flow of funds seems to have influenced both commodity and equity prices. Is it a fluke that as bank trading desks withdrew from commodity markets prices fell?

Actually today has seen a more basic manipulation in another sphere apparently come to an end. From Xinhua News.

China abandons one-child policy, allows two kids for all couples

Generation Rent sees increases of 6.3% on average whilst being told its disinflation

Today has seen the publication of new figures for rents in the UK private-sector and they provide an example of “And the beat goes on”. Indeed as i will discuss they provide quite a counterpoint to the UK inflation figures which only on Tuesday told us that the headline CPI rate of inflation was -0.1% or that we are officially in disinflation. Indeed when a rental measure of inflation is added to the numbers as a proxy for owner-occupied housing we only get to this.

CPIH (not a National Statistic) grew by 0.2% in the year to September 2015, down from 0.3% in August 2015.

So you get the impression that rents are not doing much at all or at least not making much difference.

Rental inflation surges again

The latest numbers from Your Move and Reed Rains tell a very different story.

Average rents now stand at a new record of £816 per month, after rising by 1.6% between August and September.

So we immediately get a very different story to that presented in the official inflation data as those who pay rent presumably have steam coming out of their ears. This issue is exacerbated even further if we look at the annual numbers.

The pace of change is even clearer on an annual basis – up 6.3% over the last twelve months, from £768 in September 2014.

What about affordability?

Here we see a completely different situation from those who purchase a house as the Bank of England effort to reduce mortgage costs most represented recently by the Funding for Lending Scheme benefited the owners who rent out houses and flats rather than the renters. Did they pass the gains to them on?

Rents are now almost a quarter (24.4%) higher than in January 2010, while the index of CPI inflation is just 14.1% higher over the same period. This means rents have risen by 10.3% in real terms since the start of the decade.

So no and the situation is worse if we use the Retail Price Index over that period and it was only yesterday that we were reminded that wages have underperformed CPI inflation in the credit crunch era.

median hourly pay for employees aged 18 and over in London fell by 10% in real terms.

Now that overstates the issue as it was from 2008 so some of that is not a like for like comparison and it is a London number but other estimates of real wage falls have been in that vicinity.

Even if we move to now and observe that wages are now growing at around 3% per annum we see that increases in rent are more than double that at 6.3%. Is virtually all the real wage growth being pushed into housing/rental costs?

The rentiers

The owners of the properties seem by contrast to be doing rather well.

Landlords see gross rental yields rise to 5.2%, while rising property prices take total annual returns to 9.4%

At any time those are good returns but in an era where bonds yield so little (UK 10 year Gilt yields 1.8%) it stands out like a sore thumb. This is reinforced by the fact that the other side of the equation which is mortgage costs was pushed deliberately lower by the Bank of England. At this point the see-saw of renting looks very unbalanced to me.

This means that the average landlord in England and Wales has seen a return of £16,952 in absolute terms, before deductions such as maintenance and mortgage payments.

The UK has found itself in a situation where its private-rented property market is very unhealthy for its economy as frankly it has ended up with its own equivalent of the “Greenspan Put” where prices will not be allowed to fall and mortgage costs are driven lower. The King/Carney Put Option.

This is very different from saying all renters are evil as they arrive at it from many different directions and of course those trying to rent would be even worse off if landlords disappeared. It is just that as we move from the individual to the collective the situation becomes rather like the Borg and resistance feels futile.

A London problem

Rents here are forming their own private bubble it would appear.

Rents in London are rising most rapidly, up 11.6% on an annual basis to a new record of £1,301 per month.

I note that the KPMG Global Cities Report for 2016 (Eh?) shows that after expenses the typical UK graduate only has 19% of their income left as opposed to 42% in Dublin or 46% in Madrid. Perhaps anyone feeling low might want to follow the past example of David Bowie.

The consumer prices in Berlin are 30 per cent less, and the rental costs are almost 70 per cent lower than in the UK’s capital.

Oh and Hong Kong is apparently at -8% as we try to figure out exactly how that works!

I am reminded of the London Living Wage numbers from Wednesday where we were told this.

According to ASHE, most of this net gain was in jobs paid less than the living wage (826,000).

Of 872,000 new jobs some 826,000 paid less than the London Living Wage. How does that work with the rent figures? Are we stacking people into properties in conditions that we would not allow under animal welfare rules? I think City-AM has a full bucket of rose-tinting on this subject today.

In the future, those digital tools will reduce the demands on space and lower the imperative on up sizing for young renters, first-time buyers, new parents and young families.

Whilst I understand how I-Pods and MP3 players reduce space compared to record players and album collections I await to be told how they shrink a bed or a dinner table. Perhaps that guy should get a job at the New York “I cannot eat an I-Pad” Federal Reserve.

Why do the officlal numbers miss this?

If we look at the UK inflation data we see that there is quite a gap between surveys of rent changes and what they produce.

The OOH component annual rate is 1.8%, unchanged from last month.

It seems that their calculations are a bit like the Witches Brew in Shakespeare’s Macbeth so let us follow the advice of Madonna and go “Deeper and Deeper”. You see they do measure those who rent and they are 7.2% of the CPI. But the change in September 2015 was only 0.2%. Now we need to make an allowance for social housing rents where government policy is trying to push them down by 1% per annum but even so.

Also after observing the wage rises in the construction sector running at 6.3% it is interesting to note that dwelling repair costs are falling. Again there may be some lower materials costs but…

If we look across the pond to the United States we see quite a difference as shown by yesterday’s inflation release there.

The shelter index increased 0.3 percent in September after rising 0.2 percent the prior month. The rent index increased 0.4 percent and the index for owners’ equivalent rent increased 0.3 percent.

The Shelter Index is rising at 3.2% annually and is 33% of the CPI there so it is acting as much more of a counterbalance to disinflation elsewhere.Whereas we in the UK have a CPI which only has  a weight of 7.2% for housing costs meaning that in the  single month of September the impact of higher rents increased annual CPI by only 0.01%.Oh and that impact was ” particularly for self catering UK holidays”! Does anybody really think that the impact of housing costs on consumers expenditure is over four times higher in the United States? With house prices and rents so high in the UK some of you may be wondering if it should be the other way around.


It was around 3 years ago in the autumn of 2012 that I began my campaign against the plans of the UK establishment for measuring the impact of inflation in the housing sector. I could see that the claims of including it were really an effort to neuter it. So we have official disinflation and headlines of deflation by some whilst there must be many renters signing along to the lyrics below from Dido.

But if my life is for rent and I don’t learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine.

Seems rather a harsh view to me in “deserve nothing more than I get” But then even back in 1930 the man Stevie Wonder called Sir Duke was singing about the “Rent Party Blues”. I fear that may be on repeat in 2030 on current trends.