Are London house prices set for more falls?

This morning has brought news on the state of play concerning UK house prices although I think the Guardian has tripped over its own feet a little in an attempt to slay several dragons at once.

House prices in parts of London that were once at the epicentre of the UK property boom have fallen as much as 15% over the past year in fresh evidence of the impact of the EU referendum.

Actually if you then read the article no evidence of it being caused by the EU referendum is given but in the article linked to by it from December we are pointed towards one rather likely cause as Russell Galley of the Halifax tells us this.

“As a result of the rapid price growth in the capital, house prices in relation to average earnings are still very high in London; at 8.8 times annual average earnings they are close to the historical high of 9.”

I do like the “additionally” in the sentence below, what could it be about the house price to earnings ratio that causes this?

Additionally, mortgage affordability in London is worse than its long-run average, the only region in the UK where this is so.

As we progress on we discover that the peak or nadir of the falls depending on your perspective is rather close to home for me.

Figures from Your Move, one of the UK’s biggest estate agency chains, reveal that the average home in Wandsworth – which includes much of Clapham, Balham and Putney – fell by more than £100,000 in value over the last 12 months………..Homes in the London borough of Wandsworth were fetching an average of £805,000 in January 2017 but this has now fallen to £685,000.

There have been falls elsewhere too.

Other London boroughs are also showing steep price falls. In Southwark, south London, the average price has dropped from £666,000 to £585,000 in 12 months, while prices have pegged back in Islington, north London, from £750,000 to £684,000.

At this point with Wandsworth and Southwark on the list I am starting to feel a little surrounded although a common denominator is beginning to appear.

Wandsworth and Southwark are home to huge speculative property developments facing on to the River Thames – including the Battersea Power Station development – but the market for £1m-plus one-bed properties has shrivelled in recent years.

The scale of this was explained in the Times just under a fortnight ago.

The new neighbourhood — Europe’s biggest regeneration zone, with 39 development sites across 561 acres — will contain 20,000 homes as well as cultural, retail and business facilities. It is set to be completed by 2022. A £1.2 billion Northern Line Tube extension will create two new stations, Nine Elms and Battersea Power Station, to open in 2020.

Or if you prefer in in picture form, here is a part of it which is yet to come.

If you cycle through it as you now can you get an idea of the scale that somehow cycling past does not quite give, If we return to the economic consequences of this we see that the existing lack of affordability in central London combined with the surge in supply is something that can explain the recent price falls. It was always going to require quite an influx of wealthy people to populate the area and of course that would be in addition to the many who have arrived in recent times. A sort of “overshooting” I think in assuming that a trend would not end. If we wish to help the Guardian out we could suggest that the EU Referendum has probably deterred some although it does not actually make that case and curiously I have seen one or two bits of evidence that more in fact have arrived ahead of possible changes. So something along the lines of what happened with Hong Kong a couple of decades ago.

Looking wider

If we do we get something much more sober. Here is LSL Acadata which produced the report.

Prices in London fell again in January, down £4,662 or 0.8%, leaving average prices in the capital at £593,396. That’s down 2.6% annually, the biggest decline since August 2009.

So we have gone from the 15% click bait to a reality more like 2.6%, However as we have often discussed this is significant as the UK establishment pretty much lifted heaven and earth to stop a significant house price fall post credit crunch. I remember prices falling in my locale and wondering of those selling were making a wise decision and that buyers would regret it? Instead of course we got the UK establishment house price put option as interest-rates were cut to 0.5% where they remain, QE and when they were not enough more QE the Funding for Lending Scheme and then more QE as well as the Term Funding Scheme. The latter has now finished albeit a stock of £127 billion remains as we await the next move.

Before we move on there was another hint in the data that affordability is the main player here.

The cheaper boroughs have fared better. More than half have seen price rises over the year, led by 4.5% growth in Bexley, which, with an average price of £363,082, still has the cheapest property in the capital outside Barking and Dagenham (£300,627).

Up up and away

We get reminded that the UK is in fact a collection of different house markets which are connected but sometimes weakly.

That’s now led by 4.6% annual growth in the North West, one of four regions to see new peak prices in January (along with the East Midlands, the South West and Wales).
Just eight months ago, the region was trailing every other region bar one. Now, it’s seeing strong growth in every part of the market: at the bottom, Blackburn with Darwen has seen the biggest increase in prices in the country, up 16.4% annually. At the top, Warrington is also seeing double digit growth, with prices up 10.3%.


We find on today’s journey that the trends for UK house prices remain in place as we see substantial falls in the new developments in central London and helping make the average price fall there too. This means that the UK picture is according to LSL Acadata as shown below.

Including this February, we are now in the ninth month where the annual rate of house price growth has continued to slow. It now stands at 0.6% when including London and the South East, or at 2.5% when excluding these two regions.

This represents quite a change from the 9% of February 2016 and the change has mostly been seen in London. This particular series makes a lot of effort to be comprehensive but like all efforts has its challenges and estimations.

We have subsequently recalculated all our various house price series on the basis of the new weightings, which has had the effect of decreasing the average house price in December 2017 by £6,340.

So did the average house price from this series go above £300,000 or not? I will let you decide.

One consequence of the new weightings is that the average price of a home in England & Wales has fallen below the £300,000 threshold, which we reported as having been breached during 2017.

As we mull what is or is not Fake News there was this in the Evening Standard?

Millennials, criticised by baby boomers for buying avocado on toast instead of houses….

Meanwhile eyes turn to the Bank of England as we wonder how it will respond as house prices in London fall? Perhaps its Governor Mark Carney is already thinking that June 2019 cannot come fast enough.







The Bank of England has a credit problem

This morning has opened with news that the winter chill affecting the UK has blown down Threadneedle Street and into the office of Governor Mark Carney at the Bank of England.

House prices fell by 0.3% over the month, after
taking account of seasonal factors…..“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months.”

That was from the Nationwide Building Society – as ever care is needed as it is only Nationwide customers – and it backed it up by saying that the outlook was also not so good.

Similarly, mortgage approvals declined to their weakest
level for three years in December, at just 61,000. Activity
around the year-end can often be volatile, but the weak
reading comes off the back of subdued activity in October
and November (approvals were around 65,000 per month
compared to an average of 67,000 over the previous 12
months). Surveyors report that new buyer enquiries have
remained soft in recent months

So at this point Governor Carney will be miserably observing weaker business for the “precious” and a monthly house price fall. If he is cold prospects may not be so good. From the Guardian.

National Grid has issued a warning that the UK will not have enough gas to meet demand on Thursday, as temperatures plummeted and imports were hit by outages.

Good to see that there has been plenty of forward planning on this front.

The crunch is also the UK’s first major energy security test since the country’s biggest gas storage facility was closed by Centrica last year. The Rough site in the North Sea had accounted for 70% of the UK’s gas storage.

Forward guidance anyone?

Three cheers from Governor Carney

However there was something of a warm fire in the Governor’s office today as he observed this from his own data.

Mortgage approvals increased in January for both house purchase and remortgaging, to 67,478 and
49,242 respectively.

The plan that started back in the summer of 2012 with the Funding for Lending Scheme continues.

Annual growth in secured lending was unchanged at 3.3% in January , with net lending at £3.4 billion.

In essence the plan was a type of credit easing where feeding cheap cash to the banks was designed to boost the UK economy via turning net mortgage lending from negative to positive. It took around a year to work but as mortgage rates fell ( initially by around 1% and later by more) net mortgage lending turned positive and has remained so. The Governor’s office will feel ever warmer as he observes this from the Nationwide.

net property wealth is the second largest store of household wealth after private pension wealth and amounted to c.£4.6 trillion over the July 2014 to June 2016 period – equivalent to around two and a half times UK output in 2016.

Any Bank of England economist looking for career advancement only has to write about these wealth effects feeding into the economy. Should he or she want solitude then all they have to do is point out the madness in using marginal prices especially at lower volumes to value a stock of housing. Then before you can cry “Oh Canada” they will be dispatched to a dark damp dungeon where the Bank of England cake trolley never arrives.


After the speech from Chair Powell on Tuesday this has become something of a theme and there is a clear example of it in the UK unsecured credit data.

The annual growth rate for consumer credit has slowed over the past year to 9.3%, driven by other
loans and advances.

This is where we get a lesson in number crunching from the Bank of England as this is represented as slowing whereas say wage growth is always on its way to a surge. In reality consumer credit has been on something of a tear and the monthly growth of around £1.4 billion has been fairly consistent whereas wage growth has so far gone nowhere. Or to put it another way the economy is growing at around 2% so there has been a 7/8% excess for quite some time now. One area which was driving this seems now to be a fading force.

The UK new car market declined in the first month of the year, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,615 cars were driven off forecourts in January, a -6.3% fall compared with the same month in 2017.

This fading has been reflected in the UK Finance and Leasing Association figures.

 New business in December 2017 fell 2% by value and 5% by volume compared with the same month in 2016.

Yet unsecured lending has continued on its not so merry path and has now risen to £207.5 billion.

Business Lending

This was the main aim of the Bank of England especially for the smaller business sector, at least that is what we were told. Indeed  the scheme was modified we were told to improve that success. How is that going?

Lending to non-financial businesses fell by £1.6 billion in January . Loans to small-and-medium
sized enterprises fell by £0.7 billion, the largest decline since December 2014.

If we look for some perspective we see that three of the last four months have seen credit contractions and the six month average is -£100 million. So the Bank of England arrow if I may put this in Abenomics terms missed the smaller businesses target completely but scored a bullseye in consumer credit which is still growing at 9.3% per annum. The latter is of course in spite of us being told that conditions were much tighter in the latter part of 2017.


Those who have followed the UK economy over the years and indeed decades will know that today’s data follows a familiar theme. An easing of monetary policy such as the credit easing of the FLS and now the Term Funding Scheme ( £115.4 billion) followed by the Bank Rate cut and Sledgehammer QE of August 2016 would be expected to have the following results. A rise in mortgage lending and then later a rise in unsecured lending it has been ever thus. This is because it is easy to do for the banks and it is an area in which they excel whereas business lending is both more complex and harder to do. Track records do matter as I recall my late father telling me (he had a plastering business) that when he really needed finance the banks took it away whereas at other times it was plentiful. Please remember that when we are told small businesses “do not want to borrow” it may be because they have much longer memories than the banks.

Oh and in case the Bank of England tries to tell us unsecured credit growth can be cut by a Bank Rate rise or two please remember that credit card debt costs around 18% per annum according to its data.

If we switch to the real economy then there is another area where the Bank of England is lost in a land of confusion. This is the impact of the post EU leave vote fall in the UK Pound £ which according to the PMI business survey this morning seems to have helped UK manufacturers.

the continued rise in export orders s and an uplift in new orders from the domestic market provided evidence that the
foundations for continued growth were still buoyant………New orders
showed the largest monthly gain since November
and are outpacing the rate of growth in output to
one of the greatest extents in more than a decade.

It is possible that we are seeing import substitution as well as export growth. It makes you wonder how well they would be doing if the banks supported them with more and better finance doesn’t it?

Me on Core Finance TV












Can Britain solve its credit problems and debt addiction?

A long-standing feature of the UK economy has been a problem with credit. This has several features. A major one is our obsession with the housing market and the establishment view that the economy can best be boosted by pumping it up and claiming the higher house prices as higher wealth and evidence of economic well-being.

Figure 2 shows the value of land in 2016 is estimated to be £5.0 trillion, which is 51% of the total net worth of the UK. Land increased in value by £280 billion from 2015, a 5.9% increase. This is a notably smaller increase than in 2014 and 2015, when it increased by 15% and 10% respectively. Since the land underlying dwellings is a major contributor to the value of land, the House Price Index reflects this with house prices rising at a lower rate compared with 2014 and 2015.

So £5 trillion out of this.

The total net worth of the UK at the end of 2016 is estimated at £9.8 trillion, an increase of £803 billion from 2015 and the largest annual rise on record.

I hope you are all feeling much better off! If you are a home owner then this is rather likely to be the case.

The value of land has grown rapidly from 1995, increasing by 412% compared with an average increase of 211% in the assets overlying the land.

You may have noted the swerve here which is that we have switched from the value of houses to land which presumably sounds much more secure and safe. Also if we add the value of the houses back in then £1.77 trillion added to £5 trillion means the sector is £6.8 billion or so of UK national wealth and everything else is £3 billion. Even the most unobservant may start to wonder if that is a trifle unbalanced?!

Mortgage Debt

This is something which the Bank of England put a lot of effort into increasing back in the darker days of 2012 when there was talk of a “triple-dip” in the UK economy. As I pointed out above the traditional “remedy” is to do this to the housing market.

Pump it up when you don’t really need it.
Pump it up until you can feel it. ( Elvis Costello)

They were so keen on this that we got an official denial and the Funding for Lending Scheme was badged as something to boost small business lending something which has not gone well but more of that later. What it actually achieved was to boost net mortgage lending which then when positive and now is running at a net rate of around £3 billion per month. House prices were boosted across the UK although with widely varying impacts as London boomed but other areas struggled at least relatively. Thus we end up with a claimed asset value of £6.8 billion versus a mortgage debt of £1.37 billion. What could look safer?

The catch is that there are a litany of problems with this.

  1. The economy has been tilted towards the housing sector as we note Bank of England and government support ( Help To Buy) as well as ( capital gains) tax advantages. This has shifted resources to this sector.
  2. This would not look so good should house prices fall, what would the asset value and “wealth effects” be then?
  3. Those looking to enter the housing market or to trade up are not seeing a wealth increase but instead facing inflation. This is so worrying to the UK establishment they go to pretty much any effort to keep such inflation out of the official inflation numbers.

Accordingly we know that the Bank of England will be worried by this development at the beginning of the food chain for this area.

Mortgage approvals decreased in December (Table I), with falls for both house purchase and remortgaging approvals. House purchase approvals were the weakest since January 2015 and remortgaging approvals fell to 46,475, following strength in October and November. 

Unsecured Credit

This is something of an overflow area for UK credit. What I mean by this is that when the Bank of England gives the banks the green light to lend as evidenced by the Funding for Lending Scheme in the summer of 2012 or the Bank Rate cut and “Sledgehammer” QE of August 2016 this is the easiest area to expand. After all there is a flow of people into their branches or website wanting to borrow and saying yes is relatively simple. The tap gets turned on much more quickly than mortgage or business lending.

This how we found ourselves with unsecured credit running at an annual rate of around 10% per annum. The new feature this time around was the growth of borrowing for vehicle purchase via the growth of personal contract purchase and the like, so much so that very few people actually buy a car now.

 Over 86% of all private new car registrations in the UK were financed by FLA members.

Of course central bankers desperate to calm their fears about a possible recession were pleased at all the car buying but the ordinary person will be wondering what happens when the music stops? Actually according to the banking sector this is already taking place if you recall the survey the Bank of England published and of course the Financial Policy Committee is “vigilant”. This has led more than a few economists to tell us growth is over here. Meanwhile.

Consumer credit net lending was £1.5 billion in December, broadly in line with outturns during 2017 (Table J).  The annual growth rate ticked up to 9.5% in December. 

November was revised up from £1.4 billion to £1.5 billion as well. So we have growth of 9.5% with economic growth of around 2% and wages growth of a bit over 2%. What could go wrong?

The total for this category is now £207.1 billion.

Business Lending

Lending to smaller businesses was supposed to be the rationale for this and the official view was this.

The extension builds on the success of the FLS so far

The extension continued the rhetoric.

 to increase the incentive for banks to lend to small and medium‐sized enterprises (SMEs) both this year and next;

How is that going?

Lending to non-financial businesses fell by £1.0 billion in December (Table M).  Loans to small-and-medium sized enterprises fell by £0.4bn, the largest decline since December 2014. 


There is a fair bit to consider here. But let me look at this from the point of the Bank of England. It opened the credit taps via credit easing in the summer of 2012 and added to it with the Term Funding Scheme in August 2016. This of course added to the Bank Rate cuts and QE bond buying. This was supposed to boost small business lending but in fact in spite of the economic growth we have had in recent years there has been very little of that. Indeed even the better numbers were below the economic growth rate and if anything new lending to smaller businesses is stagnant at best.

Meanwhile net mortgage lending was pushed into the positive zone and more latterly unsecured credit has been on quite a tear. So if the Bank of England was a centre forward taking a penalty kick it has not only missed the goal if we looked at the unsecured credit data it may even have cleared row Z and the stands. Or of course its true intentions were always different to what it has claimed.




UK house prices get ramped one more time

Yesterday we got the conformation we expected that the UK establishment cannot stop itself from meddling in the housing market with the intention of pushing house prices up. The various readings that the house price was turning highlighted by actual falls in the London area was always going to focus their minds. Thus the headline proposal in the Budget was this. From City-AM.

The government has used the Autumn Budget to abolish stamp duty for first-time buyers on purchases of up to £300,000.

First-time buyers will also receive a stamp duty holiday for the first £300,000 on purchases up to £500,000.

Launching the policy, the chancellor said 80 per cent of first-time buyers will pay no stamp duty as a result of the change.

Firstly let me wish those who are about to buy for the first time good luck with their windfall although not everybody sees it like that as this from the chief economics  correspondent of the Guardian Aditya Chakraborrty indicates.

Jack up your asking price to show him how stamp duty really works.

However sadly it will not end there as we know that such moves tend to boost house prices and of course this is the reason the policy is announced. For the government can claim it is helping first time buyers and boost house prices for property owners in a win double for it. If we think more deeply then poorer areas will see little benefit at all as the £125,000 limit for zero rate Stamp Duty was enough but areas with higher prices will see benefits and I note the way that the gains were given to those paying up to £500,000. That will benefit first time buyers in London ( albeit not some of central London) which makes me wonder if it is an attempt to stop or slow this? From the Evening Standard on London house prices.

Savills anticipates prices will fall 1.5 per cent in 2017 and a further two per cent in 2018, before stagnating in 2019

Things are usually really bad when an estate agent predicts price falls!

How much will house prices rise?

I put in a maximum public service effort yesterday on social media to point out that the first rule of OBR ( Office for Budget Responsibility) club is that the OBR is always wrong. Some seemed to learn but others parroted its claim that house prices will rise by 0.3%. So let us move on knowing that it will not be that as we mull that the gain can be up to £5000 so some prices will probably rise by that and of course some desperate to buy might leverage via a mortgage and be able to pay even more than that. There will be a small downwards effect above £500,000 as there is an extraordinary marginal tax rate where £1 costs £5000 on the other side.

Some however appear to be unaware of the record of the OBR and in this instance seemed as the TV series puts it Lost In Space.

You may note the large number of people who sent this one and wonder how many of them realise that Torsten now thinks it is between £160,000 and £190,000 although of course that may have changed by the time you read this. Does it qualify as fake news?

The BBC seems oblivious to the continual failures of the OBR too.

It also estimates that it will result in only an additional 3,500 first-time buyer purchases…….The policy will cost the Treasury £3.2bn over the next five years.

There is a further irony about this which is that Stamp Duty was one of the few areas where we seem able to raise tax rates and revenues. Partly of course due to the fact that housing benefits from capital gains tax exemptions for the main home.

Term Funding Scheme

Just a reminder that house prices will be pumped up by the extra £25 billion of this that the Bank of England requested on Monday and will therefore presumably supply before it ends in February. This works in several ways as you see banks get funds at or close to Bank Rate as opposed to going to savers which is both easier and cheaper than the 1.1% ( plus costs) they have to pay for new deposits from individuals according to the Bank of England. This means that the banks can mix between wider margins and lower mortgage rates than otherwise. The lower mortgage rates boost business volume compared to otherwise and of course via their impact on house prices improve the mortgage book of the banks.


There was a by now familiar refrain that we must build more houses which has been proclaimed by every Chancellor this century. From the BBC.

£44bn in overall government support for housing to meet target of building 300,000 new homes a year by the middle of the next decade.

I am sure you have already spotted that for housing demand it is jam today whereas for housing supply it is jam tomorrow! Indeed it is hard to avoid the thought that by the middle of the next decade the odds are that the current Chancellor will be long gone. Indeed according to Yes Prime Minster if you want to kick things into the long grass you announce an enquiry.

So I am establishing an urgent Review to look at the gap between planning permissions and housing starts.

It will be chaired by my Right Honourable Friend for West Dorset.

And will deliver an interim report in time for the Spring Statement next year.

Some care is needed as it takes time to plan and build houses and flats but we find yet again that demand and consequently house prices come first. On past track records the houses may not ever be built.

Universal Credit

It is clear that some of our poorest people have been affected by the clunky way that Universal Credit has been introduced. So I welcome the effort and money put forwards in the Budget to help with this and fixes if not all at least some of the problems.

Growth downgrade

The obvious cherry to pick for the headline writers has been the economic growth downgrade given to the UK. However this is based on the productivity forecasts of the OBR which have been well take a look for yourselves.

Oh and remember they were saying that UK borrowing will be higher this year than last? From the Budget Speech.

Today, the OBR confirm that we are on track to meet our fiscal rules:

Borrowing is forecast to be £49.9 billion this year; £8.4 billion lower than forecast at the Spring Budget.


So we received a giveaway Budget of which a lot of the giveaway was focused on the housing market. Again. Whilst some will initially gain the problem is that next time around the house prices that are being boosted will be even more unaffordable and thus more “Help” will be needed in a cycle which is so far endless. Existing home owners can continue to listen to some Hot Chocolate.

You win again

The problem is that for all the talk of rebalancing the UK economy we continue to lean towards the housing market. So whilst I welcome the efforts to boost productivity and technology they may find they are swimming against the tide. Still at least the extra maths teachers may help us in measuring productivity which may yet turn out to be the problem that never was. Also the technology issue needs to be in the right areas. I understand that one needs to provide stations to encourage use but my area has seen a considerable number of charging points for electric vehicles built in the last year or two but they are so rarely actually used.

As a last point welcome to the Ashes series of 2017 which seems to have had a fairly even start.

Core Finance TV

You can check my predictions against what happened.

The UK Public finances have sometimes believed as many as six impossible things before breakfast.

As we await the UK Budget which of course is showing all the signs of being a leaky vessel if not a sieve a lot is going on in the background. What I mean by this is that the goal posts are moving back and forth so much that the grounds(wo)man must be grateful they have wheels on them these days. Let me give you the first example which I mentioned last week. From the Financial Times.

Chancellor Philip Hammond is planning to shift the goalposts on the government’s borrowing limits in a move that will flatter the public finances and provide up to £5bn a year in additional public spending in the Budget on Wednesday. He will use a technical change in the accounting status of housing associations to reduce headline borrowing figures but will not make a corresponding change to his deficit targets in the Budget.

What the FT omitted to point out was the full-scale of the mess here. You see it was only a couple of years ago the housing associations were included in the national debt and now they are not. So overall we have not really gained anything it just looks like we have! Along the way the credibility of the numbers has been reduced again.

The danger for a Chancellor with an apparent windfall is that somebody spends it before he can and marathon man Mark Carney sprinted to the front of the queue to help his banking friends.

Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £25bn to £585bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

What is happening here is that the Bank of England has got permission to increase the size of its bank subsidy called the Term Funding Scheme by another £25 billion to £140 billion. This is where banks get the ability to borrow from the Bank of England at or close to Bank Rate which is bad news for depositors as it means the banks are less interested in them. This has three consequences, Firstly as we are looking at the public finances today if this £25 billion is used then it raises the national debt by the same amount. Then there is an odd link because if things are going well why do we need to add an extra £40 billion ( there was an extra £15 billion in August) to this?

With the stronger economy and lending growth, TFS drawings reached a total of £91 bn at mid-November 2017.

We are in a pretty pickle if banks need subsidies in the good times. Sadly the mostly supine media are unlikely to ask this question or to wonder how all the downbeat forecasts and Brexit worries have suddenly morphed into a “stronger economy”. The next issue is where will the money turn up? It could be funds to give the car loans sector one last hurrah but as housing appears to be top of the list right now it seems more likely that the Chancellor would prefer another £25 billion to subsidise mortgage rates even further.

Rates on new and existing loans fell after the TFS was launched and have remained low by historical standards

If we move to Bank of England policy it has raised interest-rates on the wider economy but now plans to expand its subsidies to “the precious”. Frankly its opus operandi could not be much more transparent.

Number Crunching

Part one

Firstly there is the FT on the Office for Budget Responsibility or OBR.

But the mood has improved since then after the OBR made clear it would offset some of the “significant” productivity downgrade with more optimistic employment forecasts.

So much for being “independent” and please remember tomorrow when the media are treating its pronouncements with respect and grandeur which is that the first rule of OBR club is that it is always wrong. Unless of course wage growth and gilt yields actually are 5% right now.

Part two

Then there is the possible/probable Brexit bill which is being reported as rising from £20 billion to £40 billion by places which told us it would be either £60 billion or £100 billion. So is that up or down? You choose.

Part three

I am sad that what was once a proud national broadcaster has sunk to this but this is finance from the BBC.

Today’s data

The news did not give any great reasons to be cheerful.

Public sector net borrowing (excluding public sector banks) increased by £0.5 billion to £8.0 billion in October 2017, compared with October 2016.

The driver here was increased debt costs as the interest bill rose from £4.8 billion last October to £6 billion this. As conventional Gilt yields are broadly similar then most if not all of this has been caused by higher inflation as measured by the Retail Prices Index. The actual amount varies as they pay on a lagged inflation basis which is not always the same but as a rule of thumb the measure has been ~2% per annum higher this year.

Looking beyond that there is a little more optimism to be seen as revenues are not to bad if we switch to the fiscal year to date numbers.

In the current financial year-to-date, central government received £394.3 billion in income, including £292.7 billion in taxes. This was around 4% more than in the same period in the previous financial year.

This means that we are doing a little better than last year.

Public sector net borrowing (excluding public sector banks) decreased by £4.1 billion to £38.5 billion in the current financial year-to-date (April 2017 to October 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2007.

There has been a trend for a while for the numbers to be revised favourably as time passes so even including the debt interest rises we are edging forwards. As the inflation peak passes that will be less of an influence. The next major factor will be the self-assessment season in January and February when we will find out how much last years numbers were flattered by efforts to avoid the rise in dividend taxation.

National Debt

On the theme of moving goal posts we produce quite a lot of numbers on this front and here is the headline.

Public sector net debt (excluding public sector banks) was £1,790.4 billion at the end of October 2017, equivalent to 87.2% of gross domestic product (GDP), an increase of £147.8 billion (or 4.5 percentage points as a ratio of GDP) on October 2016.

Most of the rise in the last year can be attributed to Mark Carney and his colleagues at the Bank of England.

Of this £147.8 billion, £101.7 billion is attributable to debt accumulated within the Bank of England. Nearly all of it is in the Asset Purchase Facility, including £89.9 billion from the Term Funding Scheme (TFS).

By chance our headline number is quite close to international standards as Eurostat has our national debt at this.

general government gross debt was £1,720.0 billion at the end of March 2017, equivalent to 86.8% of gross domestic product (GDP); an increase of £68.1 billion on March 2016.


The accident of timing that brings our public finance data up to date a bit over 24 hours before the Budget gives us some perspective. Firstly if you recall some of the numbers from yesterday how wrong the OBR has been which never seems to bother the media along the lines of Alice through the looking-glass.

‘I could tell you my adventures–beginning from this morning,’ said Alice a little timidly: ‘but it’s no use going back to yesterday, because I was a different person then.’

Let me offer a policy prescription for the OBR

The mad Queen said, “Off with his head! Off with his head! Off with his head!” Well… that’s too bad… no more heads to cut.”

As to the Budget it would seem it is arriving with a housing obsession. Even the Governor of the Bank of England has got in on the act with yet another banking subsidy to reduce mortgage rates. The way we are told that was ending but in fact is being expanded feels like something out of Alice In Wonderland. Perhaps we will seem some more bribes in addition to the cheap railcards for millenials also.

As to the public finances if we skip the incompetent blunderings of the Bank of England which surely could have designed a scheme which did not raise the national debt we see a situation which is slowly improving. It is not impossible once the inflation peak passes that our debt to GDP ratio could fall but care is needed as you see the only question in the number crunching here is are there only 6?

Why, sometimes I’ve believed as many as six impossible things before breakfast.






What can we expect from UK house prices looking forwards?

Today gives us another chance to take a look at the state of play in the UK housing market. This comes in the light of a couple of potential ch-ch-changes in the policy of the Bank of England of which the headline was last week’s rise in Bank Rate to 0.5% although of course that was only a rise from a “panic” back to an emergency level. More of that later as we look at the data from the Halifax which used to be a building society but is now part of the Lloyds Banking Group.

House prices rose by 0.3% between September and October, following a 0.8% increase in September. The average price of £225,826 is the highest on record and 2.8% higher than in January (£219,741).

The first impact is that house prices continue to rise in spite of what has become a more difficult environment for them with economic growth in annual terms having slowed and real wages having fallen so far in 2017. Indeed according to the Halifax things have a hint of a pick- up.

House prices in the last three months (August-October) were 2.3% higher than in the previous three months (May-July). This is the fastest price growth, on this measure, since January.  Prices in the three months to October were 4.5% higher than in the same three months a year earlier. The annual rate in October is higher than in September (4.0%) and at its highest growth rate since February.

The average price being the highest on record means that in terms of real wages house prices have risen by around 3% if you use the official inflation figure and they have risen slightly more than wages on their own. I was expecting things to slow down more in 2017 and whilst time is left as Muse would put it “Time is running out”.

There are some hints of a slow down as for example this.

Both new sales instructions and buyer enquiries fall in September. Shortage of homes for sale continues
to limit activity with the balance of new sales instructions for home sales falling for the 19th consecutive month
in September.

Also it looks as though sentiment is seeing some shifting sands.

Despite the recent rise in house prices confidence in UK house prices has fallen to its lowest level since
December 2012, according to the latest Halifax Housing Market Confidence Tracker. The survey, which
tracks House Price Optimism (HPO1 – consumer sentiment on whether house prices will be higher or lower in a
year’s time – has dropped 14 points from April 2017 (+44) to October (+30), matching the record fall seen
following the EU referendum result.
The HPO index has also fallen by 38 points since the peak of +68 in May 2015 around the time of the General

Bank of England

Last week brought us not only a Bank Rate rise to 0.5% but also this from Governor Carney.

I stressed in my opening remarks, our forecast is conditioned on a market curve which has two
additional rate increases over the forecast horizon, and we, in fact, need those two additional rate
increases in order to get that return of inflation to target.

So we received Forward Guidance that two more interest-rate increases can be expected to raise Bank Rate to 1% although they were some way in the distance and therefore may even be beyond his term as Governor which ends in the summer of 2019. Thus the guidance was not only rather weak and insipid it would bring one of the weakest interest-rate rise cycles the UK has ever seen especially as we note that the current expansion is mature so a recession of some sort is likely in the time frame.

This meant that some mortgage-rates did change as this from Lloyds Banking Group indicates others may not.

  • Lloyds Bank Homeowner Variable Rate currently at 3.74% will increase by 0.25% to 3.99%
  • Lloyds Standard Variable Rate currently at 2.25% will increase by 0.25% to 2.50%
  • Lloyds Buy to-let Variable Rate currently at 4.59% will increase by 0.25% to 4.84%

The others may not above, comes from the fact that a benchmark or guide to fixed-rate mortgages is the five-year Gilt yield which as I pointed out on Friday fell rather than rose. At 0.71% it is 0.11% below where it was pre announcement.

If we look ahead to 2018 we expect another of the legs supporting UK house prices to begin to weaken somewhat. Here is the letter from the Chancellor of the Exchequer on the subject  of the Term Funding Scheme.

I am therefore willing to authorise an increase
in the total size of the APF used to finance the TFS from £100 billion to £115 billion, in line with the current profile of TFS drawings and based on a drawdown window that will close at the end of February 2018.

So we see two things here. Firstly we get a clue as to how house price growth has carried on in 2017 as we note that draw down of this bank subsidy has been faster than expected leading to the potential increase. I also wonder if this announcement was a sot of “come and get it the waters’ lovely” to the banks? If we move on to the letter from Governor Carney we see that beneath all the rhetoric and hot air about business lending that reality is very different.

New loan rates have declined substantially over the past year and so has the rate charged on the stock of Standard Variable Rate mortgages.

So we have a confession that the Bank of England gave house prices another push and that it put out a “last call” to the banks for cheap funding in August, But as we look ahead the doors close next February so from then the stock will exist but then begin to fade as new flows stop. Is the objective to try to keep some sort of party going until the end of the Governor’s term?

Regional Differences

If we move to the official data series we see that as we disaggregate by country we begin to see wide variations.

 the average price in England now £244,000. Wales saw house prices increase by 3.4% over the last 12 months to stand at £150,000. In Scotland, the average price increased by 3.9% over the year to stand at £146,000. The average price in Northern Ireland currently stands at £129,000, an increase of 4.4% over the year to Quarter 2 (Apr to June) 2017.

The situation in Northern Ireland was particularly different to much of the UK as the previous peak was at £225,000 showing how house prices there hit something of a nuclear winter between the autumn of 2007 and the spring of 2013 when the average price dipped below £100,000. If you switch to Euros then prices in Northern Ireland fell more than in the south.

If we move onto borough or county comparisons it is hard to put these two in the same solar system let alone island.

In August 2017, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.2 million. In contrast, the cheapest area to purchase a property was Blaenau Gwent, where an average house cost £82,000.


As we look back on 2017 so far we see that the Bank of England until last week was full steam ahead in terms of propping up house prices. Last week was a change albeit a minor one in the grand scheme of things and will be backed up by the end of the Term Funding Scheme next February. However the government seems to be singing to a different beat as this from the 2nd of October makes clear.

The government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder, Theresa May has said.

It is hard not to think of the game snakes and ladders at this point. But I still continue with the view that house price growth should slow and probably go negative on a national level. In some places that is very welcome with London to the fore in others such as Northern Ireland less so but it will be a while anyway before things filter out to there. Meanwhile I am also reminded of this from the 17th of October.

Buyers of a Notting Hill mansion going on sale this month for £17 million will have to pay in Bitcoin, in what is believed to be a first for London.

The owners of the six-storey stucco-fronted home near Portobello Roadwill accept only the digital currency as payment and will not take cash.

At the current exchange rate the price is equivalent to about 5,050 bitcoin,

You see it is more like 3120 Bitcoin now. So have we seen house price disinflation and indeed deflation in Notting Hill Bitcoin style?



The continuing surge in UK unsecured credit adds to Mark Carney’s woes

This week will be a significant one for Mark Carney and the Bank of England as we await their decision on UK interest-rates. Today brings us another brick in the wall in terms of factors which will influence them as we receive the latest money supply and unsecured credit data. On the latter the Bank of England has undergone something of a change because if we go back to January 2016 Governor Carney told us this.

This has not been a debt-fuelled recovery. Aggregate private credit growth is modest compared to pre-crisis conditions, and is just now coming into line with nominal GDP growth.

However if we step forwards to the 30th of November of that year the BBC was reporting this.

The governor of the Bank of England, Mark Carney, has given a warning about the high level of debt in UK households.

In particular he said that consumers were borrowing more on their credit cards and other unsecured debt.

Figures from the Bank this week showed that credit card lending is at a record level, up by £571m in the last month.

Overall unsecured debt – which includes overdrafts – is rising at its fastest pace for 11 years.

“We are going to remain vigilant around the issue, because we have seen this shift,” he told a press conference at the Bank.

The really awkward point about all this arrives if we note who was at the van of causing the problem. From the Bank of England on the 4th of August and the emphasis is mine

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.

As so often it was something which was not a headline maker that was the main player here as the banks were given access to cheap central bank funding.

In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate. This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

A further smokescreen was provided by the claims about business lending which was unlikely to change materially and even to some extent mortgage lending as the Bank of England had pushed that higher a few years before. Thus a fair bit of the cheap funding was likely to head for the unsecured credit sector. So the problem the Bank of England has been warning about is a consequence of its own policies.

Today’s data

Credit continues to flow to the UK economy.

The net flow of sterling credit remained robust at £9.6 billion in September. Within this, lending to households has been growing steadily at around 4% per year.

The outlook for secured credit to households continues pretty much as before.

Mortgage approvals for house purchase fell slightly to 66,232 in September, close to their recent average .

But the worrying news for the Bank of England is this.

The annual growth rate of consumer credit has remained broadly unchanged since June, at around 10%. The flow was £1.6 billion in September, also close to its recent average

So contrary to what we have been told the flow of unsecured credit remains strong to the UK economy. There have been various claims that it has been slowing but so far each monthly update has kept the rate of annual growth around 10%. In addition this month has seen some upwards revisions to past data.


Business Lending

At the start of each new policy initiative we are invariably told that it is to boost business lending.

Large non-financial businesses made net repayments of £1.8 billion of loans in September (Table M), with manufacturing contributing the most to this movement.

From this we learn several things. Firstly some of the welcome boost seen in lending to manufacturing a couple of months or so ago has dissipated away. But if we look at the general picture there is no great sign of any surged. As it happens smaller businesses ( SMEs) had a better September borrowing some £400 million but this only raised the six month average to £100 million. The official response involves quoting a counterfactual world where lending to smaller businesses was even lower. Odd that they do not feel the for counterfactuals about unsecured credit don’t you think?

What about interest-rates?

If we look first at savings rates we see that the Bank of England thinks that new deposits will now get a bit over 1% ( 1.11%) driven by this.

Effective rates on new individual fixed-rate bonds between 1 and 2 year, and over 2 year maturity have increased by 16bps from 1.13% to 1.29% and 1.32% to 1.48%, respectively.

Of course this means that in real terms they are losing at a bit under 2% if you use the CPI inflation measure and a bit under 3% if you use the RPI. Meanwhile new mortgage rates remain below 2% ( 1.97%). Also “other loans” ( unsecured credit) have ignored the rhetoric of the Bank of England and got a bit cheaper as 7.54% in June has been replaced by 7.15% in September.


So we see that unsecured credit growth remained strong in the third quarter of 2017. This leaves us wondering if earlier this month the banks pulled the wool over the eyes of the Bank of England.

Lenders responding to the CCS reported that the availability of unsecured credit fell in both Q2 and Q3.

Indeed this morning’s upward revisions change the narrative somewhat for the sector below.

This decline was mainly due to weaker growth in lending for dealership car finance, although this continues be a key driver of consumer credit

Thus we see that the “unreliable boyfriend” will be finding it ever harder to be unreliable with economic growth nudging higher and unsecured credit continuing to surge especially with inflation above target. Perhaps he will concentrate on the weaker CBI surveys we have seen but there will be quite a debate going on this week in Threadneedle Street. Especially as the unsecured credit boom is something the Bank of England lit the blue touch-paper on.