The Bank of England is now re-writing history about UK house prices

Yesterday saw the latest in a series of interviews on the Iain Dale show on LBC Radio by Ian McCafferty of the Bank of England. Actually it was the last by Ian as he is about to depart the Bank of England. Before I start I should point out that we were colleagues back in my time at Baring Securities which feels like a lifetime ago mostly because it is! His main claim to fame was declaring that the German Bundesbank would not do something at a meeting and then the door was opened by someone keen to tell the room some news which I am sure you have already guessed.

Moving forwards in time to yesterday Ian had more than a little trouble with the concept of full employment as he assured listeners that the UK was at full employment at the moment. This was really rather breathtaking as it showed a lack of understanding on two major levels. Firstly if we just stay with the unemployment rate those who read my update yesterday will be aware that Japan has seen an unemployment rate some 2% lower or nearly half ours. An odd thing to miss as our shared history involved specialising in Japanese economics and finance. Also it was a statement that on the face of it made no nod at all to the concept of underemployment where people have some work but not as much as they would like. So in his world both Japan and underemployment seemed not to exist.

Presumably Mr.McCafferty was trying to bolster the case for last week’s interest-rate rise in the UK which of course needs all the bolstering it can get but he ended up being challenged by the host Iain Dale. The response was a shift to claiming we are around the natural or equilibrium rate of unemployment but of course this led to another problem. On this road he ended up pointing out that the Bank of England has had more than a few of these but he did at least avoid a full confession that they started the game by signalling that a 7% unemployment rate was significant but now tell us that the equilibrium rate is 4.25%. Thus the reality is that they have chased the actual unemployment rate like a dog chases it tail although to be fair to dogs they usually tire of the game once the fun stops. Whereas should we live up to the song “Turning Japanese” the Bank of England will have chased the “equilibrium rate of unemployment” from if we are generous 6.5% to 2.5%.

House Prices

As you can imagine this subject came up and it was interesting to hear an explanation of UK house price rises omitting the role of the Bank of England. You might have thought that having gone to the effort of producing the bank subsidy called the Funding for Lending Scheme in the summer of 2012 and then produced research saying it had reduced mortgage rates by up to 2% that you might think it was a factor. This would be reinforced by the fact that it was in 2013 that house prices in the UK began to turn and head higher. There is also the Term Funding Scheme which began in August 2016 which amounted to some £127 billion of cheap liquidity ( 0.25% back then) for the banks which even the casual observer might think was associated with the record low mortgage interest-rates which were then seen.

This seems to be a new phase where the Bank of England sings along with Shaggy “It wasn’t me.” The absent-minded professor Ben Broadbent was on the case on the 23rd of July.

But it should be borne in mind when reading – as one often does – that QE has done little except boosted
prices of assets like shares and houses, or even led to a “boom” or “bubble” in those markets.

The research quoted was from colleagues of his who have voted for this QE and I am sure many of you would love to be judge and jury on your own actions! Later he tells us this about UK house prices.

But the latest figure is barely any higher than it was in the middle of the last decade.

So it is the same as the level that contributed to the crash? Not quite so good and whilst it may not be that much of an issue when your salary plus pension benefits total £356,000 many will note that real wages are 6% below their peak according to the official data.So house prices compared to wages are rather different.

Also there is this issue.

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity
and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor,
according to the most detailed analysis available, did easier monetary policy have any net impact on it.

I guess he has never seen that bit in the film The Matrix where the Frenchman describes the role of cause and effect. Also on the subject of inequality I note that FT Alphaville has pointed out this.

In London and the South-East of England, this shift has been profound – real prices are nearly 30 per cent higher in London, and 10 per cent higher in the South-East and East.

Some house owners are indeed more equal than others it would appear. But this brings us back to Ian McCafferty who assured us on LBC that the ratio of house prices in London to the rest of the country “is now re-establishing itself at close to its more normal long-term level” . Is 30% higher the new “close to”?

Inevitably the issue of Brexit came up and sadly our intrepid policymaker seemed to struggle with both numbers and words in this regard. Here is the Reuters view on this.

“We are getting stories on (how) the numbers of French and German and other European bankers that are coming to London have fallen quite sharply over the last couple of years,” McCafferty said in a question-and-answer session on LBC radio.

You might think that he would know the numbers via contacting the banks rather than listening to “stories”. Also he had opened by saying there had been an “exodus” of such bankers which of course evokes the thought “movement of jah people” a la Bob Marley. The response from the host was that the number of bankers in the City had risen which then got the reply that the inflow had slowed which again is somewhat different to the initial claim. As this is an issue that is both polarised and political an independent ( his words not mine) should be ultra careful in this area rather than giving us vague rhetoric which falls apart at any challenge.

Oh and before we move on from housing there was this bit.

a number of those who are renting particularly those who work in the City.

Was he thinking of Governor Carney who of course got a £250,000 annual rent allowance?

Comment

There is much that is familiar here as we note that the Bank of England is looking to re-write history in its favour. There are two initial problems with this and the first is the moral hazard in you and your colleagues judging your own actions. On this road Napoleon could have written a counterfactual account of how his retreat from Moscow was a masterly example of the genre. Also there are clear contradictions in the story of which two are clear. The rise in asset prices seems able to boost the economy on the one hand but to have had no impact on inequality on the other. London house prices can have soared and become completely unaffordable in central London to all but the wealthiest and yet are close to normal long-term trends.

Only last week we were guided towards three interest-rate rises but now there seems only to be two.

Britain is “now at full employment” and so can expect “a couple more small interest rate rises” in the next two to three years to stop the economy from overheating, according to Bank of England policymaker Ian McCafferty. ( Daily Telegraph which failed to spot the full employment issue)

Maybe it is because they are only raising them so they can later cut them.

Higher interest rates will also give the Bank room to cut them once more if the economy hits a troubled spell in the years ahead.

 

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

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

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

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

Valuations

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

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

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

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

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

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

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

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

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

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

There is a specific example quoted by the BBC.

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

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

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

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

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

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

Borrowing Limits

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

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

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

This bit raised a wry smile.

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

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

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

This Australia?

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

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

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

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

 

Comment

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

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

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

As to hype well there is this.

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

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

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

As of this June it was £215,844.

 

 

 

UK house price growth continues to slow

Yesterday we looked at a house price bubble which is still being inflated whereas today we have a chance to look at one where much of the air has been taken out of the ball. Can a market return to some sort of stability or will it be a slower version of the rise and fall in one football match demonstrated by Maradona last night? Here is the view from the Nationwide Building Society.

Annual house price growth fell to its slowest pace for five
years in June. However, at 2% this was only modestly below the 2.4% recorded the previous month.

As you can see the air continues to seep out of the ball as we see another measure decline to around 2% reaching one of out thresholds on here. Or to put it another way finally house price growth is below wage growth. Of course that means that there is a long way to go to regain the lost ground but at least we are no longer losing it.

The Nationwide at first suggests it is expecting more of the same.

Indeed, annual house price growth has been confined to a
fairly narrow range of c2-3% over the past 12 months,
suggesting little change in the balance between demand and supply in the market over that period.
“There are few signs of an imminent change. Surveyors
continue to report subdued levels of new buyer enquiries,
while the supply of properties on the market remains more of a trickle than a torrent.

Although I note that later 1% is the new 2%

Overall, we continue to expect house prices to rise by
around 1% over the course of 2018.

Every measure of house prices has its strengths and weaknesses and the Nationwide one is limited to its customers and tends to have a bias towards the south but it is reasonably timely. Also there is always the issue of how you calculate an average price which varies considerably so really the best we can hope for is that the methodology is consistent. According to the Nationwide it was £215,444 in June.

The Land Registry is much more complete but is much further behind the times as what is put as April was probably from the turn of the year..

As of April 2018 the average house price in the UK is £226,906, and the index stands at 119.01. Property prices have risen by 1.2% compared to the previous month, and risen by 3.9% compared to the previous year.

As you can see the average price is rather different too.

Bank of England

It will be mulling this bit this morning.

Annual house price growth slows to a five-year low in June

This is because that covers the period in which its Funding for Lending Scheme ( replaced by the even more friendly Term Funding Scheme) was fully operative. When it started it reduced mortgage rates by around 1% and according to the Bank of England some mortgage rates fell by 2%. I think you can all figure out what impact that had on UK house prices!

Or to put it another way the house price falls of 2012 and early 2013 were quickly replaced by an annual rate of house price growth of 11.8% in June 2014 according to the Nationwide. So panic at the Bank of England changed to singing along with Jeff Lynne and ELO.

Sun is shinin’ in the sky
There ain’t a cloud in sight
It’s stopped rainin’ everybody’s in a play
And don’t you know
It’s a beautiful new day, hey hey

Some of them even stopped voting for more QE as it has mostly been forgotten that nearly a quorum wanted more of it as the economy was kicking through the gears.

Although some at the Bank of England will no doubt have their minds on other matters.

Simon Clarke MP said the figures had “disturbing echoes” of the MPs’ expenses scandal. “One of the most important aspects of the culture of any public institution is of course that it provides value for money to the taxpayer,” he added.

“In the last two-and-a-half years two members of the FPC, Mr Kohn and Mr Kashyap, have incurred £390,000 in travel expenses, which is simply a staggering sum.”  ( The Guardian).

Regular readers will recall I did question a similar situation regarding Kristin Forbes on the Monetary Policy Committee who commuted back and forth from the US. I do not know if she benefitted from the sort of largesse and excess demonstrated below though.

The pair are based in the US and Clarke said the £11,084.89 flight for Kashyap from Chicago to London would leave his constituents “gobsmacked”.

Kohn spent £8,000 on a flight from Washington to London and £469 on taxis as part of expenses for a single meeting.

As ever a sort of Sir Frank ( h/t Yes Prime Minister ) was brought forward to play a forward defensive stroke.

“Having seen these committees in action, and seen the contributions they’ve made, as high as their expenses have been, also staggering has been their contribution,”

I was hoping for some enlightenment as the their “staggering contribution” as I do not recall ever hearing of them. The man who thinks this also submitted this about his role as a bank CEO so I guess he might also believe in fairies and the earth being flat.

The key, I always found, was to begin the process by
considering life from the customer’s perspective and then to build products and services that responded to real needs – whilst taking utmost care to build the TCF principles into every operational step in the firm’s business model.

Oh and I have promoted Bradley Fried the chair of the Court to a knighthood although of course those of you reading this in a couple of years or so are likely to be observing his K.

Looking ahead

Yesterday’s mortgage data from UK Finance had a two-way swing. Let us start with the positive.

Estimated gross mortgage lending for the total market in May is £22.2bn, 8.8 per cent higher than a year earlier. The number of mortgage approvals by the main high street banks in May has also risen, increasing by 3 per cent compared to the same month a year earlier.

Except that the latter sentence was not so positive when broken down.

 As in April, increased approval numbers were driven by remortgaging, some 18 per cent more than a year earlier.  In contrast, approvals for house purchase were 3.8 per cent lower than the same period a year earlier.

In case you are wondering about who or what UK Finance represents it is the new name for the BBA. The title of British Bankers Association became so toxic that they decided to move on.

Comment

So the winds of change are blowing and not only at the O2 where the Scorpions played the weekend before last. The era of Bank of England policy moves to push asset price higher is over at least for now although of course the stock as opposed to the flow remains. If it stays like that we could see house prices for once grow at a similar rate to rents and wages but I doubt it because the Bank of England is a serial offender on this front.

And when the electricity
Starts to flow
The fuse that’s on my sanity
Got to blow
System addict
I never can get enough
System addict
Never can give it up ( Five Star and I mean the pop combo not Beppe Grillo)
In the shorter-term will Mark Carney fire things up again or spend his last year here thinking about his legacy and some Queen?
Because I’m easy come, easy go
A little high, little low
Anyway the wind blows, doesn’t really matter to me, to me

Why is the Bank of England preparing for a 0% interest-rate?

Sometimes events have their own motion as after enjoying watching England in the cricket yesterday which is far from something I can always I had time to note it was Mansion House speech time. My mind turned back to 2014 when Bank of England Governor Mark Carney promised an interest-rate rise.

There’s already great speculation about the exact timing of the first-rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

Of course four years later we are still waiting for the unreliable boyfriend to match his words with deeds. Indeed last night he was sailing in completely the opposite direction as shown by this.

The additional capital means the MPC could, if necessary, re-launch the TFS in future on the Bank’s balance sheet, cementing 0% as the lower bound.

We have learnt in the credit crunch era to watch such things closely as preparations for an easing on monetary policy have so regularly turned into action as opposed to tightening for which in the UK we have yet to see an outright one. All we have is a reversal of the last error ridden cut to a 0.25% Bank Rate as I note that the extra £60 billion of QE, Corporate Bond QE and Term Funding Scheme are still in existence.

There was another mention of a 0% interest-rate later in the piece.

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%,

In the words of Talking Heads “is it?”

The Lower Bound

This has been an area which if we keep our language neutral has been problematic for Governor Carney to say the least! For example last night’s speech mentioned an area I have flagged for some time.

relative to the effective lower bound on Bank
Rate of 0.5% at that time

When the statement was originally made there were obvious issues when we had countries that had negative interest-rates well below the “lower bound”. As an example the Swiss National Bank announced this yesterday morning.

Interest on sight deposits at
the SNB remains at −0.75% and the target range for the three-month Libor is unchanged at
between −1.25% and −0.25%

As they are already equipped for a -1.25% interest-rate and have a -0.75% one it is hard not to smile at the “lower bound” of Mark Carney. The truth in my opinion is that it means something quite different and as ever the main player is the “precious” or the banks.

In August 2016, the MPC launched the Term Funding Scheme (TFS) in order to reinforce the pass-through
of the cut in Bank Rate to 0.25% to the borrowing rates faced by households and companies.

As you can see it is badged as a benefit to you and me which of course is a perfect way to slip cheap liquidity to the banks. After all competing for savings from us must be a frightful bore for them and it is much easier to get wholesale amounts and rates from the Bank of England.

Bank of England balance sheet

There are changes here as well.

With the Chancellor’s announcement tonight of a ground-breaking new financial arrangement and capital
injection for the Bank of England, we now have a balance sheet fit for purpose and the future.

What arrangement? There will be a capital injection of £1.2 billion this year raising it to £3.5 billion. That can go as high as £5.5 billion should the Bank of England make profits bur after that it has to be returned to HM Treasury.

The gearing for liquidity operations is quite something to behold.

The additional capital will significantly increase the amount of liquidity the Bank can provide through
collateralised, market-wide facilities without needing an indemnity from HM Treasury to more than half a
trillion pounds. This lending capacity would expand to over three quarters of a trillion pounds when, as
designed, additional capital above the target level is accrued through retained earnings.

On the first number the gearing would be of the order of 140 times.Care is needed with that though as the Bank of England does insist on collateral in return for the liquidity. Mind you that is not perfect as a guardian as those who recall the episode where the Special Liquidity Scheme was ended early due to “phantom securities”. If you do not know about that the phrase itself is rather eloquent as an explanation.

Reducing the National Debt

Yesterday was  good day for data on the UK public finances but that may be dwarfed by what was announced in the speech.

Today’s announcement increases the amount of risk the Bank can carry on its balance sheet. As a result,
the Bank plans to bring the £127 billion of lending extended through the TFS onto our balance sheet by the
end of 2018/19 the financial year.

That had me immediately wondering if the Office for National Statistics will now drop the requirement for this to be added to the UK National Debt. this would bring us into line with rules elsewhere as for example if you will forgive the alphabetti spaghetti the TLTROs and LTROs of the European Central Bank are not added to the respective national debts. Such a change would reduce our national debt from 85.4% of GDP to below 80%. I am sure I am not the only person thinking that would be plenty to help finance the suggested boost to the NHS should you choose.

QE

There was a change here and this reflects the 0.5% change in the “lower bound”

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%, the MPC views that the level from which Bank Rate can be cut materially is
now around 1.5%.
Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches
around 1.5%.

Let me offer you two thoughts on this. Firstly as the Bank of England has yet to raise interest-rates from the emergency 0.5% level then discussing 1.5% or 2% is a moot point. Secondly this is a way of locking in losses as you will be driving the price of the Gilts owned lower by raising Bank Rate. Even holding the Gilts to maturity has issues because you get 100 back and in the days of the panic driven Sledgehammer QE buying where market participants saw free money coming and moved prices away the Bank of England paid way over 100.

Comment

It is hard not to have a wry smile at Governor Carney planning for a 0% Bank Rate as one of his colleagues joins those voting for a rise to 0.75%. Of course Governor Carney wants a rise to 0.75% eventually, say after his term has ended for example. The irony was that the person who has put so much effort into trying to be the next Governor voted for a rise. As to how Andy Haldane’s campaign has gone let me offer you this from Duncan Weldon.

Next month: 6 votes to hold 2 votes to hike And one vote for something involving a dog and a frisbee.

There was a time when people used to disagree with my views about Andy Haldane whereas now the silence is deafening in two respects. One is that I do not get challenged on social media about it anymore and the other is that if you look for the chorus line of support that used to exist it appears to have disappeared and in some cases been redacted.

Moving to more positive news there has been rather a good piece written by the England footballer Raheem Sterling and whilst no doubt there has been some ghostwriting the final message is very welcome I think.

England is still a place where a naughty boy who comes from nothing can live his dream.

 

 

 

 

 

 

London House Prices are falling on one measure and also rising!

This morning has seen Rightmove update us on the UK property market and in response we have learnt where Bloomberg journalists live.

London house prices fell the most since the beginning of the year in June as the capital’s property market continued to lag behind the rest of the country.

The price of property coming to market in London dropped by 0.9 percent, bringing the average price to 631,737 pounds ($838,000), property-website operator Rightmove said in a report Monday. Values fell 1 percent from a year earlier, marking the 10th negative month in a row.

The rest of the country only gets a brief look in.

Nationally, prices grew 0.4 percent on the month and 1.7 percent on an annual basis.

Then it is time to get back to the heart of the matter.

In London, “new-to-the-market sellers recognize that the traditionally busier spring selling season is drawing to a close,” said Rightmove Director Miles Shipside.

Oh and as it is Bloomberg there is a consistent scapegoat for pretty much all seasons.

London’s property market has been hit particularly badly by uncertainty surrounding Britain’s impeding exit from the European Union.

Actually we get a reminder of what Rightmove really say from property industry eye.

New asking prices have bounced up to another record, averaging £309,439.

This morning Rightmove said asking prices for properties new to the market are 0.4% up on last month, and 1.7% up on June last year.

The Rightmove data is not for the price at which property is sold it is what sellers are asking for the property or trying to get. In terms of a rising price by this measure then it is a northern thing as the stock available has declined.

From the west midlands northwards, stock has fallen away since a year ago, by between 2.2% and 10.4% in Scotland.

Stock has also dwindled in Wales, by 10.3%.

Whereas prices are under pressure from something of a wave of more housing stock coming onto the market in the south.

By contrast, the amount of available stock has shot up almost 25% on a year ago in the east of England; by 20% in the south-east; by 16.4% in London; 8.2% in the south-west; and by 4% in the east midlands.

Land of Confusion

I am using the Genesis lyric because if we move to LSL/Acadata we get told something very different about London house prices.

Despite the lack of movement in prices, there is one big change in the market this month: London and the South East are no longer a brake on the market. Taking into account these two regions, there was a 2.2% annual price growth – taking them out of the equation, the growth rate is lower – at 2.1 %. It reverses the trend of most of last year.

Although we have learnt from past experience to feel something of a chill when we read something like this.

This is partly due to a change in methodology, which better captures sales of new build properties. These tend to cost more than existing homes and have a particularly strong impact on the average price in London.

In fact the major impact from this is on flats in London.

This was particularly pronounced for flats, where new build flats sold at an average premium of almost
a third (32.3%). They also made up a substantial proportion of sales of all flats, accounting for more than a quarter (26.4%), whereas new builds accounted for just 2.4% of sales of detached properties.

Once you have done that you get this.

The revised figures in London, taking into account new build properties, show annual growth of 2.9%, the lowest since March 2012. Prices also fell on a monthly basis, down 0.3%, taking the average house price in the capital to £636,947.

In case you are no aware the issue of how to treat new builds is a difficult one and is one where the official Office for National Statistics series has had trouble too. Obviously a brand new property cannot have a price rise per se but you can calculate an index based on say quantity like size or number of bedrooms. Much more difficult and perhaps impossible is to allow for the quality of the property.

Also treating London as one market gets a bit of a critique from reality below.

A number of London boroughs are recording big falls over the 12 months to April 2018. They include the City of London (down 24.9%, albeit on a small number of sales), Southwark, down 19.1% (largely as a result of high value properties sold the year before); and Wandsworth, down 13.1%. Growth has been more modest, with only Kensington and Chelsea, the most expensive borough, recording double-digit growth, up 10.4% to £2.17 million. The next highest increase over the year was Lambeth, where prices increased 5.8%.

The issue at this level is that you are down to a small number of sales in some cases leading to large swings. For obvious reasons people like to view the data for Kensington and Chelsea but if it is based on only a handful of sales it is to say the least problematic. Although sometimes just one sale can be crystal clear at least for it.

For those wondering if the previous owners had overpaid back in 2013 I did ask.

Number Crunching

Moving on here is some Monday morning humour from the British Chambers of Commerce.

The British Chambers of Commerce (BCC) has today (Monday) slightly downgraded its growth expectations for the UK economy, forecasting GDP growth for 2018 at 1.3% (from 1.4%) which, if realised, will be the weakest calendar year growth since 2009, when the economy was in the throes of the global financial crisis. The BCC has also downgraded its GDP growth forecast for 2019 from 1.5% to 1.4%.

Yes they think they can forecast GDP growth to 0.1%!

Next come courtesy of those suffering from a type of amnesia.

Households could be left up to £1,000 a year worse off because of Brexit trade barriers, a report will suggest.

Global consultancy firm Oliver Wyman will say that under the most negative scenario of high import tariffs and high regulatory barriers the cost to the economy could total £27bn.

The problem here is the authors so with the help of FT Alphaville let me show you how their crystal ball has worked out in the past.

It has long been known that consulting firm Oliver Wyman crowned Anglo Irish the world’s best bank in 2006 — just when Anglo was actually… well, you know the story.

Sadly, the report that bestowed this fateful distinction has (quite unaccountably!) vanished from the Oliver Wyman corporate site.

Or this.

North American Investment Bank – Bear Stearns (SPI 230) is the best-performing company in this year’s most improved sector, investment banking.

Comment

After a barrage of contradictory numbers let us step back and take stock. We see that the background for UK house prices is not what it was. For example the Term Funding Scheme of the Bank of England ended in February and whilst it still represents some £126.6 billion of cheap liquidity for the banks it is now gently declining. Other factors such as a 0.5% Bank Rate and £435 billion of QE have been at play in raising prices but that has worn off now. Perhaps we are still seeing the influence of the Help To Buy scheme in the North but unless prices fall more in London many are still above its cap of £600,000.

A welcome development is that house price growth seems to have fallen back in line with wage growth although of course the official numbers still disagree (3.9%). Even that development has the issue of course that it does not help with prices being much too high in many parts of the country. As to detail all we can honestly say is that house price inflation has fallen and some parts of London especially in the centre are seeing falls.

Moving onto my new measure which refers to a block of around 80 flats near the US Embassy in Nine Elms there was an improvement this week, There were signs of life (open windows etc) in 12 as opposed to 8.

 

 

The Bank of England faces quite a dilemma

At the moment the minds of the Bank of England must be getting more befuddled than usual as jet lag adds to the usual problems. Once they get back from Australia ( Haldane and Broadbent) and Canada ( Governor Carney) no doubt they will set aside time to read Governor Carney’s latest speech on climate change. That is assuming the forward guidance of their various pilots is working much better than theirs as otherwise a few more flights will be required to get home. So let us open with some relatively rare good news for them. From the BBC.

Reaction Engines Limited (REL), the UK company developing a revolutionary aerospace engine, has announced investments from both Boeing and Rolls-Royce.

REL, based at Culham in Oxfordshire, is working on a propulsion system that is part jet engine, part rocket engine.

At the moment the sums are small but it is a reminder that space technology has been a success story for the UK economy over the past couple of years. It has been getting more and more mentions in the official statistics.

Ben Broadbent

Deputy Governor Broadbent has given a speech at the Reserve Bank of Australia this morning. Tucked away in it is something of a gem even for our absent-minded professor.

I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 2011.

The last thing any sensible person would do is equate former Bank of England Deputy Governor Paul Tucker with accountability. Many of you will remember the saga but for those that do not here is the Guardian from back then.

Paul Tucker, the former deputy governor of the Bank of England, is among several figures from the world of finance to receive a knighthood in the New Year honours list, despite claims that he was involved in the Libor interest-rate fixing scandal.

What has concerned our bureaucrat is what concerns bureaucrats the most everywhere which is a challenged to the bureaucratic empire.

Some have argued that, because there are significant interactions between the two, monetary and macroprudential policy should be housed not just in the same institution, but in the same policymaking committee
within the central bank. The distinct MPC and FPC should become a single “FMPC”.

Okay why not ?

The risk is that a single committee would pay
too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently
allocated in the main to the monetary policymaker – and too little to financial stability.

Yet he seems to forget this later as he remembers his boss is on both committees so we get this.

Even if the two hands are separate, it is important that the one should know what the other
is doing, and in that respect it helps that some people sit on both committees.

Indeed they do some things together.

Many economic
issues are relevant for both and, in the Bank of England, the MPC and FPC regularly receive joint briefings
on such matters.

Poor old Ben then trips over his own feet with this as an increasing number think that what he fears is the current state of play.

I think there would be risks in asking the central bank to meet a wide range of objectives with no distinctive accounting for the use of its various tools.

The housing market

Those at the Bank of England who have trumpeted wealth effects from higher house prices will be troubled by this from Estate Agents Today.

Prices are flat nationally but there are major regional variations with London seeing the sharpest fall in prices, according to the surveyors.

Respondents in the South East of England, East Anglia and the North East of England also reported prices to be falling, but to a lesser extent than in London.

Prices increased elsewhere in the UK in the last three months.

Will they now be so keen to try to push mortgage interest-rates higher and thus drive away the claimed wealth effects? Whereas at the moment the situation according to the credit conditions survey of the Bank of England reminds us that its previous policies are still having an effect.

A narrowing of spreads reflects an increase in the level of
competition in the mortgage market. In recent discussions, the major UK lenders noted that competition remains very strong.

Can anybody please tell me where the £127 billion of funding given to the banks by the Term Funding Scheme may have gone? It does not seem to have gone here.

The perceived availability of credit to small businesses decreased slightly in 2018 Q1, according to respondents to the Federation of Small Businesses’ (FSB) Voice of Small Business Index.

Also if we return to the argument provided by Ben Broadbent that a separate FPC is vital I wonder what he and they think of where the biggest impact of their TFS has been.

 competition remains very strong
and since November has increased in the higher LTV market,………..Consistent with this, the difference
between quoted rates on two-year fixed rate 90% and 75%
LTV mortgages has narrowed from 90 basis points in August to 69 basis points in March. ( LTV = Loan To Value).

As I understand it this is officially called vigilance these days.

Consumer Credit

Another example of “vigilance” can be provided here from today’s survey. You may recall that the Bank of England has taken something of a journey on this subject after Governor Carney told us this in February 2017.

This is not a debt-fuelled consumer expansion
that we’re dealing with.

Now the survey tells us this.

There has been a modest tightening in the availability of
consumer credit over the past year.

This is a reining back from the promises of a reduction that we saw in the survey for the third and fourth quarters of last year which they are no doubt hoping we have forgotten. Of course we see a sign of the Term Funding Scheme at play yet again.

Lending spreads have tightened in recent months as interest rates remained broadly unchanged following the rise in Bank Rate.

This provides two problems for the Bank of England. Firstly it has boosted consumer credit with its “Sledgehammer” policies and now we will have to face the consequences. Next is a confirmation of the earliest theme of this blog which is that Bank Rate has very little and sometimes nothing to do with the interest-rates charged in this area. In effect therefore it is somewhat impotent.

 

Comment

Yet again our absent-minded professor has been somewhat forgetful. For example his own move from being an “external” member to an internal one at the Bank of England was clearly beneficial for him but was bad for the idea of external members bringing fresh ideas and dare I say it independence to the Bank. Now that Rubicon has been crossed they too may now be hoping for promotion and monetary gain and hence influenced in the same way their appointment was an attempt to avoid.

Also the empire building of the current Governor who has overseen inflation in the number of Deputy Governors such as Ben is clearly something that cannot be challenged within the Bank. For example I am no great fan of macro prudential policy as when it was used in the past it failed and I notice the fanfare in favour has gone much quieter as reality has replaced hype.

Moving to the interest-rate issue that presently seems to be the topic du jour every day the Bank of England is facing something of a crisis as its forward guidance has put it between a rock and a hard place. The rock is the increases seen and expected in US interest-rates and the hard place is the trajectory of the UK economy.

Nigeria

The honesty is admirable but it is hard not to smile as you read why Nigeria released its inflation data an hour early today. The Hat Tip is to @LiveSquawk

It will be shortly. I published one hour earlier by accident. Forgot Watch still on London time so I released 8am instead of 9am as published 😊😊. Probably need a break/holiday. My apologies

 

 

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%.

Comment

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.