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.

Supply

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.

Comment

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.

http://www.corelondon.tv/uk-budget-preview-hammond-may-cash-play/

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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.

http://www.bbc.co.uk/news/av/uk-politics-42059439/loadsamoney-norman-smith-on-the-brexit-divorce-bill

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.

Comment

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
Election

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.

Comment

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.

Comment

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.

 

The UK Public Finances conform to the first rule of OBR club yet again

Not so long ago the UK Public Finances were headline news as we faced the consequences of the recession caused by the credit crunch and the cost of the various banking bailouts. We were promised that by now the situation would be fixed as we would have a surplus it terms of our annual deficit before it transpired that our previous Chancellor George Osborne was of the “jam tomorrow” variety and specifically always promised that success was 3/4 years away from whatever point in time you were at! This meant that what we might call the ordinary national debt has steady risen as whilst much of the bank debt is off our books we have borrowed overall. If we go back to the 2010 Budget forecast we were told this by the Office of Budget Responsibility ( OBR).

public sector net debt (PSND) to increase from 53.5 per cent of GDP in • 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

So we might expect the national debt to be 63.4% of GDP now. How is that going?

In November we expected public sector net debt (PSND) to peak at 90.2 per cent of GDP in 2017-18, with the August 2016 monetary policy package raising debt significantly in 201617 and 2017-18. We continue to expect debt to peak as a share of GDP in 2017-18, but at a slightly lower 88.8 per cent. As in November, we expect it to fall each year thereafter.

This is one of the factors in my first rule of OBR club ( it is always wrong…) and in a way it is quite touching that they always think that the national debt is about to shrink relative to the size of our economy.

Current issues

The first is that economic growth in the UK has continued but has slowed so that revenue growth may be under pressure. This was highlighted to some extent by yesterday’s retail sales data.

The underlying pattern in the retail industry is one of growth; for the three-months on three-months measure, the quantity bought increased by 0.6%…….Year on year, the quantity bought in the retail sector increased by 1.2%, with non-food (household goods, clothing stores) and non-store retailing all providing growth.

That suggests there is a fading of the consumer sector with implications for revenue although of course Value Added Tax is on value and not volume so will get a boost from this.

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3% (non-seasonally adjusted).

The general picture was summed up in yesterday’s monthly economic review.

GDP growth has slowed in the first two quarters of 2017, while the economy has grown 1.5% compared with the same quarter a year ago – the slowest rate since Quarter 1 2013.

Also in a week where there has been a lot of news on problems with economic statistics there was this.

we will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

I admire the ambition here but not the brains. I particularly wait to see how the quarterly services surveys will give monthly results! Ironically the same monthly review suggested grounds for caution.

The latest figures include significant revisions due to improvements in the measurement of dividend income, which have led to an upwards revision of the households and NPISH saving ratio by an average of 0.9 percentage points from 1997 to 2016, with a revised 2016 estimate of 7.1% (revised up from 5.2%).

So places like the OBR can produce reports sometimes  hundreds of pages long on the wrong numbers?

Inflation

This is proving expensive because the UK has a large amount of index-linked Gilts which are linked to the Retail Price Index which is currently growing at an annual rate of 3.9%. The effect is described below.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

Today’s data

The deficit numbers were in fact rather good in the circumstances.

Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016…….Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £32.5 billion in the current financial year-to-date (April 2017 to September 2017), compared with the same period in 2016.

The main factor in the improvement is that revenue growth continues to be pretty solid.

In the current financial year-to-date, central government received £334.5 billion in income; including £250.5 billion in taxes. This was around 4% more than in the same period in the previous financial year.

You may have already guessed the best performer which was Stamp Duty on property which has risen from £6 billion in the same period last year to £7 billion this. By contrast Corporation Tax has been a disappointment as it has only risen by £100 million to £29 billion on the same comparison.

The National Debt

Here it is.

The amount of money owed by the public sector to the private sector stood at nearly £1.8 trillion at the end of September 2017, which equates to 87.2% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Oh and thanks Mark Carney and the Bank of England as yet another bank subsidy turns up in the figures.

£100.3 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility; including £84.6 billion from the Term Funding Scheme (TFS).

Comment

We see that for all the many reports of woe the UK economy continues to bumble along albeit more slowly than before. We can bring in that theme and also the first rule of OBR club as I expect another wave in November.

The OBR is likely to revise down potential productivity growth in its November forecast, weakening the outlook for the public finances.

As they have been consistently wrong they are also likely to change course at the wrong point so this may be the best piece of news for UK productivity in a while! Actually I think a lot of the problem is in how you measure it at all in the services sector? In fact any resources the ONS has would be much more usefully spent in this area than producing a monthly GDP figure.

For those of you who measure the economy via the tax take then a 4% increase in the year so far is fairly solid. There will be a boost from inflation on indirect taxes but so far not so bad. Also we can look at revenue versus the National Debt where £726 billion last year compares with our national debt of about 1800 billion or around 40%

Meanwhile there was some good news for the UK economy from Gavin Jackson of the Financial Times.

The UK has 6.5 per cent of the global space economy!

Plenty of room for expansion (sorry). Intriguingly it may be led by Glasgow which would be a return to past triumphs.

 

 

 

 

 

 

Will car loans be the canary for UK unsecured credit?

Yesterday the news hounds clustered around one piece of economic news as they caught up at least tangentially with something we have been looking at for some time. From the Society of Motor Manufacturers and Traders.

UK new car market falls for sixth consecutive month in September – down -9.3% to 426,170 units. First time the important September market has fallen in six years.

This will have had an impact in various areas as for example if you happened to be an unreliable boyfriend style central banker looking for a reason to cancel a proposed Bank Rate rise for the third time you might think you have struck gold. However we were expecting trouble because as I pointed out on the 22nd of August there had to be a reason why manufacturers were offering what they call incentives but we call price cuts?

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

That issue has been added to by the uncertainty over what is going to happen to older diesels of the sort I have.

Confusion surrounding air quality plans has inevitably led to a drop in consumer and business demand for diesel vehicles, which is undermining the roll out of the latest low emissions models and thwarting the ambitions of both industry and government to meet challenging CO2 targets.

Back in the day I was told my Astra was efficient and low emission but let us move on whilst noting that official credibility in this area is very low. Registrations had been falling for 6 months compared to the year before so that we now find we have stepped back in time to 2014.

Year-to-date, new car registrations have fallen -3.9%. But, overall, the market remains at a historically high levels with over 2 million vehicles hitting UK roads so far this year.

What does this mean?

This is more of a consumption issue for the UK economy than a production or manufacturing one. You see in the year to August some 78.4% of UK car production was for export so whilst there is a downwards impact it is more minor than might otherwise be assumed. Ironically a fall in UK demand affects producers abroad much more as this from the European body indicates.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

For example Germany exported 809,853 cars to the UK in 2015 according to its trade body. Actually it may not be the best of times to be a German car manufacturer. From Automotive News Europe.

FRANKFURT — New-car registrations in Germany fell 3.3 percent in September as continued uncertainty over the future of diesel-powered cars hit demand.

The issue is complex as much manufacturing these days is of parts rather than complete cars. For example the UK engine industry has had a good 2017 but it is more domestic based so it will need more months like August if it is to carry on in such a manner.

Engine production rises 11.9% in August with more than 150,000 made for export and home markets. Overseas demand drives growth in the month, up nearly 20% compared with last year.

So we advance on knowing that there will be an effect on consumption and a likely smaller one on manufacturing although the latter is more unpredictable. What we will see is a reduction in imports which will boost GDP in an almost faustian fashion as the other factors lower it.

Car loans

So far there is nothing to particularly worry a central banker as after all it is not as if manufacturing or consumption are as important as banking is to them. However there is a catch and maybe the car manufacturers have been brighter than you might otherwise think. From the 18th of August.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.

Now if we return to the real world the concept of prudential regulation is of course very different as after all it was not that long ago that so many banks needed large bailouts. But have the car manufacturers been very cunning in making themselves look like “the precious” as in the banks?

So much of the car market has gone this way that you could question what registration actually means? It used to mean a car was bought but these days is vastly more likely to mean it has been leased.

The FLA is the leading trade association for the motor finance sector in the UK. In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

Today we were updated on how this is going?

New figures released today by the Finance & Leasing Association (FLA) show that new business volumes in the point of sale (POS) consumer new car finance market fell by 8% in August, compared with the same month in 2016, while the value of new business was up by 2% over the same period.

So in nominal terms they are doing okay so far but the real numbers are down. The response has been the normal “extend and pretend” of the finance industry where trouble is on the horizon.

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

So as the Bank of England Financial Policy Committee Minutes observed earlier this week if we look back there has been quite a party.

Growth in UK consumer credit had slowed a little in recent months but remained rapid at 9.8% in the year to July 2017. This reflected strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans. Growth of consumer credit remained well above the rate of growth in household disposable income.

So that is now slowing and likely will be accompanied by falling used car prices as time progresses. Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower. Ironically this could easily be the sort of deflation scenario that central bankers are so afraid of as we note the risk of both falling volumes and prices. That is bad for debt which of course the car companies are carrying plenty of.

Term Funding Scheme

The problem is that the bubble in car finance has been fed by the easy credit policies of the Bank of England. Last August it gave all this another push with its Bank Rate cut and extra QE. But personally I think the real push came from the Funding for Lending Scheme of the summer of 2013 which is now the larger Term Funding Scheme. It went into the mortgage market and some washed into the car market and here we are. Unless we were all going to have 2 cars each there had to be a limit.

Comment

So we see issues in the real economy of a nudge lower to consumption and a smaller impact on production with ironically a fall in imports. However as we see lower prices and lower volumes the real issue is how the credit market which has built up copes. We are of course told it is “resilient” and that the Bank of England is “vigilant” and the latter may for once be true as after all it hardly wants word to get around that it was there 3/4 years ago with some matches and a can of petrol! How about QE for car production? Oh and a government scrappage scheme for diesels as well…….

 

 

What is happening in the UK housing market?

There are always a multitude of factors to consider here but one has changed if the “unreliable boyfriend” can finally go steady. That is the Open Mouth Operations from various members of the Bank of England about a Bank Rate ( official interest-rate) increase in November presumably to 0.5%. This would be the first time since the summer of 2013 and the introduction of the Funding for Lending Scheme that there has been upwards pressure on mortgage rates. Indeed the FLS was designed to drive them lower ( albeit being under the smokescreen of improving small business lending) and if we throw in the more recent Term Funding Scheme the band has continued to play to the same beat. From Bank of England data for July.

Effective rates on new individual mortgages has decreased by 10bps from 2.05% to 1.95%, this is the first time the series has fallen below 2%;

The current table only takes us back to August 2015 but it does confirm the theme as back then the rate was 2.57%. Noticeable in the data is the way that fixed-rate mortgages (1.99%) have become closer to variable-rate ones (1.73%) and if we look at the combination it looks as though fixed-rate mortgages have got more popular. That seems sensible to me especially if you are looking beyond the term of office of the “unreliable boyfriend.” From the Resolution Foundation.

The vast majority (88%) of new loans are taken with fixed interest rates, meaning 57% of the stock of loans are now fixed.

Has Forward Guidance had an impact?

That depends where you look but so far the Yorkshire Building Society at least seems rather unimpressed.

0.89% variable (BoE Base rate + -3.85%) variable (YBS Standard Variable Rate -3.85%) fixed until 30/11/2019

There is a large fee ( £1495) and a requirement for 35% of equity but even so this is the lowest mortgage-rate they have even offered. You can get a fixed rate mortgage for the same term for 0.99% with the same fee if you have 40% of equity.

So we see that so far there has not been much of an impact on the Yorkshire Building Society! Perhaps they had a tranche of funding which has not yet run out, or perhaps it has been so long since interest-rates last rose that they have forgotten what happens next? If we move to market interest-rates Governor Carney will be pleased to see that they have taken more notice of him as the 2 year Gilt yield was as low as 0.15% on the 7th of this month and is now 0.45%. The 5 year Gilt yield rose from 0.39% on the 7th to 0.77% now.

Thus there should be upwards pressure on future mortgage rates albeit of course that funding is still available to banks from the Term Funding Scheme at 0.25%. But don’t take my word for it as here are the Bank of England Agents.

competition remained intense, driven by new market entrants and low funding costs

What about valuations?

There have been a lot of anecdotal mentions of surveyors lowering valuations ( which is a forward indicator of lower prices ahead) but this from the Bank of England Agents is the first official note of this.

There were more reports of transactions falling through due to surveyors down-valuing properties, reflecting concerns about falling prices.

This could also be considered a sign of expected trouble as they discuss mortgages.

However, this competition was mainly concentrated on customers with the cleanest credit history.

Affordability and Quality

This issue has also been in the news with the Resolution Foundation telling us this.

While the average family spent just 6 per cent of their income on housing costs in the early 1960s, this has trebled to 18 per cent. Housing costs have taken up a growing proportion of disposable income from each generation to the next. This is true of private and social renters, but mortgage interest costs have come down for recent generations. However, the proportion of income being spent on capital repayments has risen relentlessly from generation to generation thanks to house price growth.

As someone who can recall his maternal grandparents having an outside toilet and paternal grandmother not having central heating I agree with them that quality improved but is it still doing so?

millennial-headed households are more likely than previous generations to live in overcrowded conditions, and when we look at the distribution of square meterage we see today’s under-45s have been net losers in the space stakes

I doubt many are as overcrowded as the one described by getwestlondon below.

A dawn raid on a three-bedroom property in Brentt found 35 men living inside……..The house was packed wall-to-wall with mattresses, which the men living there, all of eastern European origin, had piled into every room except the bathrooms.

But their mere mention of overcrowded raises public health issues surely? As ever the issue is complex as millennials are likely to be thinking also of issues such as Wi-Fi connectivity and so on. Still I guess the era of smartphones and tablets may make this development more palatable albeit at a price.

More recent generations have also had longer commutes on average than previous cohorts, despite spending more on housing.

Recent Data

The news from LSL Acadata this week was as follows.

House price growth fell marginally in August (0.2%), which left the average England and Wales house price at £297,398. This is still 2.1% higher than this time last year, when the average price was £5,982 lower. In terms of transactions, there were an estimated 80,500 sales completed – an increase of 5% compared to July’s total, and up 6% on a seasonally adjusted basis.

Interesting how they describe a monthly fall isn’t it? The leader of that particular pack is below.

House prices in London fell by an average of 1.4% in July, leaving the average price in the capital at £591,459. Over the year, though, prices are still up by £4,134 or 0.7% compared to July 2016. In July, 21 of the 33 London boroughs saw price falls.

An interesting development

Bloomberg has reported this today.

More home buyers are resorting to mortgages to purchase London’s most expensive houses and apartments as rising prices drag them into higher tax brackets.

Seventy-four percent of homes costing 1 million pounds ($1.3 million) or more in the U.K. capital were bought with a mortgage in the three months through July, up from 65 percent a year earlier, according to Hamptons International. The figure was as low as 31 percent during the depths of the financial crisis in 2009.

Perhaps they too think that over time it will be good to lock in what are historically low interest-rates although that comes with the assumption that they are taking a fixed-rate mortgage.

Comment

As we look at 2017 so far we see that  rental inflation has both fallen and according to most measures so has house price inflation although the official measure bounced in the spring . We have seen some monthly falls especially in London but so far the various indices continue to report positive inflation for house prices on an annual basis. Putting it another way it has been higher priced houses which have been hit the most ( which is why the official data has higher inflation). In general this has worked out mostly as I expected although I did think we might see negative inflation in house prices. Perhaps if Governor Carney for once backs his words with action we will see that as the year progresses. The increasing evidence of “down valuations” does imply that.

If we look at the overall situation we find ourselves arriving at one of the themes of my work as I am not one of those who would see some house price falls as bad. The rises have shifted wealth towards existing home owners and away from first-time buyers on a large-scale and this represents a factor in my critiques of central bank actions. Yes first time buyers see cheaper current mortgage costs but we do not know what they will be for the full term and they are paying with real wages which have fallen. On the other side of the coin existing home owners especially in London have been given something of a windfall if they sell.