The outlook for UK house prices is turning lower

Today brings together two strands of my life. At the end of this week one of my friends is off to work in the Far East like I did back in the day. This reminds me of my time in Tokyo in the 1990s where Fortune magazine was reporting this at the beginning of the decade.

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

Back then property prices were so steep that these came into fashion and to set the scene the Imperial Palace and gardens ( which are delightful) were rumoured to be worth more than California. Younger readers may have a wry smile at the interest-rates which these days they only see if student loans are involved I guess. But this feature of “Discovering Japan” or its past as Graham Parker and the Rumour would put it comes back into mind as I read this earlier. From the BBC.

The average mortgage term is lengthening from the traditional 25 years, according to figures from broker L&C Mortgages. Its figures show the proportion of new buyers taking out 31 to 35-year mortgages has doubled in 10 years.

We have noted this trend before which of course is a consequence of ever higher house prices which is another similarity with Japan before the bust there. Although there is an effort to deflect us from that.

Lenders have been offering longer mortgage terms, of up to 40 years, to reflect longer working lives and life expectancy.

Let us look into the detail.

The average term for a mortgage taken by a first-time buyer has risen slowly but steadily to more than 27 years, according to the L&C figures drawn from its customer data.
More detailed data shows that in 2007, there were 59% of first-time buyers who had mortgage terms of 21 to 25 years. That proportion dropped to 39% this year.
In contrast, mortgage terms of 31 to 35 years have been chosen by 22% of first-time buyers this year, compared with 11% in 2007.

Should the latest version of “Help To Buy” push house prices even higher then we may well see mortgage terms continue to lengthen. This issue will be made worse by the growing burden of expensive student debt and the struggles and travails of real wages.

If you extend a mortgage term the monthly payment will likely reduce but the capital sum which needs to be repaid rises.

The total cost of a £150,000 mortgage with an interest rate of 2.5% would be more than £23,000 higher by choosing a 35-year mortgage term rather than a 25-year term.
The gain for the borrower would be monthly repayments of £536, rather than £673.

House Prices

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

Prices also held steady in September at the national level, with 6% more respondents seeing a rise in prices demonstrating a marginal increase. Looking across the regions, London remains firmly negative, while the price balance in the South East also remains negative (but to a lesser extent than London) for a fourth consecutive month.

“firmly negative” is interesting isn’t it as London is usually a leading indicator for the rest of the country? Although care is needed as the RICS uses offered prices rather than actual sales prices. Looking ahead it seems to be signalling a bit more widespread weakness in prices.

new buyer enquiries declined during September, as a net balance of -20% more respondents noted a fall in demand (as opposed to an increase). Not only does this extend a sequence of negative readings into a sixth month, it also represents the weakest figure since July 2016,

It is noticeable that there are clear regional influences as some of the weaker areas are seeing house price rises now, although of course that may just mean that it takes a while for a new trend to reach them.

That said, Northern Ireland and Scotland are now the only two areas in which contributors are confident that prices will rise meaningfully over the near term.

The Bank of England

This morning has seen a signal of a possible shift in Bank of England policy. If we look at its credit conditions survey we see that unsecured lending was supposedly being restricted.

Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4 (Chart 2). Credit scoring criteria for granting both credit card and other unsecured loans were reported to have tightened again in Q3, while the proportion of unsecured credit applications being approved fell significantly.

As demand was the same there is a squeeze coming here and this could maybe filter into the housing market as at a time of stretched valuations people sometimes borrow where they can. Care is needed here though as the figures to August showed continued strong growth in unsecured credit making me wonder if the banks are telling the Bank of England what they think it wants to hear.

Also we were told this about mortgages.

Overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — were reported to have narrowed significantly in Q3 and were expected to do so again in Q4.

However on the 6th of this month the BBC pointed out that we are now seeing some ch-ch-changes.

The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low.

Barclays and NatWest have become the latest lenders to increase the cost of some of their fixed-rate products.

At least nine other banks or building societies have also raised their rates in the past few weeks.

Business lending

This is an important issue and worth a diversion. The official view of the Bank of England is that its Funding for Lending Scheme and Term Funding Scheme prioritise lending to smaller businesses and yet it finds itself reporting this.

Spreads on lending to businesses of all sizes widened in Q3 (Chart 5). They were expected to widen further on lending to small and large businesses in Q4.

This no doubt is a factor in this development.

Lenders reported a fall in demand for corporate lending for businesses of all sizes — and small businesses in particular (Chart 3). Demand from all businesses was expected to be unchanged in Q4.

The Bank of England will no doubt call this “counterfactual” ( whatever the level it would otherwise have been worse) whereas the 4 year record looks woeful to me if we compare it to say mortgages or even more so with unsecured lending.

Comment

There is a fair bit to consider here especially if we do see something of a squeeze on unsecured lending as 2017 closes. That would be quite a contrast to the ~10% annual growth rate we have been seeing and would be likely to wash into the housing market as well. Some will perhaps borrow extra on their mortgages if they can whilst others may now be no longer able to use unsecured lending to aid house purchases. These things often turn up in places you do not expect or if you prefer we will see disintermediation. It is hard not to wonder about the car loans situation especially as it is mostly outside the conventional banking system.

So we see an example of utter failure at the Bank of England as it expanded policy and weakened the Pound £ as the economy was doing okay but is now looking for a contraction when it is weaker. We will need to watch house prices closely as we move into 2018.

Meanwhile people often ask me about how much buy-to-let lending goes vis businesses so this from Mortgages for Business earlier made me think.

Last quarter nearly four out of every five pounds lent for buy to let purchases via Mortgages for Business was lent to a limited company. With strong limited company purchase application levels throughout Q2, and the softer affordability testing that is commonly applied to limited companies leading to higher-than -average loan amounts, it is no surprise to see them take such a large slice of buy to let purchase completions in Q3.

Now this is something of a specialist area so the percentages will be tilted that way but with”softer affordability testing” and “higher than average loan amounts” what could go wrong?

 

 

 

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What are the problems raised by the unsecured credit boom in the UK?

A feature of the recent economic landscape of the UK has been the rise in unsecured credit which of course raises fears about past problems with it. This morning has seen a new way of looking at the issue and it has been provided by Citizens Advice which for those unaware provides advice on debt and money amongst other things.

Major new research by Citizens Advice finds that nearly 1 in 5 people struggling with debts has had their credit card limit raised without them requesting it -a practice the charity would like to see banned……..The charity’s major new report, Stuck in Debt, reveals that people struggling with long term credit card debt were more likely to have their limit raised. 18% of struggling credit card users had their limit raised in the past year without requesting it, compared to 12% of all credit card holders.

This reads like a chapter of Freakonomics where the bank assumes some of the functions of a drug dealer luring some of its customers in for ever more of their addiction doesn’t it? Citizens Advice does have quite a bit of up to date experience in this area.

Citizens Advice helped nearly 66,000 people with over 140,000 credit card debt problems in the last year.

Also some of the individual instances are shocking although hopefully these are the tip of an iceberg.

One pensioner Citizens Advice helped was repeatedly called by firms offering more credit cards – despite the fact that she could only afford to make minimum repayments on her existing cards. She used the cards to meet her essential bills and ended up with a total of 21 credit cards and debts totaling £70,000…..Another man the charity helped owed £15,000 on four different credit cards, but despite only making minimum repayments on each card which just covered the interest, he was notified by all four providers that they were increasing his credit limit. He turned to Citizens Advice for help when his debts hit £30,000.

Some care is needed here as people have to take at least some responsibility for their actions and the first instance begs the question of why a pensioner needed to borrow to pay essential bills. However there need to be some rules for the lenders as other wise the lenders could lend and lend and lend.

The research also showed that credit card debt led to more problems than personal loans.

People with credit card debts were also more likely to get into long term debt than those with personal loans and were less able to pay their debt down. Only 60% of people struggling with credit card debt were able to reduce it over two years, compared to 72% of people struggling with a personal loan – with credit card borrowers paying off £449 over two years, compared to a drop of £620 for people with personal loans.

This seems to be because the rules for credit card lending are more lax than for personal loans. It is therefore likely that those in the worst circumstances are pushed towards credit card borrowing which is likely to be more expensive as part of a downwards cycle.

The official response

The Financial Conduct Authority will argue it is on the case.

The FCA has announced a range of proposals to help those already in long term credit card debt – who are spending more on credit card interest charges than paying off the total amount they owe.  It says lenders should contact customers who have been in this situation for 3 years to arrange a plan to pay their outstanding balance more quickly.

Do you notice like in the case of Provident Financial that the FCA only ever seems to appear when there is a problem and never seems to be ahead of events?

The Bank of England

It has had a role in pushing unsecured credit growth higher especially if we review these words from its Chief Economist Andy Haldane on the 30th of June last year.

 I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison

He continued in the same vein or perhaps wanted to inject in the same vein.

Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

Back then there was of course a policy move from the Bank of England including a Bank Rate cut, more QE and credit easing via the Term Funding Scheme. It is easy to forget now ( especially) if you listen to the Bank of England but the “Forward Guidance” was for even more easing last November. So if you were a bank you were effectively told that if you went out and lent the Bank of England had your back. As they had already been pushing mortgage lending and business lending is difficult ( I have discussed her many times the failure of efforts in this regard) it was always likely that the lending would spread to other areas. Indeed if you are in the sort of panic Andy was in back then any lending by banks might seem a good idea. On this road unsecured lending by banks and car finance by the manufacturers ( which some think is secured others not so) was likely to rise in what we might call an “unexpected” consequence.

Yes Prime Minister

This excellent television series would of course from time to time involve the apocryphal civil servant Sir Humphrey “solving” a problem he had created in the past. On this road the Bank of England can stoke a boom whilst claiming it is in fact being “vigilant” and then when there is trouble its PR department goes into overdrive pointing out what it is doing to fix the problem. The fact it helped create it gets redacted from the official version of history.

Comment

We are likely to see more of these sort of stories in the months ahead as the issue continues as this morning’s data release from the Bank of England reminds us.

The annual growth rate of consumer credit fell to 9.8%, the lowest since April 2016, as the July flow was a little weaker than recent month.

If we move to credit card lending the annual rate of growth dipped from 9% in June to 8.9% in July which compares to an annual rate of economic growth ( GDP) of 1.7%. Quite a gap isn’t it?! Is it Sledgehammer sized? As to the small and medium-sized business lending we have been promised since the summer of 2013 how is that going?

Loans to small and medium-sized enterprises decreased by £0.2 billion

The Bank of England seems at times rather detached from reality as this below indicates.

How important are good customer relationships to keeping distressed banks stable?

However there may be a little light at the end of the tunnel. We have seen business surveys from the Confederation of British Industry saying manufacturers are exporting well. This has not been matched by the official data until perhaps this morning.

Loans to large non-financial businesses increased by £8.2 billion in July (Table M), with a particularly large increase in the manufacturing sector

Is the J-Curve finally kicking in? Only time will tell.

 

 

UK unsecured credit continues to surge

This week will see the anniversary of the Bank of England decision to open the credit and monetary taps to the UK economy. It did so in a panicky response to the EU leave vote and the consequent rather panicky business surveys. It was afraid of an immediate lurch downwards in the UK economy along the lines of the recession and 1% contraction expected by its former Deputy Governor Sir Charlie Bean. Of course that did not happen which if you look at Charlie’s past forecasting record was no surprise but the UK economy was left with a lower interest-rate, an extra £70 billion of QE ( Quantitative Easing) plus a bank subsidy called the Term Funding Scheme which currently amounts to £78.3 billion. As I pointed out at the time this was in addition to the boost provided by the lower value of the UK Pound £ which in spite of a rally to US $1.31 is still equivalent to a Bank Rate cut of 2.75%.

The problem with boosting credit in that manner is that it invariably turns up in all the wrong places. Last week I pointed out the extraordinary way that Alex Brazier of the Bank of England blamed the banks for this whilst forgetting the way the Bank of England lit the blue touch-paper with what it called at the time its “Sledgehammer” of monetary easing. What did they expect the banks to do? Now it is looking into the consequences of its own actions according to The Times.

The Bank of England is demanding detailed information from high street lenders on how they approve loans after sounding the alarm over the consumer borrowing binge.
Within five weeks, banks must provide evidence of how they assess the financial position of their riskiest customers.

The FCA and car loans

The Financial Conduct Authority ( FCA ) has apparently heard a rumour that there may be trouble in the car finance market. Here are the details from this morning’s release.

The majority of new car finance is now in the form of Personal Contract Purchase (PCPs), a form of Hire Purchase. The key feature of a PCP is that the value of the car at the end of the contract is asssessed at the start of the agreement and deferred, resulting in lower monthly repayments.

If we move onto the dangers it tells us this.

The Prudential Regulation Authority notes that a PCP agreement creates an explicit risk exposure to a vehicle’s GFV for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.

All lending scandals involve “an inadequate assessment of affordability” and a “lack of clarity for the consumer” don’t they? This is of course one of the ways the credit crunch began. Anyway there seems to be no apparently hurry as regulation continue to move at the speed of the slow train running of the Doobie Brothers.

We will publish an update on this work in Q1 2018.

It is also concerned about high cost credit too.

The FCA also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors.

I am no expert in this area but did notice Louise Cooper posting a link to this.

This represents a typical cost of using a Very Account.

Representative 39.9% APR variable

So only 39.65% over the Bank of England Bank Rate. But the FCA train runs with all the speed of Southern Railway.

Today’s data

We see that overall unsecured or consumer credit continues to grow strongly.

The flow of consumer credit fell slightly to £1.5 billion in June, and the annual growth rate ticked down to 10.0%

I will leave the Bank of England to decide whether this is a triumph and therefore due to its actions as it claimed for a while or a problem and the fault of the banks as it has said more recently. Its rhetoric may be having some effect as the main banks did cut their monthly lending from £921 million to £324 million. As this is an erratic series that may be a quirk of the data so I will be watching in subsequent months. But the fundamental point is the gap between the annual growth rate of 10% and economic growth (0.5%) or indeed real wage growth which is currently negative. Also the total amount of consumer credit had a big figure change as it rose to £200.9 billion in June.

If we move to the wider money supply there are issues too as aggregate broad money and lending annual growth was 5.3% in June. Whilst that is seemingly slowing it is a long way above the 1.7% annual GDP growth of the UK economy. The rough rule of thumb is that the gap is a measure of inflation or monetary stimulus and if allowed to persist invariably ends up with the sort of consumer credit problems we are facing now.

Meanwhile the stimulus was of course supposed to be for the purpose of boosting business lending to small and medium-sized businesses. If we look at that we see little sign of any great impact.

Loans to small and medium-sized enterprises increased by £0.4 billion, a little higher than the recent average.

The annual growth rate at 1.2% is even below our rate of annual economic growth. Do businesses no longer want to borrow from banks ( and if so why?) or are banks still unwilling to lend to them?

Comment

When it votes on Wednesday on UK monetary policy ( it votes then and announces on what is called Super Thursday) the Bank of England has much to consider. Firstly the way it flooded the UK economy with more QE and monetary easing and the consequences which are becoming ever more apparent. It pushed both unsecured credit and inflation higher just when the UK economy needed neither. The previous PR campaign that this was a recession averted was weak and has now been replaced by blaming the banks which of course were following the central bank’s lead.

Meanwhile the inflation it created has in one sense come home to roost. From the Guardian and the emphasis is mine.

The Bank of England will hold last-ditch talks with the UK’s largest trade union on Monday as the central bank attempts to avert its first strike in 50 years.

The stoppage has been called over a below-inflation pay offer to the Bank’s maintenance, security and hospitality staff, and was originally due to begin on Monday.

Meanwhile this was announced last week.

to appoint Sir David Ramsden as Deputy Governor for Markets and Banking at the Bank of England.

There are two main issues here. The first is that the “Governor for Markets and Banking” role invariably goes to someone who has no experience or much apparent knowledge of them.  The next is related to the first as Sir David ( the existing knighthood is also worrying) comes from HM Treasury which means that all 4 Deputy Governors comes from there now. What was that about inclusive recruitment again? Perhaps his replacement at the organisation below could look into this.

In January 2013 he became Chair of the Treasury’s Diversity Board.

Anyway he will be a busy chap.

Dave will also be a member of the Monetary Policy Committee, the Financial Policy Committee, the Prudential Regulation Committee and the Court of the Bank of England.

 

 

 

The Bank of England has driven a surge in UK unsecured credit

Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.

Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.

But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.

The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
November meeting.

There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down

But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.

This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.

These are some of the issues that the MPC will debate in the coming months.

So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.

The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit
negotiations.

Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.

BOJ HARADA: NOT PLANNING TO REDUCE ETF PURCHASES UNTIL 2% INFLATION TARGET ACHIEVED – DJN

So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.

Pinocchio

I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.

Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.

Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.

Loans to small and medium-sized enterprises were broadly
unchanged

Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?

Buy To Lets

Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.

Today’s data

There is little sign of a slow down in this.

Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016

I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.

Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.

I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?

The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.

Comment

The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.

Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.

Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.

Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.

Indeed he took a swipe at well people like me.

Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.

As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

UK unsecured lending continues to surge ahead

Today we get more information on just how loose Bank of England monetary policy is. But as it happens markets signalled the state of play yesterday. From the Financial Times.

The price of 10-year UK government debt rallied to its highest since October, as the general election build-up comes more clearly into investors’ view. The yield on benchmark 10-year gilts, which moves inversely to the price, dipped below 1 per cent on Tuesday to an intra-day low of 0.978 per cent, as investors sought the safety of government bonds after the long bank holiday weekend.

So if we want a strong Gilt market all we have to do is have more bank holidays, what a curious view? There are two much more relevant issues here of which the first is the easing on UK monetary conditions as the Gilt market has rallied since late January with the ten-year yield falling from 1.51% to around 1% now. The second is that it is in my experience rather extraordinary for the latest part of the rally to be taking place in an election campaign particularly one which veers between insipid and shambolic. The polls are in an even worse place as they suggest that the Conservatives may either lose their majority ( YouGov ) or win by 100 seats! Mind you after the 2015 debacle I can see why so many now simply ignore them.

Inflation

A consequence of easy monetary conditions is rising prices and we have seen another sign of what we have been expecting today already.

Grocery inflation hit 2.9 per cent in the 12 weeks to May 21, according to Kantar Worldpanel’s latest survey of the grocery sector, ahead of the official year-on-year inflation rate of 2.7 per cent. ( FT )

I doubt many consumers will be grateful for this nor will they agree with the central banking fraternity that by being “non-core” it can mostly be ignored. But they are doing their best to avoid it in an example of rationality.

in a sign that inflation is starting to affect consumers’ spending habits, cheaper products and discount retailers saw the biggest rises……Aldi and Lidl recorded their fastest growth rates since 2015, hitting a combined market share of 12 per cent. Across the sector, sales of supermarkets’ cheaper own-label products were 6 per cent higher than the same period last year,

Unsecured Credit

On the 29th of September last year I warned that the bank of England was playing with fire with its Bank Rate cut and other monetary policy easing. In particular I was worried about the growth of unsecured credit.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

So how is that going now?

The flow of consumer credit was similar to its recent average in April, at £1.5 billion; the annual growth rate was broadly unchanged.

As you can see some months later the beat goes on. The only changed is that the Bank of England seems to have changed its policy about declaring the actual growth rate so shall we see if it has something to hide? If we check we see that the three-month annualised growth rate is 9.8% and the twelve-month growth rate is the same as last August at 10.3%.

So as the late Glenn Frey would say.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Just as a reminder the numbers were “improved” a few years ago on this basis.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans……….This new measure of
consumer credit will be introduced in the August 2012 Bankstats release.

That is what we have now and as a comparison times were very different back then.

Consumer credit excluding student loans is estimated to have contracted by 0.4% in the year to June 2012.

Whereas student loans were expected to surge.

Government projections suggest that the outstanding balance of student loans will be more than £80 billion by 2017/18.

They were pretty much right about that but what does it mean for consumer credit? Well the total is much lower than it would be with student loans in it. For example I estimate that the current level of consumer credit of £198.4 billion would have nearly £100 billion added to it. As to the monthly net growth well the current £1.5 billion or so would be somewhere north of £2.5 billion and maybe at £3 billion. The reason why I estimating is that the numbers are over a year behind where we are.

Secured Credit

This will not be regarded as such a success by the Bank of England.

Net lending secured on dwellings in April was £2.7 billion, the lowest since April 2016 …. Approvals for house purchase and remortgaging loans fell further in April, to 64,645 and 40,575 respectively

Of course the Bank of England has made enormous efforts in this beginning four summers ago with the Funding for Lending Scheme. Those efforts pushed net mortgage lending back into positive territory and also contributed to the rise in UK house prices that has been seen over the same time period. Last August yet another bank subsidy scheme was launched and the Term Funding Scheme now amounts to £63 billion. However it seems to have given more of a push to unsecured lending than secured.

Of course Governor Carney also claims that car loans are secured lending ( no laughing please) and here is the latest data on it from the Finance and Leasing Association.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016.

That meant that £3.62 billion was borrowed in March using what is described as dealership finance.

Business lending

The various bank subsidy schemes have been badged as being a boost to business lending especially for smaller ones, but have not lived up to this.

Loans to small and medium-sized enterprises decreased by £0.3 billion ( in April)

Comment

The Bank of England claims that it is “vigilant” about unsecured lending in the UK but we know that the use of the word means that it is not. Or as it moves from initial denials to acceptance we see yet again a Yes Prime Minister style game in play.

James Hacker: All we get from the civil service is delaying tactics.

Sir Humphrey Appleby: Well, I wouldn’t call civil service delays “tactics”, Minister. That would be to mistake lethargy for strategy.

But it opened the monetary taps last August with its “Sledgehammer” expectations of which pushed the UK Pound lower and now we see unsecured credit continuing to surge and broad money growing at just over 7%. The old rule of thumb would give us an inflation rate of 5% if economic growth continues to be around 2%. In fact it is if we add in the trade deficit exactly the sort of thing that has seen boom turn to bust in the past.

 

 

 

 

 

 

UK unsecured credit surges whilst the Bank of England is “vigilant”

There is much to consider about the UK economy right now as we get updated on both economic sentiment and money supply data. Before we narrow down to the UK situation there was an intriguing view on the importance of money supply last night from Madame Le Pen. She seems to be suggesting that the French people as individual’s could switch back to the French France whilst businesses could use the Euro ( she seemed also to confuse the Euro with the Ecu). So how would they be paid wages and at what exchange rate? I guess there would be a boom in shops which do foreign exchange transactions as you could hardly have a fixed exchange rate! Oh well……

Meanwhile on Tuesday there was a meeting to celebrate 20 years of Bank of England independence. It has not got much publicity presumably on the grounds that so many think that there is little to actually celebrate. Even the heavily pro establishment Financial Times reports in such a fashion.

The Bank of England will be sorely tested as the guardian of Britain’s economic and financial stability in another crisis, the architects of the current system have warned.

Indeed there was an implied criticism of the current Governor Mark Carney.

Nick Macpherson, Gordon Brown’s private secretary in 1997 and later the most senior civil servant at the Treasury, said that appointing capable governors was a particular problem.

That sentence is like something I read in Yes Prime Minister 30 years ago as i marvel one more time at its insight and humour. When Sir Frank Gordon is asked about appointing a Governor who is both honest and intelligent he replies.

Although an innovation, it should certainly be tried….

There was also another reverse for Charlotte Hogg ( who apparently has now left rather than working her notice as was the claimed plan and thanks for pointing this out) who you may recall claimed there was no groupthink at the Bank of England.

“There was a terrible tendency towards groupthink,” said Kate Barker, who sat on the bank’s Monetary Policy Committee for nine years. “That the BoE emerged from the crisis with more power I think is very surprising.”

Also this from Rupert Harrison seems to contradict the official view that the FPC is “vigilant”.

Giving the Financial Policy Committee an explicit mandate to secure stability was extremely important, he told the audience: “If there is another financial crisis, we will know who to blame.”

The best reply suggest that the Bank of England may be the cause rather than the solution to the next financial crisis. Ooops!

Would that be the crisis precipitated by the BoE extreme interest rate policy and experimental QE program? ( Neil at Home)

Money Supply

This is something that the Bank of England really gave a shove to last August. We got another £60 billion of UK Gilt purchases, £10 billion of Corporate Bond purchases as well as £57.5 billion so far of the bank subsidy called the Term Funding Scheme. Oh and a cut in Bank Rate below the supposedly emergency level of 0.5%. So what is happening?

Broad money, M4 excluding intermediate other financial corporations, increased by £10.1 billion in March (Table A), with positive flows for all sectors.

This means that it grew by 0.5% on the month and 6.7% on a year before. If we take a broad sweep of the situation the Bank of England increased the annual growth rate from ~4% to ~7%. The old rule of thumb for this is to take GDP growth off this to get an idea of inflationary pressure so if we subtract 2% from that we are left with inflation heading above 4%. The inflation measure used for this was the Retail Price Index which is currently running at an annual rate of increase of 3.1%.

Unsecured credit

This continues on its own merry way as you can see.

The flow of consumer credit was in line with its recent average in March, at £1.6 billion

That is a very neutral way of describing quite a surge is it not? The monthly rate of growth was 0.8% and the annual and 3 monthly growth rates were 10.2%. So we see that the Bank of England has created quite a boom in unsecured credit about which it tells us it is being “vigilant”. In case you are wondering there is now some £197.4 billion of it.

In terms of a break down we see that credit card debt is rising at an annual rate of 8.6% with other loans and advances growing at 11%. For comparison purposes let us remind ourselves of real wage growth which is now around 0% and GDP or economic growth which is around 2%.

Looking at it another way I have written many times about the impact of easy UK monetary policy on mortgage lending. If we look back to the start of the Funding for Lending Scheme then the  annual growth rate of the “other loans and advances” part of unsecured credit was  3% as opposed to the current 11%.

Mortgage lending

It took a fair bit of effort but the Bank of England finally got net mortgage lending positive and now here is the state of play.

Lending secured on dwellings rose by £3.1 billion in March, similar to the recent average

It would be higher but the net figure is reduced by the scale of monthly repayments which are usually of the order of £17 billion.

Comment

There is much to consider here as we see that the UK monetary taps remain wide open. In the past the usual response to this is a combination of higher inflation and often a lower exchange-rate. Sounds familiar doesn’t it? The exact situation for the value of the UK Pound £ is complex because of course there are international influences as well as the vote last June. Also movements tend to happen before a policy move as they move on expectations of it so all measurements are awkward in terms of precision.

Also there is the issue of increased indebtedness at a time of real wage stagnation. On that road they are in the “spiders web” sung about by Coldplay in the song aptly named Trouble  as how can they increase interest-rates on any scale now? If we move to growth it would appear that the UK economy has regained some momentum in the second quarter if the Markit business survey is accurate.

UK service providers experienced a sustained rebound in business activity during April, supported by the fastest upturn in new work so far in 2017…….“The upturn in the services PMI rounds off a hattrick of good news after upside surprises to both the manufacturing and construction PMIs. The three surveys collectively point to GDP growing at a rate of 0.6% at the start of the second quarter.

The Bank of England will try to bask in the credit for this but the truth is that it maybe added a little to the powerful effect of the lower UK Pound £ that was already in place but at the cost of this.

The PMI surveys also show average prices charged for goods and services rising at the fastest rate since September 2008

Let us hope that the lower trajectory for some commodity prices and especially the price of crude oil continues to help in that respect.

Chocolate

The chocoholics amongst you may have noticed that the price of cocoa has fallen by about 40% over the past year. Has there been any sign of cheaper chocolate or perhaps an extra Toblerone triangle?

 

 

 

Both UK unsecured credit and car loans surge

After looking at US auto-loans yesterday attention shifts today to the consequences of the easy monetary policy of the Bank of England. This was where Bank of England Governor Mark Carney regularly gave Forward Guidance about interest-rate rises and then ended up cutting them to 0.25% in Bank Rate terms. We also got an extra £60 billion of UK Gilt (government bond) QE and £10 billion of corporate bond QE of which the former is complete but the latter continues. As ever a subsidy for the banking sector or “The Precious” was tucked away in it and now amounts to some £47.25 billion of cheap funding called the Term Funding Scheme. All this was based on the Bank of England’s grim economic forecasts post the EU Leave vote. How have they gone?

BANK OF ENGLAND MPC’S MCCAFFERTY SAYS DOES NOT EXPECT UNCERTAINTY TO DISSIPATE SOON, BUT HAVING LESS IMPACT THAN PREVIOUSLY FEARED ( @hartswellcap )

BoE’s McCafferty says “We did get it wrong last August” on the forecasts for downturn made after Brexit vote ( @KatieAllenGdn )

In other words they got it wrong again but will he respond to rising inflation with an interest-rate rise?

“I don’t know if I will vote for a rate hike… hahahaha. It will depend on how I feel at the next meeting” ( @SigmaSquawk )

In spite of admitting to being wrong he appears unwilling to put right his mistake and as he was one of those considered to be most likely to be willing to do so the UK Pound £ fell below US $1.25.

Unsecured Lending

If we look for a consequence of easy monetary policy we would expect to find it here and regular readers will be aware that I have been warning about this since late summer last year. I warned about unsecured credit growth back on the 29th of September in particular.

The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

How is that going? From this morning’s update.

The net flow of consumer credit was £1.4 billion in February. The twelve-month growth rate remained at 10.5%

So as you can see the UK consumer continues to borrow at what frankly is an alarming rate if you look at the growth in the economy or even worse real wages. Each month we get a hint of slowing ( this month in personal loans) but there were hints of that in January which have just been revised upwards!

Car Loans

Some of the increases above are from the car loan sector so let me hand you over to the Bank Underground blog from last August.

This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses.

This was discussed in yesterday’s comments section and the blog puts it like this.

First, a growing proportion of finance is now provided by the car manufacturers themselves, often through their own finance houses. Intelligence gathered by the Banks’ Agents suggests that these so-called “captive” finance providers have a market share of about 70% of all private new car finance. Second, households increasingly rent their vehicles using Personal Contract Purchase (PCP) plans.

This is another version of the economic world using the rental model which in truth is a sort of back to the future change and it has happened on a grand scale.

Industry contacts of the Bank’s Agents estimate that around two-thirds of private new car buyers now rent their vehicles using PCPs. Under PCP, the car buyer does not initially take ownership of the vehicle, but instead rents it for an average length of typically three or four years.

There are various changes here and let us start with the monetary and economic one.

This change in buyer behaviour has undoubtedly contributed to the sharp rise in new car registrations and the level of consumer debt in the economy in recent years.

This has fed into the economy and boosted economic output and GDP as more cars are bought.

The popularity of PCPs has thus been associated with a shortening of the replacement cycle for private buyers, thereby boosting the aggregate level of consumer demand for new cars.

So far, so good, although where do the old cars go and what happens to them? Is there some sort of graveyard or perhaps lower prices for older cars? We also get a confirmation of my view that the economic world is increasingly rented these days.

A consumer who might never own the car is likely to view it in the same way they view a mobile phone contract, i.e. just another monthly Direct Debit.

The conclusion is that sooner or later there will be trouble.

Those structural changes have: (a) concentrated financial risk in an industry that is especially sensitive to the economic cycle (in contrast to previous cycles when risk had been shared to a greater degree with the household sector); (b) contributed to increased household borrowing, reflected in the very rapid growth of car finance in recent years and a trend towards premium models; and hence (c) made the car industry more vulnerable to negative shocks, including hikes in interest rates, exogenous falls in market prices of used cars, lengthening of the replacement cycle and changes in consumer tastes.

 

Number Crunching

The UK Finance and Leasing Association or FLA helps out.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer car finance market grew 12% by value and 8% by volume in 2016……The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

Meaning the Bank of England was behind the times again. In terms of amounts there is this.

£88 billion of this was in the form of consumer credit, over a third of total new consumer credit written in the UK in 2016. £41 billion of it supported the purchase of new and used cars,

Here are the most up to date numbers we have.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 9% by value and 3% by volume in January, compared with the same month in 2016.

On the way we see another hint of inflation in the UK. Oh and should you look at their website I too am unsure why they have a Base Rate at 0.5%.

Business Lending

Back in the summer of 2013 when the Funding for Lending Scheme began we were promised that it was for business lending. In reality we have seen the mortgage market return to positive net lending and for unsecured credit to mimic a hot air balloon. So what about business lending?

Loans to non-financial businesses decreased by £1.8 billion in February, compared to the recent average increase of £0.9 billion . Loans to small and medium-sized enterprises (SMEs) increased by £0.6 billion in February.

If we look for some perspective the annual growth rate is 1.7% overall and 1.2% for SMEs which provides quite a contrast to the household unsecured credit data does it not?

Comment

As you can see the easy monetary policy of the Bank of England has boosted unsecured credit and a lot of it comes from the car loan sector it would appear. So earlier this week it warned about the consequences of its own actions.

UK household indebtedness remains high by historical standards and has begun to rise relative to incomes.  Consumer credit has been growing particularly rapidly.

Is that the same unsecured credit that it has told us is not growing rapidly or a different one? As to the motor industry there are clear worries although so far it assures us there is no problem. From MotorTrader on the 20th of this month.

The used car market is showing “no signs” of cooling down despite the high volume of PCP cars coming back into dealers as part exchanges.

As a last thought has the borrowing been shifted from businesses to the household in the car sector? That fits with the novel below.

Dune

A great novel and are we on the way to its suspensor suitcases?