It has been an extraordinary couple of days for data. Yesterday, the Bank of England produced monthly lending data. It showed three thing. First, net credit into the mortgage market was almost zero, but the number of mortgage approvals was up slightly. Second, lending to the corporate sector has collapsed. The decline was so dramatic that it could be described as apocalyptic. Finally, lending to the shadow banking system is up 50 percent year-on-year.
Today, we received two additional numbers. We had a first quarter GDP revision. It told us that the economy shrank much faster than originally thought. Then, we had the June house price index from the Nationwide. It showed that house prices are recovering quickly. Over the last 4 months, prices are up 3.6 percent. If you annual that rate, then prices are again growing at double digit rates.
In short, the data releases over the last two days tell us the real economy is tanking, credit conditions remain tight in the housing market, yet somehow the housing market is staging a recovery.
The only explanation is that home buyers are using spare cash balances to purchase homes. Why would they do that? Simply because they expect the return on housing to be higher than the return on deposits.
Behind this move into housing is inflation expectations and zero rates on deposits. The Bank of England's quantitative easing means that the writing is on the wall in terms of inflation. It is interesting that the uptick in house prices mirrors the uptick in the CPI inflation rate. Both started rising in February, which was the month that the BoE started printing cash. As for rates, there is little prospect of a turnaround to compensate for the expect loss in purchasing power.
The only thing holding back a massive jump in house prices is the lack of credit. However, if this should turn around, and banks begin to crank up lending, then we are in real trouble. The UK economy will hurtle uncontrollably into renewed bubble.
If this happens, everything will be in the wrong place; near zero interest rates; an exploding fiscal deficit, and government guarantees on banking lending. I shudder to think how the Treasury and the BoE would unwind this mess.
22 comments:
Alice - you're allowing yourself to recieve non-signals on this housing thing lately!
Housing futures and derivatives are falling (after a small rise over the past month). You can trade those, you can't trade the vested-interest announcements of sell-side market participants.
Jo,
It is fear. I found today's housing index numbers shocking.
Alice
This all too much like Azimovs Foundation. I wish it would all crash and be over with. It all seems eked out, the years slowly passing by- the situation slowly getting worse. The numbers have forecasted apocalypse since early 70s, according to my 'Limits to Growth' book. I hope in hundreds of years time when people look back on this that they realise this is a day by day learning curve. What's going to happen tomorrow? Peak oil? WW3? Pensions?
Noone not even the professional auditors/bankers at the top of their game know what's going to happen tomorrow never mind next year. After all the lessons history has taught. We are a shameful species.
... they expect the return on housing to be higher than the return on deposits ...
Which means that low interest rates sort-of works because it is forcing capital into the very worst investment: the last bubble.
Me, I think its a dead-cat bounce; there is not enough cash around to keep it running for long. It will only crash harder later in the year
The number of houses available for purchase has dropped 50% since January, whereas the mortgage approvals six months ago started rising. Even though approvals are at least 50% below what is compatible with a rising house price previously, supply is also low. Thus, relatively few buyers are bidding for the relatively few houses. Any change in either, ie an increase in house stock or a decrease in mortgage approvals (expected for the rest of the year), will mean further declines.
It's still a small rise. Let's see what happens when unemployment rises above 10% of the working-age population after the election.
Anon 19.29
No it is not a small rise. The chart points to a sudden turn around in prices, which bear all the hall marks of a bubble revival. We will find out in the coming months whether it is a springtime bump or something more sustainable. However, I do agree that all the ingredients are in place of a renewed surge in house prices.
VADO
Hugh Hendry on CNBC:
During 1929, 1930, 1931, 1932
The stock market fell in 1929, it fell in 1930, it fell in 1931, it fell in 1932, despite that [Jeff] in each of those years you had rallies of the order, if not greater than what we have seen [in the stock market today].
Same goes for the Real estate market.
This may be a rally but what is there to support it/
Sorry Alice:
Hugh Hendry on CNBC: "The stock market fell in 1929, it fell in 1930, it fell in 1931, it fell in 1932, despite that [Jeff] in each of those years you had rallies of the order, if not greater than what we have seen [in the stock market today]".
End of Quote.
Same goes for the Real estate market.
This may be a rally but what is there to support it/
43K loans a month will never support house price rises.
There are a huge number of landlords who can not sell. They are losing a lot of money just by their houses sitting there. When the forced sales start coming through this will lower the prices.
I think the intention of the government must be that cash buyers move back into the market, -especiallly- those who wisely sold at the peak.
These people represent the bank's liabilities. Of course the banks are absolutely desperate to limit exposure and the easiest way to do that is to cancel debt against savings i.e. a cash buyer buys out somebody with a mortgage.
This is of course the credit crunch writ large. The people who lost money on property speculation need to demonstrably lose money, no house and the debt. So although delaying repossessions seems socially reasonable, we pay a heavy price as working capital is withdrawn from business instead.
I think this is the pattern we always would have expected to see i.e. a sharp drop followed by a short recovery followed by a monumental fall. We're still waiting for the third part, but I expect it to arrive within the next few weeks and then continue for about 18 months thereafter.
A little known fact is that your HIPS runs out after a year and you have to get another one. So what would you do if you hadn't sold your house after a year? Take it off the market?
And I think it could look very attractive to buy if your interest on your STR cash pile is no longer coming close to paying the rent.
In short, a temporary blip.
I reckon we are now in the "return to normal" phase.
http://snipurl.com/l7w5g
That's what I was thinking Andrew.
"The UK economy will hurtle uncontrollably into renewed bubble."
Not a prayer - apart from virtually everything else, the bond market wouldn't let it happen - the yield curve would steepen spectacularly and if the BoE tried to manipulate it, the £ would be toast - leading to even higher rates.
In the area I have been watching, the number of houses for sale has dropped 70% in a year. The cheap ones have sold. The expensive ones have not sold. Hence average asking price is up.
Of course, if the Labour government actually cared about getting people back into work and improving housing in the country, then they would encourage a massive housing programme. This would stabilise prices and create jobs. They will not do either. I think the drain on credit resources (from business loans to mortgages) is going to further crater the UK economy.
Thanks Alice.
As you correctly say, house prices will not boom again until the credit tap is turned on as fast as it was in the boom years.
We are now in the worst recession since the 1930's according to the Telegraph, so I dont think this will happen anytime soon!
The recent rise in house prices is not accounted for by First Time Buyers ( who cannot afford the deposits) or Buy To Letters ( whose business model is now flawed).
Presumably the recent rise in house prices is the small number of people who sold in the boom and our now renting - I cant think of any other reason. This money will not last, and as unemployment increases, particularly in the public sector after the next election, I believe we will se the next leg down.
According to the elliot wave theory, the next wave 3 leg down will be substantial.
I would be interested in your comments.
Housing Bear on HPC.co.uk
Further to my last comment, the actual UK house price are NOT increasing!
These are the indices recorded as SALES rather than mortgage lending, as shown in the Land Registry and FT Index on http://www.houseprices.uk.net/graphs/
Phew!
Comments please!
Could all the recent hype be about statistical error rather than actual house price sales?
Housing Bear on www.housepricecrash.co.uk
I agree with anon@10:14. The bloated public sector has most to fear. Especially after the next election. It will be ruthless with easily 1 more million added to unemployment after the election.
In 2000 I bought a nice house for £32000. in 2006 I sold it for £85000. If I go to buy it back what price could it drop to?
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