The last few weeks have seen some much better news for the UK economy which we should all welcome. Unfortunately it has been partly driven by the same things which created the problems from which we are suffering now. This morning has already illustrated this problem which comes from our housing market. Here is the Royal Institute of Chartered Surveyors report for July.
Consequentially, prices rose in the country for the fourth consecutive month and grew at their fastest rate since the market peak of November 2006.
Notably, this was not only confined to more affluent parts of the country such as London, but every region saw growth as we enter the end of the summer period.
Looking ahead, it seems that prices across the country are going to continue to rise further, with a net balance of 35% more surveyors predicting increases.
So the boom is spreading from London and I am sure that I am not the only person troubled by the way that returning to the boom levels of the last decade are being presented as an economic success. Tucked away in the analysis was this.
On average, loans are now 83.6% of the value of a property, compared with 81.6% a year ago.
This is the impact of the various support schemes for the mortgage and housing markets from the government and Bank of England. Remember when they told us that too much risky borrowing (as in too high loans to value ratios) was a cause of the credit crunch? All of that seems to have been forgotten now as they display the memory of a goldfish.
Mortgage Lending is surging
Yesterday the Council of Mortgage Lenders told us this.
Lending to first-time buyers has hit its largest quarterly total since 2007 with 68,200 purchasing their first home in the second quarter of 2013….Our data shows that 25,300 loans were advanced to first-time buyers in June, a 30% increase on the 19,400 loans advanced in June last year.
So there is more lending to first time buyers and they are borrowing larger amounts.
First-time buyers continued to increase the amount they borrowed – with an average loan size of £117,000 in June up from £112,500 in May.
They do not overtly say this but their numbers imply that the average size of a mortgage for a first time buyer has risen by 10% since a year ago. But apparently affordability is the same.
While first-time buyers borrowed more in June, an increase in income, along with falling interest rates mean that there has been no deterioration in the affordability of these loans as typical first-time buyers mortgage payments consumed 19.3% of first-time buyers’ income
No wonder Mark Carney promised no rises in interest-rates as part of his “forward guidance”. Although contrary to what some of the media are reporting that cannot have been responsible for these numbers as he hadn’t done it yet! But I think we know what will happen if interest-rates rise, these poor borrowers will be ever more vulnerable.
Also I noted the rises in incomes which seems rather overstated when the Office for National Statistics tells us this.
The average weekly wage, including bonus payments, rose by 1.7% comparing March to May 2013 with the same period a year earlier.
So real wages have continued to fall and if we use today’s inflation numbers are falling at an annual rate of either 1.1% (CPI) or 1.4% (CPI). A mixture of falling real wages and rising house prices does not make for improved affordability in my book.
An old problem is back to haunt us
At the end of last week the Council of Mortgage Lenders told us this.
Lenders advanced 40,000 mortgages, worth £5.1 billion, to buy-to-let investors in the second quarter of 2013, according to data published today by the CML. Both the number of buy-to-let loans, and the value of lending, were the highest since the third quarter of 2008.
So another of the features of the house price boom of the last decade looks to be on its way back. It was nice of AOL to illustrate this so neatly only yesterday.
Can you cash in on the buy-to-let boom?
The credit crunch theme of an ever more powerful rentier class takes one more step forwards.
House Price rises will affect inflation?
Er no,not in the official statistics at least. Regular readers will be aware that when the Consumer Price Index consultation took place I argued for house prices to be included. However our official bodies preferred to include rents instead. On September 24th last year I summarised it thus.
The Net Acquisitions method for measuring house price inflation is by no means perfect but it may well help in the next house price boom whereas the method based on rents seems unlikely to do so. It is as simple as that.
Perhaps they were already intending to stoke the next house price boom! Whatever the motivation the new measure of house price inflation called CPIH is likely to be as useful as a chocolate teapot in my view.
Also the whole concept of Consumer Price Inflation was to give us the same measure as used in Europe. As they intend to use house prices in their inflation measure it is for UK authorities to explain their methodological u-turn.
Putting it another way we have this on house prices from the Office for National Statistics.
In the 12 months to June 2013 UK house prices increased by 3.1%, up from a 2.9% increase in the 12 months to May 2013
And now let us look at CPIH the official inflation measure which includes housing.
In July 2013, the 12-month rate (the rate at which prices increased between July 2012 and July 2013) for CPIH stood at 2.5%, down from 2.7% in June.
So it has a lower rate than the headline CPI just as house prices are beginning a boom! A complete and utter failure.
Today’s inflation figures
There was a slight fall in our main measures although of course another month is added to the list of months that it is over target. This stretches back to December 2009.
The Consumer Prices Index (CPI) grew by 2.8% in the year to July 2013, down from 2.9% in June.
RPI (not a National Statistic) grew by 3.1% down from 3.3%. (RPI is the Retail Price Index)
I left the not a national statistic bit in as in many ways it is a compliment. The underlying indices were as follows. The CPI fell back 0.1 to 125.8 (2005=100) and the RPI was unchanged at 249.7 (1987=100).
Also I think that it would be much better if the ONS stuck to providing the numbers rather than indulging in attempts at media spinning.
These latest numbers continue the trend of broadly steady inflation seen since spring 2012
Something troubling in the background
There are rumblings again at the beginning of the price chain in the UK.
In the year to July the overall price of materials and fuels bought by UK manufacturers for processing, known as total input prices, rose 5.0%, compared with a rise of 4.0% in the year to June.
Between June and July total input prices rose 1.1%, compared with a rise of 0.2% between May and June.
This was driven mostly by the prices of fuel and imported food.
UK institutional inflation continues unabated
Yesterday it announced plans to raise water bills in the London area (which includes me) by an extra £29 from next year. This is certainly not to help it pay its Corporation Tax as this appears increasingly voluntary these days and is on top of a 6.7% increase last year. Perhaps it is a form of revenge for the Ashes results from its Australian owners….
Rail transport is in quite a boom in the UK which in such a fixed-cost industry you would think would lead to economies of scale. Well apparently not as rail fares will rise by 1% over today’s RPI which means by 4.1% making a rise of 40% since January 2008.
Many may well by wondering where all the money created by booming passenger numbers and surging fares has gone?
There is so much that is familiar in the UK economic landscape right now that I wonder if the UK government or authorities are suffering from amnesia. Or that we are trapped in the sort of repeating time loops which trapped the USS Enterprise in Star Trek on occassion.But of course the 2015 general election is beginning to loom up on the horizon and our political class moves to the beat of that timetable. The “independence” of the Bank of England was supposed to help us break at least some of the links in that chain but it has faded away and become another Quango which at high cost merely implements the policy we would have got anyway.
After the next election however we can expect this. As we move from Coldplay to Taylor Swift.
Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble