The Chancellor says don’t worry be happy about UK house price rises

Analysing events has from time to time, has the virtue that if you do so properly then events can be kind enough to seamlessly fit your argument. It was only yesterday where in the process of a Quis custodiet ipsos custodes? or who guards the guardians discussion about the clear flaws in both the concept and application of regulation, that I illustrated the case by referring to the Financial Policy Committee of the Bank of England. In the midst of concerns over house prices and a possible bubble they took a hear no evil, see no evil speak no evil approach to the subject. However they did have time to be worried about this.

The levels of leverage within, and therefore the vulnerability of, hedge funds needed to be looked at more closely.

One might conclude that this collection of Sir and Dame Humphreys was both toothless and worthless and today has come an endorsement of that view, from the Chancellor of the Exchequer George Osborne.

Matters look hopeful at first at least according to the Financial Times

George Osborne acts over housing boom fears

Okay so what has he done?

George Osborne is to give the Bank of England an emergency brake on the government’s controversial Help to Buy scheme, enabling it to intervene if there are signs it is creating a housing boom.

Is that like the emergency brake it is supposed to have on inflation? The one that is apparently demonstrated by missing the target and then wringing their hands? Here are the details again from the FT.

The BoE will be able to recommend that Mr Osborne reduces the cap on properties eligible under the scheme, presently set at £600,000, to reduce its availability in the capital’s booming property market.

The Bank’s Financial Policy Committee could also recommend that the Treasury increases the fees it charges lenders for the mortgage guarantees, pushing up the price of loans.

The original plan was for the Financial Policy Committee to review the plan after the scheme was supposed to end in January 2017. I write ‘supposed to end’ because there is a danger that like Quantitative Easing it becomes to an extent self-fulfilling and hence a permanent feature of the economic landscape.Again there is a nice coincidence of timing as it is today that the Bank of England Asset Purchase facility has £1.9 billion of Gilts maturing which it will recycle next week. Now they will meet every September to review the plan.

The obvious conclusion here is that the Chancellor is playing a public relations game conveniently on a day where there is a report of more house price rises (discussed below). If you read between the lines it is quite apparent that he agrees with me about the abilities of the FPC as he wishes to make it look as though something is being done when in fact like all Chancellor’s nothing would please him more than a pre-election boom.

Our political and economic establishment contradict themselves

A fundamental problem involved in giving the FPC more powers is that we were told they had plenty already. Ooops! You do not need to take my word for it as here is Bank of England Governor Mark Carney from the 28th of August.

The Bank of England is now in a position, for example, to supervise lending to specific sectors more intensively; to make recommendations to banks and building societies to restrict terms on which new credit is provided, or even to raise capital requirements on mortgages or other types of lending. Having these in our toolkit, and if necessary using them, will help us to keep interest rates low to secure recovery without creating risks that make that recovery ultimately unsustainable.

As you can see these would be capable of dealing with a house price boom assuming of course they were actually used in anger! Of course my contention is that it is not the weapons which are lacking but rather the will to use them. Mind you if you read the remit on the Bank of England website you could reasonably argue that it was there in black and white all along.

The FPC has a secondary objective to support the economic policy of the Government.

What are house prices doing?

What is it about the Nationwide house price index that the Chancellor was trying to smother in the news today?

UK house prices increased by 0.9% in September and were 5.0% higher than September 2012

There are also signs that the pickup is becoming increasingly broad-based. For the first time since 2007, all thirteen UK regions experienced annual house price growth in the third quarter of 2013.

The acceleration in house price growth from the subdued pace prevailing throughout 2011 and 2012 has been surprisingly quick

Indeed the Nationwide also refers to official policy being a factor in what is taking place.

Demand is being supported by an improvement in the availability and a reduction in the cost of credit, partly as a result of policy measures such as the Funding for Lending Scheme and Help to Buy.

Indeed added to this the Nationwide shows a graph comparing house prices (accelerating upwards) with wages ( growth is falling). I notice that they do not use real wages where we have seen sustained falls. Perhaps that is why our establishment is so keen on pressurising  non-working spouses (mostly but far from always women) who choose to take care of their own children rather than work. One way of dealing with falling real wages for our establishment is to get more people working, and it also helps with mortgage affordability to have two earners rather than one.

What about the London bubble?

According to the Nationwide this is happening.

House price growth accelerated in London to reach 10%, the first time the capital has seen double digit growth since 2010. Prices in London are now 8% above their 2007 peak, with the price of a typical London home at £331,338.

Actually both Lambeth and Hackney reached annual rates of growth of 16% which provokes a wry smile from me as a born and bred Londoner. It just shows that areas can apparently reinvent themselves and they are far from alone in this. In the next group at 14% comes Newham where football supporters have been known to chant this.

I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.

Mind you it is not only there where it is popular sometimes I think I can hear it as I walk down Threadneedle Street.

A consequence of this

In a way this is a type of economic apartheid.

The gap between house prices in the North and the South of England reached a new high in Q3, rising above £100,000 for the first time. The typical property price in the South of England is now 74% above its Northern equivalent.

Although on the other side of the coin first-time buyers in the North have something to be grateful for which is cheaper prices!

Has it occurred to anybody (The FPC for example….) to put a geographical restriction on Help to Buy and perhaps also mortgages?

Comment

Let me first make a basic point that is often ignored. If you wish to make houses more affordable for first time buyers then lower prices would do the job nicely for them, especially as we are seeing sustained falls in real wages.

If we move to the specifics discussed today then it has been made ever clearer that the FPC of the Bank of England is not independent. As it is such a new body, that is some sort of record as the MPC did at least try for a bit before it became subverted and in my view perverted. I also note that rather than preventing a bubble the role of the FPC seems to be to observe it in a voyeuristic way and then report later. We may as well save the money and scrap it.

Oh and the word vigilant is now on its way into my financial lexicon…

Imputed Rent

Regular readers will know that this is a subject I am investigating and yesterday’s national accounts raised plenty of questions. I have spoken to the Office of National Statistics to inquire as to how they calculate an inflation statistic for a number they impute in the first place. I did ask if this counted as an imputation squared?!

 

 

This entry was posted in Bank of England, Debt, General Economics, House Prices, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • Mike from Enfield

    Hi Shaun,
    Trying to look on the bright side, allowing the FPC to meddle with existing meddling may count as a potential reduction in net meddling; so maybe that’s a good thing. But we still have the crazy idea that the solution to unaffordable housing is to raise prices whilst encouraging ever more debt in an already debt-soaked economy. There really is quite a lot that could and surely will go wrong here.

    The wider picture is of government obsessed with zero-sum, non-wealth generating parts of the economy to the detriment of the productive parts. When is the last time anybody in government or opposition even offered a view on say mining, industry, agriculture, export of services…i.e. anything that really matters?

    If they devoted a fraction of these efforts to improving the business environment then even that would be a start. The only recent contribution I can think of is Ed Milliband’s brainwave about forcing companies to employ apprentices – I’ll keep out of the politics but, suffice to say, I am not a wholehearted supporter of this idea.

  • Justathought

    Hi Shaun,

    “The Chancellor says don’t worry be happy about UK house price rises”

    Manipulating your perceptions for their own agenda, what a surprise!

    How far the rabbit hole goes? Read the MoD document that formulates strategy for making British involvement in wars more palatable to the public

    http://www.theguardian.com/uk-news/interactive/2013/sep/26/mod-study-attitudes-risk

  • Max

    As we all know most young people are totally disenfranchised from our great democracy and couldn’t care less to vote for any one of the 3 parties that don’t represent them in any way. Hence the tories are trying to engineer a successful election in 2 years by making the older people feel richer.
    The fact that this has potentially catastrophic consequences to both our national economy and a whole generation or two seems not a jot to bother Mr. Osborne or Cameron, and neither are any of the other 650 MPs apparently losing any sleep over it as they are too busy fiddling their expenses as much as possible.
    Merv the Swerv also didn’t want to lose his knighthood or massive pension pot and neither will Mr. Carney.
    I suppose we will just have to wait for the unintended consequences….

  • Justathought

    Hi Max,

    Who could blame the youngsters??? Read the following true story, I keep it in my archives.. priceless

  • Max

    priceless

  • GusBmth

    If the Governement/Bank of England wishes to cause maximum damage to the housing market and economy, perhaps they could pre-announce the withdrawl of ‘support’ for first time buyers, by at least 12 months, ideally in an already rapidly rising market. That way they could cause a nice spike in prices driven by a ‘get in before the support disappears’ mentality, mirroring a similar mistake made at the end of the 1980s and proving that they trully have learned not a thing from mistakes of the past.

  • Midge

    Hi Shaun Bloomberg reported that the only part of the UK real estate that’s risen faster than London’s luxury homes is the land underneath them.Housing plots in the UK capital rose 87% through the first quarter from the 2009 trough brokers Savills estimated. Something to keep the eye on.

  • Noo 2 Economics

    Hi Shaun,

    “Has it occurred to anybody (The FPC for example….) to put a geographical restriction on Help to Buy and perhaps also mortgages?” – wouldn’t this disadvantage the “low paid” londoners – nurses, teachers etc? I don’t think they would be happy and rightly so. Unfortunately, if you then start tinkering, only allowing “low paid” woekers in the capital the benefit of Help to buy it becomes a bureaucratic nightmare. No, better that Help to buy is scrapped on the quiet so we don’t have an almighty boom follwed by bust.

    Glad to see you making similar noises to those I made on here a while ago – that house prices should be frozen (not reduced – although I would leave it to market forces to drive prices down if the market wanted to do that) by statute unless houses were extended.

    This would be enforceable and would not create a boom or crash because I would introduce it overnight, without warning with a guarantee that it would be indefinite (whilst secretly waiting for average house price to be 3x that of average wage).

  • Anonymous

    Shaun, regarding imputed rent, there is a 2013 Eurostat methodological paper prepared by two Finnish economists, Anneli Juntto and Marie Reijo, that should provide at least a partial answer to your question, “The Comparability of Imputed Rent”.

  • Anonymous

    If Ed wants to claim “the party of small business”, he should consider the carrot approach – the offering of incentives to encourage hiring apprentices.
    The French heavy handed regulatory approach is hurting small businesses and doesn’t appear to increase employment ….

  • Rods

    Fits in nicely where the new up is down and vice versa!

    This sounds a bit like where I paid for my daughter to have extra maths lessons where I felt her school’s teaching was poor. At school open evenings the teacher used to complain, not only would my daughter instantly pick up any mistake on the whiteboard, but when the teacher set some maths exercises so she could have a quiet 20 minutes, my daughter would have them finished in minutes!

  • Rods

    Hi Shaun,

    At least we have got your excellent blog to read where you are trying to keep them honest.

    Unfortunately, one thing that would have helped would have been a relaxation of our strict planning laws which was unfortunately stopped by vested interests. This would have reduced building land prices and boosted construction, where supply especially with our net immigration falls well short of demand.

    With two working people becoming normal to be able to afford a house, I think prices will keep on rising until they are about x3.5 of joint income or x 7 for a single wage earner as it is only affordability that is going to dampen demand.

    This is not good for our economy where people having more money to start businesses to create wealth would be a more productive use of this tied up capital.

    Unfortunately, until there are an increasing number of houses being built to satisfy demand, I personally can’t see any other outcome.

  • Mike from Enfield

    With an education like that, I wonder how many of Mr Hilliker’s pupils went on to become mainstream economists!

  • Anonymous

    Hi Mike

    You make a good point about the over emphasis on housing in official policy. Mind you with the skill our politicians and regulators display our businesses and entrepreneurs may be grateful to be out of the limelight!

  • Anonymous

    Hi Justathought

    Thanks for the link. If only we applied the same thoroughness to the following 2 matters.

    1. Only getting involved in wars we can win that have clear objectives.
    2. Letting the military run the war rather than handicapping them by making them slaves to the political objectives.

    The two obviously interrelate….

  • Anonymous

    Hi Gus

    Such a scenario reminds me of Karl Marx’s words

    “History repeats itself, first as tragedy,second as farce.”

    I fear for those entering the housing market over the next couple of years.

  • Anonymous

    Hi Midge

    There has been a debate in economics for a while whether it was a house price boom or a land price boom. Mostly those arguing on the land price front were trying to keep it out of the inflation numbers. Accordingly they should now be at the forefront of arguing that London is a bubble! But somehow I doubt that they are….

    Also checking the article there is an enormous gap between London and elsewhere even allowing the switch to 2007.

    “Homebuilders were the main beneficiaries of the fall in land prices that followed the financial crisis as they boosted profit margins by developing plots acquired at a discount. Development land values for the country overall are 50 percent below their 2007 peak, Savills said.”

  • Anonymous

    Hi Noo2

    I think that this illustrates the issue around meddling in the housing market and indeed elsewhere! The proper reform would be to scrap the next stage of Help to Buy.

  • Anonymous

    Hi Andrew

    Thank you I will take a look at it. The document emailed to me by ONS actually seems to address that area as it is heading towards compliance with ESA95. Unfortunately that was only part of my enquiry :( so I will have to go back to them.

  • Anonymous

    Hi Rods

    The trouble is that virtually everything in government these days seems to be driven by vested interests! When they clash we end up with an even larger shambles than usual.

  • Justathought

    Hi Shaun,

    That’s why I emphases a “third way” to the contrary of “reformers” and “status quo’ers”. It will take time a couple of generation at least… I am an eternal optimistic blended with realism and have great “faith” from of our youngsters displaying critical thinking…

  • Anonymous

    Is it just me or is our country going through a particularly shambolic period, in which nobody at all has the national interest at heart and everyone is out to benefit himself, and exclusively himself? How else do you explain HS2, the MoD’s incestuous and incompetent procurement processes, our inability to run existing railways at acceptable cost, the wide spread of expensive vested interests in the NHS, energy pricing/green agendas, failure to store cheap summer gas, astonishing national and personal debt, useless wind turbines, QE [n], deceitful inflation indices, ZIRP and many other similar situations. Perhaps it has always been thus, and the internet has opened up the can of worms to view, but equally, perhaps the relevant elites are becoming even more brazen now that they can see that nothing can or will restrain them.

  • Justathought

    Hi Barncactus,

    May I suggest one word to sum up it all…? Competition! Who
    is the cleverest one? Who earns the most? Who has the latest gadget? Who is the most successful? Etc… Before the installation of “democracy”, countries at wars competing to territories, resources etc… With “democracy” as we know, competition has been pushed to the individual; starting at school (Only the one willing to regurgitate to the teacher what he wants to hear or read will have the highest marks)

  • Max

    I think you are right. Selfishness has taken over. Either that or cluelessness or a combination of both.

  • Max

    But you will be happy to note that they have brought it forward. :)

  • Max

    how true.

  • old soldier

    “True story”?

    This strange artefact has been kicking around the internet for the best part of a couple of decades, and most commentators see (as I certainly do) a clumsy, self-evident canard, a fraud. Might have been a joke, but more likely the work of the extreme right educational campaigners who were actively (and eventually effectively) manufacturing barrowloads of this sort of black propaganda in the 1980s and 1990s. Protocols of the Elders of Zion, anyone?

    Frequently expressed scepticism about its authenticity has not yet, in all these years, provoked or produced any provenenace or authentication from the enthusiasts who keep reposting it. As far as I know. But if you say it’s “true”, maybe you have something? For example, a school with an address, somewhere in the English-speaking world, with records that show an Adam Hilliker on its staff in 1994?

  • Anonymous

    Hi Max

    Yes I was hoping that the newspapers had reported this incorrectly until it was confirmed.

  • Justathought

    Hi Old Soldier,

    At the time of this event, Alex didn’t have any computer and internet access neither at home or at school. I first had my first home computer with internet access when I relocated from RSA to the UK In 1999.
    Within the circumstances at the time I would never have known if it was a hoax. I am conceding, with time and your explanation, that it might have been a hoax.
    Anyway I vividly recall this event and to conclude by quoting;” By the skilful and sustained use of propaganda (lies), one can make a people see even heaven as hell or an extremely wretched life as paradise”

  • Old Soldier

    Fair and civil. Whose the quote by? its a good one.

  • Justathought

    Indeed a good quote; the author, one of the worst persona having walked on this planet: Adolph Hitler