So far in 2013 the UK economy has been showing some signs of an economic pick-up. The Lloyds TSB business barometer rose to 20 in December continuing a series of improvements in this measure since the recent low at -21 in May. In addition we saw yesterday that the UK manufacturing sector returned to growth in December too. Whilst 51.4 on the Markit purchasing managers index does not show stellar growth it was the best performance for 15 months. So there are grounds for some guarded optimism as we enter 2013. Although the FTSE 100 ignored the guarded bit as it surged by 0ver 2% yesterday to close over 6000 at 6027.
What about our housing market?
Nationwide
The tone of today’s report was summed up by the headline statement.
UK house prices little changed in December,continuing the trend evident throughout 2012
If we look into the detail we see this.
Price of a typical home declined by 0.1% in December
And if we look back for some perspective we see this.
Overall in 2012 the price of a typical home declined by 1%, reversing the 1% increase recorded in 2011
So the market has trod water or been on Talking Heads “Road to Nowhere” for the past two years according to the Nationwide. Although the overall numbers hide some large regional differences as prices in London rose by 0.7% -is the London property bubble fading?- whilst Northern Ireland saw prices fall by 8.2% in 2012, continuing the heavy falls seen there. A little more of this would make London prices overall treble those in Norther Ireland.
However we can also calculate a number for the real change in house prices as the UK has had inflation over the past two years of 7.6% (November 2010 to November 2012) according to the Consumer Prices Index and 8.3% according to the Retail Price Index. So looked at this way we have had a fall in real house prices over the past two years.
Affordabilty?
Under conventional analysis this has improved as average earnings have risen (October 2010 to October 2012) by 3.5% which the Nationwide house/earnings ratio reflects. However I believe that there is a catch here. It is that real wages have fallen-take a look at the inflation numbers above- and so more of the weekly wage is required for essentials such as food and fuel. Accordingly I believe that there has been little or no improvement here and for some affordability has deteriorated.
The Land Registry
This is the official record of house transactions in the UK and it gives a similar if slightly more optimistic view of the UK housing market to the Nationwide.
The annual price change now stands at 0.9 per cent
These numbers are only up to November so they could yet show a fall for December. If we look into the detail perhaps the main difference is that London prices here -cash buyers?- are paying 5.9% more than a year ago so perhaps the bubble goes on.
Volume is lower
We have got used to lower numbers of property transcations or sales anc this is sensible if we look at the boom years but take a look at this.
The number of property transactions has decreased over the last year. From June to September 2011 there was an average of 62,006 sales per month. In the same months a year later, the figure was 57,971.
So volumes were still falling in the latter part of 2012 which to me is a sign of a market at the wrong price level.
What about mortgage credit?
According to the Bank of England survey of credit conditions this is improving and is expected to improve further as 2013 develops.
The availability of secured credit to households was reported to have increased significantly in the three months to mid-December 2012,driven in part by the Funding for Lending Scheme. A further significant increase was expected over the next three months.
There is of course something of a moral hazard in the Bank of England slapping itself on the back about the success of its own Funding for Lending Scheme! I would caution that the actual numbers have not picked that up yet on any scale.
It also recorded an improvement in the cost or price of mortgage lending.
Lenders reported that overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — tightened significantly in Q4, and were expected to tighten significantly further in 2013 Q1.
The Bank of England expects this to have an impact on the housing market.
Consistent with the reported falls in spreads, demand had increased across all household lending
Although the report does have an element of Shakespeare’s “The lady doth protest too much,methinks”
The Funding for Lending Scheme was widely cited as contributing towards the increase in secured and corporate credit availability.
Perhaps the Bank of England might like to review its own website as there it will find that as of the latest data up to November 2012 standard variable mortgage rates had risen in 2012! They were at 4.33% on average some 0.2% higher than a year before and 0.4% higher than two years ago.
Corporate Lending
A slight diversion from today’s theme but whilst the Bank of England continued to slap itself on the back about the effect of FLS for larger and medium sized firms it was much more guarded about the effect on smaller firms.
Lenders reported a slight increase in demand for credit from medium-sized companies, but a reduction in credit demand from small companies…..In contrast, spreads (i.e the cost of borrowing) had remained broadly unchanged for small firms and other financial companies.
If we review the position that large companies have tended to hoard cash and accordingly are cash rich overall we see that the sector which needs funding (small firms) seems to find itself being missed out here. The rather gushing Bank of England report- on its own actions- fails to point this out.
Comment
So we find that the UK house market has pretty much trod water over the past couple of years in nominal terms but has fallen in real terms. We also see that the number of transactions is very low. The Bank of England has told us that it expects conditions to improve because of its FLS scheme. This ignores the fact that some of our largest banks took the cheap cash on offer and then actually cut their lending on the initial results. Step forwards Lloyds and Santander in that particular house of shame.
So there is a danger that the Bank of England is misleading us in an attempt to divert us from the reality that our banks are in effect being bailed out one more time and in the case of two of our larger ones cut lending in response! I also note that according to its figures standard variable mortgage rates have risen. So it looks as though we will start 2013 with a mortgage market with cheap deals for some but not for others.
Also whilst the Bank of England talks of “spreads” I note that recently the base on which these spreads starts which is UK Gilt yields has been rising. So its implied ”lower” view could hide higher interest rates as I look for my financial lexicon one more time! As an example of this the UK ten-year benchmark yield has touched 2% this morning.
So I am somewhat cautious about the credit conditions report where there seems to be more than an element of the Bank of England talking its own book. Also even if it is correct we are heading in the wrong direction in my view as we need to reform our banks rather than continue to subsidise them. We also need our housing market to become more affordable and with wage growth low that will require house price falls rather than rises.
A Knighthood for Hector Sants
My Member of Parliament replied very quickly -something of a change in itself- to my enquiry as to whether this would be followed by a peerage for Fred Goodwin.
The Honours List always produces some raised eyebrows and I imagine there were others who were a bit surprised by this one too but it is not a Government decision as far as I am aware. We will double check but I am fairly sure there is an Honours Committee independent of Government who deal with recommendations from a range of sources.
I will come back to you with clarification on the process and register your protest with an appropriate Minister.
Glad that is clear….
