Yesterday I challenged many of the conventional views on monetary policy and pointed out that at a time when the monetary transmission system is in such distress they are out of date and likely to lead to the wrong conclusions. At that I point I discussed the enormous experiment (doubling the monetary base) being undertaken by the Bank of Japan. Today I wish to take that forwards but this time to peer under the bonnet of the UK monetary system and in particular the way it is interacting with our housing and mortgage markets as all is not well there either in my view.
The official position
We saw this established by the credit conditions survey which was published by the Bank of England this week. As you can see it feels plainly that there is no moral hazard in giving itself a slap on the back whilst blowing its own trumpet!
The availability of secured credit to households was reported to have increased in the three months to beginning-March 2013. And a further increase is expected by lenders over the next three months.
It gave the same view on unsecured credit for households. However even this rose-tinted view of the universe found itself unable to avoid the ongoing problems in business credit.
The overall availability of credit to the corporate sector was reported to have increased in Q1. But that increase was confined to large companies, with small and medium-sized companies reported to have experienced little change in credit availability. Lenders expected overall credit availability to the corporate sector to be little changed in Q2.
Here we have a fundamental problem as you see the large corporate sector which overall is awash with cash can borrow but the smaller businesses which need cash cannot! Indeed the situation is so bad that this is apparently happening.
Lenders reported a significant decrease in demand for credit from small companies in Q1, a slight reduction in credit demand from medium-sized companies…..
So if we go back to the original grand promises when the Funding for Lending Scheme was introduced we see that in terms of the business lending required it is a failure. Actually the worst part is that is resembles a past Japanese failure where its banks also offered loans to those who did not need them as a way of avoiding actually lending. So the Bank of England apparently learnt nothing from the Bank of Japan’s experience and failures.
Accordingly we see that this rhetoric from the Bank of England is much less important for the corporate sector than you might think.
The Funding for Lending Scheme was widely cited as a factor pushing down on bank funding costs and borrowing costs for households and companies.
So if small businesses could get a loan it would be cheaper,thanks for that! Many of them seem to have given up asking.
What about mortgage rates?
We see that mortgage rates have indeed fallen for new business as Novembers 3.72% has fallen to February’s 3.5% on average according to the Bank of England. However before the cheers get too loud existing business is only 0.01% lower at 3.37%. Also if FLS and QE and base rate cuts are “all that” if I may use modern vernacular why is new lending more expensive than existing lending?
Is a rise the new reduction?
Savers the other side of the balance sheet
There is not the same reticence here by banks as interest rates have fallen for existing and new savers. Apparently existing savers can get 2.77% (down from 2.88%) and new ones 2.2% (also lower by 0.11%). Odd is it not that existing savers see falling interest rates but existing mortgagees do not?
Of course the theme that this is a (not very well disguised) bank subsidy receives another tick in its column.
What about the amount of mortgage lending?
Again the rhetoric has been that this is surging. I have challenged this once or twice on twitter as the numbers did not seem to be backing it up and had several mortgage brokers tell me that they had “loads of work”, although somewhat ominously considering the UK’s past history much of it was buy-to let.
One might wonder therefore how and why net seasonally adjusted mortgage lending in January and February was at £1153 million less than half of 2012′s £2413 million for the same period?
If we look forwards then we can get a good guide via the mortgage approvals statistics so if we look at the numbers for the first two months of 2012 we see that there were 106,841 whereas this year there were 105,840. So less not more and February at 51,653 was some 2534 lower than in January. If we move to the amount approved we see that in the first two months of 2012 some £25.16 billion was approved for such purposes and this year £23.92 billion.
Mortgage borrowers are not behaving as “expected”
Even if you ignore the above and believe the official spin at face value you then face a problem with the transmission of your (supposed) gains to the real economy. The plan is that mortgage borrowers will be better off and spend more. Unfortunately for that there is another problem which is that they are reducing their debts.
In the first two months of 2012 total mortgage redemptions/repayments were £23.04 billion whereas this year they were £25.18 billion.
So we see yet another example of people behaving differently from the views held by many economists who seem to learn little and sometimes I have to confess I wonder if some of them actually want to learn.
What about house prices?
Today’s report from the Halifax tells us that they continue to edge higher.
House prices increased by 0.2% in March. This followed a 0.5% rise in February
Prices in the three months to March were 1.1% higher than in the first months of 2012.This was the third consecutive rise in this annual measure.
Although with the official inflation measure at 2.8% I note that in real terms prices are falling.
Also to be fair to the Halifax whilst we do get a bit of sales up by 5% hype (industry figures) they also agree with my mortgage approvals analysis above.
We see in the numbers above that the conventional economic theory being applied to the UK economy by the Bank of England is not working. In my view they are conventional even when they think they are being unconventional! If we look at why then our mortgage and housing markets give us a guide.
1. The supposed rise in volumes is in fact a fall and even worse looks likely to fall further if mortgage approvals are any guide.
2. The supposed fall in mortgage rates still leaves new mortgage rates above existing ones.
3. Even if this was working then we have changed and rather than wanting to spend any such gains as conventional analysis would assume we now reduce our debts.
So even if things were going as hoped it might not work anyway. Oh dear!
Also on the other side of the balance sheet we see that savers have been punished and are poorer and are therefore likely to spend less. Indeed the new “human credit crunch psychology” I have been advancing in recent weeks may also make them want to save more as they face an uncertain world full of fears.
If that was not a long enough list of challenges and problems we also see that our businesses cannot get the funding they want and need.
There is only one winner here and it is our banks as we revise Abraham Lincoln’s speech.
Government of the banks,by the banks,for the banks
When,when,when will we ever learn?
This not from the UK (thankfully as we have our own problems) but from the United States and I will let the Washington Post take up the story.
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery
What could go wrong? (Google the sub-prime collapse if you are unsure)