Macroprudential – How To Do It Right

Brilliant speech from Alex Brazier UK MPC member on macroprudential “How to: MACROPRU. 5 principles for macroprudential policy“.

He argues that whilst macroprudential policy regimes are the child of the financial crisis and is now part of the framework of economic policy in the UK, if you ask ten economists what precisely macroprudential policy is, you’re likely to get ten different answers. He presents five guiding principles.

There are some highly relevant points here, which I believe the RBA and APRA must take on board. I summarise the main points in his speech, but I recommend reading the whole thing: This is genuinely important! In particular, note the limitation on relying on lifting bank capital alone.

First, macroprudential policy may seem to be about regulating finance and the financial system but its ultimate objective the real economy. In a crisis, the financial system may be impacted by events in the economy – for example credit dries up, lenders are not matched with borrowers. Risks can no longer be shared. Companies and households must protect themselves. And in the limit, payments and transactions can’t take place. Economic activity grinds to a halt. These are the amplifiers that turn downturns into disasters; disasters that in the past have cost around 75% of GDP: £21,000 for every person in this country. So the job of macroprudential policy is to protect the real economy from the financial system, by protecting the financial system from the real economy. It is to ensure the system has the capacity to absorb bad economic news, so it doesn’t unduly amplify it.

Second, the calibration of macroprudential should address scenarios, not try to predict the future but look at “well, what if they do; how bad could it be?” In 2007, he says it was a failure to apply economics to the right question. There was too much reliance on recent historical precedent; on this time being different. And, even more dangerously, they relied on market measures of risk; indicators that often point to risks being at their lowest when risks are actually at their highest.

The re-focussing of economic research since the crisis has supported us in that. It has established, for example, how far: Recessions that follow credit booms are typically deeper and longer-lasting than others; Over-indebted borrowers contract aggregate demand as they deleverage; While they have high levels of debt, households are vulnerable to the unexpected. They cut back spending more sharply as incomes and house prices fall, amplifying any downturn; Distressed sales of homes drive house prices down; Reliance on foreign capital inflows can expose the economy to global risks; And credit booms overseas can translate to crises at home.

When all appears bright – as real estate prices rise, credit flows, foreign capital inflows increase, and the last thing on people’s minds is a downturn – our stress scenarios get tougher.

Third, feedback loops within the system mean that the entities in the system can be individually resilient, but still collectively overwhelmed by the stress scenario.

These are the feedback loops that helped to turn around $300 bn of subprime mortgage-related losses into well over $2.5 trillion of potential write-downs in the global banking sector within a year. Loops created by firesales of assets into illiquid markets, driving down market prices, forcing others to mark down the value of their holdings. This type of loop will be most aggressive when the fire-seller is funded through short-term debt. As asset prices fall, there is the threat of needing to repay that debt. But even financial companies that are completely safe in their own right, with little leverage, and making no promise that investors will get their money back, can contribute to these loops.

The rapid growth of open-ended investment funds, offering the opportunity to invest in less liquid securities but still to redeem the investment at short notice, has been a sea change in the financial system since the crisis. Assets under management in these funds now account for about 13% of global financial assets. It raises a question about whether end investors, under an ‘illusion of liquidity’ created by the offer of short-notice redemption, are holding more relatively illiquid assets. That matters. This investor behaviour en masse has the potential to create a feedback loop, with falling prices prompting redemptions, driving asset sales and further falls in prices.

And in a few cases, that loop can be reinforced by advantages to redeeming your investment first. Macroprudential policy must move – and is moving – beyond the core banking system.

Fourth, prevention is better than cure.

Having calibrated the economic stress and applied it to the system, it’s a question of building the necessary resilience into it. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. Our stress tests show that it could absorb a synchronised recession as deep as the financial crisis.

And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further.

But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation.

We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards: A limit on mortgage lending at high loan-to-income ratios; And a requirement to test that borrowers can still afford their loan repayments if interest rates rise.

These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen.

A diversified policy is also more comprehensive. It guards against regulatory arbitrage; of lending moving to foreign banks or non-bank parts of the financial system. And by reducing the risk of debt overhangs and high levels of debt, it makes the economy more stable too.

Fifth, It is that fortune favours the bold.

The Financial Policy Committee needs to match its judgements that what could happen has got worse with action to make the system more resilient. Why will that take boldness? Our actions will stop the financial system doing something it might otherwise have chosen to do in its own private interest – there will be opposition. The need to build resilience will often arise when private agents believe the risks are at their lowest. And if we are successful in ensuring the system is resilient, there will be no way of showing the benefits of our actions. We will appear to have been tilting at windmills.

As the memory of the financial crisis fades in the public conscience, making the case for our actions will get harder. Fortunately, we are bolstered by a statutory duty to act and powers to act with. And whether on building bank capital or establishing guards against looser lending standards, we have been willing to act. Just as building resilience takes guts, so too does allowing the strength we’ve put into the system to be drawn on when ‘what could happen’ threatens to become reality. Macroprudential policy must be fully countercyclical; not only tightening as risks build, but also loosening as downturn threatens. Without the confidence that we will do that, expectations of economic downturn will prompt the financial system to become risk averse; to hoard capital; to de-risk; to rein in. To create the very amplifying effects on the real economy we are trying to avoid.

A truly countercyclical approach means banks, for example, know their capital buffers can be depleted as they take impairments; Households can be confident that our rules won’t choke off the refinancing of their mortgage. And insurance companies know their solvency won’t be judged at prices in highly illiquid markets. We must be just as bold in loosening requirements when the economy turns down as we are in tightening them in the upswings. Boldness in the upswing to strengthen the system creates the space to be bold in the downturn and allow that strength to be tested and drawn on. Macroprudential fortune favours the bold.

 

UK Home Prices Rise Again

Latest data from the UK’s ONS shows that average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013. However, annual growth has been weaker in the second half of 2016 compared with the first half of the year. The average UK house price was £220,000 in December 2016. This is £15,000 higher than in December 2015 and £3,000 higher than last month.

The main contribution to the increase in UK house prices came from England, where house prices increased by 7.7% over the year to December 2016, with the average price in England now £236,000. Wales saw house prices increase by 4.7% over the last 12 months to stand at £148,000. In Scotland, the average price increased by 3.5% over the year to stand at £142,000. The average price in Northern Ireland currently stands at £125,000, an increase of 5.7% over the last 12 months.

On a regional basis, London continues to be the region with the highest average house price at £484,000, followed by the South East and the East of England, which stand at £316,000 and £282,000 respectively. The lowest average price continues to be in the North East at £129,000.

The East of England is the region which showed the highest annual growth, with prices increasing by 11.3% in the year to December 2016. Growth in the South East was second highest at 8.5%, followed by London at 7.5%. The lowest annual growth was in the North East, where prices increased by 4.1% over the year.

How renting can fix the UK’s broken housing market

From The Conversation.

How to fix the UK’s housing crisis has been the subject of national debate for decades. Universal home ownership is a popular goal, which successive governments have failed to achieve. This is largely because they have been faced with the paradox of increasing the supply of affordable housing while not encouraging house prices to fall, as this is widely regarded as political suicide.

One solution has been to promote policies that make it easier to get a mortgage or boost disposable income so that it rises faster than house prices. In fact, nearly ten years after a global financial crisis caused by the ready availability of mortgages to households with no ability to repay them, the UK government maintains its “Help to Buy” initiatives. These focus on helping people to borrow the large sums necessary to pay for unaffordable homes.

What has been missing from the debate is the role that renting can play in solving the UK’s housing problems. The government’s latest white paper is significant in that it features policies to help renters. But ownership remains the ultimate goal.

In the UK there is social and political pressure for people to “get a foot on the housing ladder” – even when, in many cases, it is financially preferable for households to rent. Although the benefits of home ownership are many, one should ask whether it is wise for governments to encourage – and subsidise – people to take on debt that they would otherwise not be able to afford, in order for them to place all of their financial resources into an asset that may be overvalued or unsuitable.

Must you get on the ladder? shutterstock.com

Eggs in one basket

One of the most basic rules of investment is “don’t put all your eggs in one basket”. Yet most households do just that when they buy a home and then they leverage this investment by borrowing money.

This is much riskier than placing all of your money in a fund that tracks the global stock market. Not only is it difficult to sell a house when you urgently need the money, if house prices fall – even by a not unusual 10% – your losses will be multiplied by the gearing effect of the mortgage. For example, if all of your savings amount to £20,000 and you use this as a 10% deposit to buy a £200,000 home, then you borrow the remaining £180,000, a 10% price fall will leave you with no savings and owing money to the bank if you then try to sell.

For previous generations, from the late 1970s onwards, the risk of homeownership has paid a commensurately high return because inflation has been generally positive but benign. And, at the same time, interest rates have trended down from double digits towards zero.

For those contemplating buying their first home today, however, the outlook for both interest rates and inflation is more uncertain. For example, Japan and more recently some eurozone countries have experienced prolonged periods of deflation. In the UK, despite efforts to keep inflation positive, actual realised inflation has been consistently below the Bank of England’s forecasts from the second quarter of 2013 until January.

Don’t bet on inexorable rises. shutterstock.com

House prices vary substantially over time relative to both GDP and household income – confirming that housing is a risky investment. Furthermore, in markets where building land is in short supply (such as Japan and many parts of the UK), this variability is greater than in markets such as the US where it is more readily available to meet demand.

When renting is better

In a recent paper I demonstrate that renting can be a better financial option than buying in a number of circumstances. These include: if you do not plan to live in the same house for at least five to ten years; or if inflation is negative (deflation); or if the net rent saved by owning is less than your mortgage interest or the return you could have achieved by putting your money in other investments with a similar level of risk.

This is because rent typically includes substantial ownership costs such as building insurance, property maintenance and furnishing. So the money saved by owning a house is considerably less than the rent not paid. Another reason is that buying and selling houses incurs substantial transaction costs in the form of legal fees, transaction tax (stamp duty) and selling agents’ fees. These are much higher than rental transaction costs. So unless you plan to stay in the new home for a considerable time, the chances are that these higher costs will not be recouped by savings from rent or price appreciation.

Plus, although prices have tended to drift up in the long term, prices can and do fluctuate substantially in the medium term (five to ten years). So if you plan to relocate within a few years there is a greater risk of being unlucky in your timing and suffering a price loss.

Finally, purchasing a home fixes your housing costs and often incurs a substantial mortgage liability. This is good if prices and wages are generally rising – because the mortgage payments become more affordable as incomes rise. But, in a world of low inflation or deflation, mortgage liabilities remain fixed, but incomes, prices and rents tend to decline making it harder to sustain mortgage payments and harder to recoup the capital invested in buying.

There are many ways that governments can influence the affordability of housing besides helping financially constrained households to concentrate all of their savings into risky assets that they would not otherwise be able to afford. Allowing house prices to drop will always be politically difficult – homeowners tend to make up the bulk of the electorate that turns out to vote. But they could do much more to encourage renting, even if it does require a radical rethink in the British mindset when it comes to home ownership.

Author: Isaac Tabner, Senior Lecturer in Finance, Director of the MSc in Finance, University of Stirling

 

 

What interest rates will mean for your mortgage choices

From The Conversation.

For many of us, our home is the single most important investment we will make in our lifetime and mortgage payments can take up a huge chunk of our income. As politics and economics seem to deliver nothing but uncertainty, how should home owners or first-time buyers react?

Things still look tight for household budgets. One recent survey showed that the average mortgage payment for a three bedroom house in the UK is about £965 per month, more than half the average take-home wage.

That is with interest rates at historic lows. And they are staying put. The nine members of the Bank of England’s Monetary Policy Committee have decided to keep the official interest rate in the UK, the Base Rate, at that ultra low level of 0.25%.

The fortified walls of the Bank of England on Threadneedle Street. Robert King/Flickr, CC BY

In various guises, this rate has been around since 1694. It is the rate at which high-street banks borrow from the central bank and its function in the economy is simple but effective. If banks can borrow money cheaply from the Bank of England then they tend to pass it on cheaply to us, the public. When their borrowing gets expensive, so does ours.

The Base Rate is only an overnight interest rate but it starts a domino effect with more long-term interest rates. If it is raised then the whole economy is soon paying more to borrow money.

But if that’s not happening now, what about when the MPC meets again on March 16?

Up, up and away

Let’s start with the bad news for those paying a mortgage or seeking one. Interest rates, and consequently our payments, will definitely increase in the future. The graph below shows the history of the Base Rate since 1970. With a historical average of more than 6% and years when the Base Rate stayed consistently over 12% to combat the spiralling inflation of the time, it becomes evident that a rate of 0.25% is abnormally low.

Bank of England, Author provided

The good news for home owners and house hunters is that interest rates could well stay low for a few more years. And all the signs are that when rates do rise, it will be in small increments of 0.25% or 0.50% every few months. A key aim of the Bank of England is not to surprise markets and to be as predictable as possible, particularly at a time when stability and certainty are rare commodities.

Most people will remember why we ended up with such low rates. In the response to the global financial crisis of 2008, central banks sought to make it cheaper for people to borrow money. A low interest rate makes it easier for consumers to afford not just mortgages but also cars, appliances or nights at the pub. Companies profit from our spending and get access to cheap money that helps them expand or stay afloat.

Debt as a driver. Thomas Hawk/Flickr, CC BY-NC

So, if they are so good for the economy, why do interest rates have to go up again? Mainstream economic theory views very low interest rates as harmful in the longer-term. They are a disincentive to healthy saving rates and when the economy is at full-throttle, they act as a boost to inflation which in turn erodes people’s real incomes. They also distort investment decisions and, particularly dangerously for the UK, add fuel to investment bubbles.

Market forces

Brexit and the rise of Donald Trump in the US, the two great causes of uncertainty these days, will probably save us some money, at least in the short to medium term. Brexit brings with it the prospect that businesses will lose full access to an EU market of 450m affluent Europeans. In a climate like this, it would be a foolhardy Bank of England which chose to make money more expensive in the UK.

Trump, meanwhile, is known to favour a cheap dollar and low interest rates in the US in an effort to make exports more competitive. The Bank of England, as ever, will keep a close eye on its US counterpart, and will likely avoid increasing UK interest rates for fear of pushing the pound higher and blocking out much needed investment from the US.

So how can you use this information?

First of all, I’d avoid taking a mortgage or any loan that I could only barely afford as rates will eventually rise. For those that already have a mortgage, most commentary on the real-estate market will advocate for a fixed-term mortgage but that is not necessarily a good idea. The most popular fixed-term products offered by high street banks are usually for a period of two years.

The trouble here is that you will normally pay a fee and a higher interest rate as the cost for fixing, during which time rates are unlikely to rise anyway. And so only fixed mortgages of five years or more start making sense – and you would still pay fees and a relatively higher interest rate for a couple of years before you started to benefit.

A good idea would be to make small but regular overpayments into your mortgage, and request that these payments are used to reduce your monthly instalments (rather than to bring closer the year that the loan will be repaid in full). So when the interest rate does increase in the future, the outstanding amount it will apply to will be reduced. Flexible mortgages typically accept unlimited overpayments and even the fixed deals usually allow overpayments of up to 10% each year.

Banks are not particularly happy with the overpayment approach. It reduces their profits and de-stabilises their portfolio a little. But reluctant banks are usually a sign that this might just be a good deal for you.

Latest UK Inflation Expectations Stronger

The Bank of England released their latest economic and inflation update. They are now expecting a stronger inflation rate in the short term, higher than their immediate post-Brexit-vote projections.  GDP looks pretty good too.

UK economic activity remained resilient in the second half of 2016. Growth is likely to slow over 2017 as households adjust their spending to lower real income growth resulting in large part from the 18% fall in sterling since late 2015. That fall in sterling will raise CPI inflation, which is likely to return to around the 2% target by February and then rise above it over the following months.

Conditioned on a market path for Bank Rate that rises to just under 0.75% by early 2020, the MPC projects CPI inflation to fall back gradually from the middle of 2018. Continued pass-through of higher import prices means, however, that inflation is projected to remain somewhat above the 2% target at the end of the Committee’s three-year forecast period.

The UK economy has remained resilient, with activity growing at close to its past average rate in 2016. Growth has been stronger than envisaged in the immediate aftermath of the vote to leave the European Union when survey evidence pointed to a sharp slowdown in activity. That partly reflects robust growth in consumer spending, with few signs that households are cutting back expenditure ahead of a squeeze in their real incomes. Official data for investment have been considerably weaker, although above recent expectations. Reinforcing the domestic news, there are signs of increasing momentum in the global economy with a stronger medium‑term outlook in several economies, supported by fiscal policy (Key Judgement 1). That has been reflected in global asset prices, with longer‑term interest rates and equity prices rising.

Domestic demand growth is still expected to slow over the course of this year as higher prices for imported goods and services begin to weigh on households’ spending power (Key Judgement 2). That pulls down four-quarter GDP growth, which settles at around 1¾% from the end of 2017 (Chart 5.1). That slowdown comes a little later than previously assumed. Moreover, the Government’s Autumn Statement represented a fiscal stimulus, relative to previously announced plans, the outlook for global growth is stronger, and credit conditions and equity prices are more supportive. Taking all the news together, the MPC now judges that the growth outlook is stronger than thought in November. Overall, in the central projection that leaves the level of GDP around 1% higher in three years’ time than projected in November. Relative to expectations in the May 2016 Report, just before the EU referendum, however, the level of GDP is still around 1½ lower in the medium term despite the significant monetary, macroprudential and fiscal support since then.

Theresa May confirms: Britain is heading for Brexit Max

From The Economist.

For the past few months Theresa May and her ministers have allowed some ambiguities to swirl around Britain’s future relationship with the European Union. Yes, she confirmed in her conference speech in October, Brexit would take it beyond the jurisdiction of the European Court of Justice and the EU’s free movement regime. Some found this hard to square with reports that special arrangements would be sought for parts of the British economy (like the City of London and carmaking) or with Mrs May’s assurance to businesses that she would seek to avoid a “cliff edge” on Britain’s exit from the club. Many in other European capitals questioned whether Britain would leave at all.

To the extent that such uncertainties persisted despite her endless choruses of “Brexit means Brexit”, at a speech to EU ambassadors in London on January 17th Mrs May put them to the sword. Britain will leave the single market and the customs union, and will thus be able to negotiate its own trade deals with third-party economies. It will not pay “huge sums” to secure sectoral access (a phrase whose precise meaning now matters a lot). She wants this all wrapped up within the two years permitted by Article 50, the exit process she will launch by the end of March; ideally with a “phased process of implementation” afterwards covering things like immigration controls and financial regulation. In other words there will be no formal transitional period. There will, in fact, be a cliff edge of sorts.

This reflects two realities to which policymakers in Britain and on the continent must now get accustomed. First, Mrs May unequivocally interprets the vote for Brexit as a vote for lower immigration even at the cost of some prosperity. Never mind that the polling evidence supporting this assumption is limited: such is now the transaction at the heart of the new government’s political strategy. Second, even allowing for a certain amount of expectation-management, it seems Mrs May is not placing huge importance on the outcome of the talks. She wants a comprehensive free-trade agreement (FTA) based on the one recently signed between the EU and Canada; but where “CETA” took about seven years to negotiate, she has permitted herself two. She said that this might cover finance and cars, but also recognised the importance the EU places on the “four freedoms” (making freedom of movement a condition of market membership), suggesting a realism about the extent of any such FTA in the narrow time constraints available. Mrs May also wants some associate membership of the customs union but declared herself relaxed about the details. In short: she will do her best, but if the talks come to little or nothing, so be it.

Of course, they will be tough. The prime minister will want firstly to maximise the scope of the FTA, secondly to maximise the benefits of any associate relationship with the customs union and thirdly to minimise the precipitousness of the cliff off which British firms will fly in 2019. She hinted at how she intended to do so, characterising the country’s current defence and security co-operation with the continent as a possible negotiating chip and warning that her government could “change the basis of Britain’s economic model” (i.e. turn it into a tax haven) if the EU does not play nice. She also said that she would be willing to walk out on the talks: “no deal…is better than a bad deal.”

So Britain’s economy is in for a rough ride and, though the government will try to smooth it out, the priority is getting the country out of the EU in the most complete and rapid way possible. If the price of this priority is economic pain, then pay Britain must. All of which gives firms some of the certainty they have craved since June 23rd: those fundamentally reliant on continental supply chains or the EU “passport” for financial services, say, now have the green light to plan their total or partial relocation. It also means the Brexit talks will be simpler and perhaps even less fractious than they might have been had Britain tried to “have its cake and eat it”. The country will eat its cake and live with an empty plate afterwards. Brexit really does mean Brexit.

Are the rich really getting poorer and the poor getting richer?

From The UK Conversation.

The median UK household is better off. The poorest households are doing even better than the median, and the richest households have been the greatest losers. At least that’s one way to read the headline statistics put out by the Office for National Statistics (ONS) on January 10 in a new report on household disposable income and inequality.

Yet exactly the same statistics could have been reported in a very different way. In fact, while the poorer 90% of UK households have seen their equality of income improve, all these households are now receiving less in real terms because of the fall in the value of the pound, and this report says nothing about the best-off 10% of households.

Let’s take the three groups, the average, the poorest, and the richest, one by one.

The average household

Does the median UK household now really have more disposal income than a year earlier? Here, the dates being compared are the financial year up to April 2016 compared with the financial year ending in April 2015. According to the ONS, that median disposal income is now £26,300, compared to £25,700 a year earlier. The government statisticians say this is the case after they have accounted for inflation and changes to household composition.

The disposable income being described by the ONS is income after taxes have been paid and benefits have been received – but it is before housing costs have been deducted. So where rent and the cost of buying a home has risen those rises are not been taken into account.

Average UK house prices rose by 8.2% in the year to April 2016. Rents have been rising by similar amounts and fewer young couples are setting up home. If this housing crisis means that fewer grown-up children are able to leave home, household composition would alter and the average household would look a little better off overall because that grown-up child might well have an income.

The poorest households

The incomes of the country’s poorest households – in the bottom fifth of the income distribution – have increased. This is because unemployment has fallen and even very low-paid work pays more than most benefits (if you can get enough hours). However, the reason unemployment has fallen in recent years is because of the most draconian application of benefit sanctions ever applied in the history of the UK.

In 2013, over one million people were sanctioned, losing benefits that amounted to more than all the fines handed out by sheriff’s courts in Scotland and magistrates courts in England and Wales for all the actual crimes committed that year.

What the imposition of sanctions at unprecedented rates showed was that it is possible to reduce unemployment by taking away benefits. To survive, people are forced to take any work that they can possibly find, or move in with relatives or with anyone that will give up a sofa.

This employment growth has resulted in the apparent disposable income of the median household in the worse-off fifth of households appearing to rise by £700 a year, or just over £13 a week. However, for those households in which an extra adult is now working, the cost of actually getting to work every day, of the clothing needed for that work, and the loss in time to care for others (such as children) will be more than that £13 weekly rise.

The richest households

At the same time, the ONS reports that the median income for the best-off fifth of households fell by £1,000 last year. But crucially, this is their median income, and the incomes of the better-off half of all those households are ignored. There is actually greater income inequality in the best-off fifth than between all the other 80% of households put together. Within the best-off tenth, inequalities are huge, with the top 1% of households receiving roughly the same income as the next 9%.

Information on changes to national insurance contributions and child benefit payments, have shown us that most people in the best-off tenth will not have fared well either. But other statistics on the incomes of some of the very best-off (such as top paid bankers) also reveal that those in the very richest 1% have done well over this period.

The number of British bankers paid over a million Euros a year rose from 3,178 to 3,865 in 2014. There is no reason to believe that has reduced. In fact, preliminary figures for 2015 revealed that 971 people working in just four of the large US banks in London received more than a million Euros in pay in 2015, with 11 working for Goldman Sachs getting more than 5m Euros each.

For the poorer 90% of households in the UK, with total household incomes below £53,448 a year, economic inequalities are falling. But they are falling because the people who are poorest are being forced into work that they would not do if they had any choice. They are falling because benefits such as child benefit are no longer universal (top rate tax payers no longer qualify). Or possibly because it is harder and harder for young adults to leave the family home and statistical adjustments for household composition are not sophisticated enough to account for such changes.

Most people are not really financially better-off, other than a tiny proportion of the population in the top 1% who are not even included in these statistics. Most people becoming a little more equal (while a few become very much better off) – as living costs are about to rise even further due to inflation – is not a good news story.

Author: Danny Dorling, Halford Mackinder Professor of Geography, University of Oxford

UK Housing Construction Higher In November

Latest data from the UK’s Office of National Statistics shows that despite the overall fall in all work in November 2016, new housing continued to grow at an increasing overall rate of 1.2% in comparison with October 2016, representing the biggest increment since February 2016. A rise in affordable public housing is a significant factor. This has resulted in housing output reaching an all time high of £2,639 million, as seen in Figure 4.

The increase in housing has occurred in part as a result of the notable rise in public housing, which recovered from negative growth in October 2016 to increase by 5.5%. There was an increase of 13.7% compared with the same period a year ago, the largest month-on-year growth rise since December 2014. This high level of growth comes in the shadow of the government committing to “drive up the housing supply” by providing £8.0 billion to deliver over 400,000 affordable housing starts by 2020.

In addition, private sector housing continued to grow at a steady month-on-month rate of 0.6% compared with October 2016. However, similar to public housing, the private sector has experienced large growth in relation to the same period last year, at a rate of 12.5% which has been broadly consistent throughout 2016. This may be in part due to historically low interest rates facilitating borrowing for construction firms, coupled with the loosening of private housing planning restrictions, both of which could have contributed to the continued boom in private housing both in November 2016 and throughout the year.

How Best To Measure Owner Occupiers Housing Costs

Within the CPI, the costs of housing are included. But as a recent article from the UK’s Office for national statistics shows, this is not straight forward.

Owner occupiers’ housing costs (OOH) are the costs of housing services associated with owning, maintaining and living in one’s own home. There is not a single defined measure of OOH because they can be calculated differently depending on what the target is.

In particular, should OOH be measured at the point of acquisition of the housing service (for example, the net acquisitions approach – NA), the point of use (for example, the rental equivalence approach – RE), or the point at which it is paid for (for example, the payments approach)? Each of these 3 approaches has its own specific methodological strengths and weaknesses, and is measured using different methods.

Although each of the methods measure different aspects of OOH and are therefore not comparable, it is still useful to look at the 3 measures together to see how they differ over time.

The fact that OOH(RE) does not directly follow house prices is not a disadvantage to using the rental equivalence approach in the calculation of the owner occupier’s housing costs component. This is because the rental equivalence approach aims to measure the housing services that are consumed each period, and therefore there is no reason why it should follow the trend of house prices.

Britons Hoard Cash as Economic Uncertainties Prompt Caution

From Bloomberg.

Britons are holding onto their cash in a sign that they may be hunkering down in the face of economic uncertainties, according to the British Bankers Association.

Personal deposits grew an annual 4.8 percent in November, data compiled by the BBA show. They increased by 32.4 billion pounds ($39.7 billion) in the first 11 months of the year, outstripping the 19.8 billion-pound growth in the same period of 2015.

 

British investors and savers were shaken by the June decision to leave the European Union, which prompted the Bank of England to cut interest rates to a record-low 0.25 percent. While the economy has held up well so far, most economists foresee a slowdown in 2017 as businesses seek more clarity on the nation’s future relationship with the world’s largest trading bloc.

“We’ve seen personal deposits, in particular, grow more strongly in recent months as consumers hoard cash in the absence of higher-yielding, liquid investment opportunities,” BBA Chief Economist Rebecca Harding said. “This growth in personal deposits may also suggest that consumers are looking to grow their cash reserves against potential economic uncertainties, such as an expectation of lower wage growth.”

The BBA figures also showed that approvals for home loans fell 9 percent in November from a year earlier. In the first 11 months of the year, approvals declined 4 percent.

U.K. house prices may only eke out a modest gain next year as economic growth weakens and a pickup in inflation squeezes consumers, according to a separate report by Halifax. The mortgage lender sees housing demand easing in 2017, partly as tax changes and stricter underwriting standards restrict buy-to-let investment.

It highlighted the market in London, where poor affordability means the capital will see a sharper slowdown than elsewhere.

 

London’s underperformance has also been a theme of 2016, with Brexit and an increase in stamp duty weighing on the market. Luxury home prices in some of the most expensive districts are down more than 10 percent this year, and land values are also dropping. Property website operator Rightmove said this month that the bubble in prime London “continues to deflate,” and it sees prices there declining 5 percent in 2017.

Halifax said prices should find some support from the shortage of property for sale, low levels of building and low interest rates. It forecasts that values will be rising about 1 percent to 4 percent in the U.K. by the end of next year. The most recent official data showed an increase of about 7 percent in October.

The wide range for the forecast “reflects the higher than normal degree of uncertainty” for the economy, it said.

“Slower economic growth in 2017 is likely to result in pressure on employment with a risk of a rise in unemployment,” said Martin Ellis, housing economist at Halifax. “This deterioration in the labor market, together with an expected squeeze on households’ spending power, is likely to curb housing demand.”

The Royal Institution of Chartered Surveyors also sees a slowdown in price growth in 2017, adding to the multiple reports that underscore the recent loss of momentum in Britain’s housing market. It says the supply shortage means the average number of properties on realtors’ books is close to a record low, supporting the outlook for values.