1 House Prices set to rise by over 5% this year and by over 8% in 2014.
House prices are rising with the latest data from Nationwide and Halifax suggesting house prices are rising by 5%. Data from the ONS, indicates prices are rising slightly less in the information available to July. We expect the year on year out turn to be around 5.5% with a further increase in prices of between 7.5% to 10% next year.
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2 Regional Prices will rise too ...
London and the South East are leading the way with price rises averaging 10% in London based on both the Nationwide and ONS data. The ONS suggest prices are increasing less markedly across the regions with some indication prices are still falling in the North West. The Nationwide data suggests the increases are far more widespread averaging over 3.5% across the UK, with marked increases in the East Midlands specifically.

Price rises will spread across the UK, like a tidal wave across the flood plain. We expect an acceleration of house prices across the regions into the final quarter of 2014 and into 2015.

3 Long Term Fundamentals support the price move
The Nationwide long term fundamentals will support the price rise. Real long term house prices are below the trend rate. And the house price to earnings ratio appears to have established a resilient higher level post 2008.

4 As prices rise, the real cost of borrowing falls
As prices rise, the real cost of borrowing falls and with no immediate base rate rises on the horizon for a further two years, the real cost of borrowing will fall to -2% or more increasing to -5% next year. Of itself this is a great stimulus to house market activity.

5 Mortgage Lending will increase by over 20% this year
Mortgage lending is set to increase by over 30% in the third quarter and by over 20% for the year as a whole. This will still be less than half the activity at peak of market but a dramatic turnaround in any case. We anticipate an increase in lending to over £225 billion by 2015.

6 Housing transactions will increase by over 12% this year
Housing transactions, after a slow start to the year, will increase by 24% in the third quarter and by over 12.5% for the year as a whole. We are projecting an increase to over one million transactions in the year, still well down on the peak 1.8 million in 2007 but a significant recovery from the lows of 2008-9.

7 House building set to increase by over 30%
House builders are reacting to the recovery with a significant increase in housing starts. We are forecasting an increase of 30% over the year as activity accelerates into the second half.

We expect further skill shortages in bricklaying and plastering and a significant increase in the cost per 000 index for brick layers.

8 Is this the right time for Help to Buy Stage 2?
Probably not. The house market is on the move. No need to impart a significant demand shock to the recovery which the help to buy scheme represents. The scheme could increase house market transactions by as much as 100,000 in each of three years. The housing sector may increase the new build from 125,000 last year to over 150,000 this year. If we assume further supply increase in 2014, cost price pressures will begin to place additional pressure on the demand price shock.  

The Bank of England will not hesitate to take action in this cycle to mitigate price increases. Help to buy will be pared back in the September 2014 review. The spreads on high LTV loans will rise and higher capital provisions for high LTV lending will be in the mixer.

John Ashcroft October 2013

Economics news – lunch with the Governor and a trip to the Isle of Manchester

It has been an interesting week, lunch with the Governor of the Bank of England on Thursday before catching a flight to the Isle on Man to spend the day as a guest of the Government Economic Development Office. Lots of key meetings crammed into a 24 hour visit to understand more of the great opportunities for cross trade between Manchester and the Isle of Man. More on that next week.

As for the lunch with Mark Carney, you have to admire the new regime at the Bank. Pragmatic, approachable, with a real understanding of the banking sector. The governor is skeptical about QE, has allowed long rates to decouple from short rates, understands low rates do not of themselves lead to a surge in investment and depreciation will not, of itself, lead to a boost to exports.

Indeed in the Budget for Greater Manchester, many of our “Ten challenges to economic thinking at the Bank of England” have largely been confined to the dustbin of economics history. (Along with many of the old theories of Governor King). Yes we welcome the regime change at the Bank and we are also supportive of Forward Guidance. My thanks to John Young for the invitation.

What is it about FG?
The great thing about FG, is that it marks the end of QE. For this alone we should be grateful. Analysts and commentators are having real trouble accepting forward guidance. William Buiter writing for Citigroup, describes FG as a “pleonasm”. I had to look it up! Pleonasm, the use of more words or word parts than is necessary for clear expression. How absurd. It’s just two words after all. WB then goes on to describe over 17 pages, using 12,000 words in the process, why this is so, with a bit of obtuse greek econometrics thrown in for good measure.

What does FG offer? During the recovery, the Bank will not move to inhibit growth by an early increase in base rates before certain conditions relating to employment and inflation have been met. FG is not “carte blanche”. It is state dependent not time dependent. The MPC reserve the right to increase rates notwithstanding the forward guidance. For the moment, it offers reassurance to businesses. Investment plans can be brought back to the board table, with rate risk evaluated, as the economic outlook clears.

GDP and UK Growth
and clearing it is. The GDP stats this week did not change the view of the economy over the first half of the year but the outlook for the second half is improving radically. In the GM Chamber of Commerce Survey for Q3 to be released next week, The QES Composite Leading Indicator® surged higher in the latest survey suggesting strong growth in the third quarter of around 1.5% rising to trend rate 2.4% by the final quarter.

The index measured 28.3 from 18.9 in the second quarter, higher than the peak levels recorded in 2007. As a result of this, we are upgrading our forecast for GDP growth in the year as a whole, to 1.5% rising to around 2.5% next year.

Why so positive? The outlook for orders and deliveries were much higher in the quarter in both the service sector and in the manufacturing sector. Growth was positive in both the UK and export markets but particularly strong in domestic activity. Businesses are less worried about interest rates and are revising the investment plans!

In the wider economy, growth, jobs, inflation, government debt and borrowing are all heading in the right direction. Only the trade figures will continue to disappoint. The UK cannot grow faster than Europe and the USA without exacerbating the structural trade in goods deficit.

World trade is also recovering. Flat in the second quarter but up by 3.6% in July, for the year as a whole we expect world trade growth of just over 3% well down on the pre recession growth of 5.5% but a recovery nevertheless.

House Prices,
The Nationwide House Price index confirms house prices increased by 5% in September. The increases confined not just to the South East but across the UK. In the North West prices increased by over 3%. The housing market is also recovering but for the moment, the overall level of transactions is still well down on the “boom” years. No need to worry about another “Boom” just yet.

Is this the right time to introduce, Help to Buy Stage 2 in the New Year? Of course not. This week the Chancellor invited the FPC to exercise more control over the Help to Buy scheme. A bit like handing over car keys and credit cards before heading out for a night on the town. Enjoyable in the short term with a bad hangover in the offing, the bank will move to limit the damage with higher interest rate spreads and capital provisions forthcoming. The FPC will ensure money is “put behind the bar”, to pin the profligacy.

What happened to sterling?
Sterling moved up against the dollar and up against the Euro. The pound closed at £1.6150 from $1.5994 clearing the 1.60 level intra week. Against the Euro, Sterling closed up at €1.1935 from €1.1840. The dollar moved down against the yen closing at ¥98.2 from ¥99.3.The dollar euro cross rate at 1.353 was largely unchanged.

Oil Price Brent Crude closed at $108.63 from $109. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact.

Markets, slipped - The Dow closed at 15,258 from 15,451. The FTSE closed at 6,512 from 6,596. The Fed statement forgotten, markets are beginning to fret about the US debt ceiling. It creates volume if nothing else. What’s the problem with the ceiling? The plasterers will be called in to cover the cracks sooner or later, usually later.

UK Ten year gilt yields closed at 2.73 from 2.92, US Treasury yields closed at 2.63 from 2.79. The fed statement has now pulled long rates down by 25 basis points. Long rates are decoupling from shorts, returning to fair value. They are reluctant to leave, with pleas from the FOMC to “stick around” but leave they must.

Gold closed at $1,336 from $1,331. The bulls have it or do they? The news on tapering bought more upside gain but not much, we think gold will trade sideways for some time yet.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.

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© 2013 The Saturday Economist, #TheSaturdayEconomist by John Ashcroft and Company, Dimensions of Strategy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.

Good news for the economy continued this week.
A fall in the rate of unemployment AND an increase in output and orders for the construction industry. Who would believe it was just a few months ago headlines were devoted to the risk of a triple dip recession? The year is becoming a tale of two halves with a significant pick up in activity and sentiment into the third quarter. Get ready, we are leaving Planet ZIRP.

Speed bumps in the housing market
It is a strange recovery with strange roles in evidence. The Bank of England is hoping to keep base rates on hold for three years. The RICS warned this week of the need to maintain a stable and sustainable path for house prices.

“We suggest setting an annual growth rate threshold in a national index, which if exceeded, triggers tighter macro prudential policy” said Josh Miller Senior Economist in the RICS report.

The RICS is advocating “speed bumps” to limit the rate of price increases. The Bank of England (in the form of the FPC) should intervene to regulate mortgage allocations of LTV ratios across the UK if prices moved over 5%. That sort of thing.

“Taking away the punch bowl as the party gets started” is the traditional role of the central banker. Now some of the heavy drinkers are suggesting, we dilute the hooch. How strange.

Most commentators have reacted badly to the suggestion. Why 5%? Is there a regional variation? Is it the same for maisonettes and mansions? Should the government confiscate revenues where prices exceed the guidelines? Are the RICS advocating a prices and incomes board, monitored by the RICS perhaps?

Graeme Leach at the IOD has suggested it is a “statist solution to a state created problem”. Calm down Graeme, it was just for fun and not to be taken too seriously. The FPC is to meet this week. Top of the agenda will be the need to limit loan to value ratios. The government “homes for heroes” scheme, (the scheme in which the tax payer underwrites high loan values for house buyers) will be on the agenda no doubt.

Unemployment
The unemployment rate ticked down in July to 7.7% in July. The claimant count fell to 4.2% in August. The number of claimants - down by 32,000 to 1.4 million. Further indicators the recovery is on track, towards trend rate of growth, into the final quarter.

What does this mean for forward guidance? The models still suggest it will be the end of 2015 at least before the 7% threshold will be reached. That is the rate at which the MPC will begin to think about base rate rises, (speed bumps and knock out drops aside).

The caveat about earnings continues. The recovery cannot be sustained without a change in household fortunes, either lower inflation or higher earnings growth is required. Plus, the UK cannot grow at a faster rate then Europe for too long, without the trade deficit coming under severe pressure. The trade deficit, of itself, “a speed bump or pothole”, where growth is concerned.
 
Construction
Good news on construction. Output increased in July by 2% compared to July last year.  Orders for new work, especially in the housing market, were up by 33% compared to the same time last year. This is an important change indicator for the sector.

Overall the growth in services continues. The recovery in manufacturing and construction will look much stronger into the final quarter of the year. The UK recovery is on track. It is just over eighteen months to the election. Buckle up, we are leaving Planet ZIRP. Gilts are already in low orbit.

What happened to sterling?
Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5871 from $1.5627 and at €1.1940 from €1.1860 against the euro. The dollar moved up against the yen closing at ¥99.4 from ¥99.0

Oil Price Brent Crude closed at $111 from $114. The average price in September last year was almost $113. We expect oil to average $112 in the current quarter, with no real inflationary impact.

Markets, rallied - The Dow closed up at 15,376 from 14,923. The FTSE closed up at 6,584 from 6,547. The Fed statement this month will mark the larger DOW move. Still a good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000.

UK Ten year gilt yields closed at 2.94 from 2.95, US Treasury yields closed at 2.89 from 2.93. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave!

Gold closed at $1,312 from $1,388. The bulls have it or do they? Some still worry about tapering.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.

Join the mailing list for The Saturday Economist or forward to a friend
UK Economics news and analysis : no politics, no dogma, no polemics, just facts.

John
© 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy .
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.