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House Prices cycles - UK and USA compared

Comparison is made between house price cycles in the UK and USA using data from the Nationwide house price index and data from the Case-Schiller Index for the USA. Indices rebased to 2000 = 100.

In the USA house prices peaked in May 2006 as the index increased to 294.3. In the UK house prices continued to rise for a further sixteen months before peaking in October 2007 with an index base of 372. Hence, UK house prices increased by a further 26% from the American peak, demonstrating a much stronger house price boom than was the case across the Atlantic.

As for the down turn, by March of 2009, US house prices had fallen peak to trough by 32%  to levels last seen in August 2003. In the UK house prices had fallen by just 19% to levels last seen in June 2004.

As for the rate of change, by March, the rate of house price declines in the USA appeared to be “troughing” at 18%, comparative data for the UK suggests the nadir in the rate of change may have occurred in February as the Nationwide data hit 17.4%, the latest April data suggests prices fell by just 11.3% from 15.8% and 14.8% in March and April.

The much vaunted second derivatives are slowing but analysts in the UK anticipate further house price falls of around 12% in 2009 and a possible further 3% next year according to the Treasury survey of forecasts. This would present a total peak to trough decline of some 30%.

In the USA further falls of between 5% to 10% in the year appear to be a strong possibility which would take the overall rate of decline to almost 40%.

So for the UK housing market - it’s a bigger boom and a smaller bust of sorts!

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UK Economics - news and analysis : no politics, no dogma, no polemics, just facts

Nationwide house prices May - fall by 11.3% year on year

According to the latest data from Nationwide, house prices have risen for the second time in three months. The average house price increased by 1.2% to £154,016 from £151,861 but the annual rate of decline slowed to 11.3% in May from 15% in April.

“Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively.” said Martin Gahbauer, Nationwide's Chief Economist.

During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods. In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet.

Analysts still call for a further 10% fall in house prices in this cycle but the Nationwide data is beginning to mark a turn in the “second derivatives” as the rate of decline is clearly slowing. Prices have returned to the long term trend rate according to the Nationwide data. But a degree of overshooting is the norm in the cycle.

Nationwide House Prices May 2009

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Green shoots in the USA - can it really be over soon?

Green shoots in the USA can the recession really be  over soon. According to three key US indicators, the recession could be over by the second half of 2009.

1 The Conference Board Leading Economic Index™ for the U.S. Increased sharply in April.
The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.0 percent in April, following a 0.2 percent decline in March and a 0.5 percent decline in February.  Ken Goldstein, Economist at The Conference Board said: “The leading indicators suggest that while the recession will continue in the near term, the declines will be less intense. The question is how long before declines in activity give way to small increases. If the indicators continue on the current track, that point might be reached in the second half of the year.”

2 The Conference Board Consumer Confidence Index™ Increased Sharply in May.
The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index stands at 54.9 (1985=100), up from 40.8 in April.
“Consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us."

3 Finally according to the National Association of Business Economists.....
the end of the recession is in sight. The NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply and employment turning up in early 2010. NABE forecasters expect real GDP to rise at a subdued 1.2% rate in the second half then rallying into 2010.

Growth and recovery will be weak but growth it is. As for the UK, the old adage still applies, watch the USA and add six months or in this case, at least six months, the UK could see a recovery in the second quarter of 2010 if the green shoots don't wither.

US Conference Board - Economic Indicators

US Conference Board - Consumer Confidence Index

National Association of Business Economists outlook and forecasts

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GDP and inflation trends - confused about inflation join the club

Each month the Treasury produces the analysis of forty forecasting institutions for the British economy including estimates of twenty five parameters from house prices to oil prices including GDP and inflation. It is a great must read!

In terms of GDP growth for this year and next a reasonable consensus (of sorts) is emerging. Analysts anticipate a fall in GDP this year of between -2.5% and -4.5% with an average of around -3.8%. In 2010, the average forecast is for modest growth of around 0.4% within a range of -1.0% to 2.0%.

Chart 1 plots the scatter chart of the forecasts for this year and next. A reasonable pattern is discernible in the analysis with some correlation evident.

[The position of each forecasting institution is plotted. For example Morgan Stanley anticipates a fall in GDP of -2.5% this year and a recovery to growth of 1.7% next year.]

Chart 2 analyses the inflation forecasts CPI basis. The scatter chart demonstrates a diffuse pattern of projections with plots all over the chart. This year CPI is expected to be around 0.8% at the end of the year, with a range from -0.2% to 1.8%. Next year CPI forecasts range from 0.5% to 3.6% with an average of 1.4%. The experts are confused.

RPI is not shown but the forecasts are similarly diffuse providing a forecast range of 1.0% to -3.1% for 2009, with an average of -1.5%. In 2010, forecasts range from 0.1% to 4.4% with an average of 2.6%.

Analysing the May data, forecasters appear to have a better idea about GDP growth this year and next, than about inflation CPI or RPI based. If confused about inflation trends - then join the Treasury forecasting club.

HMT Forecasts for the UK economy : A comparison of independent forecasts is available from the Treasury web site. HMT monitors forty forecasting institutions in the UK analysing some twenty five forecast parameters from house prices to oil prices, GDP to inflation.

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Government borrowing soars to £8.5 billion in April

The Chancellor is off to a flying start in the race to hit the record £175 billion forecast for 2009/10. In April the public sector had a net borrowing requirement of £8.5 billion, £6.6 billion higher than in April 2008, when net borrowing was just £1.8 billion.
 
At the end of April net debt was £754.0 billion, equivalent to 53.2 per cent of gross domestic product. This compares to £618.7 billion (42.9 per cent) as at the end of April 2008. 
 
The most recent figures for public sector net debt (excluding financial sector intervention) are for March 2009, when net debt was £609.0 billion (42.9 per cent of GDP).

One of the great euphemisms in economics is the concept of the “ automatic stabilisers”. It is difficult to think of anything more destabilising than a dramatic swing in government debt, a visit from the IMF and a ratings outlook  downgrade from Standard and Poors.

Revenues were hit by the cyclical falls in Income Tax, Corporation Tax and NIC contributions. VAT was similarly hit, compounded by the rate reduction to 15%. Expenditure was affected by the increase in social security expenditure plus a degree of overrun in departmental expenditures compared to prior year.

Income tax revenues were down by 15%, corporation tax by 27%, and VAT revenues were down by 22%. Total tax (HMRC) receipts were down by just over £7bn of which £1.2 bn is accounted for by the ill judged VAT giveaway.

Expenditure was boosted by some £2bn of which half was Social security related. The cyclical swings therefore amount to some £8bn. Extrapolate over the year, this would add some £100 billion to the last years deficit of £87 billion.

Include this contribution in the National Debt, plus the prospect of including the debts of RBS and Lloyds and more than one A could be at risk in the triple A rating. The good news, given a recovery in the world economy and in the UK, the swing in revenue fortunes could be as dramatic.

ONS - Public Sector Finances April 2009
 
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S & P casts a shadow - will the UK lose the AAA rating?

Standard & Poor's Ratings Services today said it had revised its outlook on the United Kingdom to negative from stable. However, the 'AAA' long-term sovereign credit rating was affirmed for now  The UK is on notice to improve the prospects for public finances within the next two years as the agency casts a shadow over the Treasury forecasts and plans.

No need to panic just yet. Rating outlooks assess the potential direction of a rating, typically over a period of up to two years. Like an early warning notice. An outlook does not necessarily precede a rating change. In fact a negative rating is followed by a down grade in about one third of cases.

S & P are concerned about the rapid decline in the public sector finances, the prospects for growth and recovery, the financial commitment to the banking sector and the prospects of a debt to GDP ratio approaching 100% in the medium term. Such a high debt to GDP ratio would be incompatible with a AAA rating.

The rating could be returned to “stable” if the economic outlook improves or a new administration following the election were to produce more hard line spending cuts and or enhanced revenue plans for the economy. S & P along with the IMF consider there is a real need to put the debt to GDP ratio on a “secure downward trajectory over the medium term”.

Assuming as the Chancellor says “ we can get through this” and the economy does recover, the reversal in public sector finances will be pretty dramatic. The prospects for profits and debt release from the banking sector assets are significant. Yet together this may well not be enough without some surgery on spending and additional revenue tasking in addition to the planned VAT reversal.

If the recovery in the world economy does not materialise, there could be many more Triple A ratings in question. Since debt is universal, the ratings are relative and the UK as a “wealthy diversified economy” may yet escape the down grade.

Standard and Poors UK outlook revised to negative on deteriorating public finances

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UK Retail sales up 2.6% in April

According to the latest ONS data, The seasonally-adjusted volume of retail sales in April was 2.6 per cent higher than in April 2008. 
 
Food stores volumes rose by 1.5 per cent, the largest increase since May 2008. Non-food stores volume increased by 2.8 per cent. Within non-food stores, the largest increase was for textile, clothing and footwear stores at 11.9 per cent, followed by non-specialised stores (eg department stores) which increased by 6.0 per cent. Household goods stores fell by 8.0 per cent. Non-store retailing and repair increased by 9.1 per cent.

Internet sales were up by 14% compared to April 2008 accounting for 3.3% of total retail sales.

According to the British Retail Consortium like for like sales increased by 6.3% in the month. British Retail Consortium Director General Stephen Robertson said: "This official data confirms our own findings that April's retail sales were well up on a year ago. Our Retail Sales Monitor showed this growth was driven by food, clothing and footwear sales, which is the same picture painted by the ONS.

"But it's too early to say whether we've actually turned the corner towards sustained improvement. We had a sunny Easter this year which fell in April. That's the key reason why overall sales were up compared with last year when Easter was in March and the weather was miserable.”

The ONS figures have been published under changed methodology. The changes include introducing ‘chain linking’ and the use of commodity indices from the Consumer Prices Index rather than the Retail Prices Index for the calculation of RSI industry deflators.

The effect of the changes is to restate the volumes for 2008. Under the old methodology, the average monthly volumes for 2008 were 3.6% compared to 2.7% with the revised chain linked values used. In the first three months of 2009, volumes averaged 0.8% compared to 1.9% under the old series.

ONS Retail Sales April
BRC - ONS Sales figures paint same picture.

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Chancellor Darling - it will all be over by Christmas

According to the latest minutes of the Monetary Policy Committee released today,
1 The outlook for economic growth was unusually uncertain.  [30]
2 The strength and sustainability of the recovery was uncertain. [31]
3 The outlook for inflation also remained extremely uncertain. [32]
4 The impact of monetary policy on nominal spending was more difficult to judge than normal. [31]

Yet today in an interview with the Times,  Alistair Darling has predicted the recession will be over by Christmas, brushing aside doubts that his Budget forecasts are over optimistic. According to Gary Duncan, Economics Editor of the Times, the Chancellor defied a gloomy assessment of Britain’s recovery prospects from the IMF, the Bank of England and others.

“I am not going to change my forecasts,” he said. “I remain confident that we will see a return to growth at the turn of the year.”

The Bank and the Governor have become particularly circumspect of late but the minutes are a little more positive than the Inflation Report Presentation. The MPC believe, there has been a considerable stimulus from the easing in monetary and fiscal policy at home and abroad, together with the substantial depreciation in sterling, past falls in commodity prices, and actions taken by authorities internationally to bolster the availability of credit. The stimulus, when combined with a turnaround in the stock cycle, should lead to a recovery, albeit a relatively slow recovery in economic growth over the forecast period.

Slow recovery or it will all be over by the end of the year. The Chancellor stated :  “I remain confident that we will come through this." and by Christmas.

Minutes of the Monetary Policy Committee
The Times : Alistair Darling predicts UK recession will be over by Christmas.
Bank of England Inflation Report and the known unkowns
Bank of England Inflation Report - the worst is not over yet

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UK Inflation April - CPI service sector inflation 3.6%

CPI inflation slowed to 2.3% in April, from 2.9%.  RPIX inflation slowed to 1.7 per cent from 2.2 per cent. Deflation headlines are dominated by the RPI inflation number where the RPI headline rate has fallen to -1.2%. The largest downward contribution to the change in the RPI annual rate came from housing costs as a result of interest rate changes last year.

Are we heading for a prolonged period of deflation? The key number to watch is service sector inflation - CPI basis. Service sector inflation slowed from 3.9% to 3.6%. still well above target rate. The CPI headline fall to 2.3% from 2.9% was flattered by a fall in goods inflation from 2.0% to 1.2%.

Since 1995, CPI has averaged 1.9% in line with target. During this prolonged period, service sector inflation has averaged 3.7% and goods inflation has averaged just 0.6%. Volatility in the headline rate is derived from goods inflation, services inflation accounting for almost half the weighting, has remained consistently well above the target rate.

CPI based, clothing and footwear prices fell once again by 8% producing the largest move to the downside in the CPI level. Food prices remained high at 8.6%. Housing utilities, water, gas, and other fuels, were up by 6%. Education costs were up once again by almost 9%. Furniture and household goods were higher by 3.5% and restaurants and hotels were higher by 2.5%.

Barring a total collapse in earnings, service sector inflation will prevent a fall in the CPI rate. much below the target rate. The minimum wage round with an increase of just over 1% will assist the deflationary process.

According to the Bank of England Inflation report, CPI inflation is expected to fall towards, then below the target this year but deflation in the CPI index is not projected. By the final quarter the target rate may be as low as 0.5% according to the Bank but the rate will increase towards 1.5% by the end of 2010. CPI service sector inflation is the key index to watch.

ONS Consumer Price Indices  April  2009

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Rightmove Housing - asking prices up - realised prices down

New sellers are pushing up asking prices by 2.4%, driven by a mixture of ambition, optimism and necessity according to Rightmove the UK’s largest property web site. Compared to prior year prices are down by 6.2% and 7.4% in April. This is the largest May rise Rightmove has measured since 2003 but the increase does not mark any recovery in the housing market as Rightmove is quick to stress.

The organisation reported 61,000 new sellers in the month compared to 135,000 in May last year a reduction of 55% and the lowest number of new properties coming to market in May since 2003.
 
Miles Shipside, commercial director at Rightmove comments: “The long term worry is that the supply side of the housing market is now compromised for several years to come. We are now seeing the lowest number of new sellers of second hand homes for the month of May since 2003. Many people who might have wanted to take advantage of the spring selling season to trade up will be victims of equity immobility.”

New stock is in short supply but the existing inventory of unsold stock remains high, dropping from 72 to 71 per estate agency branch. This points to a high level of effectively unsaleable stock.

Lenders are short of funds and more sensitive to risk, and are denying movers access to their better mortgage deals unless there is a substantial deposit, often 25% plus.

Shipside comments: “At present it looks like the market is bumping along the bottom in terms of transactions, with limited supply preventing further price falls. This is a welcome element of stability though being on one’s knees, whilst stable, is not a desirable position for any length of time. With deals being done at prices 25% below the peak of the 2007 boom, it’s not surprising it’s taking some sellers a long time and some hefty price slashes to adjust to the new 2009 price floor.”

Rightmove House Price Index May

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