Bubbles Everywhere: BoE’s Mark Carney: UK housing market approaching “warp speed”

A few months back, a group of UK realtors approached the Bank of England (BoE) and asked the latter to put a brake on what they see as a simmering housing bubble. 

Today, BoE governor Mark Carney warns of UK’s housing market approaching “warp speed”.

From the Bloomberg: (bold mine)

Bank of England Governor Mark Carney may be struggling to prevent Britain’s housing market from reaching what he calls “warp speed.”

About two-thirds of 27 economists in a Bloomberg News survey said property in the U.K. is at risk of overheating. The survey, published today, also showed that the outlook for the economy has improved, with forecasts for growth this quarter raised to 0.7 percent from 0.6 percent last month.

Carney has already taken a first tilt at the market, ending some incentives on mortgage lending in a program the central bank started last year to boost credit. House prices rose to a record in November, Acadametrics said today, while home-loan approvals and sales are increasing, bolstered by a strengthening economy, government incentives and record-low interest rates…

Carney has justified his decision to revamp the Funding for Lending Scheme by saying that taking small steps now will curtail the need for bigger measures later on.

“There’s a history of things shifting in the U.K. and the housing market moving from stall speed to warp speed and underwriting standards slipping,” he said in New York on Dec. 9. Developments “merit vigilance but not panic,” he said.

Acadametrics and LSL Property Services said today house prices rose 0.6 percent last month as transactions exceeded 77,000, the most for a November since 2007.

More on record prices from another related Bloomberg article: (bold mine)

U.K. house prices rose to a record in November as strengthening demand pushed values higher in all regions of England and Wales, Acadametrics said.

Values increased 0.6 percent from October to an average 238,839 pounds ($390,900), the real-estate researcher and LSL Property Services Plc (LSL) said in a report today. Prices reached an all-time high in London and parts of the southeast as average values climbed 4.9 percent from a year ago. In London, prices surged an annual 9.2 percent in the quarter through November.

The source of funding for UK’s corporate sector comes mainly from bond issuance and banking loans…

...where the distribution of loans by industry from financial institutions and from the BBA panel of lenders have mostly been in real estate, hotel and restaurants and construction based on BoE data.

The above distribution closely resembles bank loan distribution in the Philippines.

Meanwhile residential mortgages have likewise turned around…

…as consumers go on a borrowing spree.

And its not just in housing.

When the BoE began its second wave of QE from late 2011 until 2012…

…this coincided with the bullmarket in UK’s equity bellwether, the FTSE 100.

What would likely put a halt on a housing and stock market approaching “warp speed”? Again aside from bubbles collapsing from its own weight, the likely answer will be higher interest rates. 

Yields of UK’s 10 year sovereign bonds appear to have gotten a ‘second wind’  and seems headed higher. 

Again the bond vigilantes lurks behind the shadows and remains a key threat to ubiquitous bubbles in the global financial markets, including those in the UK.

European Economic Recovery? UK Industrial Production Unexpectedly Drops

Again we see another example of the difference between what people say and what people actually do. 

Earlier, UK’s economy has been touted as emerging “strongly from the deep recession of recent years” , due to a big jump on the purchasing managers index (PMI) which rose from 54.8 in July to 57.2 August – “its highest level in two and a half years” (the Guardian).

The reality turns out different, contra consensus expectations UK’s industrial production fell "most in almost a year"

From Bloomberg:

U.K. industrial production unexpectedly fell in August by the most in almost a year, casting doubt on the strength of the third-quarter recovery.

Industrial output dropped 1.1 percent from July, when it gained 0.1 percent, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was for an increase of 0.4 percent. Factories cut output by 1.2 percent, with pharmaceuticals contributing most to the decline.

Whether in the Eurozone or Japan, the establishment’s spin machine eventually faces wrenching reality

UK Realtors ask Bank of England to Put a Brake on Bubbles

Below is an interesting report stating that in the United Kingdom, beneficiaries of the indirect asset transfer via zero bound rates have been appealing to authorities to put a dampener on an alleged housing bubble.

From the Financial Times (hat tip zero hedge) [bold mine]

Estate agents and surveyors have become so concerned about the dangers of another unsustainable housing boom that their trade body is urging the Bank of England to limit national house price growth to 5 per cent a year…

“The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases,” said Joshua Miller, senior economist at Rics.

“This cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.”

The Rics intervention comes as data this week have reinforced a sense of recovery in the UK housing market and sparked warnings that a new bubble could be forming.

Average house prices hit another record high last month, according to figures published on Friday by the LSL/Acadametrics House Price Index, rising 3.2 per cent to £233,776 over the year to August.

It is important to point out how rare it is for beneficiaries of current policies admit to the risks of an inflating bubble. And that their call to contain bubbles signify as Posttraumatic stress disorder (PTSD) or stigma from the previous unpleasant experience expressed through the fear of another bubble bust.

As previously pointed out, a parallel universe exists in UK where asset prices continue to surge even as the economy struggles.

Asset booms in UK has led to a quasi-stagflation where statistical inflation rates have been higher than statistical economic growth rates whether annualized or by quarter.

Yet like in China or elsewhere, once the inflation genie has been let out of the proverbial lamp, hardly any regulatory caps have been successful in taming of bubbles. 

Besides bubbles have been convenient tools to generate statistical growth that embellishes the image of political authorities.

And proof of this is that despite BoE governor Mark Carney’s promise to keep interest rates low via “forward guidance” to supposedly bolster growth, which has rightly been met by skepticism by some of the Members of the Parliament (MP), yields of UK government bonds suggests that the halcyon days in the real estate and the stock markets appear to have been numbered—with or without the BoE’s action.

If the current trends of the bond markets persist, then eventually the bond vigilantes will force the hands of (global) central banks to officially hike interest rates which places all malinvestments forged via a regime of zero bound rates under intense pressure. 

By then, UK realtors will have their demands met, but sad to say that they are likely to endure anxiety relapse from another terrifying episode of a bubble bust. 

Why Bank of England’s Small Business Loans Program May Fail

Talk about central banking wizardry. 

The Bank of England (BoE) will extend lending programs to small and business enterprises for another year even if such measure has initially failed.

From Bloomberg:

The Bank of England will extend by one year its plan to provide cheap loans to companies and consumers and make credit available for small companies, enhancing a nine-month-old program to aid the economy.

The Funding for Lending Scheme will now last until January 2015, and will make lending to small companies more attractive and open to non-bank lenders, the BOE and the Treasury said in London today. The government says its program has lowered borrowing costs by about 100 basis points and provided 13.8 billion pounds ($21 billion) between its creation and December

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” Chancellor of the Exchequer George Osborne said in an e-mailed statement. “This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Osborne is expanding the program on the eve of economic statistics that may show Britain’s economy was close to an unprecedented triple dip in the first quarter. The announcement also precedes an audit of the U.K. by the International Monetary Fund, whose delegation visits London next month after the fund said Osborne should ease his austerity plan to aid growth.

Today’s extension to the FLS will allow banks to borrow 10 pounds next year for every 1 pound they lend to small companies in 2013, the Treasury said. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. Banks can borrow 1 pound for every pound loaned with the rest of the program.

The premise here is that access to finance has been the key barrier besetting the Small and Medium scale businesses.

While it has been true that UK’s overleveraged economy has forced households and firms to pay down debts, that’s only part of the story.

The main obstacle to small and medium scale businesses has been the domestic economy and domestic demand, this is according to the latest survey by the Federation of Small Businesses (FSB).

John Walker, National Chairman of FSB says another factor influencing the weak economy and demand has been inflation

Though our members are feeling more optimistic, the outlook remains challenging with domestic demand weak. Consumer spending has been subdued by inflation, eroding disposable incomes, with inflation expected to remain above the target level in 2013. In this quarter, members report that three cost elements – fuel costs, input prices and utility bills – are increasing their overheads and while down from 12 months ago, the last three quarters of 2012 showed these cost pressures persisting.

So this should be a great example of how inflationism distorts the economic calculation that leads to a stagnating economy amidst elevated inflation or stagflation

The Bank of England has basically increased their balance sheet by almost three times since 2008. 

Over the same period, UK’s statistical consumer price inflation rate remains lofty despite the deleveraging by households and firms. 

Yet as pointed out by the article, UK’s economy is facing the risks of a triple dip recession. (charts from tradingeconomics.com)

In short, all money printing by the BoE has failed to deliver what has been promised—a recovery.

Instead what all the money printing has done has been to keep the bubble in the property sector afloat. 

While UK’s average housing prices have been down from 2007, they remain above the pre-bubble bust levels. This goes the same with housing pe ratios (chart from Nationwide.co.uk)

Another area which BoE’s QE has positively influenced has been the stock market.

UK’s FTSE 100 has been on the rise since 2011 (blue trend line), even as the economy fumbled from one recession to another. Another wonderful example of a parallel universe. The FTSE has been up 8.6% year to date as of yesterday’s close. (chart from Bloomberg)

In other words, all cheap credit and money has done has been to incentivize speculation (asset bubbles) at the expense of the productive sector of the economy. 

Why invest in businesses when the costs of operating one have been unpredictable and when financial markets, especially backed by an implicit Bank of England Put, would give a better yield?

Since the inception of the FLS, the BoE’s recourse to cheap credit has also failed to boost lending to the SMEs.

What this means is that the BoE’s FLS credit program hardly addresses the roots of the problems, which hasn’t been about credit. The BoE fails to see that her inflationist policies has functioned as one of the principal obstacles to economic recovery.

Yet like typical political authorities, who wants to be seen as “doing something”, the expedient action has been to do the same thing over and over again and expecting different results. Unfortunately, the outcome will likely go against their wishful expectations. 

Nascent Signs of Stagflation?

UK may be the first country to manifest symptoms of stagflation or “a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation” (investopedia.com).

chart from tradingeconomics.com

This from Businessweek-Bloomberg

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest weather in a century in December hampered services and retailing.

Gross domestic product fell 0.5 percent in the three months through December after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Economists forecast a 0.5 percent gain, based on the median of 33 predictions in a Bloomberg news survey. Growth would have been “flattish” in the quarter without the impact of the weather, the statistics office said.

The U.K. recovery is losing momentum even before Prime Minister David Cameron’s government steps up its fiscal squeeze to cut the budget deficit. While the Bank of England left its key interest rate on hold this month to support the recovery, inflation has soared to an eight-month high and policy maker Andrew Sentance said late yesterday the “time has come to act” as price pressures intensify.

So economic contraction, which adds to unemployment amidst high inflation rates are signs of stagflation- a tradeoff which traditional Keynesian models have not incorporated.

Other developed economies are likewise seeing signs of emergent inflation

From the Economist:

Recently, however, rich-country inflation has also started creeping up: in December Britain’s consumer-price index hit 3.7%, while euro-zone inflation also rose above the ECB's target. Much of the blame has been put on the increase in commodity prices. But the impact on consumers differs widely between countries. A larger share of income is spent on food in poorer countries such as China (33%) and India (46%), so the rise in global food prices is the main driver of inflation there. By contrast, pricier energy is a bigger factor in the rich world, although it forms a relatively small component of consumer spending.

Given the near unanimity of policy directions by global central bankers, it is not deflation that we should worry about but stag- or super-inflation.