Both consumer and house price inflation are on the march again

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by Shaun Richards

Sometimes one has to have a wry smile as events give a different perspective on what seemed likely only the day before. Only yesterday we noted what was a fading of the mortgage numbers in the UK with the associated implication that as we look ahead the steam will come out of the rises in house prices. The only undercut to this was the way that banks had reduced the typical mortgage interest-rate by 0.12% to 1.83%. However according to the Nationwide we were still playing “the heat is on” by Glenn Frey.

Annual house price growth increased to 11% in August, from 10.5% in July. Prices rose 2.1% in month-on-month terms, after taking account of seasonal effects. House prices are now around 13% higher than when the pandemic began.

I had another wry smile at the numbers when I noted the 2.1% monthly rise. After all those who follow the inflation measure the Bank of England targets are in an alternative universe.

The Consumer Prices Index (CPI) rose by 2.0% in the 12 months to July 2021, down from 2.5% to June; on a monthly basis, CPI was unchanged in July 2021, compared with a rise of 0.4% in July 2020.

So house prices have risen by more in one month than we were just told inflation has risen in a year! First-time buyers have good reason to be very unhappy with the way that the targeted measure ignores owner-occupied housing. They are told there is little inflation but find that houses are increasingly unaffordable.

There was a technical feature which added some spice to the mix.

The bounce back in August is surprising because it seemed more likely that the tapering of stamp duty relief in England at the end of June would take some of the heat out of the market. Moreover, the monthly price increase was substantial – at 2.1%, it was the second largest monthly gain in 15 years (after the 2.3% monthly rise recorded in April this year).

Can something boost prices via its introduction but not have the reverse effect when it fades out? So far maybe so. Of course care is needed as we need more time for a proper evaluation due to time lags in the system. But for now the fires burned even brighter than what we have become used to.

Indeed the next section had a worrying implication/suggestion that it is first-time buyers driving prices higher.

The strength may reflect strong demand from those buying a property priced between £125,000 and £250,000 who are looking to take advantage of the stamp duty relief in place until the end of September, though the maximum savings are substantially lower (£2,500 compared to a maximum saving of £15,000 on a property valued at £500,000 before the stamp duty relief in England tapered).

You might think that with prices at these levels ( the average is just under £249,000 according to the Nationwide) that sellers would be easy to find, but apparently not.

Lack of supply is also likely to be a key factor behind August’s price increase, with estate agents reporting low numbers of properties on their books.

Perhaps Yazz is playing again.

The only way is up, baby, for you and me now
The only way is up, baby, for you and me now

Looking Ahead

We are told this by the Nationwide.

Underlying demand is likely to remain solid in the near term. Consumer confidence has rebounded in recent months while borrowing costs remain low. This, combined with the lack of supply on the market, suggests continued support for house prices.

I would disagree about consumer confidence after the latest Retail Sales figures which showed a drop. Also the latest Gfk report last week suggested a move from larger purchases towards saving. That does fit with the Bank of England monetary data which showed a £7.1 billion rise in bank deposits in July.

There are, however, two particular concerns.

Activity will almost inevitably soften for a period after the stamp duty holiday expires at the end of September, given the incentive for people to bring forward their purchases to avoid the additional tax.

Moreover, underlying demand is likely to soften around the turn of the year if unemployment rises, as most analysts expect, when government support schemes wind down.

Let us move on noting that as so often happens an expected downturn for house prices does not take place.

The Euro area

Here the news came from the headline inflation measure yesterday.

Euro area annual inflation is expected to be 3.0% in August 2021, up from 2.2% in July according to a flash
estimate from Eurostat, the statistical office of the European Union.

Let me now present a typical view on this.

FRANKFURT, Aug 31 (Reuters) – Euro zone inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank’s benign view on price growth and its commitment to look past what it deems a temporary increase.

I have skipped the bit where expectations were wrong again as we were expecting rises. There is a significance in the big figure now being 3. Partly due to human psychology but also due to the fact that if inflation was 1% below the ECB target we all know it would act.

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Also some new areas picked up the pace.

followed by non-energy industrial goods (2.7%, compared with 0.7% in July),……… and services (1.1%, compared with 0.9% in July)

These  impact in two ways. Firstly central bankers love to cherry pick the numbers and that is getting harder to do with even services inflation picking up albeit from low levels. Next the move is looking ever more broad based. I can add to that with a couple of officially non-core examples.

energy is expected to have the highest annual rate in August
(15.4%, compared with 14.3% in July)……..food, alcohol & tobacco (2.0%, compared with 1.6% in July)

Now let me link all of this to today’s topic which is that the measure above ignores owner-occupied housing inflation and if we put it in we get to 3.3%. That if we look at the pattern of inflation in the Euro area is a big deal. The only weakness is that the house price numbers are from the first quarter of this year and are therefore behind the times.

Comment

The last 24 hours have brought a couple of significant pieces of news on the inflation front. It would appear that the UK housing market has kept an upward trajectory for house prices even when some of the air was taken out of the ball by the Stamp Duty effect fading. Indeed according to the Nationwide things accelerated. That will have real world impacts when they were already recording  a price to earnings record of 6.6 for the second quarter ( 2007 was 6.4).

If we now switch to the Euro area we have seen an official inflation measure surge which would be even worse if they made any proper effort to measure owner-occupied housing. They keep kicking that particular can even after admitting it can be as much as a third of consumers expenditure.

Some of the factors will wash out of the numbers as presumably the changes to Stamp Duty will impact UK house prices in time and the effect of the German VAT changes will end in January. Also Belgium will not see another 3% rise in its annual rate for some time. But other areas are rising too.

An ECB policymaker has just explained the mess they are in.

ECB’s Stournaras notes that the EZ inflation jump is temporary and the ECB should be cautious; adds that wages are not yet following the course of inflation. ( @PriapusIQ )

So he has improved the economy by making workers poorer. How does that work please?

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