Central banks plan to ride to the rescue of house prices one more time

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by Shaun Richards

It is good to be ahead of the pack as I note that this morning the Resolution Foundation has caught up with one of my main themes.

Housing costs have put increasing pressure on living standards for all generations alive today, compared to predecessors at the same age. Housingcost-to-income ratios fell faster (by 1 percentage point) for families headed by
under-30s than for older family units in the year to 2017-18, but this does little to alter the long-term picture. At age 30 housing costs were equivalent to 24 per cent of income for millennials born in the early 1980s, and 21 per cent for
members of generation X born in the early 1970s. That compares to 10 per cent at the same age for members of the silent generation born in the early 1940s.

As you can see this has been a long-running saga where housing in the UK has got more expensive. Yet our inflation numbers have missed much of this. This is for two reasons. The first is that we switched in 2003 to a measure called CPI ( Consumer Price Index) which excludes owner-occupied housing costs and that is what the Bank of England targets. So if we compare the latest situation as we were old yesterday that the official UK House Price Index in April was at 120.1 with for example the 67.8 of April 2003 you can see the danger of ignoring this area as it does.

In some ways more disturbing is that way that our official statisticians claim that such housing costs are now included when in fact they use imputed rental numbers in the CPIH measure. If there is a home owner out there who acts as if they pay themselves rent then you are fine, but the rest of us are not. Actually on a personal basis I fall down on the issue of even knowing how much rent my flat would get.

It gets better in that there are a lot of doubts about the rental series that the numbers are imputed from. These start with concerns that the balance of new to old rents is wrong leading to the number being around 1% too low. Next comes the issue that houses which are bought for ownership may well not be similar to ones which are rented. Finally there is the fact that the Office for National Statistics does not have sight of the actual numbers as it relies on data collected by others.

This is something which the Resolution Foundation returns to.

Younger cohorts are more likely to live in overcrowded homes: between 1994-96 and 2016-18, the share of family units headed by 18-29 year olds in overcrowded
homes increased by almost one-third (from below 8 per cent to above 10 per cent). Younger cohorts spend longer commuting too.

I have highlighted this because it suggests a problem which we have thought is taking place but is hard to get concrete numbers on. This is the issue of a lowering of the quality of housing. We may well be paying more for less meaning that the actual rate of inflation has been higher than we get from just looking at the price indices.

This has consequences.

Our spotlight analysis focuses on the fact that changes in housing costs could be having a more wide-ranging effect on living standards too.

That seems to be the written equivalent of mealy mouthed to me.

Has all the “Help” actually helped?

Maybe a little but as you can see the extraordinary efforts I have documented over the years on here have put only a minor dent in the trend.

While the latest evidence points towards a bottoming out of this decline – family units headed by 18-29 year olds experienced an increase in ownership
rates from 7.9 per cent in 2016 to 9.2 per cent in 2018 – the fundamentals of high house prices and deposit requirements remain a significant barrier to

So good work from the Resolution Foundation although as champions of the CPIH inflation measure they have stood on a land mine here in my opinion.

More! More! More!

The issues raised above are on my mind because as the song lyrics above from Andrea True Connection hint the world’s central banks are already riding to the rescue of housing markets and house prices. We have seen rate cuts recently from the Reserve Banks of India and Australia with the latter especially suggesting more is to come. Then yesterday evening there was the US Federal Reserve.

“Overall, our policy discussion focused on the appropriate response to the uncertain environment,” he said. “Many participants believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”……….“Many participants now see the case for somewhat more accommodative policy has strengthened,”  ( Federal Reserve Chair Jerome Powell via CNBC )

This meant that the market for a rate cut in July went straight to 100% with the only debate being whether it would be a quarter or a half point. So those with variable-rate mortgages can expect better news. Added to that we saw further strong rallies in bond markets with for example this morning the US ten-year Treasury Note yield dipping below 2%. Regular readers will be aware I have been writing for a while that I expect the cost of fixed-rate mortgages to fall and the falls just get larger.

If we switch to the Euro area it was only on Monday that we saw ECB President Mario Draghi move the goal posts on monetary policy. This morning a contender for his job post October has joined in. From Reuters.

“We in the Governing Council are ready to act as appropriate unless there is improvement in the economic conditions,” Rehn told a conference in Brussels.

Asked whether the ECB should proceed with rate cuts or resuming asset purchases, Rehn said: “The whole range of instruments is on the table.”

He is not alone as @DeltaOne reports.


Apologies for the capitals which are a regular theme of that twitter feed.

If there is going to be a coordinated easing party from the world’s main central banks then the Bank of Japan has its sake ready at body temperature.

BOJ Governor Kuroda: We Will Not Hesitate To Ease Further If Momentum Towards The Price Target Is Lost ( @LiveSquawk )

Although as they are not especially keen on negative interest-rates and are already buying assets like they are powered up pac-men and women their options are not so obvious.


This week has seen a turbocharger added to the central banking engine. It is also true that one of the drivers of this is asset prices albeit that President Trump concentrates on the stock market. But it increasingly looks that the central banking cavalry will ride to the rescue of house prices yet again. However there is a catch in that as we approach and then pass 0% for official interest-rates the responsiveness of mortgage-rates has fallen. So the cavalry could yet end up like General Custer.

One game changer would be if banks prove willing to pass on negative deposit rates to the retail customer. But even without that we seem set to see more of what took place in Denmark a few weeks ago when mortgage bonds moved into negative yield territory. The central bankers seem to be placing their tanks on this lawn and have added loudspeakers blaring out Whitesnake.

And here I go again on my own
Goin’ down the only road I’ve ever known
Like a drifter, I was born to walk alone
And I’ve made up my mind
I ain’t wasting no more time

Of course in the UK we see that the Bank of England has been wrong-footed by this change as it is still promising interest-rate increases. But I expect it will not take the unreliable boyfriend long to do another 180 degree turn.

The Investing Channel


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