Today has given us an opportunity to bring together several of our ongoing theme at once. Let me open with news that will be announced to smiles at the Bank of England morning meeting.
“Average houses prices rose again in December, stretching the current run of continuous gains to six months.
However, the monthly rise of 0.2% was the lowest seen during this period and significantly down on the 1.0% increase in November. The average house price was therefore little changed, but nonetheless still reached a fresh record of £253,374.” ( Halifax)
The smiles will have then turned to cheers and only Covid-19 social distancing will have stopped a round of high fives.
“All this left average prices sitting some 6.0% higher at the end of 2020 when compared to December 2019, a notably
strong performance given the anticipated impact of the pandemic earlier in the year. Whilst the annual rate of inflation did fall compared to November (+7.6%) to stand at its lowest level since August, it should be noted that this also
reflects a particularly strong period for house prices towards the end of 2019 as political uncertainty at that time began to ease”
With the rather parlous state of the economy this is really rather extraordinary but seen through the eyes of our central bankers this is quite a triumph. In their circle the numbers from Italy ( 1% annual house prices growth) we looked at yesterday will be seen as a disaster. Indeed PhD’s will be instructed to explain how the Bank of England monetary easing in March boosted the change in 2020 observed below.
“2020 was a tale of two distinct halves for the housing market. Following a strong start, the first half was dominated by the restrictions on movement due to COVID-19, and prices were subsequently down 0.5% at mid-year as the market effectively ground to a halt. However, when the market reopened, prices soared as a result of pent-up demand, a desire amongst buyers for greater space and the time-limited incentive of the stamp duty holiday.”
Indeed some started early back in June and if you want your research sponsored by the Bank of England this this the way to do it.
The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled
So confident are they after displaying such a number that they are willing to countenance a central banking heresy.
But just as the Governor’s temper is tested they save the day by pointing out the contribution of other monetary policy measures.
Mortgage debt expanded rapidly as house prices rose in the UK before the crisis, so this could be an important channel for the UK.
This fits neatly with the £128 billion of the Term Funding Scheme which has pumped up the quantity of mortgage debt banks can offer without any need to attract any of those pesky depositors and savers. There is an irony here as, of course, the money supply numbers I looked at on Monday show there has been a surge in deposits as savings have soared post the Covid-19 pandemic.
I now wish to switch to a rather revealing speech by Andrew Hauser of the Bank of England yesterday. He opens by describing a scene which for a modern central banker sends a chill down the spine.
Increasingly we look to financial markets, rather than banks, to care for our savings or provide credit.
Millions save via pension, investment or exchange traded instruments……… And firms, large and small, borrow from capital markets or non-bank lenders.
Taken together, fully half of all financial assets are now held outside the banking system.
I guess we are reminding ourselves that a central bank has bank in its name. Because when you look at the liquidity mismatches which banking relies on this is quite a cheek.
Some of that reflects vulnerabilities in business models and practices of specific market participants: including liquidity mismatch in funds; leveraged and trend-following investment strategies; or insufficiently forward-looking margining practices.
Does “trend-following investment strategies” apply when the banks all piled into ( and then left with singed fingers) estate agents? Or when they lacked capital when the credit crunch hit as that is another form of margin? Anyway I am sure you have got the idea.
The issue is highlighted as we note the reference to the standard for this sort of thing.
And the canonical description of how to
achieve that is given by Walter Bagehot’s description of the ‘Lender of Last Resort’ (LOLR), which
(in essence) recommends stemming financial panics by lending freely, to sound institutions, against good
collateral, and at rates materially higher than those prevailing in normal conditions
It opens well as the Bank of England did splash the cash but at a time when the US Federal Reserve was liberally applying US Dollar swaps then “sound institutions” had a hollow ring in some cases and what is “good collateral” these days? I could write a whole article on that alone! For now let’s put that under Hmmmmmmm. Then the operations involving a Bank Rate cut, a surge in QE and the TFS were designed to give us rates materially LOWER than in normal conditions. You do not need to take my word for it as we get a confession later in the speech.
The Bank of England provided extra liquidity to banks through a wide range of facilities, at
favourable rates, in the early stages of the March crisis.
Next we get to the crux of what we might call the Hauser matter.
‘Market Maker of Last Resort’ (MMLR). Buiter
and Sibert believed that central banks, acting as MMLR, should be ready to tackle dysfunction in securities
markets relevant to monetary or financial stability, by making two way prices to buy and sell those securities,
or lending against them.
You can figure where that is going,especially if you have followed the mission creep of central banks in the credit crunch era. It is hard not to laugh as the Bank of England purchases of corporate bonds is used as an example because they were an example of a dictum used in the early stages of the Desert War ( World War Two) “order, counter order, disorder”
In case you had not figured out where we are being led.
The review of the Bank’s liquidity framework carried out by Bill Winters in 2012 recommended formalising the
Bank’s approach to MMLR, setting out public principles under which future interventions might occur……
But in the event, the Bank –
in common with other central banks – chose to say relatively little in public.
I wish now to give an example of the muddled thinking going on here. Let me start with this from the speech.
Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.
As even in these inflated times those are large numbers they have intervened on a grand scale. But apparently they do not influence the price at all.
Purchases typically took place at prevailing market prices
It gets worse.
While not charging an ‘insurance premium’ to market participants for an extended period may be understandable in a severe unexpected pandemic,
Actually they did exactly the reverse they actually paid an “insurance premium” to sellers of government bonds. What I mean by that is that they drove the price of them to record highs. For example they bought the UK’s 2068 bond in the 230s which is extraordinary for a relatively recent bond. This issue of the extraordinarily high prices paid gets ignored in the debate because these days the concentration is usually on yields. For those who prefer that the signal is that up to around the 6 year maturity the UK has negative bond yields and is paid to borrow.
Let me give you another example of what is at best muddled thinking.
driving term repo rates and government bond yields sharply higher.
Okay so the UK benchmark ten-year yield went to around 0.8% which in another perspective is historically extraordinarily low. Central banks intervened on a massive scale and it fell to 0.08% but apparently that is a “market price”
No the Bank of England set the price for UK bonds via the large scale of its purchases so could it set policy for house prices? Well this year I think we are about to find out.