There is no bigger purchase than a house. Ask most individuals who have at some point in their life purchased a house and they will tell you about the considerable time they devoted to making the decision to purchase. It’s not like rushing to a supermarket and purchasing a kilo of sugar. The decision to purchase a property is not taken lightly: the mood music has to be right. Consumer confidence is therefore an important ingredient for an active housing market. The latest mortgage approval data from the Bank of England suggest the music is not right!
April’s mortgage approval numbers continue to demonstrate the on-going fragility of the UK housing market and, in turn, of British households. April saw 45,166 mortgages approved for house purchase. What makes this figure particularly noteworthy is that it is the lowest level recorded in the month of April since the Bank of England figures started back in 1993. It is also 9% lower than April 2010. Some commentators have argued that the number of public holidays in April contributed to the fall in activity. But, 138,756 approvals over the period from February to April was 4.3% lower than over the corresponding period last year. This would suggest that we can’t lay the blame for low levels of mortgage approvals solely on hot cross buns and Kate Middleton!
The weakness in mortgage approvals data has been regular news for some time. Over the past two years the number of approvals per month has been close to 50K compared to about 89K over the past ten years. What makes the latest figures troubling is that there is no indication of recovery any time soon. Rather, the figures show that housing demand may be weakening yet again. If we exclude December’s low of 42,772, when housing market activity was hit by the harsh winter conditions, April’s figure is the lowest since March 2009.
The weakness in the demand for housing can in large part be attributed to the poor mood music: economic growth remains fragile, average real incomes have been declining and unemployment levels are expected to rise over the coming months. Furthermore, households are naturally reluctant to purchase property is they think house prices may fall further. All in all, we can expect the weakness in housing demand to persist for some time. The question seems to be one of just how weak housing demand will be. The next few months promise to be very interesting to say the least. Keep listening to the music!
Articles
UK mortgage approvals hit record low in April Telegraph, Emma Rowley and Harry Wilson (2/6/11)
Mortgage approvals fall to record April low Guardian, Mark King (1/6/11)
Mortgage approvals fall to two-year low Financial Times, Norma Cohen (1/6/11)
Mortgage approvals hit new low, Bank of England reports BBC News (1/6/11)
UK mortgage approvals drop to lowest in four months on lower confidence Bloomberg, Scott Hamilton (1/6/11) )
Pound drops on weak UK manufacturing PMI and mortgage approvals data RTT News (6/1/11)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- How sensitive do you think mortgage approval numbers are likely to be both current and future economic conditions?
- Are there any other types of purchases which households make which you might expect to be especially sensitive to economic conditions?
- Is it just the weakness in the demand for housing which explains the current low levels of mortgage approvals? Explain your answer
- Do weak mortgage approval numbers mean that we should expect house prices to fall in the months ahead? Use demand and supply diagrams to help explain your answer.
While inflation is a concern in the UK and is making the Bank of England think twice about keeping interest rates at their all time low of 0.5%, inflation in Japan is being celebrated. The Japanese economy has been plagued by deflation for over a decade and for the past 2 years inflation has never been above 0%. However, in April the consumer price index (CPI) rose to 0.6% from the previous year, fuelled by petrol prices. Strangely it might be the Japanese earthquake and tsunami that helped this situation, as Japan was unable to generate sufficient electricity and hence had to import fuel from abroad.
A typical question from non-economists is always about why deflation and hence falling prices is such a bad thing. Surely, it’s great for consumers? For those shopping for bargains, perhaps it is helpful – after all, if prices fall, a consumer’s real income will be higher. However, the problem with falling prices is that people start to hold off buying. If you want to buy a car, but expect prices to be lower next month, then it’s a rational decision to delay your purchase until next month when prices are lower. However, next month, you still expect prices to be lower in the following month and so delay purchasing again. And so the process continues. When people expect prices to fall they put off their purchases, this reduces demand and so prices do indeed fall. There are also costs for businesses: as consumers delay buying, sales begin to fall. And businesses are also consumers, and so they start delaying their purchases of inputs.
While many central banks across the world have begun to tighten monetary policy, the Japanese central bank seems inclined to keep monetary policy loose and has even considered expanding the emergency lending programme. As Azusa Kato, an economist at BNP Paribas, said:
“The bank will probably add stimulus if it sees more signs of weakening demand”. “If you strip out energy and food costs, consumer prices are basically flat now.”
Despite this inflationary pressure, many believe that it is unlikely to continue and deflationary pressures may appear once again in the near future. The following articles consider the Japanese deflationary situation.
Articles
Japan ends 25 months of deflation Bloomberg, Mayumi Otsuma (27/5/11)
Japan consumer prices log first rise in 28 months Associated Press (27/5/11)
Japan beats deflation for the first time in two years BBC News (275/11)
Japan overcomes deflation for first time in two years Guardian, Julia Kollewe (27/5/11)
Japanese consumer price rise (including video) BBC News (27/5/11)
Japan April core CPI rises 0.6 pct yr/yr Reuters (26/5/11)
Japan experiences inflation for first time in over two years Telegraph (27/5/11)
Data
Japan Inflation Rate Trading Economics
Consumer Price Index (Japan) Japanese Statistics Bureau
Inflation Rate and Consumer Price Index (CPI) (for USA, Canada, Australia, UK and Japan) Rate Inflation
Statistical Annex, Preliminary Version OECD
Questions
- What are the main costs of deflation? Think about the wider effects on consumers, businesses and the government.
- What has caused the increase in inflation to 0.6% in Japan and why was there an expectation that inflation would re-appear?
- What explanation can be given for the belief that deflation will soon re-emerge?
- Using a demand and supply diagram, explain the process by which consumers delaying their consumption will lead to prices falling continuously.
- What is the best policy for the Japanese central bank to pursue in light of the new data?
The banking sector was at the heart of the credit crunch and it may also be at the heart of the recovery. Too much lending to those who could not repay has now translated into government encouragement and targets to stimulate further lending. Banks made a deal with the government (Project Merlin) to lend £76bn to small and medium sized companies (SMEs) in 2011, however, the data for the first quarter of 2011 shows that the top five UK banks lent only £16.8bn, some £2.2bn short of their quarterly target (about 12%). Despite this sum still being a significant figure, small companies have said that they are still finding it difficult to obtain credit from banks. A poll found 44% of companies that asked for a loan were turned down and many were discouraged from even applying as they had almost no chance.
Encouraging banks to lend and hence stimulating investment by businesses may prove crucial to the UK’s recovery. Vince Cable’s words with regard to lending emphasise its importance:
“We will monitor the banks’ performance extremely closely and if they fail to meet the commitments they have agreed we will examine options for further action.”
If small businesses can obtain credit, it will help them to develop and expand and this should have knock on effects on the rest of the economy. Jobs could be created, giving more people an income, which in turn should stimulate consumption, further investment and finally aggregate demand. It may not be the case that the UK’s recovery is entirely dependent on bank lending, but it could certainly play an important role, hence the government’s insistence for further lending. It may also act to create confidence in the economy. The following articles consider the bank’s role in providing credit to SMEs.
Articles
Bank lending falling short of promises by £25m a day Mail Online, Becky Barrow (24/5/11)
Cable tells banks to increase lending to small firms BBC News (23/5/11)
Bank lending targets: What the experts say Guardian, Alex Hawkes (23/5/11)
Major banks fail to meet their lending targets Independent, Sean Farrell (24/5/11)
Banks on course to miss small business lending target Guardian, Philip Inman (23/5/11)
Project Merlin needs to be less woolly and more wizard Guardian, Nils Pratley (23/5/11)
Bankers caused the crash and now they strangle recovery Guardian, Polly Toynbee (27/5/11)
Data
Trends in Lending Bank of England (see in particular, Lending to UK Businesses)
Questions
- Why have banks not met their lending targets for the first quarter of 2011?
- Why is project Merlin so potentially important to the recovery of the economy?
- Using an AD/AS diagram, illustrate the possible effects of further lending.
- Are there any possible adverse consequences of too much lending?
- Why might banks have little incentive to increase their lending to SMEs?
Each month the Bank of England releases figures on the amount of net lending to households. Net lending measures the additional amount of debt acquired by households in the month and so takes into account the amount of debt that households repay over the month. For some time now, the levels of net lending have been remarkably low. Over the first quarter of 2011, monthly net lending to households averaged £1.2 billion. This might sound like a lot of money and in many ways this is true. But, to put the weakness of this figure into perspective, the monthly average over the past ten years is £7 billion.
Household debt can be categorised as either secured debt or unsecured debt. The former is mortgage debt while the latter includes outstanding amounts due on credit and store cards, overdrafts and personal loans. Levels of net secured lending have averaged £1 billion per month over the first 3 months of 2011. This compares with a 10-year average of £5.8 billion per month. Levels of net unsecured lending have averaged £196 million per month over the first 3 months of 2011. This compares with a 10-year average of £1.2 billion per month. In 12 of the months between December 2008 and January 2011 net unsecured lending was actually negative. This means that the value of repayments was greater than new unsecured lending. Once bad debts are taken into account we observe from the autumn of 2008 almost persistent monthly falls in the stock of unsecured debt.
Weak levels of net lending reflect two significant factors. First, on the supply-side, lending levels remain constrained and credit criteria tight. Second, on the demand-side, households remain anxious during these incredibly uncertain times and would appear to have a very limited appetite for taking on additional credit.
Finally, a note on the stock of debt that we households collectively hold. The stock of household debt at the end of March 2011 was £1.45 trillion. This is £7.2 billion or 0.5% lower than in March 2010. The stock of secured debt has risen over this period by only £2.6 billion or 0.2%, while unsecured debt – also known as consumer credit – has fallen £9.9 billion or 4.5%. These figures help to reinforce the message that British households continue to consolidate their financial positions.
Articles
Latest data shows UK economy still sluggish Euronews (4/5/11)
Bank reveals weal lending on mortgages City A.M., Julian Harris (5/5/11)
Mortgage lending plummets by 60% Belfast Telegraph (5/5/11)
Mortgage lending down as borrowers repay debt thisismoney.co.uk (4/5/11)
Average UK household owes more than £50,000 in debts Mirror, Tricia Phillips (6/5/11)
Data
Lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Tables A5.2-A5.7).
Questions
- What is the difference between gross lending and net lending?
- What do you understand by a negative net lending number?
- What is the difference between net secured lending and net unsecured lending?
- What factors do you think help to explain the recent weakness in net lending?
- How would you expect the net lending figures in a year’s time to compare with those now?
- As of 31 March 2011, UK households had accumulated a stock of debt of £1.45 trillion. In what ways could we put this figure into context? Should we as economists be concerned?
- It is said that households are consolidating their financial position. What do you understand by this term and what factors have driven this consolidation?
- What are the implications for the wider economy of households consolidating their financial position?
Growth figures across many countries still remain vulnerable, including the UK, where growth lies at only 0.5%. Despite some countries starting to grow more rapidly, the numbers still remain close to 0. The eurozone area is a particularly interesting case, as there are so many individual countries that are all interdependent. So, despite growth in the eurozone area increasing to 0.8% in the first three months of 2011, which is higher than that for the UK, this doesn’t explain the full story in the area. Germany has grown by 1.5% and it is this figure which has largely contributed to the 0.8% figure. It was also helped by growth of 1% in France and incredibly of 0.8% in Greece, despite its huge debts. The growth in Greece is allegedly down to a better export market.
Why then wasn’t the figure higher? Whilst countries like Germany showed an acceleration in demand, growth remained sluggish in Spain and Italy at only 0.1% and 0.3% respectively and Portugal faced the second consecutive quarter of negative growth and so has officially gone back into recession. This situation may get even worse as the austerity measures put in place by the EU and IMF take effect. One of the key arguments against joining the eurozone is that the policies implemented are never going to be in the best interests of any one country. With some countries beginning to grow more quickly and others remaining sluggish, what should happen to macroeconomic policy? Should interest rates remain low in a bid to boost aggregate demand or should they rise as other countries see accelerating growth?
An interesting question here is why do countries, such as Italy, Spain and Portugal struggle, whilst France and Germany begin their recovery? One obvious explanation is that Germany and France are at the heart of the eurozone, where as Spain, Portugal and Italy remain on the periphery. Ken Wattret at BNP Paribas said:
“The periphery are getting the worst of both worlds. The core countries like Germany are doing really well and that’s keeping the euro strong, and it’s making the ECB [European Central Bank] more inclined to tighten policy.”
If the ECB do go ahead with a tightening of monetary policy, it could spell further trouble for those countries on the periphery of the Euro area that would benefit from interest rates remaining low and a weaker Euro. The following articles look at the conflicts within the 2-speed Eurozone.
Articles
Sterling lags euro on growth outlook; trails dollar Reuters (13/5/11)
Eurozone’s growth surprises as UK lags behind Telegraph, Emma Rowley (13/5/11)
Eurozone’s economic growth accelerates BBC News (13/5/11)
Solid finances help drive German economic revival Financial Times, Ralph Atkins (13/5/11)
UK’s economy in the slow lane as eurozone surges Scotsman, Scott Reid (14/5/11)
Euro growth eclipses rivals despite north-south divergences AFP, Roddy Thomson (13/5/11)
Eurozone economic growth data prompts political clash BBC News (13/5/11)
Fresh fears for UK economy as Germany and France power ahead Guardian, Larry Elliott (13/5/11)
Portugal’s GDP is set to shrink this year and next Wall Street Journal, Alex Macdonald and Patricia Kowsmann (14/5/11)
Data
UK GDP Growth National Statistics
Eurozone growth rates ECB
EU countries’ Growth rates of GDP in volume Eurostat News Release (13/5/11)
Real GDP growth rate for EU countries and applicant countries, EEA countries and USA and Japan Eurostat
Questions
- What has contributed to the German, French and Greek economies surging ahead?
- Why is there such a north-south divergence in growth within the eurozone?
- What is the most suitable monetary policy for those countries growing more strongly?
- What is the best direction for interest rates and hence the value of the euro for countries, such as Spain, Italy and Portugal?
- ’The UK economy would be in a worse position if it were a member of the eurozone’. What are the arguments (a) for and (b) against this statement?
- What is the relationship between interest rates, the exchange rate and growth?