Blog Archive -September 2013
25th September 2013
The sustainability of the recovery is being question yet again with talk of another housing boom financed by cheap credit and the chancellor's guarantee on deposits. And this argument takes on a certain amount of poignancy when prices in London have almost jumped by 9% in the last year to the point that average house prices have almost reached the same levels as they were in 2009. The counter argument for a bubble forming is that the current price increase is little half of that of 2007 the height of the boom and that the parts of the rest of the UK are actually falling. But how do the numbers stack up? Clearly the current growth is partly the result of a pent up demand from the mortgage drought but also includes overseas buyers using up their holdings of sterling and other investors seeking higher returns. On the plus side the money supply as measured by M4 is actually some 15% greater than when it was at the time of the Lehman's collapsed. So in theory the proportion of debt in the economy is lower than in 2009 even with this new lending. Secondly as the FT (21-09-13) points out that sales involving cash only has risen from 10% of the total in 2004 to 35% today which too can be regarded positively from view point of debt. On this account fears over a second banking crisis may be a little premature however the impact of rising of home prices on the real economy may be less benign. Increased lending will see an increase in the money supply that will normally lead to an increase in transactions that equates with growth but with growth solely coming from property it is hard to see how this new money will be diffused into the rest of the economy especially as the increase in mortgage lending has been offset by lending to businesses. The increase in cash only sales may also exacerbate the situation. As with 'buy to let' mortgages these will typically be investment vehicles looking for a return and the higher prices will translate as higher rents that are more likely to be reinvested in further assets rather than being spent in the real economy reinforcing the situation of the last few year. How else can one explain the apparent contradiction of a growing money supply with flat lining GDP and where the size of the real economy may have even shrunk by 10% as derived from fisher observation of real and notional interest (based on 2% contraction over 5 years where real interest or real growth in the economy is typically the difference between the notional interest and inflation which has been negative for the last five years). As economic conditions for the majority of the populace are not going to get any better there is another reason to question the sustainability of this boom and that is that mortgage drought over last 5 years. In that period there will have been people who had both the cash and the need to buy a home who could not but with the change to the lending regime these have all come to the market together but in the future the number or supply of individuals who can and need to buy will reduced; perhaps to a quarter or fifth of the current demand based on the previous yearly average. The result of which may cause house prices to flat line again.