Let's not pretend there's a housing boom, George Osborne tells audience

Chancellor's speech to Institute of Directors backed by some who say exceptional London prices are skewing national picture

George Osborne on Wednesday insisted he was not inflating a housing bubble, despite official data showing property prices in England have broken through their pre-crisis peak.

The chancellor told an audience at the Institute of Directors annual conference that there was no housing boom under way even though the ONS data showed the average price of a UK house has now surpassed its peak of five years ago with the average price reaching £245,000.

Osborne said he was "alert to the risks but let's not pretend there's a housing boom".

He insisted that his Help to Buy scheme, which has been widely criticised for pumping up demand and prices, was not a "weapon of mass destruction".

He was speaking as the Bank of England body charged with deflating bubbles was holding its scheduled quarterly meeting.

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But the members of the Bank's financial policy committee, who may have to decide whether the chancellor's Help to Buy scheme is overly inflating the market, face a plethora of divergent information about house prices.

An analysis of 10 house price surveys shows that estimates of average prices on a national level vary from £154,300 to £252,881. They put the average price of a London home between £300,800 and nearly £500,000.

The discrepancies can be explained by differences in the way that information is gathered and measured. Some cover only homes bought with mortgages and exclude those which are bought to let out to tenants, while others are based on estate agencies expectations or asking prices posted on websites. Some exclude Northern Ireland and Scotland, or houses which have not changed ownership for more than 20 years.

This week's ONS index, which has sparked the latest debate, is skewed towards higher valued properties and developments in London. Matthew Pointon, property economist at Capital Economics, said that it has "almost certainly overstated the rise in price of a typical home".

He argued that, excluding parts of London, house prices are way off their previous peaks.

"In any event, this is a useful reminder of the challenge the financial policy committee will face when deciding whether action needs to be taken to choke off an unwarranted rise in house prices.

"Not only are regional house prices behaving very differently, but alternative house price indices can give very different signals about the strength of the market as a whole."

Many economists stress the relationship between incomes and prices – which will vary widely depending on which house price survey is used.

The FPC uses a range of price indicators including a house price to rent index based on an average of the Halifax and Nationwide indices and the rent levelscontained in the retail price index.

According to Steve Pateman, head of UK banking at Santander, there is a house price bubble in London, but it is not evident in other parts of the country.

As the Spanish-owned bank prepares to embark on a new push into the home loans market, Pateman said: "That is borne out by the statistics you can see.

"You can't argue with the fact that the London price point is at higher level than in 2008, so people will talk about whether that is sustainable and the south east is caught in that glow.

"But you are not seeing the same trends in other (regional) markets, where there is a closer correlation between local GDP and house prices".

Lucian Cook, head of research at upmarket estate agents Savills, said Land Registry had the widest sample data and unlike some measures also included cash buyers. These buyers are responsible for 35% of purchases.

Richard Donnell, director research at Hometrack, said another 6% of the market was buy-to-let, excluded from some of the indices.

Land Registry has not yet published data for August but specialist residential property investor London Central Portfolio (LCP) has bought data from the body to make it possible to calculate average house prices for last month.

LCP's calculations show UK house prices up 2.4% to £252,881 over the last year. In London there was an average August sale price of £482,141 – a 6.5% rise in the last 12 months.

Naomi Heaton, chief executive of LCP, said that the average national price figure could have policy implications for Osborne as it is above the £250,000 threshold at which stamp duty jumps from 1% to 3%.

"It will a deal a huge blow current homeowners wishing to trade up. The chancellor should urgently restructure these thresholds in his autumn statement to avoid a bunching occurring at the £250,000 mark."

Article Source : http://www.guardian.co.uk

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UK retail sales in unexpected fall

ONS data shows volume of retail sales dropped 0.9% in August – mainly due to weaker demand for food

Britain's consumers took a break from shopping last month as spending fell back from the high levels recorded in July.

Data from the Office for National Statistics showed that the volume of retail sales dropped by 0.9% in August – mainly as the result of weaker demand for food.

The ONS said supermarkets had been particularly busy in July during the hottest of the summer weather but that activity came back to more normal levels in August.

After the recent run of strong economic news, the City had been expecting retail sales to grow by 0.4% between July and August, and the pound fell when the figures were released.

Food sales dropped 2.7% in August, and there was little evidence of the recent pickup in housing activity helping sales of household goods, which fell by 1.6%.

Over the three months to August – considered a better guide to the trend than one month's figures – retail sales were up by 1.7%.

Annual growth – comparing the latest quarter with the same three months in 2012 – stood at 2.3%, the ONS said.

The official figures also indicate Britain's increasing love of online shopping. The ONS said non-store retailing sales grew by 29% between August 2012 and August 2013 and that there had been a marked upward trend since the turn of the year.

"Since January 2013, the non-store retailing sector has seen continued year-on-year growth in both the amount spent and bought in this sector."

James Knightley, an economist at ING, said: "It is a disappointing outcome that has taken the wind out of the sails of sterling for now, but the underlying story still looks good with the three month on month total sales growth still up 1.7%, consumer confidence rising, employment increasing and credit availability improving."

Article Source : http://www.guardian.co.uk

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Federal Reserve maintains bond-buying stimulus in surprise move

Markets cheered as federal open markets committee says US recovery is too fragile to cut back on $85bn-a-month stimulus

US stock markets hit record highs Wednesday as the Federal Reserve surprised investors by announcing that the economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program.

After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets which had sunk ahead of the news on fears that the Fed was preparing to "taper" the so-called quantitative easing (QE) program. Even the threat of a slight reduction in the stimulus spooked the markets in July.

But the news also underlined the precarious state of the wider economy as a row over the US's debt limit threatens a government shutdown. In a press conference Ben Bernanke, Fed chairman, warned that the current row could have "very serious consequences".

Analysts had expected the Fed to announce that it was preparing to trim back QE, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment.

Bernanke signalled in July that the scheme would be cut back and that such a move could be announced in September. But the FOMC concluded to leave the scheme intact for now.

The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

It would continue to closely monitor economic and financial developments in coming months and continue its purchases of Treasury and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability".

Bernanke warned that the political clash over the US's debt limit and the threat of a government shutdown were all likely to harm the economy. "A government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy," he said.

The FOMC said fiscal policy was "restraining economic growth" and expressed concern about rising mortgage rates and the still high unemployment rate. Bernanke said the FOMC's ability to mitigate the impact of a debt ceiling crisis was "very limited".

Bernanke has linked any tapering of the QE policy to a sustained decline in the unemployment rate. US unemployment dipped to 7.3% last month, down from 8.1% a year ago. But the pace of job recovery remains sluggish and the latest drop was driven in part by people deciding to leave the workforce. The labour force participation rate slumped to 63.2%, its worst reading in 35 years.

Only one member of the FOMC, Esther George, chief executive of the Federal Reserve Bank of Kansas City, voted against the decision not to cut back on QE. She has been a persistent critic of the scheme. According to the Fed, George "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations".

US stock markets soared to record highs shortly after its release. Both the Dow Jones and S&P 500 set new records after the news. The Dow closed up over 147 points at 15676.94, the 31st time this year it has set a new record. Oil and gold prices also rose. The yields for the benchmark 10-year Treasury note sunk and the dollar slumped to a seven month low against the euro.

President Barack Obama is now assessing potential successors and Bernanke's second term ends in January. On Sunday former Treasury secretary Larry Summers withdrew from the race leaving vice-chairman Janet Yellen seen as most likely to succeed to the post. Bernanke declined to comment on the succession. "I'd prefer not to talk about my plans at this point," he said.

The Fed's move comes as the US faces a potentially disastrous row over increasing its borrowing limits. In 2011 a standoff in Congress over the debt ceiling led to a historic downgrade of US debt and panic on the financial markets.

Obama accused Republicans of trying to "extort" him Tuesday by holding up negotiations unless he is prepared to amend or scarp his landmark healthcare reforms, the Affordable Care Act. Republican House speaker John Boehner hit back Wednesday calling Obamacare "a train wreck", as other party leaders set out further terms and conditions for raising the limit. The two sides are now at an impasse just days before the 30 September deadline to pass a government funding bill.

The government reached its $16.7tn debt limit in May and has been employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers, to stay below the line. But Treasury secretary Jack Lew has warned that the government will run out of room to manoeuvre in October and will be unable to meet its obligations.

On Tuesday Lew warned Congress again that a prolonged argument over the debt limit could do lead the US to default on its debts and irrevocably damage to the economy. "We cannot afford for Congress to gamble with the full faith and credit of the United States," Lew told the Economic Club of Washington.

A default would likely cause turmoil on world stock markets and a sharp rise in interest rates. Lew repeated a warning he made last month that the Treasury would soon be left with only around $50bn in cash on hand. The Treasury pays investors about $100bn to investors every Thursday that investors immediately lend back to the government, a process known as rolling over the debt.

"If US bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance," Lew said.

Default could come soon after that and would likely rock Wall Street and lead to a sharp rise in interest rates.

Article Source : http://www.guardian.co.uk

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