Lack of housing, not credit, is root of property problem

A closer look at year-on-year figures shows that the market is still some way from another crash, despite Help to Buy fears

Farquhar Road, a leafy address in Birmingham's Edgbaston suburb, has homes selling for north of £1.5m. In Glasgow's West End a five-bedroom Victorian terrace can command a seven-figure price tag, while there are hundreds of streets in London where a family will struggle to secure a purchase without £2m to spend.

It seems to confirm that Britain is experiencing a house price boom that will, in a couple of years, lead to another spectacular crash.

Already opposition politicians and housing experts have warned of the dire consequences of the government's speculators' charter, otherwise known as Help to Buy. The scheme gets round the need for a 20% deposit by offering a taxpayer-funded 20% top-up loan in combination with a buyer's 5% deposit and 75% mortgage.

Combined with the Bank of England's funding for lending scheme (FLS), critics argue that it provides yet another sugar rush for a market that is already enjoying a good deal of stimulation.

Some economists put the average price rise this year, and next, at a combined 15%. Others have pencilled in more than that. And in the topproperty hotspots, prices seem to be rising almost every week. As a topic of dinner party conversation, the vaulting price of a half-decent flat or house is back at the top of the menu.

Recent evidence also points skywards. The Council of Mortgage Lenders (CML) said last week there was a marked pick up in mortgage advances in May, adding that surveys show the housing market is moving out of first gear. Property website Rightmove revealed on Monday that "all regions are up year-on-year for the first time in nearly three years contributing to the positive national picture".

Yet a closer look at the figures shows the UK is still some way from another crash. There are many ways to judge house price inflation. If we use the Bank of England measure that marries the Halifax and Nationwide indices, the fall in average values since the 2007 peak is 15%. So the expected rise in prices between now and 2015 will only take us back to the previous peak.

More importantly, the number of people buying today at the newly inflated prices is small compared with the peak, which means if prices fall, only a few people will get in trouble.

A look at the number of transactions adds support to this view. The CML has pencilled in 950,000 transactions in 2013/14 compared with 1.6m in 2007. Repossessions, which are another measure of trouble ahead, are roughly static at around 35,000 a year and the CML expects a small rise to 37,000 next year.

The supply of new homes, or lack of it, is particularly important in keeping prices high. Building remains at levels last seen in the 1920s. The construction data for May showed output down almost 5% on the previous year, with private and social house building hardest hit.

Private builders reported a surge in profits last week and pointed to Help to Buy and the FLS as key drivers of the buying spree. But they are adding to the housing stock at a snail's pace. Far from sensing a market that can withstand thousands more homes at top prices, they are drip-feeding them into what they perceive to be a relatively fragile situation.

Then there are the housing associations. There are plans for them to increase their programmes, though not while austerity is the order of the day. A lack of social housing heaps more pressure on an already over-stretched private home market, pushing up rents and prices further in a way that economists find, in the short term and in the narrowest gauge of supply and demand, entirely justifiable.

Hundreds of London streets are off-limits to families with less than £2m to spend on buying a house.So at a time when banks are restricted from offering the kinds of crazy loans available before the crash and are better capitalised to deal with unforeseen shocks (and the supply of new homes is atrociously small), there is a certain amount of justification for this price level. High prices, a small number of transactions and restricted supply have many social, political and economic consequences, but are not a reason to panic about a possible crash.

No wonder George Osborne told MPs last week: "The purpose of [Help to Buy] is to repair an impaired mortgage market that is clearly not functioning properly. I don't think the situation at the moment looks like an asset price bubble."

The problem is that we seem to be at a crossroads where the UK either continues its lost decade of low growth, low wages and severe restrictions on the supply of credit, or we allow a consumer boom built on the credit available through Help to Buy, the FLS and looser ties on bank lending to rescue the economy.

Rob Wood, an economist at the private German bank Berenberg, watched the previous boom from his position as an analyst inside the Bank of England. He is concerned about the outlook beyond 2015 when house price rises will take the UK average to new highs. If that occurs without any noticeable degree of wage growth or cut in unemployment, then we will be back in bubble territory.

"House prices thus reach the heart of Britain's current policy paradox," Wood said. "Loose monetary policy works by boosting asset prices and encouraging households and firms to spend now and save later. That boost can prevent depression. But it can only delay the inevitable adjustments of saving, spending and house prices.

"To keep the economy alive today, policy has to do the opposite of what is needed to keep it alive tomorrow. The positive way this plays out is that UK adjustment is less painful in the future. Eurozone austerity is due to ease off next year and the US will be through the fiscal cliff. With a stronger world, UK adjustment could be less difficult in the future".

Wood says relying on other countries to bail out the UK is a risky strategy when the best way to avoid a house price bubble is to build more homes. In fact, he would embark on a wide range of infrastructure projects to bring down unemployment and stabilise house prices.

But the British disease could be embedded to the extent that a bubble is inevitable without more far-reaching reforms to a tax system that already encourages speculation in property.

Former Bank of England adviser Kate Barker wrote a report for Gordon Brown that said Britain needed around 400,000 extra homes a year to keep house price rises in line with general inflation of 2%. That seems like a pipe dream when the government refuses to back public house builders with cash, relying instead on the private sector.

Consumer lobby group PricedOut agrees with the CML and most housing groups that Help to Buy will do little to ensure that more house-building happens over the longer term. It says: "Boosting buyers' access to credit simply allows house-builders to raise their sale prices to match. This means bigger profits for developers, but even higher house prices for struggling first-time buyers to contend with."

Only public housing built on publicly owned land, of which there is still plenty, especially in the hands of the Ministry of Defence and local authorities, can save the day.

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

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UK retail sales slump as shoppers balk at higher prices and cold weather

ONS said food shops were the worst affected as retailers reported a 1.3% decline in the amount of goods sold

Retail sales slumped in April after shoppers balked at rising prices and were reluctant to venture out to the high street in one of the coldest springs on record.

The Office for National Statistics said retailers reported a 1.3% decline in the amount of goods sold, with food shops the worst affected. Sales of food plunged 4.1% on the month, the weakest showing in almost two years. Shops also suffered a 0.2% contraction in the amount of money spent on the same month a year ago, which was the biggest year-on-year fall in retail spending since the turn of the century.

The cold weather was the biggest factor as the sale of barbecue food, garden furniture and summer dresses was put on hold. April was also a terrible month for garden centres following the big chill that effectively delayed spring by a month.

Cold weather was the biggest factor as the sale of barbecue food, garden furniture and summer dresses was put on hold

Several major stores have announced a significant bounce back in May, with garden centre sales reportedly up 70% in the first three months of the year, but the overall contraction, and especially the deterrent of rising food inflation, will concern the Treasury.

Ministers are hopeful of a bounce back in consumer confidence during 2013 to increase high-street sales and boost economic growth.

The ONS said consumer prices data showed that food prices had steadily been increasing and that a wide variety of food types contributed to the rise, including staple goods.

"This rise in prices will have squeezed consumers' disposable income, possibly resulting in them buying less or substituting cheaper goods for their normal purchases," it said.

Chris Williamson, chief economist at financial data provider Markit, said the weather-related drop in sales was a reminder that the economy remains in a fragile state.

"It is likely that spending will revive again in coming months, helping keep the country out of another downturn, though recovery will be only gradual as incomes continue to be squeezed," he said.

He pointed out that the underlying picture was more likely one of modest growth of sales following a 0.7% rise in the latest three months sales on the previous three-month period, which was the strongest rate of increase since last September.

"Households' views on their finances are the brightest for three years, according to Markit's household finance index for May. Being busier at work, rising house prices, news of the country having avoided another recession and buoyant equity markets have all helped generate more of a 'feel-good factor'."

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

UK plunges down economic wellbeing league, while US remains top

In terms of disposable household income, UK fell from fifth place to 12th place over six years, according to new report

The UK has plunged down an economic wellbeing league, falling from fifth place to 12th over six years, according to a new report that underlines the pressure on Britons' finances amid rising unemployment.

The Office for National Statistics ranked OECD countries in terms of disposable household income from 2005 to 2011, but on a separate ONS labour-market ranking Britain dropped even further, falling 12 places over the six years.

The ONS looked at various economic factors that might affect wellbeing across the OECD club of mostly rich nations as part of its scheme to measure national wellbeing. It ranked the United States top in terms of disposable household income, followed by Luxembourg. Chile was ranked bottom out of 30 countries.

Statisticians said part of the UK's drop down the disposable household income table was due to the devaluation of the pound, which raised the price of goods and services in the UK relative to other countries. But the ONS also noted other factors including changes to taxes and benefits.

Household actual drop in income per head 2011. Source: OECD

 "Over the course of the recession, as unemployment rose, people paid less in taxes and claimed more benefits – causing less of a strain on household income. However, as the economy emerged from the first period of contraction (measured by GDP), households began to feel the squeeze on their incomes as these effects wore off," the ONS said.

Opponents of the government's austerity drive seized on the apparent deterioration in UK household finances. The Trades Union Congresssaid the squeeze on incomes reflected slow wage growth, currently running at little more than 1% on average, compared with inflation of 2.8% at the latest count.

"The combination of recession and austerity has taken its toll on household finances, with income levels in the UK falling behind many of its European neighbours," said TUC general secretary Frances O'Grady.

"Even before the recession, household spending in the UK was far more reliant on debt than in other advanced economies. In order to address this as a country we need to obsess less about housing bubbles and focus instead on securing decent pay rises and creating better paid jobs."

The ONS report also looked at spending and wealth and said the UK remained "relatively strong" compared with other OECD countries on those measures.

It was on unemployment that the UK suffered the most dramatic drop in the international rankings. However, the ONS noted the "UK labour market has been more resilient than in previous recessions" in that employment did not fall as far and unemployment did not rise as much.

With the unemployment rate at 8% in 2011, the UK was more than halfway down the labour market league table. It ranked 21 out of 34 countries. That ranking was down 12 places from 2005.

Norway was top of the league with unemployment at just 3% and Spain was bottom at 21.6%.

The UK had one of the biggest drops over the six years although the US suffered similarly, down 13 places to 25th.

The ONS put the shakeup in the labour market rankings down to the nature of the recession.

"Many of the countries that have overtaken the UK and US in the rankings are smaller economies, less exposed to the 2008 downturn, which centred on the US and Europe. The fall of 12 places in the international rankings for the UK has therefore come despite historically the most stable labour market seen in a UK recession," it said.

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