Goldman Sachs grows its balance sheet by almost 7 percent

It is just like old times.....

The extraordinary real estate agent bubble

This is one of those "sign of the times" charts.

The housing bubble also generated a bubble in real estate agents. The number of people working in real estate activities almost doubled between 1996 and 2009. As of September last year, there were around 370,000 people employed within the sector. That is about one estate agent for every 70 workers in the UK.

This staggering growth in the number of real esate agents was brought home to me about 18 months ago when I visited St Albans. It is a small but beautiful town just outside of London. However, the number of estate agents and mortgage brokers in the town centre was extraordinary. Perhaps, every fifth shop front was somehow related to real estate activities.

Over the last year, the numbers employed in the sector have declined by around six percent. However, housing transactions are down by around 50 percent. This would suggest that salaries and bonuses have also fallen by around a half.

This is not the time to be a real estate agent.

(The Data is from the ONS - the ONS employment series code is ALY2)

Learning from our mistakes

It is a sad fact that in the last 40 years, Britain has suffered from four separate housing bubbles.

The first occurred in the early 1970s when Ted Heath was Prime Minister. He liberalized the banking sector, reduced interest rates, and tried to keep the economy afloat with a huge fiscal deficit. He also antagonised the unions and drove the UK to the edge of hyperinflation. House prices rose and fell in parallel with Ted Heath’s opinion poll ratings.

In the late 1970s, Jim Callaghan tried the same trick. He had less success than Ted. House prices didn't skyrocket in quite the same dramatic way. Nevertheless, his departure from office coincided with a house price crash.

Mrs Thatcher was a little slow in playing the housing bubble game. It was well into her second term as prime minister before she engineered the conditions for a hyperventilating property market. Nevertheless, it was a spectacular one. And when it crashed the whole economy sank with it.

John Major never got the chance to inflate the housing market. He spent most of his wretched time in office cleaning up the mess that Mrs Thatcher made. By the time he was shown the door, house prices had stabilized. This was good news for the next occupants of 10 and 11 Downing Street. The UK economy was ripe for another bubble.

Tony Blair and Gordon Brown produced perhaps the greatest bubble of them. When it finally burst in 2007, it did more than just send the economy into the longest recession since the war. It nearly destroyed the UK financial system. The UK economy came within a centimeter of Armageddon.

Have we learnt anything from these experiences? I am afraid not. As soon as this bubble has finally unwound, and the banks have recovered, the British people will be ready for another round of property market monopoly.

Deep down inside, we love it too much. We would miss those greedy conversations about how much price appreciation is now embedded in our homes. The illusion of wealth, it might be an imperfect substitute for being truly rich, but it will do for most of us.

However, there are others who look upon our experiences with unbridled horror. Having seen the harm that speculative bubble can inflict on an economy, the Singapore government introduced a series of measures designed to cool down their housing market.

The government announced its intention with extraordinary clarity: “The government’s objective is to ensure a stable and sustainable property market where prices move in line with economic fundamentals.”. Could you imagine a British government ever committing itself to that kind of sanity?

• It raised down payment requirements for second mortgages. Individuals with more than one mortgage can only borrow up to 60 percent of a property’s value, down from 70 percent.
• It extended the period homeowners must hold properties to avoid a sales tax. Sellers will now have to pay a stamp duty for all homes and land sold within four years of purchase.
• Singapore’s homeowners who sell a property within a year of purchase will have to pay a tax of 16 percent.

Earlier, the government barred interest-only loans for some housing projects. It also barred developers from covering interest payments for apartments still being built.

House prices in Singapore are rising rapidly. The risks to the financial system and economy are serious. Nevertheless, in contrast to our sorry history, the Singaporean government understands the dangers of permitting unbridled property speculation. Although, we cannot learn from our own history, there is some comfort in the fact that others can see the dangers that we cannot.

the daunting dynamics of Staffordshire house prices

I find these regional house price charts quite daunting. Fundamentally, they all look the same. The challenge is to say something different about each one.

The data for these charts comes from acadametrics. The first datapoint is in 2000. Between that starting point and 2007, prices double. Thereafter, they fall back and begin to recover in 2010.  Nevertheless, the final datapoint looks horribly inflated compared to the first datapoint.  The chart screams out a single word - BUBBLE!

With each chart I am troubled by the same question. Why would an otherwise unremarkable region of England suddenly see the value of property double in seven years? I have my answers; excessive credit, bad lending practices, unscrupulous real estate agents, Krusty Allsopp, and property-ramping journalists. However, these answers seem so inadequate when confronted with the shocking price dynamics of a place like Staffordshire.

I have been to the West Midlands. The region is dominated by small terraced housing, built for factory workers in the late Victorian or early Edwardian periods. Most of them were built without inside bathrooms.

These houses are pokey, difficult to heat, and with tiny rooms. The walls are thin, the gardens are small, and the kitchens are impossible. People do amazing things with them to make them attractive places to live in, but lets be honest, these houses are horrible. And don't misunderstand me; the houses in London are just as bad. Why on earth would anyone pay £200,000 for one?

To this latter question I have no answer. I just don't get it. I will never understand it.

BTL is back in town

When the financial crisis first hit back in autumn 2008, UK banks became very nervous about the buy to let business. Many banks pulled their mortgage products. Finding loans became very difficult for BTL landlords.

Thankfully, banks are again falling in love with those shady landlords keen to build a rental empire in Britain's inner cities. The number of buy to let mortgage products has almost returned to pre-crisis levels.

Meanwhile, the UK corporate sector is repaying its loans, despite record low interest rates. For British firms, the credit crunch continues.

Debt problems worse now than in 2008

Low mortgage rates - great for buy to let

Mortgage lending rates are at historical lows. The problem, however, is actually convincing a bank to dish out the cash. Nevertheless, banks seem to have no problem giving out loans to buy-to-let speculators. Lending to this sector is recovering nicely.

Buy to let is alive and well

There is something deeply distasteful about Britain's obsession with buy-to-let. It is extremely speculative and crowds out first time buyers.

Still, you would think that banks would have learnt something over the last couple of years about risk, and in particular, about lending to highly over-leveraged individuals. Not so. Insofar as there is any mortgage lending going on, buy-to-let is taking up a large proportion of new loans.

According to the Council of Mortgage Lenders, buy-to-let lending rose by 12% during the three months of summer. That amounted to 26,900 buy-to-let loans advanced, worth £2.8 billion. This was a quarterly rise of 8 percent by volume and 12 percent by value. It is the second consecutive quarterly increase in lending. Compared to the third quarter of last year, the volume of lending was up 14 percent and the value up 33 percent, from 23,700 and £2.1 billion respectively. A startling recovery, don't you think?

At the moment, there are about 1.3 million buy-to-let mortgages out there, which accounts for over 10 percent of all home loans. But it remains a shaky business, top-full of dodgy characters. So why to UK banks continue to pour cash into this shady area of the housing market?

Is buy-to-let the key to easy riches?

Rosie Murray-West asked this question in the Telegraph today.

Is the buy-to-let bandwagon on the run again, and if so, should you jump on? Many will be surprised to hear the health of the buy-to-let industry described as anything but sickly.

Housing speculation is something of a sickness in Britain. This idea - that property development should not be the preserve of the rich but should be democratically shared by all - is deeply ingrained in our national psyche.

Have we learnt nothing from the financial crisis? Show me the way to the nearest Paragon office, I need a mortgage now.  I want to be a productive land-lady, not a feckless worker.

The Wilson's sell up

The King and Queen of Buy to Let are selling up. Fergus and Judith Wilson have put up their 700 properties for sale, hoping to pull out about £70 million, once they have paid off the loans used to accumulate their little property empire.

The former comprehensive school teachers had built up their massive portfolio during the bubble years, when credit was easy and house prices were inflating. However, since property prices have crashed, the couple have seen their net worth fall by more than half; such is the magic of leverage.

However, I wonder what the Wilsons will do with their cash once they have offloaded their tenants. Will they put it in a bank and watch it slowing whittle away once quantitative easing feeds through into higher inflation? Goverment bonds might be another money losing alternative. Equities? Off shore, on shore?

Whatever the decision, the Wilsons don't seem to be all that confident that house prices will continue to go up. If they did, they wouldn't be selling up.

FSA screw it up again

The FSA is irredeemably compromised. It has been captured by the financial services industry. As such, taxpayers can not rely on it to properly supervise banks. It must be abolished, with all its powers returned to the Bank of England.

This story from the FT, which highlights the government's disapointment with the FSA's so called crackdown on bonuses, further emphasises the need to abolish this pathetic institution as soon as possible.

Senior cabinet ministers are so disappointed with the Financial Services Authority’s new pay rules, released this week, they are considering whether legislation may be needed to crack down on bankers’ bonuses.

A number of ministers, including Lord Mandelson, the business secretary, are understood to be unhappy with the City regulator’s remuneration code, which toned down some earlier suggested measures.

Lord Mandelson thinks the guidelines, intended to reduce reckless risk-taking, have failed to reflect public concerns that the City is returning to “business as usual” after receiving billions in state support.

“Excessive risk taking had the results that we saw. Ordinary businesses are paying the price,” he said in an interview. “We have not heard the last word on this subject.”

His views are shared by other senior ministers, who suggest legislation may be needed to control short-term incentives for bankers unless the FSA shows it can pursue a tougher line.

B&B - huge losses for the taxpayer

I feel nauseous every time I hear the name "Bradford & Bingley". It is state-owned and it is, financially speaking, a stinking heap of toxic crap. It is not something that I can easily ignore since this mess now firmly belongs to UK taxpayers.

It has just announced a further £160 million of losses. Moreover, 40 percent of its mortgage book is now mired in negative equity. That is what you get when 60 percent of your loans were extended to buy-to-let and 20 per cent were self-certified loans.

However, I suspect that the B&B isn't something that can be safely filed away. It is not something that can be explained away as a past mistake. It As we move away from the terrifying events of September 2008, those commitments to tighten up banking sector supervision are being quietly watered down. Furthermore,We have yet to see a major overhaul of the FSA.

In short, five or ten years down the line, we could easily see another B&B turn up at the doorstep of her majesty's treasury, demanding a bailout.

Credit card debtors generously help out the banking sector

The Bank of England may have cut interest rates, reducing funding costs for banks, but you won't see that generosity extended to credit card debt serfs. The spread between LIBOR and credit card interest rates has increased by well over 600 basis points.

It is probably a good thing, hopefully discouraging a further unsustainable increase in household debt. Also, the increased spread presumably increases the profitability of credit cards, and helps banks cover their huge losses speculating on those hopelessly mis-priced asset backed securities. In effect, credit card debtors are providing their very own bank bailout.

Personally, I am grateful to those credit card debtors for this generous assistance to our beleaguered banks. It means less of a burden for taxpayers.

David Miles on house prices

David Miles, prospective member of the Monetary policy committee thinks the housing market is over the worst. Here is his answer to the Treasury Select Committee:

What are your views on the prospects for the UK housing market?

Before house prices started falling I - like many others - believed that prices were over-valued. I said that in 2005 and 2006 (and was ridiculed by many in the mortgage industry for so saying).

The economic modelling I did then suggested prices might be 20-25% too high – relative to sustainable levels. Since then there have been many offsetting developments: Incomes are weaker; unemployment is up sharply, and is expected to rise further. But interest rates are down a lot (and there has been a reasonable amount of pass-through to the cost of mortgages since the significant cuts in Bank
Rate).

High loan-to-value mortgage products have dried up. Ultimately that is not a disaster; people will wait a bit longer to buy and rent a bit longer. The owner occupation rate would be lower, but the rented sector bigger. It does not clearly reduce substantially the long run demand for housing.

The short run issues are more difficult. Now 20-25% deposits are typically required. The flow of first time buyers will be reduced as they accumulate higher deposits. This means that the volume of house purchases on a transition to a new equilibrium, where people buy later and with higher deposits, will be reduced. That is part of what we have been going through over the past 18 months. But it is a transition.
Expectations are crucial in the housing market and they look a bit better now than a few months ago.

My hunch – and I put it no stronger than that – is that we have seen most of the overall aggregate house price falls. But no-one knows.

Keep on doing what you are doing

There were many reasons why we got into this crisis; poor financial sector regulation, distorted incentives, bonuses, speculation, excessive risk-taking. However, there is one reason that doesn't get enough attention; the policy remit of the Bank of England.

When the BoE became fully independent, the government gave it an inflation target. It said to the bank "go chase down the consumer price index. Make sure it doesn't increase by more than 2 percent a year". Ominously, the government didn't say keep asset prices under control and avoid speculative bubbles.

The BoE happily went along with this new target. Keeping inflation under control would be easy. Moreover, the Bank added an air of modesty to their objection about preventing speculation. It echoed the claim by Greenspan that it could not properly identify bubbles. Speculation was something that could only be ascertained once the crash had actually happened, and then it would be too late.

For about eight years, the BoE claimed that it had beaten inflation. It met the target and told the rest of us that everything was under control. House prices, it occasionally acknowledged, were increasing at double digit rates. So too was the money supply, but this didn't matter because the CPI was nailed down. Furthermore, the BoE managed to do this with historically low interest rates. In short, they implicitly told us "sit back, relax and if you feel like it, take out a loan."

However, the truth was that the CPI was declining because of the extraordinary increase in the world supply of cheap manufactured goods, mainly coming out of China and other emerging market economies.

During these years, the CPI should have been negative; a fact that the BoE were happy to ignore. Domestically determined prices were increasing sharply. (If you want proof, just take a look at the price of UK rail tickets or the council tax.) Putting a cap on this hidden inflation would have required higher interest rates, which would have put an end to the housing bubble.

The rest of the story we know. Throughout the decade, Banks were taking on too much risk, households were borrowing silly amounts of money and the housing market was out of control. This sorry mess hit the wall in August 2007. So far, the UK taxpayer has been forced to pump in 90 percent of GDP into the financial sector, just to prevent it from collapsing.

Have policy maker learnt anything from this dreadful experience? It seems not. Later this month, the Treasury will publish a White Paper on financial services. In principle, this offers an opportunity to extend the BoE's target to stabilising asset prices and preventing bubbles.

However, for the New Labour radicals that manage the Treasury, this idea is too extreme. They want to keep things pretty much as they are. The BoE will continue to target the CPI and asset prices can do what they want. In principle there is nothing to prevent a recurrence of the current crisis.

It is very much a case of "keep on doing what you are doing". So, is everyone ready? We have a one way ticket back to Bubbleville.

Mortgage approvals increase in May

Is the glass half empty or half full.

According to seasonally adjusted data from the British Bankers Association, mortgage approvals reached 31,000; 74 percent up from the November peak. However, approvals are down 50 percent from a typical pre-crash month.

For what it is worth, I think there is a recovery taking place. Moreover, I fear that it will gather pace on the coming months.

What? More bitterness?

My recent post on inflation upset a minority of readers. The criticisms took three forms:

Inflation – its not going to happen

Despite the huge increase in monetary growth, some are profoundly skeptical that inflation is going to pick out. Of course, no one can know what the future will bring. I could be wrong when I say that inflation will rise. Furthermore, I would be happy to be wrong. A 5 percent by the middle of next year inflation rate is the last thing I want to see.

In the short term, I expect inflation to keep on falling. By the late summer, it could be as low as 1.5 percent. The short period deflation last winter did knock the wind out of rising prices.

However, that stopped in February, and since then the monthly inflation rate has been painfully high. By next winter, I expect inflation to rise, and within two years, it could be a serious problem. By that, I mean a rate somewhere between 5-10 percent. If the MPC raise rates, then this prediction is nothing more than a gloomy alternative scenario that an appropriate policy tightening successfully avoided.

With each passing month, we will pick up more information about the likely path of inflation. The following simple rule will help enormously. If the monthly inflation rate is 0.15 or lower, then the Bank of England can rest easy. It will easily meet its inflation target. If the monthly inflation rate is about 0.3 percent, then it is in trouble. We can be fairly confident that inflation will hit 4 percent by December. Of course, if the monthly inflation rate is consistently negative, we have deflation.

How dare you suggest an interest rate rise!

Some people become extremely agitated by the idea that the price of money should increase. Some think that rates should remain low in order to help homeowners pay down their ridiculously large mortgages. This amounts to an argument that savers should subsidize borrowers. Personally, I don't see any compelling reasons why this should be so.

Others seemed to think that low interest rates will sustain the economy and keep unemployment at bay. I have a lot more sympathy for this argument. Recessions are nasty and miserable.

However, historical experience suggests that a surge in monetary growth can only have a temporary effect on output and employment. In the long run, more money means higher prices. I wish that wasn't so, but it is, and denial helps no one.

You are just a bitter renter

Well, I've never tried to hide that fact. It says it on my profile in proud letters. If you don't like the bitterness, then this isn't a blog for you. Move on, find your happiness six elsewhere, because I'm not going to provide it for you.

Besides, bitterness is something that the Brits do very well. Personally, I don't feel the least bit isolated. This is the country full of anger and despair, and this blog in part, reflects that fact.

So, returning to the inflation question, who knows? Maybe everything will be all right in the end, and people can read this blog and tell me that I was wrong. I'm ready for that.

April is the cruellest month

This is the core of the problem; the government has lost control of the public purse.

This chart compares just one month's fiscal deficit - April - over the four previous years. During the good times, the government ran up a surplus in April. Revenues were always higher than expenditures.

Things began to go pear-shaped in 2008, but even then, the situation was under control. However, in April 2009, the government ran up a deficit of almost ₤7 billion. As the chart so amply illustrates, this monthly deficit is unprecedented.

Finally, the credit rating agencies have woken up to this unfolding disaster. At last, they have realised that the truck is rolling down the mountain track, and there is no one in the driving seat.

UK mortgage approvals down again

The entire UK real estate industry is waiting, desperately hoping for the first signs of a pick up in housing activity. Once the first positive number comes through, we will be smothered in an avalanche of hype.

"The crash is over", they will declare. The UK will be back to normal. Property, and how fast it is appreciating, will again become the main topic of conversation.

However, the mortgage approvals data isn't being terribly obliging. April data was rather disappointing. Maybe next month, we will see some improvement.

Paragon wants a piece of the action

Its been a while since we heard from Paragon, the BTL lending specialist. However, they cropped up today. The company wants the government to give specialist mortgage lenders, like itself, a chance to use all those generous credit guarantee schemes.

Why would the government even consider such a thing? Lenders, like Paragon have a standard, albeit self-serving answer. The economy needs credit markets to unfreeze, and allow lending to recover. Presumably, this will somehow lead to faster growth and rising living standards.

The reality, however, would be that Paragon would receive cheap financing, with all the credit risk being transferred to the public sector. It would be just another tired old game of "heads the private sector wins; tails, the taxpayer pays up".

Moreover, if Paragon did receive guarantees from the government to finance extra lending, this cash would go to BTL speculators. The price of housing would go up, and again, young workers would be robbed of their chance of financial and personal independence. What is more, they would end up paying for this scam as public sector debt increases, and which in turn, will push taxes up in the future.

It is a nice try, but there is no case for Paragon to receive public assistance to expand its balance sheet. If this company wants to lend more to BTL speculators, then it should go to the capital market, issue a bond or raise more equity. It should leave the poor beaten down taxpayer alone.