“Solving the UK Housing Crisis , the Bow Group”, so what about Canada?

“Denmark prohibits non-EU nationals from buying a home unless they have lived in the country for five years”

This is a worthwhile read.  A report on the UK housing market’s affordability crisis by a UK Right Wing think tank that recommends limiting foreign ownership of the property market.  I can definitely see some relevance to Canadian property markets here and the issues raised are very much in line with those expected by the considerable excess asset focussed money supply growth we see globally.   Unconventional monetary policy and increasing income inequality running alongside slowing economic growth have increased the asset focus of global money supply, especially towards hard real assets such as property that will not disappear in an economic/financial crisis.  

You can see this in the Canadian asset market:

The real return on the S&P/TSX composite since the market peak in September 2007 has been –23% to mid December 2015:


Yet the value of the Canadian residential property and land has moved the other way:


Interestingly the MLS Canadian Composite Home Price Index shows an increase of 33% since since September 2007 and the Greater Toronto component an increase of 59.2%.  

And there has been an increasing dialogue on the issue in the Canadian press:

Affordable housing crisis affects one in five renters in Canada: study” “One in five Canadian renters face an affordable housing crisis, spending more than half their income on shelter costs, a problem that appears to be even more acute in suburbs and small cities than in major urban centres.”

Moody’s, The Economist warn of high Canadian debt, housing prices” “”The risks are less around the rapid house price appreciation per se, than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,”

Bank of England Stress Test

“..the stress-test results and banks’ capital plans, taken together, indicated that the banking system would have the capacity to maintain its core functions in a stress scenario. Therefore, the FPC judged that no system-wide, macro prudential actions were needed in response to the stress test.”

My main concern with the stress tests is that the explanatory document came bereft of the underlying economic scenarios!   How far did GDP fall, for how long and what was the recovery like?  Did IRs stay at an elevated 4+ plus from current levels or did they fall?  I have not got a clue as this exercise seemed to focus on fairly extreme contractions in domestic property markets, higher interest rates and some assumptions re mortgage, personal debt and CRE defaults.

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Re Neil Irwin’s Archive “You Can’t Feed a Family With G.D.P.”…but the family has been eating GDP???

In a recent Washington Post article Neil Irwin quipped  that you cannot feed a family with GDP and illustrated this comment with a graph of GDP relative to income growth.  The graph showed the rate of growth of GDP and median income moving in opposite directions from circa 1998 onwards.  

My point is that the family has been feeding its family with GDP, to a large extent, via debt and falling savings and that it was the combination of high debt levels and weak income growth that played a major role in the crisis and weak economic growth thereafter. 


We can see that personal consumption expenditures grew at roughly the same rate as GDP up to the early 1980s, started to grow at a moderately higher rate between early 1980s and 1997, and then spiked higher…

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UK growth

The UK economy has been receiving a number of plaudits for its economic growth.  Initial estimates for growth in the first quarter came in at 0.8%, or 3.2% annualised.  But there are growing concerns over debt, the housing market, real wage growth and income inequality and weakness in fixed capital investment and a tail off in export led growth.

Much of recent growth has been ascribed to an increase in consumer debt and housing market activity, and we can see that there has been a notable increase in secured lending:


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US Industrial Production

Strong revisions to February data and a rise in March appear to show a resurgence in industrial production post winter blues.


Clearly the revised February bounce has been a strong one, and the short term data is also strong relative to historical benchmarks – note the two averages of monthly changes in non seasonal  industrial production (one with recessions excluded).

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Global slump risk falls as world money rebounds…. Really?

In a recent article, Ambrose Evans opined that a rising narrow money supply (M1 to be exact) presaged a rise in economic activity.

Usually this might be the case as an increase in shorter duration/easier access narrow money might imply a) an increase in bank lending that creates deposits via the money multiplier (implying higher current and/or future economic expenditure), and/or b) a shift from longer duration money with the intent of spending (which implies a reallocation of money from future consumption to current consumption).  It may also very well mean just an increase in money supply occasioned by quantitative easing. Continue reading

B of E June 2012 Financial Stability Report

A good read which details all the main balance sheet issues for UK and, by implication, international banks:  Bank of England Financial Stability Report June 2012:

The outlook for financial stability has deteriorated. Stresses have persisted due to increasing concerns about sovereign debt sustainability, banking sector resilience and imbalances across the euro area. Past efforts by UK banks to build resilience through higher capital levels and stronger funding structures have provided some insulation from strains in the euro area. And higher liquid asset buffers provide significant protection against potential future funding strains. But progress in building capital has slowed recently and, despite a continuing reduction of structural funding vulnerabilities, UK banks’ funding costs remain high, partly due to investors’ concerns about potential future losses. The pass-through of higher funding costs to lending rates could lead to a further tightening of credit conditions, exacerbating a potential adverse feedback loop were the economy to weaken and the quality of bank assets to deteriorate. Various policy measures have been announced aimed at reversing this process, notably the ‘funding for lending’ scheme.

UK – the great depression was almost “a walk in the park”!

A graph that can be found in the NIESR’s recent report on third quarter growth shows the current economic recovery set against historical benchmarks. The profile of the “great depression” of the 1930s was well on its way to recovery by this stage, and the turbulent and difficult times of the 1970s (remember the IMF was called in to pull Britain out of its funk) looks like a walk in the park in comparison.  No wonder market valuations are depressed and below historical averages: there is some justification for this.

To highlight the distended nature of the recovery, UK industrial production fell 1.7% in the year to October and 0.7% in the month. Manufacturing rose a meagre 0.3% in the year and fell 0.7% in the month.

UK Markit/CIPS service sector PMI: rises to 52.1 in October – like the US diffusion index, the UK also experienced a decline in order backlogs and employment components. Incoming orders continue to grow but at a decreasing rate. It always worthwhile looking at the PMIs against the countervailing economic backdrop: in this case we have very high consumer debt, government austerity, weak manufacturing and an financial and economic stress in Europe). The PMI does not drive business. Furthermore, a marginally positive service sector PMI does not provide room for error in a low growth deleveraging environment: look at UK third quarter growth running at a mere 0.3%.

Negative Broad UK Money Supply Growth = deflationary times ahead

Inflation in the UK is running at 5% in the year to October, so the following broad money supply assets/lending and liability (deposit) figures need to be seen in this light.  

Current loan growth and deposit growth is negative in real terms: in other words the velocity of money supply has increased and/or asset values are declining and debt is defaulting at the margin.   The supply of broad money, whichever way you look at it, is growing at a slower rate than the nominal growth rate of the economy.  This cannot continue for long.

The following chart shows MFI sterling liabilities to the private sector declining at an annual rate of -2.9% (quarterly growth rates are –5.26%).  Based on available records, this is the lowest historical growth rate to date (1982 to 2011): the edge of cliff.


The following charts are taken from the Bank of England’s website:

M4 lending excluding securitisations etc. and excluding intermediate OFCs fell by -0.8% on the year to October and by a much faster -3.1% annualised quarterly rate:   

Component M4Lx lending to the household sector grew 0.8% (0.8% quarterly annualised) in the year to October, and fell –2.2% (-4.6% quarterly. annualised) for private non financial corporations and by –5.6% (-18.6% quarterly annualised) for other non intermediate financial institutions:

These are not good figures at all when considered in the context of the current financial environment.  A decline in broad money growth was indeed inevitable following on from the excess of the 1990s and the first 8 years of the noughties, but it does imply negative real economic growth if the declines are maintained.

The UK Model of Austerity may not be working….and this should be a worry

In my December 2010 report on the dynamics of Debt etc, I stated that it would be extremely difficult to reduce debt by debt reduction and that the only way to bring down debt realistically was to rely on nominal growth.   The only problem is that a) large amounts of debt have been built up in unproductive assets which will act as a drag on growth going forward and b) with limited increases in debt, for a number of reasons, potential growth going forward on potentially more productive assets could be limited.  

The UK economy has had the benefit of a flexible exchange rate (which the individual Euro Zone economies do not) and a central bank that has been able to a) monetize debt and b) effectively finance government expenditure through bond purchases in the secondary market, which Euro Zone economies have not.

Yet, the UK is in danger of missing its budget deficit reduction forecasts amidst weak economic growth.  

Why is this a concern?  Well, it is not a surprise to some, but since many of the more bullish views of the direction of markets and economies depend on the transformation of the ECB into a lender of last resort, it should be a reminder that this may not be the panacea it is expected to be.   Additionally, the UK has not attempted to reduce its government debt, only to reduce the amount it borrows each year.

David Cameron: deficit harder to clear than first thought

What if the UK misses its deficit reduction target

Why the British economy is in very deep trouble

Dr Gloom’s Reform Trilogy