Tuesday, 5 July 2016

Any excuse is good enough for another land price/credit bubble...

From the BBC:

The Bank of England has warned there is evidence that risks it identified with Brexit are beginning to emerge. In a major report it states: "There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging."

To help lubricate the financial system it has eased special capital requirements for banks. The move potentially frees up £150bn for lending, the bank's Financial Policy Committee (FPC) said. That could help if uncertainty caused by leave vote causes the economy to slow down and banks to be cautious.

"This is a major change," said Bank of England governor Mark Carney. "It means that three-quarters of UK banks, accounting for 90% of the stock of UK lending, will immediately - immediately - have greater flexibility to supply credit to UK households and firms."

… It said there were risks apparent in the commercial property market, with vital foreign inflows falling by 50% in the first three months of 2016.

The FPC also has concerns over "the high level of UK household indebtedness [and] the vulnerability to higher unemployment and borrowing costs" for some households. House prices could also come under pressure, particularly if buy-to-let investors abandon the market, it said…

The Bank would reduce the level of the buffer - set to be introduced next year - from the planned 0.5% of a banks' lending "exposure" to 0%. The 0% rate would be maintained until at least June next year, the FPC said…

"These measures are really about Carney aligning the Bank of England's guns in case the UK economy enters a downturn. Markets are going to be reassured by his pro-activity," said James Athey from Aberdeen Asset Management Investment. "He's not waiting for anything bad to happen but rather acting in case it does. It also means that both halves of the BoE: the monetary policy and financial policy are pulling in the same direction."

A glorious mess of contradictions there. They've got "concerns over the high level of UK household indebtedness" and their knee jerk is to encourage more borrowing by scrapping one of the few sensible measures introduced the last time the land price/credit bubble looked like popping?

And how can they justify measures on the basis that "risks… are beginning to emerge" or "have begun to crystallise"? What sort of double-think is that? The commenter from Aberdeen Asset Management is a bit more honest about it at least - to paraphrase "We've got to take measures to pump up the land price and credit bubble as long as there is a perceived risk that Something Bad will happen. If we sit tight, the likelihood is that nothing bad will happen and we will have missed a golden opportunity."


Ralph Musgrave said...

Just listened to BBC radio news. Main news item was that the BoE
wants to encourage banks to lend more in the wake of the
referendum. Plus the BoE is concerned about debt levels. Now hang
on: for every extra £X banks lend, debts rise by £X. Doh!

You thought the Simpsons were stupid?

Mark Wadsworth said...

RM they are mad, aren't they?

Let;s assume their dire predictions about economic doom and mass unemployment are correct - in that case, they should be advising people to pay off debts as much as possible and not to borrow any more for the time being.

Is it only a few people like you and me who spot the irony in all this?

mombers said...

SME demand for loans in a downturn is going to fall, so I guess the extra lending will just end up in the usual place...

Random said...

Of course we could just regulate what assets a bank can hold and create instead of doing crazily silly calculations.

Lola said...

Death really is too good for them. The bank has also cancelled its visit to Norwich later in July. Shame. I was going to make the effort to go and have a go at them. e.g. Since Carney is a remainer shouldn't he resign now?

CornCrake said...

Was it only us poor proles that learnt anything from the 2008 fall-out?

As it seems the BoE clearly didn't offering more dosh to our TBTF banks, just when it looked as if they were off the laughing gas. Carney is an utter fool; it's like taking the local Alcoholics Anonymous members on a booze cruise to cure them!

As for the commercial property funds, looks like they'll be lining up cap in hands, in Threadneedle Street for a free money hand out soon.

Of course when it all goes breasts up he can feck off back to Canada and blame it all on Brexit. Meanwhile Osborne continues his MacCavity (oops have to watch it Maccy D might sue me for using Mac) impressions.

Steven_L said...

Aren't these kind of downturns caused by folk not borrowing / investing / buying stuff? I don't see how letting banks leverage themselves a bit more will increase demand for credit.

Once the new PM / Chancellor are in place they'll be able to start work on the demand side I guess. Expect bigger 'help to buy' giveaways, guarantees and sooner or later they'll probably push for 25 year fixed rats like in the US.

Hell, if they bring in 25 year fixed 4% low deposit mortgages I might even buy one!

I topped up my holdings of Virgin Money Group again and brought some British Land (which is pricing in a 35%+ drop in commercial property now) today. This is the 'bear trap' I reckon and it time to stock up on land and lender shares.

Dinero said...

Agreed, the policy has contradictory features. A balance sheet capital buffer is to protect the capital against reductions in asset values.

Banks capital is not a sum that is "held" by banks and is "Freed up" following a reduction in capital requirement, as is the description in the article .
Bank capital is not a sum of cash held aside from investment, it is the calculation made from the sum of the value assets minus the liabilities.

Piotr Wasik said...

MW, "predictions about economic doom and mass unemployment are correct (...) they should be advising people to pay off debts" - this is common sense speaking, but doesn't current economic orthodoxy say that if people are paying off debts, it is like voluntary taxation or saving thus decrease aggregate demand and cause even deeper depression? also, amount of money in circulation goes down when people pay off debts thus lowering inflation (which is also supposed to be a bad thing).

Bayard said...

Just as the answer to anything to do with the climate is "global warming" and anything to do with politics is "it's Jeremy Corbyn's fault", so the answer to anything to do with economics is "lend more money". Why bother to think, when you can use these ready-made answers?

Mark Wadsworth said...

L: "Death really is too good for them." Agreed.

CC: "Was it only us poor proles that learnt anything from the 2008 fall-out?" It appears so.

SL, so you are gambling on the government stepping in to prop up the bubbles, as they have done so many times before? I suppose that is the safest way of investing.

D: "Bank capital is not a sum of cash held aside from investment, it is the calculation made from the sum of the value assets minus the liabilities." Spot on!

PW, you mean the Paradox of Thrift. That is fine in theory but in the real world, especially a Home-Owner-Ist real world, it is nonsense.

Very little productive activity is funded by loans. Most businesses are funded by share capital and retained profits; most household spending is out of current wages.

Most borrowing and lending (by volume), is related to acquiring and speculating in land. And in the absence of lending, land selling prices would be much, much lower.

So a contraction in lending/borrowing primarily hits land values and not the productive economy.

B, "Why bother to think when... you've got a ready made excuse to pump up the land price and credit bubbles?"

Lola said...

PW / MW The paradox of thrift is a fallacy. Keynes was wrong, again.

Mike W said...

MW agreed,

I read a modern report discussing Keynes 'animal spirits'; the core was that business men are not in fact moved by a % rise or a fall in interest rates when making a real business, capital investment. So Keynes profoundly understanding the economy yet again. And our guv deliberately asking the punters to look at the wrong card being held in the wrong hand like any old party trickster.

Steven_L said...

so you are gambling on the government stepping in to prop up the bubbles, as they have done so many times before?


For valuing property companies I look at the assets. I ignore all the intangible assets. I discount the property based assets by a third. Then I subtract all the liabilities.

If the price of the share is still around book value after that I'm a buyer. Of the main REIT's British Land Group and Land Securities do the best on this test. They are trading at around book value using the above test.

The housebuilders are still over-valued on this test, but then people attach hope value to their landbanks. So this is to be expected. I'm not buying them at the moment. If they fall further I might be interested.

On Virgin Money I consider myself a long term investor in a good quality company, with good quality assets, which is backed by proper long term investors. I am quite happy to hold shares in this company that I acquired at under current book value. If there is a recession I would expect their assets / earnings to suffer a hit and their share price to be depressed longer, in which case I will probably buy more of it.

At the end of the day, I can't touch my pension until 2037 at the earliest, so these are very much long term 'value' investments.