U.K. Outlook Raised by NIESR as Property Boom Feeds Spending

This article by Jennifer Ryan of BloombergBusinessWeek on November 4th, 2013 reveals the fast growth of the UK economy as opposed to what was previously reported according to NIESR.

The U.K. economy will grow faster than previously forecast as a pickup in house prices stokes consumer spending, according to the National Institute of Economic and Social Research. 

Gross domestic product will expand 1.4 percent this year and 2 percent in 2014, a 0.2 percentage-point increase for each year, London-based Niesr said in a report published today. Forecasts for annual house-price growth in 2014 were raised to 5 percent from 0.5 percent, adding about 0.5 percentage point to spending projections.

“The housing market has thawed quite noticeably by almost every measure you want to look at,” Simon Kirby, an economist at Niesr, said at a press conference yesterday. “We’ve got quite a buoyant housing market compared with the previous few years. That feeds through and has a knock-on effect to our consumer-spending growth forecasts.”

k Ltd. said last week prices in England and Wales rose 3.1 percent from a year earlier, the biggest gain since 2007.

Bubble Warnings

Help to Buy allows people to buy homes costing as much as 600,000 pounds ($957,000) with a 5 percent down payment. The program began in April with interest-free loans for buyers of newly built properties and the second phase -- mortgage guarantees covering all homes -- was brought forward to last month from January.

The plan has drawn warnings from the International Monetary Fund, and former Financial Services Authority Chairman Adair Turner said last month that Britain risks a repeat of the debt-fueled binge that led to the credit crisis.

“I don’t think any of us are fans of Help to Buy,” said Jonathan Portes, director at Niesr. Angus Armstrong, an economist at the institute, said “the design of it is so wretched, that’s what’s depressing about it.”

“Banks have an incentive to loosen underwriting requirements for mortgages,” Armstrong said. “If you’re going to intervene in the mortgage market there are a lot better ways to do that,” such as through the mortgage-backed securities market, he said.

‘Unsustainable’ Growth

Growth based on consumer spending is “unsustainable” because it’s based on the housing market rather than increases in real incomes, and it’s coming at the expense of household saving, Kirby said. Significant contributions from business investment and trade won’t start until 2015 and 2016, respectively, he said.

Unemployment, now at 7.7 percent, will fall below 7 percent at the start of 2016, though there’s a one-in-five chance it will reach that level in the first quarter of next year, Kirby said. A 7 percent jobless rate is the threshold at which Bank of England policy makers say they’ll consider raising the benchmark interest rate, provided none of the three “knockouts” in their forward-guidance policy are first triggered.

Kirby said that the knockout related to financial stability risks will probably lead to a rate increase in the second half of 2015. The caveats related to inflation forecasts and inflation expectations won’t be triggered, as inflation will drop to the bank’s 2 percent target in the first quarter of 2015, he said.

Article Source: http://www.businessweek.com/news/2013-11-04/u-dot-k-dot-outlook-raised-by-niesr-as-property-boom-feeds-spending

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Bank of England Watches for Possible Property Bubble

This article by Huw Jones and William Schomberg of Independent.ie on September 26th, 2013 shows how Bank of England will keep a watchful eye for possible dangers of another property bubble.

The Bank of England said on today there was no immediate danger of a property bubble in Britain but that it was keeping a watchful eye out.

It also said it wanted more study on how vulnerable hedge funds that rely on borrowing would be to future interest rate rises.

The central bank's Financial Policy Committee (FPC) said Britain's housing recovery "appeared to have gained momentum and to be broadening" but was under control, based on gauges such as level of activity, debt costs and prices compared with incomes.

"In view of that, the Committee judged that it should closely monitor developments in the housing market and banks' underwriting standards," it said in a statement after its September 18 meeting. "The Committee would be vigilant to potential emerging vulnerabilities."

If any action was needed, it would be "proportionate to the risks and consistent with a graduated response."

House prices in Britain as a whole rose 3.3pc in the 12 months to July but jumped nearly 10pc in London, official data showed last week.

This has triggered some concern that BoE and government lending incentives are creating a housing bubble.

Stephen Lewis, chief economist at Monument Securities said the FPC - which is tasked with spotting risks to the economy from the financial system - was right to hold off for now. "It's probably the right thing at the moment. There is a lot of uncertainty at present about the housing market."

The housing recovery has been helped by government and Bank measures to free up mortgage lending. A new phase of the government's Help to Buy programme is to be launched in January.

Governor Mark Carney and finance minister George Osborne have shown no concern about the prospect of a housing price bubble, pointing to levels of activity in the property market that are below their pre-crisis peak.

But earlier this month, a group representing British property surveyors called on the Bank to take measures to slow mortgage lending if national house price growth exceeds 5pc a year.
Ed Miliband, leader of Britain's Labour opposition party, said this week that if he wins election in 2015 he would more than double the number of new homes built annually to 200,000 by 2020 to ease a shortage that has helped to push up prices.

FOCUS ON HEDGE FUNDS

In June, the BoE ordered an investigation into the vulnerability of Britain's financial institutions and borrowers to higher interest rates when central banks around the world start to wean their economies off massive stimulus.

The FPC said in its statement on Wednesday that a moderate rise in long-term interest rates did not pose an immediate threat to major banks and insurance companies and so far "had not led to dislocations in market functioning or significant impact on financial institutions."

However, levels of leverage within hedge funds, which could make them vulnerable to a sharp rise in borrowing costs, "needed to be looked at more closely," the statement said.

The Financial Conduct Authority, which is represented on FPC, said it asked a number of hedge funds during the summer about their preparedness for changes in interest rates following the June FPC meeting and as part of routine supervisory work.

The FPC's wider review of rate hikes would continue by looking at what impact "more significant stresses" would have and how any impact would ripple through the financial system.

The FPC said it will publish on October 1 a discussion paper on the design of a new framework for stress testing banks.

Article Source: http://www.independent.ie/business/bank-of-england-is-watching-for-signs-of-uk-property-bubble-29609879.html