Tag: UK

UK’s reduction of stamp duty for first-time homebuyers will benefit RMBS

From Moody’s

On 22 November, the UK government announced a number of measures in its Autumn Budget, including a stamp duty reduction that will benefit 95% of first-time homebuyers, with a maximum saving of £5,000 per buyer. For purchases completed on or after 22 November 2017, first-time buyers do not have to pay stamp duty on properties worth up to £300,000, while for properties worth up to £500,000 they pay £5,000 less. The stamp duty for purchases above £500,000 is unchanged. Such measures will be credit positive for residential mortgage-backed securities (RMBS), allowing first-time buyers to amass the down payment they need to take out a loan faster or allow them to borrow a larger amount, strengthening both housing demand and property prices and lowering market-implied loan-to-value ratios on existing loans.

The stamp duty reduction will help alleviate some of the financial burden on first-time buyers amid stagnant wage growth, proportionally more household cost expenditures, and rising rents (rental price inflation in the UK has slowed recently, but was up 0.9% in October 2017 versus a year ago, according to HomeLet). Nevertheless, first-time buyers, especially in London and surrounding counties, still face relatively high equity layouts compared with other regions. Our recent RMBS pool analysis also showed that compared with non-first-time buyers, first-time buyers start with up to 15% less equity in the property (see exhibit).

The budget also confirmed additional funding under the help-to-buy equity loan scheme, another credit positive because it increases the availability of loans for borrowers, while supporting house prices, which overall we expect will remain flat in 2018. Under the scheme, borrowers can purchase a newly built property with just a 5% deposit. Since its launch, borrowers have purchased 120,864 properties, with 81% of the sales attributable to first-time buyers. In 2017, Halifax Ltd. estimated that first-time buyers accounted for almost half of all mortgage-financed house purchases, an important driver of housing demand.

Budget 2017 fails to reset or rebalance anaemic UK economy

From The Conversation.

Given the May government’s weakness and instability, and the ongoing toxic, Brexit-laced personal and political divisions within the cabinet, not much was expected from Philip Hammond’s Autumn 2017 budget. He did not disappoint.

During a rambling, hour-long speech of nearly 8,000 words, weak jokes torturously delivered were interspersed with a raft of policy announcements whose sum total fell far short of resetting UK economic policy away from austerity. This was not a budget to redress the “burning injustices” and interests of the “just about managing”, which the prime minister once promised would be the mission of her government.

Hammond’s announcements fell far short of the £4 billion in investment required to redress the impact of a lost decade of cuts in welfare, including the freeze on benefits. Or the £4 billion required to maintain services in the National Health Service in England in 2018-19. And little to redress the financial unsustainability of England’s schools or its local government.

Hammond’s statement announced token investment in driverless vehicles, but onlookers could be forgiven for thinking that this was the anaemic budget of a driverless government. Like his next-door-neighbour in 10 Downing Street, Hammond lacks the necessary gumption to lead the UK economy at this critical juncture.

The Autumn 2017 budget represented the opportunity to make good Hammond’s July 2016 promise “to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months”. The data that has emerged subsequently should have convinced him that the time for a reset was long overdue. Austerity has clearly failed to revive the British economy and there is an urgent need to prepare businesses – and not just government departments – for Brexit.

Rising debt

Austerity – the notion of balancing the books by cutting spending – has singularly failed to rebalance the nation’s finances. Since Hammond’s appointment as chancellor, a further £176 billion has been added to the UK’s public sector net debt, which now stands at more than £1,790 billion. This has maintained the pattern since May 2010, which has seen the Cameron-Clegg coalition’s “unavoidable deficit reduction plan” add £772.5 billion to public sector net debt.

The budget now forecasts that in 2022-23, public sector net debt will still be £1,909 billion or 79.1% of GDP, and the government will be borrowing £25.6 billion or 1.1% of GDP.

This is contrary to what Hammond’s predecessor George Osborne promised would have been achieved by 2015-16. When the Conservatives came into government in June 2010, Osborne promised “to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export”.

That new, balanced economy has proven to be a fiction. In 2016, the UK ran a record current account deficit of £115.5 billion, equivalent to 5.9% of GDP, and a trade deficit of £43 billion, equivalent to 2.2% of GDP.

There was little in the latest budget to reverse these trends. Instead, the independent Office for Budget Responsibility (OBR) downgraded its forecasts for real GDP growth between 2017-18 and 2021-22 from 7.5% to 5.7%. The British economy is now forecast to grow by less than 2% in each year of the current parliament, and, as the OBR also noted, this contrasts with “a pick-up in other advanced economies”.

Storing problems for the future

The budget concluded with a raft of announcements to address the housing crisis in England, including the abolition of Stamp Duty on properties up to £300,000. This was Hammond’s crowd-pleasing rabbit out of the hat. But the OBR has observed that “the main gainers from the policy are people who already own property” rather than first-time buyers, and will likely push up prices, thus making properties less affordable.

Official government statistics have revealed that over the past 20 years, land values have increased by 479% and property values by 203%. The latest budget has done nothing to reverse these trends towards investment in property and rent-seeking, rather than in the real economy of businesses.

David Willetts, who until May 2015 was complicit in the implementation of austerity, as a cabinet minister in the Cameron-Clegg coalition government, recently warned:

We are reshaping the state and storing problems for the future by creating a country for older generations. The social contract is a contract between the generations and in Britain it is being broken.

The truth is more stark than that. Philip Hammond’s failure to reset UK economic policy by perpetuating fundamentally flawed austerity policy means the May government is reshaping the state and storing problems for the future by creating a country for older, rentier and asset-rich interests. This risks breaking down the political contract between the governing elite at Westminster and the people of Britain.

Author: Simon Lee , Senior Lecturer in Politics, University of Hull

Weaker UK Growth Forecasts Highlight Debt Challenge

Ensuring the medium- to long-term sustainability of the UK’s public finances appears more challenging following the November Budget and the Office for Budget Responsibility’s (OBR) reduction to its economic growth forecasts, Fitch Ratings says.

The OBR now expects real GDP growth to average 1.4% over the four years to 2020, down from 1.8% in its March forecasts, before picking up slightly to 1.5% in 2021. This would leave the level of real GDP in 2021 around 2% lower than forecast in March. The revision is largely due to a weaker productivity assumption, which also means the OBR’s assumptions for potential growth have come down significantly (now averaging 1.4% to 2021). Weaker growth makes reducing public sector indebtedness more challenging.

We expect the UK economy to expand by 1.3% next year, but are more optimistic than the OBR for 2019. Nevertheless, as we said when we affirmed the UK’s ‘AA’/Negative sovereign rating last month, our projections for 2019 are unusually uncertain, as macroeconomic developments will be related to the outcome of the Brexit negotiations.

The outcome of the June general election suggested that ‘austerity fatigue’ is a meaningful factor in British politics and the Budget included discretionary fiscal measures that will translate to a fiscal policy loosening of GBP16 billion in the next two financial years (around 0.3% of GDP in FY18/19 and 0.5% the following year).

The main changes on the tax side are the abolition of stamp duty for first-time home buyers for the first GBP300,000 on a purchase up to GBP500,000, and the freezing of fuel and alcohol duties. The main spending change is extra current and capital spending on the National Health Service of around GBP5 billion over the next three financial years.

The OBR still expects the public sector deficit to fall, but probably not fast enough to meet the government’s target of a balanced budget by the middle of the next decade. The structural deficit would still fall below the government’s 2% of GDP target of in FY20/21, but with a smaller safety margin than forecast six months ago.

The OBR now expects the public debt ratio to decline only slightly over the next three financial years. This underlines the scale of the challenge of putting the UK public debt ratio on a firm downward path.

Our deficit projections from our October rating review, which do not incorporate the latest policy announcements, imply general government debt declining gradually as a share of GDP from a peak of 88.3% of GDP in 2016 to 85.7% of GDP by 2019. This would still leave the UK with one of the highest public debt ratios among highly rated sovereigns. If we mechanically feed the discretionary policy changes in the Budget into our October public finance projections, this also suggests slightly worse public debt dynamics over the next few years.

Why the Bank of England is raising interest rates – and the risks involved

From The Conversation.

The Bank of England is poised to raise interest rates for the first time since July 2007. Its monetary policy committee (MPC) will meet to decide on November 2. The MPC’s last vote on the issue was a 7-2 majority for maintaining current rates, but it’s only a matter of time before rates rise.

Initially, the rise will likely be from 0.25% to 0.5%. This may not sound like much, but it could have significant implications for the UK economy. Mark Carney, the bank’s governor, is facing an uncomfortable trade-off, mulling priorities of curbing inflation versus financial stability.

The reason for the rate rise is inflation, which has risen to its highest level since April 2012 (3%) – beyond the government’s target figure of 2%. This is a result of the Brexit vote in June 2016, which saw a precipitous drop in the pound, making imports more expensive and pushing up prices of everyday items.

A rise in interest rates should help stem this by boosting the value of the pound. For example, expectations of a rate increase last month prompted a temporary jump in the value of the pound of 1.5%. Plus, the central bank will be hoping that higher interest rates will encourage people to save – another method of curbing inflation – although any increases on savers’ rates will be negligible.

But, despite hints of a rise from Carney, the situation is not that simple. The long period of low interest rates has been accompanied by a worrying surge in consumer borrowing. Household debt exceeds 100% of household income and house prices are on an upward trajectory, climbing back to 2007 crisis levels.

Clearly, an interest rate increase would harm borrowers and may even harm financial stability if monthly repayments are no longer manageable and defaults rife.

UK household debt to income ratio. ONS and Bank of England calculations

With the average outstanding balance on a mortgage in the UK estimated to be close to £120,000 and, assuming repayment will take 15 years, the next graph shows estimated annual repayments for a variety of possible interest rate hikes.

What is worrying is that the Taylor rule (a popular interest rate forecasting tool) suggests that interest rates should be approximately 2% higher than they currently are. This would further squeeze household budgets and push the average repayments above £11,000 per year.

Stopping a car crash

Another area the Bank of England is keeping a close eye on is the way cars are financed. Many new cars are purchased on personal contract plans (PCPs) whereby they are paid for via monthly repayments – usually with zero or low upfront payments. A rise in interest rates could result in an awkward situation for car financiers if owners are unable to keep up with payments and decide to return their keys early.

With a glut of cars returning to the forecourt, as people reallocate resources to increasing mortgage and debt payments, the estimated residual values of the cars may prove inaccurate, leaving financiers (banks and car firms) with heavy losses. And it doesn’t stop there. The loans have been syndicated so there could be ripple effects through the financial system.

Headed for a crash? John Stillwell/PA Archive/PA Images

All in all, this sounds rather reminiscent of 2007, with the difference being that the asset here is a car that is depreciating in value as opposed to a house. Not surprisingly, the Bank of England is trying to reign in car financing to engineer a soft landing.

Slow and steady

On top of all this, there is the notably gloomy outlook for the UK economy to contend with. To keep growth on an upward trajectory, keeping interest rates low is still seen by some as a necessity, and some economists (notably Danny Blanchflower, a former MPC member) still advocate for this.

Unemployment is now at low levels not seen since the mid-1970s, which is music to the ears of cautious central bankers. Yet wage growth – a measure of longer term inflation – remains subdued, and “underemployment” (such as the part-time worker who really wants to work full time) still has some way to fall to get back to pre-crisis levels not withstanding recent drops.

This will ensure that any hikes in interest rates will be a drawn out process – to avoid frightening financial markets, which have grown accustomed to cheap central bank funds and loose monetary policy over the past decade.

Author: Johan Rewilak, Lecturer, Aston University

UK Rate Rise Has Little Growth Impact, Shows Global Shift

The Bank of England’s (BoE) decision to increase UK interest rates by 25 bp partly unwinds the monetary stimulus it provided last summer, and is unlikely to have a large economic impact, Fitch Ratings says. The BoE looks set to tighten policy slowly, but the first UK rate hike in over decade highlights how shrinking output gaps and tighter labour markets are pushing central banks towards interest rate normalisation.

The BoE said Thursday that its Monetary Policy Committee (MPC) voted by 7:2 to increase the Bank Rate to 0.5%, reversing the cut it made last August in the aftermath of the Brexit referendum. It left the stock of bonds purchased under its quantitative easing (QE) scheme unchanged. Prior to last August, the Bank Rate had been unchanged for over seven years. The BoE’s last rate hike was in July 2007.

Fitch has for some time been expecting the post-referendum interest rate cut to be reversed, although in our most recent Global Economic Outlook (September 2017), we expected this to happen in early 2018. The MPC summary said that all members agreed that future increases “would be expected to be at a gradual pace and to a limited extent,” and that monetary policy “continues to provide significant support to jobs and activity.”

We think another increase is unlikely in the next 12 months, given the impact of Brexit uncertainty on the outlook for investment. Today’s decision does not alter our UK growth forecasts , which see a net trade boost partially offsetting slower domestic demand this year, enabling real GDP to rise by 1.5%, before slowing to 1.3% next year. But it remains to be seen how firms and households adjust to a shift in the monetary policy stance after such a long period without a rate rise.

While the BoE has no intention of slowing the economy down, its decision highlights how tighter labour market conditions (UK unemployment is at a 42-year low) and concerns about adverse supply-side impacts from Brexit have reduced tolerance for above-target inflation. Inflation rose to 3% in September partly in response to the weakening of sterling. We forecast inflation to slow next year, averaging 2.5%, but this would still be above the BoE’s 2% target.

As output gaps close, central banks around the world are generally refocusing on policy normalisation. The BoE said it was “ready to respond to changes in the economic outlook as they unfold” to ensure a sustainable return to target, while supporting the UK economy through its Brexit adjustment. Meanwhile the ECB has announced smaller monthly QE purchases from January, while this week’s Fed statement emphasised solid growth and did little to suggest that it felt that recent low US inflation readings were becoming more persistent.

UK Government Plans to Increase Social Housing Grants

From Moody’s

Last Wednesday, UK Prime Minister Theresa May announced that housing associations and local authorities will receive an additional £2 billion in grants for social (i.e., public) housing, including social rented homes. She also announced that rent increases will be set at CPI plus 1% starting in fiscal 2021 (which starts 1 April 2020) for five years. These announcements are credit positive for English housing associations because they signal greater support for the social rented sector.

Increased grant funding will reduce external financing needs and provide incentives to focus on social renting activities, which provide more stable cash flow than markets sales. The rent-setting regime provides clarity about housing associations’ operating environment and signals a shift from the previous government policy, which had negative financial effects on the sector.

The amount of grant funding available under the Affordable Homes programme for housing associations and local authorities will increase by £2 billion to £9.1 billion over the length of the program. Housing associations historically have relied on government grants to finance the production of new social homes, but such grants have significantly dwindled since the financial crisis.

The new grant programme aims to fund the construction of an additional 25,000 homes, and we expect the average subsidy per home to more than double to £80,000 from £32,600 in the last allocation round of the programme in 2016 and from £23,500 in the 2014 round. Although the distribution of the grants will depend on yet-to-be-defined criteria that determines which areas are most in need, we expect the 39 English housing associations that we rate to receive £650-£900 million of new grant funding, which would contribute to financing 8,000-11,250 homes.

The additional grants will reduce housing associations’ external financing needs, and should reduce future borrowing, which we currently expect will reach nearly £4 billion during fiscal 2018-20. However, some housing associations may choose to use the freed-up financial capacity to further increase their production of homes for open market sale rather than to stabilise indebtedness.

The grant programme signals a rebalancing of the government’s position in favour of rented social housing. The social letting business provides more stable cash flows for housing authorities than low-cost home ownership programmes, which had been at the centre of the previous housing policy. The lack of grants for building social rented homes and political pressure had encouraged housing associations to subsidise social homes by building units for open market sale that expose housing associations to the cyclicality of the housing market. The share of such sales to turnover has steadily increased over the past five years, reaching 15% in fiscal 2016 for our rated issuers and more than 40% for a small number of housing associations. Hence, this shift in the availability of funding and the direction of policy is credit positive.

BOE Warns Popular 35-Year Mortgages Shackle Consumers With “Lifetime Of Debt”

From Zero Hedge.

Consumers in the UK have been on a credit binge since the Bank of England cut its benchmark interest rate to an all-time low as investors braced for the widely anticipated economic shock of Brexit – a shock that, unsurprisingly, has yet to arrive, despite warnings from the academic establishment that a “leave” vote would trigger an imminent economic catastrophe. And now, with total credit growth rising at 10% a year, the BOE is warning that the increase in unsecured lending is becoming increasingly unsustainable.

While the central bank is less concerned with mortgage debt than credit-card debt and other types of consumer credit, some at the bank are beginning to worry that the growing demand for long-term mortgages will shackle borrowers with a lifetime of debt, according to the Telegraph.

 “British families are signing up for a lifetime of debt with almost one in seven borrowers now taking out mortgages of 35 years or more, official figures show.

Rapid house price growth has ­encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments and easing affordability pressures.

Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more. While this is slightly down from the record high of 16.36pc at the end of 2016, it has climbed from just 2.7pc when records began in 2005.”

The steady rise has triggered alarm bells at the BOE, prompting regulators to warn that the trend risks storing up “problem[s] for the future” if lenders ignore the growing share of households prepared to borrow into retirement. Indeed, bank figures show one in five mortgages today are between 30 and 35 years, up from below 8% in 2005, as the traditional 25-year mortgage becomes less popular.

There’s also the unaffordability question. That borrowers are opting for longer mortgage terms means they’re finding rent and mortgages are growing increasingly unaffordable, a worrying sign as credit expands.

David Hollingworth, a director at mortgage broker London & Country, said the trend showed that an increasing share of borrowers were “struggling with affordability pressures, and deciding that lengthening the term will offer leeway” as house price growth continues to outpace pay rises.

Sam Woods, the chief executive of the Prudential Regulation Authority, has said policymakers are watching developments closely.

“If lenders become too narrowly preoccupied with the profile of the loan in the first five years” and not look at the entire profile of the loan when assessing affordability “this could store up a problem for the future,” he said in a speech.

While interest rates are expected to stay low, the pound’s 15% drop against the dollar since the last year is driving up the price of consumer goods, adding to the pressure on borrowers. Prices of consumer staples are growing at an annualized rate of 3%, far more than interest rates on savings accounts.

Vanguard’s UK Online Investment Platform Is Credit Negative for Incumbent Players

From Moody’s

Last Tuesday, low-cost fund provider Vanguard (unrated), announced its intention to enter the UK’s direct-to-consumer online investment market. Vanguard’s entry into the UK retail online investment market is credit negative for incumbent online platforms such as Hargreaves Lansdown (unrated) and FIL Ltd.’s (Baa1 stable) Fidelity FundsNetwork because it will likely trigger a price war that costs incumbents their profitability.

Vanguard’s online service, the Vanguardinvestor, lets UK retail investors directly access a wide range of Vanguard’s exchange-traded funds (ETFs) without using a broker or financial advisor. So far, most of Vanguard’s UK business has been sourced from brokerages and financial advisors, which typically require clients to have minimum account balances of at least £100,000. Using Vanguard’s online platform, retail investors will now be able to open an individual savings account with £500 or a monthly investment of £100. And, Vanguardinvestor will charge a flat administrative fee of 0.15% (capped at £375 per year), which is lower than the 0.45% fee that Hargreaves Lansdown, the UK’s largest online provider, charges (see Exhibit 1).

Vanguard will target investors from both the mass and mass-affluent markets – those with savings of £5,000-£50,000. These investors lost access to advice in 2013 with implementation of the UK’s Retail Distribution Review (RDR) and invest directly. In a November 2012 publication, Deloitte estimated that the RDR had created an advice gap population of as many as 5.5 million people.

Gross inflows into stock and share individual savings accounts in 2015-16 totalled £21.1 billion, and this segment has been growing (see Exhibit 2), driven by the tax-free individual savings account allowance increase to £20,000 from £15,240 in April 2017 and new products. In addition to individual savings accounts and defined-contribution pensions, general investment accounts without any tax wrapper are benefiting from investor inflows as people become increasingly aware of their investment options. Vanguard announced plans to launch a self-invested personal pension in the future.

Vanguard’s online service also targets younger investors such as millennials, who are comfortable with online services and are not yet a target for financial advisors or wealth managers. As they evolve in their careers and garner higher incomes, this demographic will be accustomed to low-cost services and investment funds. Vanguard’s online service in the UK is so far limited, but we can see it evolving toward robo-advice as it has in the US with The Vanguard’s Personal Advisor Services.

Incumbent platform providers will likely lower administrative fees and increase services to maintain market share, but this will compress their margins. Given the high and rising costs of running online services, smaller platforms with less price flexibility such as Interactive Investors (unrated) and Nutmeg (unrated) will be most challenged. Cheap online investment services will also accelerate the adoption of low-costs index trackers and ETFs among UK retail investors. Active managers such as Aberdeen, Henderson, Schroders, and FIL Ltd. Will face fee and margin pressure as a result.

In addition, the UK’s Financial Conduct Authority’s upcoming investment platform market study to improve competition between platforms and improve investor outcomes is likely to challenge most platform providers’ prices and Vanguard would be well positioned for any price war. As the best-selling fund manager in 2016 and second-largest asset manager globally, Vanguard has the scale, resources and brand necessary to disrupt the UK retail market, which was £872 billion as of year-end 2015. In the US, where Vanguard provides a similar online-value proposition, platform costs went down.

UK Home Price Growth Eases

According to the UK’s Office for National Statistics, average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017). This continues the general slowdown in the annual growth rate seen since mid-2016.

The average UK house price was £216,000 in March 2017. This is £9,000 higher than in March 2016 and £1,000 lower than last month.

On a regional basis, London continues to be the region with the highest average house price at £472,000, followed by the South East and the East of England, which stand at £312,000 and £277,000 respectively. The lowest average price continues to be in the North East at £122,000.

 The East of England and the East Midlands both showed the highest annual growth, with prices increasing by 6.7% in the year to March 2017. This was followed by the West Midlands at 6.5%. The lowest annual growth was in the North East, where prices decreased by 0.4% over the year, followed by London at 1.5%.

The UK HPI is a joint production by HM Land Registry, Land and Property Services Northern Ireland, Office for National Statistics and Registers of Scotland.

The UK House Price Index, introduced in June 2016, includes all residential properties purchased for market value in the UK. However, as sales only appear in the UK HPI once the purchases have been registered, there can be a delay before transactions feed into the index. As such, caution is advised when interpreting prices changes in the most recent periods as they are liable to be revised.

British prime minister calls snap general election

British Prime Minister Theresa May has called a snap general election for 8 June.

She made the announcement in Downing Street after a cabinet meeting.

With a Commons working majority of just 17, and a healthy opinion poll lead over Labour, senior Tories have suggested Mrs May should go to the country in order to strengthen her parliamentary position.

Such a move would also give a mandate both for her leadership and her negotiating position on Brexit before talks with the European Union start in earnest.

Justifying the decision, Mrs May said: “The country is coming together but Westminster is not.”

She said the government has a right plan for negotiating with European Union.

She said they need unity in Westminster, but instead there is division.

From RTE.

The current 5-year fixed term should run to 2020, and will require a 2/3’s vote in Parliament to progress. This may cause significant heartburn in Labour circles in Britain!

The FT Index fell on the news.