Safe as houses
* To outsiders the British can seem slightly obsessed with house prices. Yet it is an asset that matters. Two-thirds of UK households are owner occupiers and 35% of household wealth is tied up in property.
* The value of that wealth has risen by almost 50% in the last ten years. Taking account of rising house prices and rental costs the average homeowner has enjoyed a return of roughly 8% a year in the last ten years – slightly less than the return from equities but far faster than earnings which have risen by around 2% a year over this period. Since the recession the average homeowner has made far more from increases in the value of their home than from pay rises.
* But in the last three years the housing market party has tailed off. UK prices rose by just 1.4% in the last year. London prices fell 1.9% but this has been offset by modest gains in most other parts of the country.
* Brexit uncertainties and consumer worries about the economy have weighed on the market, compounding the problem of stretched affordability in London and the South (elsewhere in the UK housing is significantly more affordable). Higher rates of stamp duty on more expensive properties and weaker demand from foreign buyers have had their greatest effect on the London market. Meanwhile increased rates of stamp duty on additional homes, reduced tax reliefs and new regulations have dented the attractiveness of buy-to-let.
* But what about the long term outlook for UK house prices?
* Over the last 40 years ever easier access to credit and ever lower financing costs have driven a dizzying rise in house prices. The liberalisation of the mortgage and financial markets from the 1980s increased the amount of mortgage credit available to home buyers. Interest rates have trended down since the early 1980s, with quantitative easing eventually collapsing the base rate to just 0.25% – a fraction of the peak rate of 16% seen 25 years earlier. Strong growth in population, an increasing number of single person households and a collapse in house building after the recession have added to the upward pressure on house prices.
* It is hard to see the heady gains in house prices of recent decades being repeated in the future. With mortgage rates close to all-time lows there is little scope for major reductions in financing costs. Whereas the trend in financial policy in the 1980s and 1990s was towards liberalisation, today it is towards regulation. That has made lenders more cautious and mortgages rather harder to come by.
* Politicians and policymakers are alive to the distributional effects of rising house prices. Rocketing prices have increased the wealth of older, generally higher income people, widening wealth inequalities and making it harder for young people to get on the housing ladder. The focus of policy today has tilted to helping first time buyers and those renting while increasing levels of housebuilding.
* It’s been hard not to make money out of housing in the UK in the last 40 years. It is likely to be harder to do so in future.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.0% at 7,278 as global equity markets retreated on concerns over trade tensions between the US and China.
Economics and business
* Google barred Chinese phone maker Huawei from using its operating software after the White House placed the company on its ‘banned entity’ list
* President Trump announced a three-month exemption period before the ban takes hold
* Network providers EE and Vodafone pulled Huawei phones from the UK 5G launch after the Chinese group was hit by Google’s ban
* President Trump unveiled $16 billion in aid to US farmers hit by the trade war with China
* China sold $20 billion of US treasuries in March, an amount that can’t be accounted for by normal market flows, sparking fears that China might sell US debt as a tactic in a trade war between the two countries
* The US 10-year yield fell to a 17-month low as investors sought out safe assets amid worsening US-China trade tensions
* The New York Federal Reserve estimates the new US tariffs on Chinese imports will cost the typical US household $800 annually
* US durable goods sales missed expectations in April, falling by the most in six months
* UK retail sales continued to grow at a strong pace, rising 5.4% in the three months to April compared to the same period last year
* UK inflation accelerated to 2.1% in April as changes to energy tariffs and rising wages boosted prices
* The European Central Bank raised concerns that inflation remained uncomfortably below target and market inflation expectations had receded
* German business confidence fell to its lowest level in more than four years this month
* The US Federal Reserve said it planned to keep rates on hold, despite weak inflationary pressures
* The right-wing Bharatiya Janata Party won a landslide victory in India’s general election, giving ruling prime minister Narendra Modi five more years in office
* The Bank of England is considering tightening mortgage lending rules due to an increase in the number of high loan-to-value deals
* Jamie Oliver’s restaurant chain entered administration, resulting in 1,000 job losses, in a further sign of the difficulty facing the casual dining sector
* Shareholders of oil major BP have voted overwhelmingly in favour of making greater disclosures about how its business aligns with the goals of the Paris climate agreement
* British Steel entered administration, putting 5,000 jobs at risk
Brexit and European politics
* The newly formed Brexit party was the biggest winner in the UK’s European elections winning around one-third of the vote, the Liberal Democrats also made significant gains while support for the Conservative and Labour parties collapsed
* Eurosceptic and nationalist parties made modest gains across other European member states in the elections but pro-EU parties largely held their ground as support increased for Green and Liberal parties
* UK prime minister Theresa May announced she will step down as Conservative Party leader on 7th June
* Theresa May had set out a “new, bold offer” on Brexit at the start of the week which included MPs voting on a second referendum, a vote on different customs union options and enhanced protections for worker’s rights
* The revised deal was roundly criticised by MPs from both sides of the house before Mrs May pulled it from the Commons schedule on Thursday
* Prior to Mrs May’s resignation, Andrea Leadsom resigned as the leader of the House of Commons saying “that our approach will no longer deliver on the referendum result”
* Conservative MPs Sajid Javid, Matt Hancock, Jeremy Hunt, Dominic Raab, Andrea Leadsom and Michael Gove all announced they will run for leadership of the party
* The top three candidates for the Conservative leadership, according to bookmaker Paddy Power, are Brexit supporters Boris Johnson (55% implied probability of victory), Dominic Raab (14%) and Michael Gove (11%)
And finally… The US embassy in Austria has announced a partnership with McDonalds in Austria to allow Americans to contact the US embassy via a McDonalds restaurant should they lose their passport or if they are in distress – when the chips are down