Tuesday, January 08, 2008
Mixed signals
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The British Retail Consortium reported that sales in December were up by 2.3% on a year earlier, and by 0.3% on a like-for-like basis. This was the weakest December outturn for three years and reinforced the BRC's calls for an interest rate cut this week. But, again, it was not as dire as earlier warnings from retailers had suggested.

Meanwhile, the Halifax house price index showed a surprise 1.3% rise on the month - even bulls had looked for nothing more than a flat figure. This pushed the "raw" annual rate up to 6.3% in December, from 3.1% in November. However the Halifax prefers to concentrate on the latest three months compared with a year earlier, which showed a dip to 5.2% in October-December from 6.3% in September-November.

Comments

Hi David

I am now more convinced than ever that somehow (I have no idea how), there is a HIPS effect in the Haliwide numbers.

Approval numbers don't support the previous falls, the other indicies, Hometrack, FT, Land Reg. The only index that supports the Haliwide large falls, and large rises is rightmove, and they say it is HIPS.

Anyway, If I am correct Natiowide should show a rather weak number next month (because they run 15-15) and then they should show a bounce. Also Halifax should show stronger than expected figures as Small places get the hip treatment.

Maybe I'm wrong, and Haliwide are both hedonically regressing out the HIPS, but my gut says there is something "unusual" going on.

Posted by: kingofnowhere at January 8, 2008 01:02 PM

I don't believe those house figures, they smell a bit fishy to me. Where have they got that from? They must have just pulled it out of thin air because in my neck of the woods, Chelmsford, Essex, house prices are only going one way...

Posted by: James Trouble at January 8, 2008 01:10 PM

Sorry, didn't see kingofnowhere's comments: Yes, I agree with you sir, seems like something unusual is going on with those figures, time will tell. Stand by for big revision in next months figures is my guess...

Posted by: James Trouble at January 8, 2008 01:11 PM

No, that's not that point he's making - it is that the earlier falls in the Halifax series were probably exaggerated by the introduction of Hips, just as this rise may have been distorted. Irrespective of this, it is always difficult to match the anecdotal to house-price series, not least because of seasonal adjustment. I suspect early January is never a great time for unadjusted house prices, even in Chelmsford.

Posted by: David Smith at January 8, 2008 03:46 PM

Mixed Signals!

Mixed inflation, mixed money supply, mixed GDP forecasts, mixed political messages, mixed messages indicate mixed up opinions, my household bills are going through the roof, school fees up 2x inflation rate, diesel 1.10 and what not. I believe we lag the US by about 12 to 18 months, now that good be a mix up ofcourse....I fear however GDP and GBP are going to have to battle it out, whichever the BOE king backs is going to hurt the other.


Happy New year David


Arik Schickendantz

P.S Can things still get only better?
(or did that die with peacekeeperTB, god bless him)

Posted by: arik schickendantz at January 8, 2008 07:34 PM

Happy New Year to you too. Too many mixed things there, I think. Money supply growth is, of course, now slowing sharply. As for private school fees, they've been rising by at least twice the rate of inflation for as long as I can remember.

Posted by: David Smith at January 8, 2008 08:44 PM

Even in the Chelmsford, well quite :-P

Out of interest, what is the theory behind the hips packs distorting this freaky figure upwards? I'm being a bit slow today...

Posted by: James Trouble at January 8, 2008 11:03 PM

HI James

In August, 4 bed houses need to have Hipps, and then in Sept 3 bed houses.

This, meant that sales of these more expensive houses were below normal in Oct and Nov (Because there wasn't the supply)

Therefore, this may have lead to price falls, in the data

Now these 3 & 4 bed houses are back to normal levels, and so the sales are more representitive.

This may mean that the average sale prices has risen compared to the period where they were under represented.

Therefore IMVHO, the Haliwide and nationwide falls, may have been purely because of the distortions of hips, and the rises now are just the data sorting itself out.

Posted by: kingofnowhere at January 9, 2008 07:43 AM

Intereesting article in the Times today about an inflationary threat looming as the tide of cheap Chinese goods dries up. This is something we have been predicitng for some time...

Posted by: Pete Balchin, Solicitor at January 9, 2008 09:13 AM

I liked David's comment about school fees, that they have always increased at double the rate of inflation. Of course, this is true for most of the things that the British people use in their everyday lives - housing, council tax, petrol, utilities (including water), train journeys, tube journeys etc, and now food. But, CPI always holds firm at c. target, and as it does, the publics confidence in this hedonically-adjusted basket-of-goods conception of inflation declines. What is inflation? That is the question. We all know that there is no deinite answer to this question, but the CPI paradigm has not served us well me thinks.

The discussion about house price indices is interesting. If the bottom of the market freezes up (credit effect on BTL, and lack of FTB), but the top end of the market continues to flourish (foreign buyers etc), then we should see large increases in house prices as the 'average' sale price increases. The indices are troubling.

David - from a previous discussion we had you noted that the housing market in 2005 was clearlt picking up before the infamous August cut. You evidenced this by pointing to the uptick in prior mortgage approvals. Approvals are obviously hugely important. Given that they have declined dramatically, when do you think we shall see this in the HPI indices? Anecdotally, my brother works at a senior level for one of the big housebuilders. He tells that footfall and sales have literally walked off a steep precipice. Me thinks the crash underway, but time will judge.

The M&S figures today, and the market response to the sector add weight to the view that the UK is slowing rapidly now. Northern wreck is still just that. Some of the largest banks in the world are probably insolvent (but they don't have to account properly). Looks like Goldilocks has been hugged to firmly by the bears.

Posted by: T Gumbrell at January 9, 2008 09:32 AM

"It is not a matter of when, it is a matter of data..." Mervin King

I think this will apply equally well to David and his view as to the interst rate cuts that are on the way, the second of which will come tomorrow.

Interesting market reactions today, offers in the front end of the curves are all being ripped into. Not so much of a knife edge decision any more, so it seems...

Posted by: James Trouble at January 9, 2008 05:25 PM

Goldman Sachs said today that the US is going to go into recession. If this is true then we now have our example of a property correction (which is gradually turning into a crash) causing an economy to go into recession (rather than vice versa). I wonder if any posters on this site (including its owner-creator) believe that the same scenario, and the same order of causality could play itself out in the UK?

Posted by: T Gumbrell at January 9, 2008 09:10 PM

T Gumbrell, it will indeed be interesting to see if our property market crashes before we go into recession. But I believe we will be going into recession whether or not the property market crashes first or not. My view, for what it's worth, is that we have already entered recession and it's just a matter of the data feeding through.

I really don't think there is much doubt about what is going to happen, David seems to be in the minority of economists now and it's just a matter of data, not time until the last of them turn to the 'dark side'.

In my opinion, the only way for the inevitable recession to be avoided is for Mervin and his men to be pragmatic, follow the Fed's lead and undertake a series of rate cuts to 4.5-5% in the next 2-3 months, and signal tomorrow their intention to do this, with a wait and see period after that, with the possibilty of continued rate cuts to 4% as the data starts to confirm the need to do so.

We could well see carnage in the markets tomorrow if Merv pulls a stunt like he did last month and follows the ECB's lead and releases a statement again about their concern of inflationary pressure.

HOWEVER, maybe the 'right' thing to do is not raise rates, the years of bull markets have made genius out of idiots, and all those property developers who have had it easy, the hedge fund managers who have been naive and reckless, bank managers lending money they shouldn't have, fools borrowing money they can't afford to, a government wasting too much money for too many years without saving for the future etc etc, they should swallow some nasty tasting medicine. Teach them all a lesson, don't bail them out, the B of E are independent and their job is to control inflation. If I was in charge I wouldn't bail anyone out. But I hope for everyone in this country that Mervin is not as mean as I am and that he feels that slashing interest rates quickly to 4.5% will have little effect on inflation in the medium term...

Posted by: James Trouble at January 9, 2008 10:38 PM

There's more nonsense talked on this than on most subjects. Thus, we had a succession of people saying the US had already entered recession in the fourth quarter but the data now points to continued growth, so they all move it on to the first quarter. You need two quarters of declining GDP, of course, to meet the technical definition of recession. Goldman has been bearish for some time on the credit crisis and is now predicting a mild US recession.

As far as the UK is concerned, the coincident indicators we have, e.g. the purchasing managers' surveys, all point to continued, if modestly slower, growth. So it is crazy to say the UK has entered recession.

Posted by: David Smith at January 9, 2008 10:49 PM

Dear David,
Using UK data on house price inflation (Nationwide index) and GDP growth over the 1974-2007 period, "Granger causality" statistical tests (named after the Nobel Prize winner Sir Clive Granger) reveal that recessions are not caused by house price falls. The statistical methodology is pretty convincing as it allows for up to 8 quarters of house price effects on UK GDP.
Thanks
Costas

Posted by: cmilas at January 10, 2008 09:07 AM

You are right Costas.

But beware of letting past performance be a guide to future performance. David Hume's writings on induction are a good place to start.

Also, the Granger results might benefit from have the recent US experience fed through the test.

TG

Posted by: T Gumbrell at January 11, 2008 08:40 AM

Even if US house price inflation data (or even US output data) are included as exogenous effects, there is no evidence of UK house prices triggering a recession in the UK.
Thanks
Costas

Posted by: C Milas at January 11, 2008 02:38 PM

Costas - I meant that the US house price crash had (or rather will) cause US recession, not UK recession - I wasn't suggesting it was an exogenous shock to UK economy. My general point is that the property crash in the US will, for the first time ever, put that economy into recession. By extension, I believe the same thing can, and probably will, happen in the UK (property price falls cause collapse of consumer spending and then recession).

So, while I agree that history suggests that house price falls are the result of recession and not vice versa, this time it wil be different, and the order of cause and effect will reverse. You are supporting David's main contention about property and the UK economy. I am opposed to this view point, and think that we are on the brink of a massive property market crash and consequent recession.

Posted by: Gumbrell at January 11, 2008 08:36 PM

Hi TG,
One of the challenges the profession faces is the difficulty to find a meaningful economic model which is able to predict the business cycle better than a purely statistical model which relies solely on lags of the business cycle (i.e. an autoregressive model).
Recent evidence (http://core.ecu.edu/econ/rothmanp/ijf-accepted.pdf)
suggests that economists can do well by pooling information from alternative economic models which correlate the business cycle with consumer prices, interest rates, money and oil prices.
There is no evidence that house prices are missing from the picture.
Thanks
Costas

Posted by: cmilas at January 12, 2008 09:05 AM

Interesting debate. For me the issue has always been whether a housing market downturn is the cause of recession, or merely a leading/coincident indicator of recession. So the cause of the 1990-92 recession was a loss of control of monetary policy and a doubling of interest rates from 7.5% to 15% in 1988-9. Housing responded to that but so did employment, GDP growth and just about everything else.

In the case of the US at present, if there is a recession it would be fair to say that it originated with a shock in the housing market - subprime - which then spread into the markets and into the wider economy.

What about the UK? Though I don't expect a recession, the sharp shift of economic mood we have seen in recent months is directly attributable to the credit crisis, which in turn emanated from the US housng market. So the link to slower UK growth is, in my view, from the US housing market, not our own. That would still be true, incidentally, if UK housing suffered bigger problems than I expect. Those problems could prolong UK weakness/recession but would not, in my view, have been the cause of the initial downturn.

Posted by: David Smith at January 12, 2008 11:26 AM

Dear David,
For the US, there is also empirical evidence that the speed of housing construction (and therefore the supply of new houses) is faster during economic contractions (possibly because builders have extra capacity to allocate among the existing projects during contractions). This certainly adds to the mismatch between supply and demand for houses in periods of deteriorating economic conditions.
Thanks.
Costas

Posted by: cmilas at January 12, 2008 12:53 PM

Nothing to do with all those city centre shoe boxes selling for a quarter of a million, built on land normally used for warehouses.

cos there woz a shortage of houses dontcha know?

Posted by: Piers Ponsenby-Smythe at January 13, 2008 09:26 PM
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