Housing Treasury – Financing Risk

Plenary one: Economic overview and the development of social housing

Speaker: Philip CogganButtonwood ColumnistThe Economist

National Housing Federation

Economic outlookPhilip Coggan

Buttonwood columnistThe Economist

Slow growth

• Five year average of nominal global GDP growth is the lowest since the 1930s

• Nominal GDP growth important since debt is repaid in nominal GDP terms

• British nominal GDP is up, but only 8%• In real terms, it is down 3% on the first

quarter of 2008

So still too much debt

• US non-financial debt* still 250% of GDP• Eurozone debt nearly 250%• UK above both at 285% but below..• Japan non-financial debt at 375% of GDP• Source: Chris Watling, Longview

Economics• * i.e. everything but the banks

Will growth accelerate?

• The big western problem is demography• Economic growth equals more workers plus

more productivity• But what if there are fewer workers?• Between 2010 and 2035, there will be a 20% fall

in Germans and Japanese of working age (15-64), 10% fall in Italians and Dutch, French flat, Britain tiny increase

• All the growth must come from productivity

The old age burden

• The baby boomers retire• Ratio of those of working age to elderly

deteriorates• Britain 1970 (4.3), 2010 (3.6), 2050 (2.4)• Germany 1970 (4.1), 2010 (3), 2050 (1.6)• Japan 1970 (8.6), 2010 (2.6), 2050 (1.2)• In UK, there were 7.2m people over 65 in 1970.

Now there are 10.7m, by 2030 14.2m and by 2050, 16.6m

• In OECD, there were 85m pensioners in 1970, by 2050 there will be 350m

So what will central banks do?

• From 1945 to mid 1970s, focus of economic policy was unemployment

• From 1979, Paul Volcker switched to inflation

• Late Greenspan/early Bernanke era, avoiding all recessions and stabilising financial system

• Now Fed and Bank of England have unemployment targets

Evolution since 2008

• Rates cut to 0.5% in UK, lowest level in BofE’s history

• Then quantitative easing, massive expansion of balance sheet, BofE owns a third of all gilts

• Now forward guidance

Taper tiger

• Fed hinted at tapering in May, bond yields rose, emerging markets fell

• So Fed retreated in September• Don’t want to repeat past mistakes, 1937

(US) or 1997 (Japan). • So tapering may start but it will stop if

markets wobble

The risk?

• No inflation pressures• US rate 1.5% (12 months ago, 1.7%)• UK rate 2.7% (12 months ago, 2.5%)• Eurozone rate 1.3% (12m ago, 2.6%)• Japan rate 0.7% (12m ago, - 0.4%)

Why hasn’t QE caused inflation?

• Bath analogy• Money supply hasn’t grown• But ketchup issue.• When the first rate rise occurs, markets

will price in lots more• 1994 saw Fed tighten rates after long

pause and was worst year for bond markets since 1927

Make hay while sun shines

• Record year for junk bond issuance• Many junk bonds trade above par• Largest ever bond issue (Verizon), largest

ever junk bond (Sprint)• European companies now moving away

from bank funding and using bond market

So what about property?

• Good news when rental yields are higher than base rates

• UK Commercial property 1987-2012• Biggest positive gap between yields and

rates, the annual return was 12%• Lowest gap, annual yield was 2%

Residential

• A new bubble?• Rightmove says inner London asking

prices rose 10% in a month• London safe haven for global elite, first

Europeans, then Africans and Latin Americans

• Help to buy scheme, very reminiscent of Fannie Mae and Freddie Mac

Valuation

• Nationwide first time buyer price-to-earnings ratio

• 30 year average 3.4• Peak in 2007 was 5.4• Low in 1995 was 2.1• Since crisis, the ratio never fell below 4.1• Now 4.6, higher than at any point before

2004

Not rocket science

• Supply versus demand balance• Between 1971 and 1981 censuses, British

population grew by 500,000 while 2.9m homes were built

• Between 1981 and 1991, population rose 1m while 2.1m homes built

• Between 1991 and 2001, population rose 1.7m while 1.86m homes built

• Between 2001 and 2011, population grew 3.5m while just 1.88m homes built

Other factors

• There were 25.5 million households in Great Britain in 2011, an increase of 1.6 million since 2001.Average household size in Great Britain has decreased from 3.1 persons in 1961 to 2.4 in 2011.

• But there is only one answer; build more houses, build more flats, and not just for rich expats!