London Olympics To Bring Economic Contraction to London and the UK

I was fortunate enough to be in London for the Olympics and have a very pleasant time in an empty London.

Unfortunately, my having great time was of little encouragement for London, as most tourists seem to have avoided what the BBC London and other commentators were quite proudly and pedantically calling The Greatest Games in History in the Greatest City in the World and London was then compared to a Ghost Town by the FT.

My personal interpretation is that fear mongering by the Mayor of London resulted in the following points to happen simultaneously:

1. Employees were asked to either work for home or take holidays. Now imagine the economic impact of so many people "working for home" with an eye on the TV set watching the Olympics... Most companies must have been hit hard on this one.
2. Londoners left the city when they could, for extended holidays or break.
3. Tourists who usually come to London for "normal" tourism didn't show

In addition to the fear mongering, the silly ticketing system prevented most people from buying tickets for the events, and hence, do you really think that people would travel across countries and continents for the Olympics without tickets? Seriously?

There were countless interviews on the radio about cabbies making amount half of their usual income, stores being empty, cinemas, theatres, etc.

I personally asked one of the sales persons in the Covent Garden Apple Store: "Is it busier than usual during the Olympics?" to hear that the store had been "painfully empty" and that this particular sales person, who had done all the week-ends since the opening continued "it's the first time I see the store so empty".

The whole situation was so obvious that I'm now really wondering what kind of lies our great leaders will come up with to explain the Olympics brought in a lot of tourists, clients, shoppers and their business to the UK.

Asking Prices for London Home Back To All Time Highs

Just a couple of days ago, we wrote about the Homeowners Would Be Moguls Make Comeback in U.K and the massive real-estate bubble still growing in the UK. Today, Righmove says London House Prices Surge to Near Record High.

Feb. 20 (Bloomberg) -- Asking prices for London homes rose to close to a record in February, helping push national values the most in almost a decade, Rightmove Plc said. 

Average asking prices in the U.K. capital rose 2.5 percent from January to 449,252 pounds ($710,300), less than 1,000 pounds below the record reached in October, the operator of Britain’s biggest property website said in a report today. Prices in England and Wales rose 4.1 percent on the month, the most since April 2002. 

“Confidence in bricks and mortar in the capital seems set to continue, with ‘seller-power’ twice as strong in London compared to the rest of the U.K.,” Miles Shipside, commercial director of Rightmove, said in a statement. “Upwards price- pressure is likely to be maintained in 2012.” [...]

The number of new property listings in London fell 9 percent in January from a year earlier, Rightmove said. This is an “early indication that shortage of sellers and upwards price pressure will again feature in 2012,” it said. 

Nationally, home prices rose 1.4 percent in January from a year earlier to an average 233,252 pounds. In London, the annual price increase was 4.3 percent. 

The London districts of Richmond-upon-Thames, Kingston- upon-Thames and Wandsworth recorded the largest monthly increases in asking prices within the capital, Rightmove said. 

Nationally, all 10 regions of England and Wales tracked by the company showed asking prices gained. The southeast led the increase, up 6.9 percent. 

About the shortage, I said two days ago: "Shortage of property? Right? Well, Findaproperty.co.uk lists 918,441 properties for sale and rent from 13,586 estate agents. Close to 1 million properties on the market, for a country with about 55 million inhabitants. Does that sounds like shortage? " and things haven't changed.

But the fact that Olympics in London might be driving people to reach an even higher level of speculation is not to be ignored.

Homeowners Would Be Moguls Make Comeback in U.K

It seems like the mega-real-estate bubble in the UK is still blowing and Bloomberg published this amazing report about it:

Feb. 9 (Bloomberg) -- Mortgages that helped fuel speculation during the U.K.’s housing boom by turning homeowners into aspiring property moguls are making a comeback. 

Investor demand for bonds backed by so-called buy-to-let mortgages surged last week by the most in almost two years, according to JPMorgan Chase & Co. New lending to rental property investors rose 40 percent last year to 14.1 billion pounds ($22 billion), the Council of Mortgage Lenders said today. [...] 

The extra yield investors demand above benchmark rates to hold 3-year senior bonds backed by U.K. buy-to-let mortgages contracted to [...] 3.3 percentage points, JPMorgan data show. That’s narrowed from 11 percentage points in June 2009 and is the least since August. 

“There’s a realization that buy to let is a prime credit- quality risk,” said John Heron, director of mortgages at Paragon Group of Companies Plc, which lends mainly to landlords with more than 10 properties. 

Paragon raised 163.8 million pounds in November by selling bonds backed by buy-to-let loans, its first issue since July 2007. The mortgage provider has climbed almost six-fold in London trading since November 2008 after losing 97 percent of its market value during the previous 32 months. [...] 

Landlord financing became easier to obtain starting in the 1990s, when the government allowed more companies to provide mortgages. That fueled a 19-fold increase in buy-to-let lending in the decade ending Dec. 31, 2007, during which U.K. home values tripled, Savills Plc estimates.

The government, by allowing fiat-currency, partial reserve banking, and the absurd mortgage laws created the mess. The banks are working downstream the government.

TV shows promoted rental property as a way to diversify savings. In the final years of the investment boom, buy to let developed a reputation for get-rich-quick schemes as property investment clubs offered seminars to persuade novice investors to put savings in new residential development projects. 

[...] “A small minority gave buy-to-let a bad name,” said Law. “People didn’t use it to fund a landlord business, but as a speculative way of making lots of money.”
The boom ended with the freeze in global credit markets triggered by the U.S. subprime mortgage crisis. Companies scaled back or withdrew from the market after a 15 percent slide in U.K. property values in the 18 months through March 2009. 

[...] While property values fall, investor demand for buy-to-let loans has increased because of the attractive income rental properties generate compared with other financial assets.
“Now’s a good time to invest,” said Richard Blanco, 45, who plans to buy a property a year to add to the 10 rental homes he already owns in East London and Nottingham. “Prices are depressed and people are struggling to get finance so there’s less competition.” [...] 

Increased competition has led some lenders, including Clydesdale Bank, to start offering mortgages with only a 20 percent down payment requirement for borrowers instead of the 25 percent deposit prevalent since 2008. 

[...]“The tests are still to come for buy-to-let, when interest rates start to rise,” said Jonathan Livingstone, a senior analyst at Moody’s, who covers U.K. residential mortgage-backed securities.
[...] A shortage of properties to lease lifted rents by 4 percent last year, LSL estimates, based on a survey of more than 18,000 homes in England and Wales. Countrywide estimates that 3.3 people competed for each rental property on its books in the final quarter of last year and it took less than two weeks on average to lease a home.

Shortage of property? Right? Well, Findaproperty.co.uk lists 918,441 properties for sale and rent from 13,586 estate agents. Close to 1 million properties on the market, for a country with about 55 million inhabitants. Does that sounds like shortage?

[...] “Buy-to-let came through the recession showing it was much more resilient that many thought,” Charcol’s Boulger said. “What appeals to lenders is the higher margin for less risk.”

Higher interest rates mean more risk, and not the opposite. Only someone living in a bubble can make the above comment. "Market is resilient", "margins are high" and "risks are low" should all be seen as flashing red light by any rational person.

Thanks to my friend SS for sending me that report.

UK Retail Sales Unexpectedly Jump in January — Looking Beyond the Headline Number to Debunk it and Uncover Flawed Methodology Used by the ONS

Optimism reached a new high in the UK on Friday and the UK equity market and the GBP jumped, when the Office of National Statistics published an unexpected jump in the retail sales index:

(The Telegraph) — Official retail sales data for January rose 0.9pc month-on-month, well above gloomy forecasts of a 0.4pc decline, as falling inflation and post-Christmas discounting lured consumers back to the shops. 

Economists said the performance was surprisingly strong because it came on the back of a 0.6pc rise in December, which was itself better than had been expected. 

"It suggests at the very least that we will be growing by 0.5pc in the first quarter and probably faster than that," said Scotia Capital economist Alan Clarke, who was one of the first to warn of a contraction before the 0.2pc decline in the final three months of last year. "This is the third strong indication that the UK economy has turned the corner."

As per usual, economists — this highly (over)paid yet ignorant and incompetent bunch — completely missed their forecast, and then tried to explain a posteriori the reason why sales jumped in January, yet again completely missing the point.

First, here are a couple of other pieces of news that were not making headlines — obviously so because market participants are in über-bullish mode and are only look at the bright side of the news:

(The Daily Mail) — Around 14 shops are shutting every day on the High Street, alarming figures show. 

Last year 5,268 shops were closed by major retailers and only 5,094 opened, according to a study by accountants PricewaterhouseCoopers and the Local Data Company. 

It was the first time since the height of the recession in 2009 that more shops were shut than opened.
[...]
The real number of closures could well be higher as the research only focused on chain stores in the 500 biggest town centres.
[...]
London fared worst in 2011, with 1,084 shops shutting and just 983 opening, according to the study.
[...]

Beyond showing the incompetence of Mervyn King, the following report confirms that debt deflation has started in the UK:

(The Daily Mail) — Bank of England Governor Sir Mervyn King yesterday spoke out against the ‘harsh treatment’ of small companies which are still ‘suffering’ at the hands of the banks.

He said ‘market failure’ meant firms are being starved of the funds they need to grow, create jobs and drive the economic recovery.

The startling statistics emerged in Bank of England figures showing that net lending fell by £10.7 billion in 2011 – in other words, the banks received £10.7billion more in loan repayments than they gave out in new loans. That took the total fall since the end of 2008 to £82.7 billion.

After all the manipulation and fiddling that the BoE is doing, the one thing that is currently working fine — small business not borrowing, and banks not lending to insolvent firms — is considered to be a "market failure". This is the favorite game of central planners and socialists: blame the market for their own failure, and make a bigger mess trying to fix it.

Summary:

• Retail sales as reported by the ONS jumped in Jan
• While business are closing at an alarming rate of 14 shops a day for the whole of 2011
• And debt has been deflating for 3 years in a row, showing that business are not trying to borrow to expand (in obvious contradiction with what would happen if sales were rising).

So, where am I going will all this?

As with any thing reported by the government, one must look a bit further than the headline number — ironically, market participants whose very job is to do so won't do it — and try to find what is really going on.

Looking at the methodology used by the ONS to calculate their retail sales index gives us the answer:

Understanding the data

Quick Guide to the Retail Sales Index (116.9 Kb Pdf)

Interpreting the data
The Retail Sales Index (RSI) is derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes all large retailers and a representative panel of smaller businesses. Collectively all of these businesses cover approximately 95 per cent of the retail sector in terms of turnover.

There, you have it: they survey 5,000 businesses, completely ignoring the fact that many businesses are closing on a daily basis. This creates a massive survivorship bias and leads to completely distorted numbers.  Could Wikipedia's quote fit more to the ONS flawed methodology?

Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility. This can lead to false conclusions in several different ways. 

The survivors may literally be people, as in a medical study, or could be companies or research subjects or applicants for a job, or anything that must make it past some selection process to be considered further. 

Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance.

Should someone send this link to the incompetent people at the ONS so that they can fix their methodology?

Finally, not only the survivorship bias make you miss direct losses due to businesses closing, but these failures make the surviving businesses more prosperous, artificially making the retails sales numbers bigger.

Let me give an example to illustrate this last point: imagine your local baker closes down because it wasn't a viable business. Yet, some part of their customers will still want to buy bread and would divert their shopping to another other local baker. The local baker might see it sales raise by say 20%, yet that original baker lost 100% of its sales. So the surveyed shop would report a jump in sale of 20%, but the loss of that 100% from the closed-down baker will not be accounted for in the retail sales number.

Governments and Central Banks in Panic Mode

In case some people were not sure, these below are not signs that everything is fine and that the green shots of 2009 are not producing an impressive massive harvest... quite the opposite.

Euro Central Banks Seen Providing Up to $270 Billion via IMF

(Bloomberg) — 02 Dec 2011 — A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.

At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go- ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.

Swiss Government May Consider Negative Interest Rate Policy 

(Bloomberg) — 01 Dec 2011 — Switzerland’s government said it may consider additional measures including negative interest rates to aid the country’s central bank in its fight against the appreciation of the Swiss franc. [...]

Stocks surge on Central Bank liquidity offering

Nov. 30 (Bloomberg) — The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed.

China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.

 U.K.’s Cable Urges ‘Unlimited Powers’ for ECB Amid Euro Crisis

Nov. 13 (Bloomberg) — U.K. Business Secretary Vince Cable said the European Central Bank needs unlimited powers to support the euro and the region’s debt-ridden economies.

“If a monetary deal’s going to work, the central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse,” Cable said in an interview on BBC television’s “Politics Show” today. “They need to have that clearly at a European level, and that’s one of the issues that hasn’t yet been adequately clarified.”

London super-prime property forecast to reach incredible highs

My friend SS sent me this link, and I'll quote the most relevant bit:

Speaking at the release of Knight Frank's The Wealth Report, Liam Bailey, head of research at the property group, said that top properties in London are approaching £10,000 a square foot.

He said: "Given that top properties were selling for around £1,000 a square foot around a decade ago and that those same properties could now achieve £6,000 a square foot, it's entirely possible that we will see levels approaching £10,000 soon."

This report illustrates perfectly well the capacity of the human brain to extrapolate just a few historical points into the infinite future. In addition to that, when the human brain wants to believe into something, no matter what exogenous events happen to prove it wrong, it will still believe in it and find rationalisation in order to fool itself. Of course, something like the real estate collapse of the Japan, the US, Ireland, Dubai, etc. could never happen to the UK. Because the UK is different... or is it?

This is actually scientifically proven, and for those who still haven't read it, I highly recommend the book titled Vital Lies, Simple Truths: The Psychology of Self-Deception by Daniel Goleman.

Osborne Lowers U.K. Growth Forecast, Increases Borrowing, Seeks Voters Approval by Taxing Oil Companies, Banks, Rich

The UK budget was announced yesterday by George Osborne, and here are the main points of interest:

• Lower growth forecast (anyone surprised?)
• More borrowing needed than forecast (anyone surprised?)
• Higher Oil Production Tax, Bank Tax, Rich Tax
• Most other measures are anecdotal.

One thing I would bet on, is that even the current levels of borrowings are too conservative (expect more borrowing than "expected") and the growth will be negative once the real estate bubble pops in the UK (expect another "who could have none?" moment).

While Osborne and Cameron are definitely moving in the right direction compared to Brown and Darling, they are still way to shallow in their cuts. Moreover, propping up banks, then taxing their profits is stupid and distorts de markets. Finally, taxing the rich and oil companies is just a populistic political move that has no other motives but to earn votes.

Finally, the 10,000 interest free loans he is willing to make for people is just one of the worst ideas I've heard, only the French had come with such ideas before. First of all, you end up creating two classes of people: those privileged who get the loans, and those who pay the interest on these loans. Second, he's sinking people into debt at the very peak of the real estate bubble, which could have catastrophic consequence on the personal finances of these people — and dare I ask, losses on the tax-payers portfolio of loans?

March 23 (Bloomberg) -- Chancellor of the Exchequer George Osborne said the British economy will grow more slowly than forecast in 2011 and the U.K. will need to borrow more than previously thought in the next five years.

The Office for Budget Responsibility predicts 2011 growth of 1.7 percent, down from the 2.1 percent forecast in November, Osborne said in his budget speech in the House of Commons in London today. The government will borrow 122 billion pounds ($198 billion) next year compared with an earlier forecast of 117 billion pounds. The chancellor said he will stick to his plan to eliminate the bulk of the deficit by 2015.

Osborne announced tax reductions in what he said was a “fiscally neutral” budget, with a 2 percentage-point cut in company tax this year to 26 percent, an increase in the tax-free allowance for personal earnings and an immediate lowering of duty on gasoline. The levy on banks will rise in January.
[...]
Osborne said the bank-levy rate next year will be adjusted to “offset” the effect of the cut in corporation tax. The levy will increase to 0.078 percent from January 2012, raising an additional 100 million pounds, according to the Treasury.

Seeking to turn around sentiment in the housing market, Osborne also announced 250 million pounds of interest-free loans for 10,000 people buying their first house or apartment.
[...]

March 24 (Bloomberg) -- Chancellor of the Exchequer George Osborne sought to pacify U.K. voters hit by his deficit- reduction plans and a sluggish economy with money taken from oil companies, banks and the wealthy.
[...]
The budget was “impressively populist even though the wider macroeconomic situation is appalling,” Andrew Hawkins, chairman of London-based polling company ComRes Ltd., said in a telephone interview. “This budget sets a different tone. The emergency budget last year was bleak. He is now telling people that he is a tax-cutter, something we haven’t heard from the coalition yet.”
[...]
Among his headline measures, Osborne raised oil production taxes to pay for a cut in fuel duty aimed at helping drivers paying record gasoline prices. The supplementary charge on North Sea oil profits went up to 32 percent from 20 percent, while Osborne lowered the tax on gasoline pump prices by 1 penny a liter and delayed a planned increase in line with inflation for a year.
[...]
For 10,000 people earning less than 60,000 pounds a year who are buying their first home, Osborne offered 250 million pounds in interest-free loans.
[...]
A 30,000-pound annual charge on people domiciled elsewhere for tax purposes who’ve lived in the U.K. for seven years will rise to 50,000 pounds for those in the country for more than 12 years, Osborne said. In return, he said, income remitted to the U.K. for investment in British businesses won’t be taxed. He also pledged not to change the tax status of the non-domiciled again before 2015.

For the wealthy, though, Osborne held out the prospect of abolishing the 50 percent top rate of income tax in the future.

“I am clear that the 50-pence tax rate would do lasting damage to our economy if it were to become permanent,” Osborne said. “That is why I regard it as a temporary measure.”

There are three kinds of lies: lies, damned lies, and statistics

According to Wikipedia:

"Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments, and the tendency of people to disparage statistics that do not support their positions. It is also sometimes colloquially used to doubt statistics used to prove an opponent's point.

The term was popularised in the United States by Mark Twain (among others), who attributed it to the 19th-century British Prime Minister Benjamin Disraeli (1804–1881): "There are three kinds of lies: lies, damned lies, and statistics." However, the phrase is not found in any of Disraeli's works and the earliest known appearances were years after his death. Other coiners have therefore been proposed. The most plausible, given current evidence, is Englishman Sir Charles Wentworth Dilke (1843–1911).

Now, let's see the magic of statistics, when applied to UK home prices and also the magic of brainwashing, when it comes to reporting. Just look for the journalist parroting the fact that the government trying cut its deficit will make the housing market collapse. The typical sentence is "during the biggest government budget squeeze since World War II hurts demand for housing". I have highlighted them in yellow to make your life easier.

This post should give you a good understanding of the different players in UK's housing market, and also about the state of the housing market itself. It's not in any way exhaustive, though I spent a lot of time gathering the information. I hope you will find it useful nonetheless.

Aug. 10 (Bloomberg) -- A U.K. housing-market gauge showed the first decline in prices for a year in July as demand for homes fell and more people put their properties on the market, the Royal Institution of Chartered Surveyors said.

The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 8 percentage points, compared with a positive reading of 8 in June, the London-based group said in an e-mailed report today. A third more real-estate agents reported an increase rather than a drop in the number of properties they had for sale.

The housing market is starting to falter as Britons brace for the deepest spending cuts in a generation and banks curb lending. Bank of England officials may cut their forecasts for economic growth tomorrow after they kept up their emergency stimulus last week to aid the recovery, economists say.

“Since the election and budget, confidence and interest in property seems to have declined,” Murray Wills, an estate agent at Page and Wells in Maidstone, Kent, southern England, said in the report. “Mortgages are not easy to secure and the threat of redundancy may be an underlying factor.”

U.K. banks approved fewer mortgages in June and Nationwide Building Society and Hometrack Ltd. both also reported falling home values in July. RICS said 28 percent more estate agents expected prices to fall in coming months, compared with 6 percent in June.

“The forward-looking price expectations numbers suggest that this softer trend will continue through the second half,” Ian Perry, a spokesman for RICS, said in a statement.

A separate report by the National Association of Estate Agents today showed the number of people looking for a home rose in July. The total of house hunters registered per branch of estate agent increased on average to 292 in July from 279 the previous month, the NAEA said in an e-mailed statement today.
[...]

One week later:

Aug. 16 (Bloomberg) -- London home sellers cut 17,000 pounds ($26,500) off their asking prices on average in August, wiping out gains recorded in the first half of the year, Rightmove Plc said.

Asking prices in the capital fell 4.1 percent on the month to an average 405,058 pounds, the operator of the nation’s biggest property website said in a report today. The drop is the biggest in two years and returns values to levels seen in January. Prices across England and Wales fell 1.7 percent.

Reports from Nationwide Building Society and Halifax also signal that the U.K.’s housing recovery is faltering, while Rightmove said a squeeze in the availability of credit may limit price gains. [...]

Rightmove’s data show the London boroughs of Wandsworth and Brent led declines in the capital, falling 6.2 percent. Newham was the best performer, slipping 1.2 percent, while the Kensington and Chelsea district fell 1.7 percent.
[...]
The average stock of unsold property per real-estate agent rose to 79, the highest since July 2008, from 77 in July, Rightmove said. Properties now spend an average of 95 days on the market, the most since January 2009.

The monthly drop in asking prices in England and Wales is the biggest since December, and the second this year. Seven of 10 regions tracked by Rightmove showed declines, led by a 4.4 percent drop in the west Midlands. From a year earlier, national prices rose 4.3 percent in August.
[...]

Two weeks later, prices are still falling:

Aug. 30 (Bloomberg) -- U.K. home values dropped in August by the most in 16 months as the housing market endured a “modest re-pricing” that is likely to last as long as a year, Hometrack Ltd. said.

The average cost of a home fell 0.3 percent from the previous month to 158,200 pounds ($246,000), the London-based property researcher said in an e-mailed statement today. That was the biggest drop since April 2009. Hometrack’s index is based on a survey of 5,100 real-estate agents and surveyors.

The report adds to mounting evidence that the housing market is weakening, and economists predict data tomorrow may show that banks granted the fewest mortgages in more than a year last month.
[...]
From a year earlier, prices rose 1.5 percent, the least in five months, Hometrack said. Demand for homes, measured by the change in new buyers registering with real-estate agents, fell for a second month, dropping by 2.2 percent.
[...]
U.K. banks probably approved 46,500 mortgages in July, the least in 14 months, according to the median forecast of 19 economists in a Bloomberg News survey. The Bank of England will release that data tomorrow.

The following day:

Aug. 31 (Bloomberg) -- U.K. mortgage approvals were little changed in July, signalling that the housing market remains sluggish as the government implements the biggest budget squeeze since World War II.

Lenders granted 48,722 loans to buy homes, compared with a revised 48,562 in June, the Bank of England said today in London. Net lending for homes dropped to 86 million pounds ($133 million) from 518 million pounds, the lowest since March.
[...]
Economists forecast that July approvals would decrease to 46,500 from an initially reported 47,600 in June, based on the median forecast of 19 economists in Bloomberg News survey. The July figure compares with 53,126 a year earlier and is less than half the level at the peak of the housing boom in 2007.
[...]
Today’s data also showed credit card lending rose a net 213 million pounds, the most since February. Households repaid a net 41 million pounds of personal loans and overdrafts.

About 1 month later:

Oct. 8 (Bloomberg) -- U.K. house prices rose to a two-year high in September as demand picked up in London and the property market showed signs of peaking, research company Acadametrics Ltd. and LSL Property Services Plc said.

The average price of a home in England and Wales rose 0.2 percent from August to 223,965 pounds ($357,000), the highest since July 2008, the companies said in an e-mailed statement in London today. Values were up 7 percent from a year earlier.

[...] Lloyds Banking Group Plc’s Halifax unit said yesterday that home values dropped the most since at least 1983 last month. Analysts in today’s report predicted that their index will show annual declines in most of England and Wales by December.
[...]
The increase in house prices last month came as the number of transactions rose 3.4 percent from August to about 66,000, according to the report. That’s an increase of 11 percent from a year earlier, Acadametrics and LSL said.
[...]
Acadametrics uses methodology employed by the U.S. S&P/Case-Shiller price index, combining initial housing transaction data from the Land Registry and results from other price measures to produce an estimate for the most recent month. That number is then revised in following months.

Another week later:

Oct. 15 (Bloomberg) -- A gauge of U.K. residential rents climbed for an eighth month in September as a lack of mortgages and affordable housing for sale drove letting fees in London to a record high, LSL Property Services Plc said.

The average monthly rent for a home in England and Wales rose 0.5 percent to 689 pounds ($1,106) from 685.70 in August, the Newcastle, England-based company said in an e-mailed statement today. That’s the highest since LSL started compiling the index in June 2007. The average fee in London gained 1.1 percent to 972 pounds, also a record.

Potential homebuyers are putting off purchases due to concerns about the impact of the government’s biggest budget squeeze since World War II and a dearth of affordable finance, LSL said. Landlords are benefitting from a lack of properties to let as banks curtail mortgages for buy-to-let transactions, reducing the number of rentals entering the market.
[...]
Unpaid rent in the U.K. totaled 230 million pounds in September, compared with 266.3 million pounds the previous month, LSL said. That’s the equivalent of 10 percent of all rent across the country, it said.

Amongst the 18,000 properties surveyed by LSL for the gauge, monthly rents ranged from 4,117 pounds for an apartment in London’s Kensington area to 250 pounds for a terraced house in Huddersfield in northern England.
[...]

Two weeks later:

Oct. 28 (Bloomberg) -- U.K. house prices fell in October to the lowest level in eight months as the deepest government spending cuts since World War II sapped confidence, a report by Nationwide Building Society showed.

The average cost of a home dropped by 0.7 percent from September to 164,381 pounds ($259,000), the lowest since February, Britain’s biggest customer-owned lender said in an e-mailed statement today. From a year earlier, prices increased 1.4 percent, the least since September 2009.
[...]
House prices fell 1.5 percent in the three months through October, the fastest quarterly pace of decline since April 2009, Nationwide’s report showed.

Recent housing data have been mixed. While a measure by Halifax, a division of Lloyds Banking Group Plc, showed a 3.6 percent drop in September, the Land Registry said today that values fell just 0.2 percent that month. Rightmove Plc, operator of the U.K.’s biggest property website, said last week that home sellers raised asking prices by 3.1 percent in October.
[...]

Another two weeks later:

Nov. 9 (Bloomberg) -- A U.K. housing-market gauge dropped more than economists forecast to an 18-month low in October as homebuyers became “cautious” on prospects for prices, the Royal Institution of Chartered Surveyors said.

The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 49 percentage points, compared with minus 36 points in September, the London- based group said in an e-mailed report today. Economists forecast a decline to minus 39 points, according to the median of 20 predictions in a Bloomberg News survey.

The housing market has weakened after more homeowners put their properties on sale and the government unveiled a budget squeeze that will wipe out almost half a million public-sector jobs. While the Bank of England kept its benchmark interest rate at a record low of 0.5 percent last week, banks are still rationing credit, RICS said.
[...]
A measure showing the number of new property listings fell for the first time since January to minus 4 from 22 the previous month, RICS said. A gauge of new buyer enquiries dropped to minus 12 from minus 2.
[...]

Another week later:

Nov. 15 (Bloomberg) -- U.K. home sellers cut asking prices by the most since 2007 this month as they endured a record wait to shift their properties because of a lack of demand, Rightmove Plc said.

Average asking prices in England and Wales fell 3.2 percent from October to 229,379 pounds ($371,000), the operator of Britain’s biggest property website said in a report published in London today. That’s the biggest monthly drop since December 2007. Values rose 1.3 percent from a year earlier.
[...]
The average time a property stays on the market before being sold climbed to 101.6 days in November from 94.5 the previous month. That’s the highest level since Rightmove began keeping the data in September 2001. The average number of unsold properties per real-estate agent held close to a record high at 77, the report showed.

Nine out of 10 regions in England and Wales tracked by Rightmove showed falling asking prices, led by a 6 percent drop in East Anglia. Values in London fell 0.4 percent.
[...]
In London, 10 areas out of 32 showed gains, led by Hammersmith and Fulham and Westminster. Merton and Newham showed the biggest price drops, Rightmove said.

Recent data on the housing market have been mixed. While Lloyds Banking Group Plc’s mortgage-lending Halifax unit said on Nov. 4 that home values climbed 1.8 percent last month, erasing almost half a record drop posted in September, Nationwide Building Society said that they fell to an eight-month low.
[...]
Gauges of business sentiment and output indicate that the economy may contract in the first quarter of next year and could start shrinking as early as next month, BDO LLP said today. Its optimism index and output index are both at levels that would indicate a contraction in the economy, the accountancy company said in an e-mailed statement.

BDO’s indexes are calculated using previously released survey data by other organizations covering 11,000 companies employing 5 million people.

Just a few days later:

Nov. 19 (Bloomberg) -- Northacre Plc, an unprofitable London developer, became the second-best performing real-estate stock in Europe this year thanks to just one project that’s still in progress.

Sales at The Lancasters redevelopment, a city block of 1850s townhouses overlooking Hyde Park, have probably been sufficient to entitle the company to a 50 percent share in the profits under an agreement with partner Minerva Plc. The shares have climbed to 122.5 pence from 24 pence this year, more than a fivefold gain, compared with 4.3 percent average decline for the 50 members of the FTSE AIM Real Estate Index.

One shareholder “hugged and kissed me” at the company’s Aug. 3 annual meeting, Chief Executive Officer Klas Nilsson, 69, said in an interview in The Lancasters’ model apartment. The grateful investor bought 10,000 pounds ($16,000) of Northacre stock when it languished at 2 pence, an investment that was worth 612,500 pounds at yesterday’s closing price.

Apartments in the 77-unit Lancasters went on sale amid increased demand from wealthy overseas investors, who are using the pound’s weakness as an opportunity to buy homes in central London. A shortage of properties for sale for more than 1 million pounds pushed prices higher, making luxury homes in London outpace the rest of the U.K. housing market.
[...]
The company reported losses totaling 4 million pounds for the two years through February. Aside from property sales, the company gets income from its Intarya interior design arm and its Nilsson architecture unit.

Northacre is focusing on selling the remaining apartments, priced from 900,000 pounds to 16.5 million pounds for the 5,385 square-foot (500-square-meter) show apartment that opened in June.

Refurbishment of the 192,000-square-foot former hotel began in 2008, with the heritage-protected façade retained as the interior was gutted. The front gardens were excavated and will be covered over again for two underground stories of garages and a third-story swimming pool, gymnasium and leisure facility.

“There’s a lot of foreign money seeking to invest in London residential property,” Nilsson said. While London luxury home sales have slowed in the final quarter as the end of the year approaches, he expects all the units to have sold by the time work at The Lancasters is completed.

Two weeks later, prices are still falling, for a fifth month:

Nov. 29 (Bloomberg) -- U.K. house prices fell for a fifth month in November as demand for property dropped the most in almost two years, Hometrack Ltd. said.

The average cost of a home fell 0.8 percent from October to 155,000 pounds ($242,900), the London-based property researcher said in an e-mailed statement today. Demand for homes, measured by the change in new buyers registering with real-estate agents, fell 4.3 percent, the biggest decline since January 2009.

The report adds to evidence of a weakening property market after Rightmove Plc said on Nov. 15 that home sellers cut asking prices by the most since 2007 this month and U.K. banks approved the smallest number of mortgage since 2009 in October. The government has announced the biggest budget squeeze since World War II and officials have warned the cuts may harm the recovery.
[...]
Price declines were led by London, Wales, as well as England’s south east, West Midlands and north east regions, which all posted a fall of 0.9 percent, Hometrack said. Values in southern England, which posted the strongest recovery after the recession, are under the greatest pressure, it said.

The average time a property stays on the market before being sold climbed to 9.8 weeks in November, the longest since May 2009. Sellers in Wales and England’s East Midlands and north west regions have to wait more than three months.

A couple days later, prices fell to a nine-month low while rents are going a lot higher as people seem to be selling properties and renting... But, when you sell property, doesn't it mean that somebody else is buying? Here, the supply of properties to sell is raising, implying a drop in price. It's all consistent. What is completely silly, is that the residential rents increase is based on a survey of 152 individuals or companies. So the numbers are completely random. This is "statistics" for you.

Dec. 1 (Bloomberg) -- U.K. house prices fell to a nine-month low in November as more people tried to sell their homes, a report by Nationwide Building Society showed.

The average cost of a home dropped by 0.3 percent from October to 163,398 pounds ($255,000), the lowest since February, Britain’s biggest customer-owned lender said in an e-mailed statement today. From a year earlier, prices increased 0.4 percent, the least since September 2009.
[...]
Recent reports suggest Britain’s housing market is faltering. Consumer confidence declined as the government detailed plans for the biggest fiscal squeeze since World War II, while mortgage approvals fell to an eight-month low in October. 

[...] Other reports have also shown home values are declining. A report by Hometrack Ltd. this week showed that house prices fell for a fifth month in November. The Land Registry said last week prices dropped in October. 

Dec. 1 (Bloomberg) -- U.K. residential rents rose for the third straight quarter as more people chose to become tenants rather than buying properties, according to a gauge published by the Royal Institution of Chartered Surveyors.
[...]
U.K. mortgage approvals fell to an eight-month low in October to about half the level they were at the beginning of 2007, according to the Bank of England. Lenders have restricted mortgages for buyers who purchase homes with the intention of renting them out, limiting the properties available to tenants.

“With both buy-to-let and traditional mortgages in short supply and now with concern about prices, people have come back” to the rental market, said Simon Rubinsohn, chief economist for RICS. “It’s simple supply and demand, and there is more uncertainty around with people losing jobs in the public sector.”
[...]
U.K. consumer confidence fell to a 19-month low in October as Britons faced the deepest budget cuts since World War II, Nationwide Building Society said on Nov. 12. House prices have fallen for five months in a row, according to Hometrack Ltd.

The survey was based on responses from 152 individuals or companies in the U.K. rentals industry.

Dec. 1 (Bloomberg) -- U.K. home prices may fall by as much as 5 percent next year as the government raises taxes and cuts jobs to reduce the record budget deficit, the country’s largest property broker said.
[...]
Prices are now about 10 percent lower than the market’s peak in 2007. In the second half of this year, home sales have slowed as the government cutbacks and borrowing restrictions imposed by debt-laden banks deterred buyers. Mortgage lending in October was the lowest for that month in the past decade, the Council of Mortgage Lenders said Nov. 18.

This year, property transactions will fall short of the 610,000 registered in 2009, Turner said in the interview at the Hamptons International office opposite the U.S. embassy in London’s Mayfair district. Hamptons is one of 46 brands owned by Countrywide, which is also the U.K.’s largest mortgage broker.
[...]
Mortgages have become unattractive for homebuyers with only a small amount of equity, Turner said. For a borrower with a 10 percent down payment, the initial interest rate for one of the most popular types of loan is about 7 percent, while someone with 40 percent of equity would pay 2.75 percent, he said. Borrowing costs for this mortgage are fixed for two years before reverting to a variable rate.

“Ten to 15 percent of the mortgage market has gone forever or at least for the foreseeable future,” he said. “Over the next 12 months, there will be a gradual increase in competition. We will see sensible lending, but not back to the heady days.”
[...]
“The U.K. hasn’t fallen out of love with property,” Turner said. “A lot of moves are on hold.”

What people seem to not understand from the previous report is that:

1. Falling prices is part of the solution solution
2. Borrowing for 40 years on an interest-only mortgage is stupid.
3. Raising lending standards is back to sanity
4. Still being in love with property means that the property bubble has yet to pop in the UK

Another two weeks later, prices are still falling:

Dec. 13 (Bloomberg) -- U.K. home sellers cut asking prices for a second month in December to the lowest level in almost a year and may reduce them by a further 5 percent in 2011, Rightmove Plc said.

Average asking prices in England and Wales fell 3 percent to 222,410 pounds ($351,000) from November, when they dropped 3.2 percent, the operator of Britain’s biggest property website said in a report published in London today. That’s the biggest consecutive monthly drop since Rightmove’s index began in 2002.

The price drop adds to evidence from mortgage lenders of weakness in the housing market at a time when the economy is bracing for public-spending cuts that will inflict 330,000 job losses. 

[...] All 10 regions in England and Wales tracked by Rightmove showed falling asking prices in December, led by a 5 percent drop in the West Midlands. This month’s national average asking price is the lowest since January.

Values in London dropped 2.7 percent as all but two of the 32 districts tracked by Rightmove showed losses, led by Tower Hamlets and Newham. The only two neighbourhoods to post gains were Camden, and Hammersmith and Fulham, the company said.

So is the housing-market gauge.

Dec. 14 (Bloomberg) -- A U.K. housing-market gauge stayed close to the lowest in 18 months in November as demand for homes waned, the Royal Institution of Chartered Surveyors said.
[...]
Britain’s housing market is faltering as consumers prepare for the deepest government spending cuts since World War II, leading to the loss of 330,000 jobs.
[...]
“The housing market is only a shadow of itself in 2007,” Jeremy Dell, a real-estate agent at JJ Dell and Co. in Shropshire, England, said in the report. “The economics indicate a long downward spiral.”

Lenders granted 47,185 loans to buy homes in October, compared with 47,369 in September, the Bank of England said on Nov. 29. That’s less than half the level at the peak of the housing boom in 2007.
[...]

Collapsing lending is part of the solution, yet home lending is at about 135 billion pounds a year, which is a completely crazy figure. This survey confirms that people are still in love with property. The survey is based on the answers from 2,047 adults. That's a tiny number, if you ask me.

Dec. 15 (Bloomberg) -- U.K. net mortgage lending will shrink by a third next year as the housing market shows persisting weakness, the Council of Mortgage Lenders said.

Net mortgage lending will drop to 6 billion pounds ($9.5 billion) in 2011, the London-based lobby group said in an e- mailed statement today. That compares with an estimated 9 billion pounds this year and a total of 40 billion pounds in 2008. The number of housing transactions will slip by 30,000 to 860,000, the CML said.
[...]
Mortgage approvals fell to an eight month-low in October and demand for homes may suffer as the government implements the deepest spending cuts since World War II, leading to the loss of 330,000 jobs.

The amount of gross home lending will stay unchanged at 135 billion pounds in 2011, the CML said.
[...]
Forty-three percent of respondents in a quarterly survey said they tended to agree or agreed strongly that this is a good time to buy residential property, the organization representing customer-owned lenders said in an e-mailed report today in London. That compares with 58 percent a year earlier.

YouGov Plc questioned 2,047 adults for the BSA survey between Dec. 3 and Dec. 6.

Two weeks later, prices are still falling:

Dec. 27 (Bloomberg) -- U.K. house prices fell for a sixth month in December and will extend their decline in 2011 on “weak” demand and tighter mortgage-lending conditions, Hometrack Ltd. said.

The average cost of a home fell 0.4 percent from last month, and prices will drop a further 2 percent in 2011, the London-based property researcher said in an e-mailed report today.
[...]
The Hometrack report also showed sellers had to wait the longest since April 2009 to shift their properties in December and adds to forecasts for a weaker housing market in 2011.
[...]
Sellers achieved on average 92.1 percent of the asking price during the month, the lowest proportion since August 2009, while the time taken to sell increased to 10 weeks, Hometrack said.

In 2010, average values fell 1.6 percent, Hometrack said. The supply of homes for sale rose 24 percent, while demand fell 7 percent. The latter dropped 18 percent in the second half.
[...]
Adding to uncertainty among prospective homebuyers, the government is implementing the biggest budget squeeze since World War II, which will lead to public-job losses and may slow the economic recovery.

Home prices will fall next year. That's the consensus. It's kind of worrisome for a contrarian like me to go with the consensus... but the consensus is a decline of 2.5%. I would say I expect 25%.

Dec. 30 (Bloomberg) -- The median estimate of 23 banks, brokers and property forecasters that took part in the survey was for a decline of about 2.5 percent. Predictions ranged from a gain of 3 percent to a drop of 10 percent.

A 12-month home price rally ended after the government announced tax increases and the biggest budget reductions since World War II.

No more than 900,000 homes will be sold next year, according to the CML. That compares with 1.6 million transactions in 2007.

But, wait a second, now UK house prices are rising? The following report explains in details why you can have contradicting directions, thanks to the power of statistics.

Dec. 31 (Bloomberg) -- U.K. house prices unexpectedly posted their first gain in seven months in December as values rebounded from declines, a report by Nationwide Building Society showed.

The average cost of a home rose 0.4 percent from November to 162,763 pounds ($250,200), the first monthly increase since May, Britain’s biggest customer-owned lender said in an e-mailed report today.[...] 

Nationwide’s report of a house-price gain contrasts with other data that show values are declining as the prospect of 330,000 public-sector job cuts during the biggest government budget squeeze since World War II hurts demand for housing. Hometrack Ltd. said earlier this week that prices fell for a sixth month in December and may decline 2 percent next year.
[...]
House prices dropped 1.3 percent in the fourth quarter as they fell in 10 out of 13 U.K. regions, Nationwide said in a separate quarterly report. The declines were led by Northern Ireland with a 3.4 percent drop, while East Anglia was the best- performing area with a 1.6 percent gain. Values in London decreased 2 percent during the period.

Let's now try to understand this mess that is the UK's housing price reports:

Dec. 9 (Bloomberg) -- U.K. home prices are rising. Or they’re falling. It depends whom you ask.

Property researcher Hometrack Ltd. reported a 0.9 percent monthly decline in October, the biggest since January 2009. Mortgage lender Halifax said prices rose 1.8 percent, rebounding from a 3.7 percent drop in September. Acadametrics Ltd. tracked a 0.3 percent gain, pushing prices to the highest since June 2008.
[...]
“It has been very difficult to define a residential property benchmark because there are so many different indices out there,” said Down, who plans to raise as much as 500 million pounds ($788 million) for a U.K. housing fund starting next year. “The appetite to invest in the sector is unquestionable, particularly with the retail investor.”

Still in love with property...

The seven indexes only agreed on the direction of the market in five of the 22 months through October, according to data compiled by Bloomberg. The last time was in January, when all indicated a price rise.

Today’s Numbers

Halifax said today that U.K. house prices slipped 0.1 percent in November as demand weakened and the government prepared to implement the biggest spending cuts since World War II to reduce a record budget deficit.

Indexes covering at least three months give a more accurate picture of the market, according to Steve Morgan, chairman of housebuilder Redrow Plc. Comparing longer periods helps “smooth out the volatility currently experienced,” he said. Of the seven most-used indexes, only those produced by Halifax and Nationwide provide quarterly data.
[...]
Acadametrics is a research company that combines housing transaction data from the U.K. Land Registry and other price measures to produce an estimate for the most recent month. The number is then revised in following months as more complete data becomes available. It doesn’t cover Scotland, which Hearthstone’s Down wants to include in his portfolio.

The last report from London-based Acadametrics, on Nov. 12, showed that home prices climbed 6.1 percent in October from a year earlier. That was the biggest increase indicated by any of the seven indexes. At the other end of the scale, Hometrack recorded a 0.1 percent decline.
[...]
About 600,000 residential properties changed hands in the U.K. in 2009, half the level of 2006, according to the Land Registry. About 69 percent of people in Britain own their homes.

The government’s Land Registry is the only source for the actual price paid in residential property transactions in England and Wales, including those made for cash. Indexes from lenders Nationwide and Halifax are based on mortgages that they offer. Rightmove Plc, which operates the U.K.’s largest residential property website, provides asking prices from a sample of properties offered on the site. Some measures are based on data from England and Wales only, while others look at the whole U.K.

The different measures also produce contrasting house price averages across the country. In November, Hometrack’s estimated price was about 155,000 pounds, while Rightmove’s asking price was close to 230,000 pounds.

Data from the Communities and Local Government department includes mortgages from the Council of Mortgage Lenders and excludes cash buyers, who account for 25 percent of all transactions. The Land Registry data consists of properties sold at least twice since it started in 1995, excluding about two- thirds of U.K. property and all new homes.
[...]
Halifax and Nationwide now rely on less data than they used three years ago because they’re offering fewer mortgages, Down said. That makes the results more volatile. Approximately 144 billion pounds of mortgages were granted last year, compared with 363 billion pounds in 2007, according to the Council of Mortgage Lenders.

The Land Registry doesn’t distinguish between property types or the number of rooms homes have, whereas the lenders weight their indexes according to property type, to avoid one kind of home dominating a certain month.
[...]

Savill's expecting a drop of 1% in luxury property prices. Yes, that is 1.00% percent.

Dec. 10 (Bloomberg) -- London bankers and other financial- services employees will spend about 1 billion pounds ($1.6 billion) of their 2010 bonus money on homes in the U.K. capital, 17 percent less than last year, Savills Plc said.

The purchases may not stop prices of London luxury homes from falling next year, though the drop probably won’t exceed 1 percent, Savills said in a statement. Values rose about 2 percent this year, helped in part by approximately 1.2 billion pounds of 2009 bonus money, the broker estimates.
[...]
Bonus-earners typically account for half of the buyers of London homes costing more than 1 million pounds, according to Savills. Record payouts in 2006 and 2007 -- which the Centre for Economics and Business Research says totaled 11.5 billion pounds each year -- sent property values surging to all-time highs in neighborhoods such as Chelsea, Belgravia and Kensington.

The CEBR expects bonuses for the 300,000 financial-services workers in London to total 7 billion pounds before taxes in 2010, about 5 percent less than in 2009, according to Savills’s report.
[...]
Changes in bonus pools have the most effect on real estate in southwest London. Owner-occupiers employed in banking and financial services tend to favor neighborhoods such as Battersea, Wimbledon and Chiswick because of the relatively high proportion of family homes and good schools.

Prices in this part of London rose 12 percent in the third quarter from a year earlier, the biggest gain in Britain, Savills estimates. Prime property here costs an average of about 1.3 million pounds, less than the 2 million pounds or more needed to buy a similar home in central London.

Bonuses have been less of a driving force for prime residential property values in central London. Overseas buyers have been lured to those neighborhoods by the pound’s weakness and price declines during the height of the financial crisis.

Savills estimates that 60 percent of prime central London property purchases are made by people outside the U.K.
[...]

And yes, if you want to assess the value of a property, you have to factor in the fact that the pound has dropped by about 20% against other currencies, in some cases by far more than that, as much as 50% against the Yen. So in real terms, prices in the UK have already collapsed quite a bit.

Dec. 23 (Bloomberg) -- The number of properties in London and southeast England worth at least one million pounds ($1.5 million) rose more than 10 percent this year as foreign investors helped boost demand, property website Zoopla said.

London homes worth a million pounds jumped 11.1 percent to 123,236 in 2010, the company said in a report today. That’s almost twice the 6 percent increase recorded nationally and the capital now accounts for more than half the U.K. total of 226,344. The number of “property millionaires” in the South East rose 11.9 percent to 56,026.

Just the fact that they call it "property millionaires" shows that people are still in love with property.

The south of the country has been affected “far less by the mortgage squeeze as a result of the inflow of foreign money and the strength in the City keeping demand for million-pound pads at peak levels,” Zoopla Commercial Director Nick Leeming said in the report. “But the rest of the market and particularly the North have seen a steep decline.”

Demand for homes has weakened as banks restrict lending and Britons brace for government spending cuts and tax increases aimed at narrowing the budget deficit. Still, a shortage of supply has helped underpin prices in some areas and the Royal Institution of Chartered Surveyors said this week that average declines in 2011 will be “negligible.”

The number of million-pound properties increased 14.9 percent in the East of England and 4.5 percent in the South West. Numbers fell in the rest of Britain, with Wales, and Yorkshire and Humber dropping by half.

Nine of the 10 areas in Britain that feature the most property millionaires were in London, led by Kensington, where more than half of homes are worth more than a million pounds.

Ben Bernanke looks in the mirror and sees Mervyn King [updated twice]

[Update at the bottom of the post]

Just a few minutes after publishing the previous post on Bernanke, Fed says they will keeping on printing, irrelevant of the economy, I realized how much what the Fed was doing reminded me of what the BoE was doing in the UK.

There are quite a few differences between the state of the two economies though, that I would like to remind:

1. The GBP has collapsed by about 20% against the USD or the EUR from its mid-2007 levels
2. The Credit Bubble and real estate bubble are still very much inflated, due the destructive actions of the BoE and the former UK government
3. The new UK government has started reducing the size of its labor and spending.

But nonetheless, you will see that when the central bankers are put in a position where they have to chose between two conflicting policies, they will always go for the politically easy one: money printing. It also shows that even if Bernanke is 100% sure that he will be able to control things, there will always be a good reason for more inflation and for keeping the "stimulus" on: not enough jobs, or not enough inflation, or enough jobs and inflation, but lower forecasts for any of the two, or any other Monetarist or Keynesian nonsense.

Additionally, you will notice that:

• The GBP collapse does not prevent price deflation in the retail market. As recently as last month, I've seen never before seen discounts in my superstores in the UK: "buy one, get two free" offers. I was quite astonished.
• Journalists and economists, two groups of people who are living in an ivory tower, believe that governments create growth, and take a very critical approach to Cameron's government decisions to cut spending and government workforce. The message is transmitted in comments such as budget austerity measures clouds the prospects for the economy or Mervyn King is setting aside his inflation target to protect the economy from the biggest budget cuts. These comments are stated as simple truths which does not require any justifications, and and provided without any explanations. They are extremely insidious.

Here are a quotes from a few Bloomberg reports published back in August 2010.

Aug. 11 (Bloomberg) -- Bank of England Governor Mervyn King said inflation will probably slow below the bank’s target in 2012 and growth will be weaker than previously forecast, signaling the U.K. economy may need more emergency stimulus.

Inflation will be about 1.5 percent in two years, below the 2 percent goal, the central bank said in its quarterly Inflation Report today. Inflation will undershoot the target even if the bank keeps its benchmark interest rate at the current 0.5 percent, the forecasts show.
[...]
U.K. policy makers have split on the outlook for inflation even as the biggest round of budget austerity measures since World War II clouds the prospects for the economy.
[...]
“They still look more likely to loosen policy than to tighten,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “The Monetary Policy Committee continues to believe that spare capacity in the economy will pull inflation down sharply in the next couple of years.”
[...]
The Bank of England held its bond-purchase plan at 200 billion pounds ($315 billion) and kept the main rate at a record low on Aug. 5. Minutes of the June and July meetings show Andrew Sentance called for higher rates to curb inflation. His colleague David Miles has since argued that the recovery may falter and the bank should be ready to increase stimulus. The minutes of the most recent meeting will be published on Aug. 18.

“If it is necessary to respond, then we are quite prepared to do that,” said King. “It’s much too soon to say that we’re struggling to see a recovery.”

Recent data has painted a mixed picture of the U.K. economy. While a report today showed employers added jobs in the second quarter at the fastest rate since 1989, it also said that jobless claims dropped less than economists forecast in July. Measures of manufacturing, services and construction fell last month and Nationwide Building Society said today that consumer confidence dropped to the lowest in 15 months. The housing market is also showing signs of faltering.

At the same time, economic growth accelerated to 1.1 percent in the second quarter, the most in four years.

While inflation will be faster than previously forecast next year because of higher sales tax, it is “likely to fall below the target as persistent spare capacity weighs on companies’ costs and prices,” the Bank of England said. “There is a range of views among committee members” on the risks.
[...]

Aug. 5 (Bloomberg) -- Bank of England Governor Mervyn King is setting aside his inflation target to protect the economy from the biggest budget cuts since World War II.
[...]
King is tolerating faster inflation just as Prime Minister David Cameron’s push to ax the Group of 20’s largest budget deficit threatens to hurt the economic recovery. Policy maker Andrew Sentance, for now the only advocate of higher rates, counters that growth is solid enough for the bank to withdraw emergency stimulus. Inflation has exceeded the bank’s 2 percent target since December.

“King is willing to take risks with inflation,” Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official, said in a telephone interview. “He has become the man most determined to get a decent recovery.”
[...]
The combination of persistent inflation and budget cuts has widened the debate about when to raise rates. Sentance voted for higher rates at the last two meetings and Chief Economist Spencer Dale, who favors keeping rates unchanged for now, has said the central bank must be “incredibly vigilant” on prices. On the other side of the debate, David Miles said last month that the BOE must be ready to buy more bonds to help growth.

Inflation was 3.2 percent in June and has exceeded the government’s 3 percent limit since March. King said last week the rate is likely to stay above the bank’s target “for much of next year” because of higher sales tax, though weakness in the economy then risks pushing it “significantly below” the goal.

King “sees no need to try and offset what is likely to be rather a temporary continuing overshoot,” former Bank of England policy maker Charles Goodhart said in an interview.
[...]
The danger of a renewed recession justifies a further expansion of the Bank of England’s bond-purchase plan, according to Alan Clarke, an economist at BNP Paribas in London. He provided the only forecast in the Bloomberg survey for a 25 billion-pound increase in the program today, and predicts another move of the same size in November.
[...]

Aug. 4 (Bloomberg) -- U.K. store prices of non-food items fell at the fastest monthly pace in 1 1/2 years in July as shops offered bigger discounts, the British Retail Consortium said.

The cost of goods such as clothing and furniture dropped 0.6 percent from June, the biggest decline since January 2009, the group, which represents about 80 percent of the nation’s retailers, said in an e-mailed statement today in London. The drop offset an increase in food costs, leaving the pace of overall annual price gains at 1.5 percent, unchanged from June.

The report highlights a divergence between global cost pressures and the weakness of domestic pricing power at a time when Bank of England policy makers are split on whether the economy faces bigger risks from inflation or budget cuts. Economists predict officials will keep emergency stimulus in place at their monthly policy meeting tomorrow.

“Shop prices have remained stable largely due to aggressive discounting,” Stephen Robertson, director general of the BRC, said in the statement. “It’s clear the high street is not the main source of inflation.”
[...]
The pound has declined by about a fifth on a trade-weighted basis since the start of 2007, making imports more expensive, and the government’s planned increase in value-added tax in January will automatically raise the inflation rate. Wheat jumped to a 22-month high earlier this week after the hottest July in Russia in 130 years withered crops.

U.K. annual food-price inflation accelerated to 2.5 percent in July from 1.7 percent the previous month, BRC said. On the month, food prices gained 0.9 percent, the most since January.
[...]
A U.K. index of hiring for permanent jobs fell in June to a nine-month low, KPMG LLP and the Recruitment and Employment Confederation said today in a separate report. The gauge of full-time job placements dropped to 60.2 from 60.7 in June, the groups said in the e-mailed report. A gauge of demand for temporary staff dropped to 54.3 from 57.

Nov. 16 (Bloomberg) -- Bank of England Governor Mervyn King said the risks of inflation slowing below the central bank’s 2 percent goal in two years is “significant” and policy makers can increase stimulus if necessary.

“As we see things at present, there are significant risks to inflation undershooting the target,” King told lawmakers in London today. “At present, the committee would feel that given what is happening to broad money growth, given what is happening in the labor market, given what is happening to the amount of spare capacity in the economy, all of those things make us feel that in the medium term inflation will come down.”

Inflation unexpectedly accelerated in October, forcing King to write to the Treasury explaining how he will bring it back under the government’s 3 percent limit to the goal. Officials have split three ways on whether to raise interest rates to curb consumer prices or add stimulus to aid the economic recovery.

“We could do further quantitative easing if that turned out to be necessary,” King said. “We have a difficult balancing act,” and if the bank’s judgment is wrong, then “we will find ourselves in the position two years from now where we will have seriously undershot the inflation target.”

Inflation accelerated because of increases in costs of gasoline and diesel, overdraft charges and mortgage arrangement fees, and computer games, the Office for National Statistics said today. The result of 3.2 percent exceeded the 3.1 percent median forecast of 28 economists in a Bloomberg News survey. On the month, prices increased by 0.3 percent.

The inflation rate has exceeded 3 percent this year in every month apart from February.[...]“Let me make it absolutely clear that we are focused entirely on the outlook for inflation,” King told lawmakers on the House of Lords Economic Affairs Committee. “On the upside, the major risk is on inflation expectations,” though “given the amount of spare capacity and the other medium term indicators I have described, there is also a risk inflation could fall below the target and that could be just as damaging.”

The governor must write to the chancellor every three months when the inflation rate deviates more than a point from the central target in either direction. King said in the letter that the inflation rate “is likely to remain elevated throughout 2011” and “might rise further” in coming months.

Nov. 17 (Bloomberg) -- Bank of England Governor Mervyn King said officials can expand economic stimulus if necessary as the risk of inflation slowing below the bank’s 2 percent goal in two years remains “significant.”
[...]
The nine-member Monetary Policy Committee this month kept its bond-purchase plan at 200 billion pounds ($320 billion) and its interest rate at a record low of 0.5 percent. In October, Andrew Sentance called for higher interest rates to combat inflation, while Adam Posen pushed for more stimulus to sustain the recovery.

“There are some differences on the committee,” King said. “I don’t think, given the scale of the shocks that we’re confronting, it’s particularly surprising or very large. When the minutes come out tomorrow you’ll see the distribution of views on the committee.”

[Update]
Just a couple of hours after I made this post did this report got published on Bloomberg. It just confirms everything that I stated, and also teaches us another very important feature of the monetary policy and the Grand Experiment: inflation above the so called target is not issue, but inflation below the so called target is very dangerous. For example, it's worth printing 2 trillion dollars if inflation is at 1% below of the so called target of 2%. But, if inflation is 1% above the target, then it's not very important to do anything, because of "underlying inflation". Yet another ridiculous excuse to keep on printing, printing and printing.

Note that I do not believe this will cause further inflation, but just lead to the debt and/or currency crisis sooner, forcing into deflation the culprits.

Dec. 16 (Bloomberg) -- Bank of England policy maker Adam Posen said policy makers shouldn’t “overreact” to inflation, which may slow below 1 percent in two years.

The bank’s Monetary Policy Committee “would only make things worse by making policy looking in the rear-view mirror, trying to make up for past mistakes,” Posen said in a speech today in Billericay, England. “If we allow for even just some exchange-rate pressure upwards on prices over this period as well, underlying U.K. inflation has stayed well below target.”

U.K. inflation has exceeded the government’s 3 percent limit for nine months, and an increase in value-added tax on sales in January may add to prices in 2011. Posen said Britain’s economy still has a “large” amount of slack in the aftermath of the recession and the largest government budget squeeze since World War II will slow inflation.
[...]
Consumer prices rose 3.3 percent from a year earlier in November, the highest since May. Consumers’ inflation expectations reached a two-year high in November in a GfK NOP Ltd. survey for the Bank of England released today.
[...]
The bank’s nine-member committee kept its bond-purchase plan unchanged at 200 billion pounds ($312 billion) this month and held its benchmark interest rate at a record low of 0.5 percent. Minutes of the central bank’s Nov. 4 decision showed policy makers split three ways, with Andrew Sentance calling for higher rates to combat inflation and Posen pushing for more stimulus to sustain the recovery. The rest voted for no change.

London's Shard, Britain's new tallest building - revisiting The Skyscraper Curse

I wanted to mention London's Shard for quite some time already, as part of debunking UK's bubble economy, but I never had the time to... until today. The DailyMail is actually running a report about it today, so I'll take the opportunity to write the post I wanted to do.

[...] The Shard - Britain's tallest skyscraper - is shaping up to be something spectacular.
The 87-floor tower will have 44 lifts and will be topped by a four-floor viewing gallery that will be open to the public.

But yesterday the businessman behind the mammoth London tower - currently 72-floors high - said 'it's not all about height', and revealed how the building was first sketched on the back of a menu. 

Speaking from the 24th floor of the Shard - which when completed will be the highest in western Europe - Irvine Sellar said his building would be known for more than its altitude.
Mr Sellar, who is chairman of the Sellar Group, said: 'It's not an ego thing. We're not the tallest building in the world by a long way, but we are the best-looking in Europe.' 

The Shard, which last month outstripped Canary Wharf's One Canada Square to become the tallest building in the UK, is the highest-profile part of a broader plan for a £2 billion redevelopment of the area around London Bridge Station.

Fast backward to early 2006 now:

Feb. 6 (Bloomberg) -- [...] it's time to revisit thatever intriguing economic indicator: the Skyscraper Curse.


As this columnist has pointed out periodically, there’s an uncanny, if unscientific, correlation between financial crises and efforts to build the world’s tallest building. Look no further than Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 and in biblical times with the Tower of Babel.


The human propensity for architectural overreach has been a surprisingly reliable omen. It’s not a stretch to think of such projects as visual punctuation marks. A giant billboard made of steel, glass, concrete and money. A common thread between skyscrapers and economic disasters has to be easy credit, which fuels irrational growth, valuations, and hubris.

So we've been talking a lot about the collapse of the UK real estate bubble and more generally speaking bubble economy based almost entirely on the real estate and financial sectors. Maybe that time has come.

Osborne Rejects IMF Call to Revise Plan If UK Growth Falters

I'm more and more amazed by the new coalition government in the UK, as they seem to be doing most of the right things and rejecting all Keynesian destructive theories. Here are some quotes from a Bloomberg report about the rejection of the call from the ever-Keynesian IMF:

Nov. 11 (Bloomberg) -- Chancellor of the Exchequer George Osborne rejected a call by the International Monetary Fund to revise his spending cuts if the U.K. economy slides into recession.

Osborne, 39, said sticking to plans to eliminate most of the record budget deficit within four years would be the best defense against a global slump. He didn’t comment on a proposal by the Washington-based lender for Britain to cut taxes to stimulate demand.

“In that situation, a hypothetical situation where the world is turning down, the thing that would raise its head, I suspect, would be sovereign debt,” Osborne said in an interview in Hong Kong yesterday. “The most important thing at the moment is fiscal credibility.”
[...]
Osborne intends to narrow Britain’s deficit to 2 percent of economic output by 2015 from more than 10 percent today. That will involve 490,000 public-sector job losses and 18 billion pounds ($29 billion) of welfare reductions, a cut of almost 9 percent in the total bill.

Osborne said his budget plans have been praised widely, including by the IMF and leaders in China where he spent two days on a visit this week aimed at boosting trade. The Bank of England said yesterday that the economy would grow above its long-term average over the next two years.

“The IMF make a point about potential contingency planning in the U.K.; they were saying that, in a situation where there is a very serious global downturn, Britain, like many other countries, will have a challenge,” Osborne said.

The chancellor, who heads for Seoul today to the Group of 20 summit, declined three times to say whether he will consider plans to combat such a challenge. He says that regulating demand is the role of monetary policy, not government spending, and his plans have helped secure Britain’s top-grade credit rating.

Standard & Poor’s said last month the cuts had safeguarded Britain’s AAA rating and it was no longer in danger of being downgraded.


Elsewhere in Europe, Spain, Italy and Belgium “are unlikely to grow strongly enough to avoid the fiscal arithmetic becoming more challenging,” HSBC Holdings Plc said two days ago. Erik Nielsen, chief European economist at Goldman Sachs Group Inc., said Nov. 8 some euro-area countries’ financing costs won’t be sustainable because of weak growth.
[...]
Central bank governor Mervyn King noted the importance of the global economy, and especially the euro area, for the U.K. outlook yesterday.
[...]
Osborne rejected suggestions that King has been wrong to express his views on fiscal policy. King has repeatedly stressed the need for a “credible” fiscal plan and yesterday denied putting pressure on the government, saying he had spoken less about the public finances than his counterparts at the U.S. Federal Reserve and the European Central Bank.

“The governor of the Bank of England is entitled to express his opinions, and he has done, and he is entirely independent when he does that,” Osborne said.

UK Gov to bring in compulsory work placements in exchange for Jobseekers' Allowance

I heard this yesterday, and I was quite amazed by the decision that the new coalition government in the UK has decided to do:

(Telegraph) In the most radical clampdown on the work-shy yet, Iain Duncan Smith will announce that the unemployed will be found compulsory 30 hour-a-week work placements and if they fail to turn up they will lose their Jobseekers' Allowance for at least three months.
[...]
But there will be harsh sanctions for those who refuse to co-operate. In one of the most controversial measures, the Government will bring in compulsory work placements, whereby unemployed people who are judged to be failing in their efforts to find work will be given an "extra push".

This is a very welcome development. I would have phrased it differently though. Basically they are turning the Jobseekers' Allowance into a real job paid by the government, but fail to explain it properly. Indeed, why not get people to do something for the money the government pays them? Instead of just sitting at home getting free money?

The best solution would be to just not have a Jobseekers' Allowance, and not have income tax neither. You are then incentivized to work, you are not expropriated from your property (money and labor) and you save for your own sake and rainy days.

Those forced to take up Work Activity Placements will be expected to spend 30 hours a week for four weeks at a time in a local business or project benefiting the community. If they do not attend or fail to complete the placement a "significant" financial sanction will be imposed, such as withholding Jobseeker's Allowance for at least 3 months, government insiders said.

One source close to the plans said: "We know there are still some jobseekers out there who need an extra push to get them into the mindset of being in the working environment. "This is all about getting them back into a working routine which in turn makes them a much more appealing prospect for an employer looking to fill a vacancy, and more confident when they enter the workplace.

"The goal is to break the habit of worklessness."Some five million people are currently claiming out of work benefits in the UK, with 1.4 million claiming for 9 out of the last 10 years.

What an irony...

Britain has one of the highest rates of workless households in Europe, with 1.9 million children living in homes where no one has a job.

This sounds like Italy or France to me...

There are 900,000 people who have spent at least 10 years claiming Incapacity Benefit, while the cost of IB alone since 2000 has been almost £135bn and the welfare budget as a whole has increased by 40% in real terms from £63bn in 1996/1997 to £87bn in 2009/2010.

 Same here, Italy...

As well as sanctions, Mr Duncan Smith will announce a reform of benefits payments designed to ensure work pays. He is expected to pledge that around 35p in every £1 people earn as they come off benefit will stay in their pocket to ensure there is an incentive to work.

Currently some families on benefits lose more than £1 of income for every £1 they earn because of the withdrawal of state subsidies and tax credits.

Same again. Italy, France, probably most European countries... People need incentive to work, or else, they'll just stay at home and cash in free benefits on the back of the fewer and fewer wealth producing and hard working people.

In an interview this weekend, Mr Duncan Smith said his reforms were "the biggest change since Beveridge introduced the welfare system".

Some charities opposed to the changes have warned that thousands of people could be pushed into poverty, in particular by reforms to incapacity benefit. Disability Alliance claims that up to a million people with long term sickness or disability could be affected.

 Of course, socialists will always come and complain. But no system is perfect. A system were almost a million people spend 10 years claiming incapacity benefit or two million children living in homes where nobody works. Imagine just a moment what part of the population actually does work and feed the rest of the people?

Despite this, there are signs that Labour could be close to supporting some of the measures. Douglas Alexander, the shadow work and pensions secretary, has said that Labour could support testing incapacity benefit claimants for their availability for work.

Under the plans, claimants face a new 12-month cap on their benefits, if ruled able to work. People who cannot work, for example the terminally ill, would be given support with no time limit.

Thank you Mr Duncan Smith. Let's hope that all other welfare and socialist countries in the west will follow.

Is it time to become bullish on the GBP?

The pound has dropped dramatically against the Euro since Cameron announced his austerity policies — and very wrongly so. Keynesians and Monetarist don't get anything right, and so it's not surprising to hear that these mesures will weaken the economy and the currency. But it's precisely the opposite that is true.

On the sentiment side, it looks like the trade is one-sided, with every player in the market thinking that the pound is due for a collapse, while it reality, it has already collapse, and that deflation will make it's value higher, and not lower.

Here are a few quotes from a Bloomberg report:

Oct. 25 (Bloomberg) -- The only major currency rivaling the dollar’s decline since July is the pound, and foreign-exchange strategists say the worst is yet to come for Britain’s legal tender.

Sterling has depreciated 5.1 percent against a basket of the nine other most-traded currencies, including last week’s 1.29 percent drop. Strategists are the most pessimistic on the pound versus the euro since the ruling Conservative-Liberal Democrat coalition came to power in May, according to data compiled by Bloomberg.

The decline suggests investors are losing confidence in Prime Minister David Cameron’s ability to restore growth while promising the deepest spending reductions in British history to shrink the biggest deficit in the Group of 20. His 81 billion pounds ($128 billion) of cuts through 2015 will force Bank of England Governor Mervyn King to print cash through so-called quantitative easing to prevent a new recession, overwhelming demand for sterling, according to UBS AG.

“There’s definitely more weakness to come,” said Hans- Guenter Redeker, global head of currency strategy in London at BNP Paribas SA. “The fiscal consolidation is going to hit the economy at a time when it’s slowing. Under these conditions, you need to have loose monetary conditions and that weakens the exchange rate.”

UBS[...] recommended on Oct. 21 its clients sell the pound, especially against the Swiss franc, Australian dollar and Norwegian krone. Morgan Stanley strategists said it may weaken to 93 pence per euro from 88.96 pence today should the recovery slow further or Bank of England policy makers signal more credit-easing measures.
[...] 

The U.K.’s spending cuts are “insane” and the pound will slump to below $1.40 as early as this year, John Taylor, chief executive officer of FX Concepts Inc., told the Telegraph newspaper.

Yet another nonsensical statement by incompetent John R. Taylor. So far in the past, it has always paid for me to bet against him (follow this).

[...]
“The U.K.’s fiscal policy is going to be tighter than anyone else’s, and therefore there’s much less reason to expect any tightening of monetary policy even if there is some sort of global recovery,” said Adrian Schmidt, London-based foreign- exchange strategist at Lloyds Banking Group Plc in London. Schmidt said the pound may weaken to 95 pence per euro this year. “The ECB will be raising rates before the BOE,” he said.

[...]
“We like the pound relative to the dollar,” said Monica Fan, London-based senior currency strategist at State Street Global Advisors, which oversees $83 billion. “King’s recent statement, which the market took as an endorsement of another round of QE, took a bit of the shine off, but the pound remains undervalued against the dollar and the government’s fiscal consolidation will provide support.”

Monica Fan gets it. Cheerio!

[...]
Policy makers may favor a weaker pound to keep Britain’s exports competitive, said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees about $20 billion.

It looks like sentiment is extremely bearish on the GBP, while actually fundamentals have been improving. This is a positive development for trading the GBP against the EUR, which is in the opposite situation: extreme bullishness, and weaker (compared to where we were 6 months ago) fundamentals.

Full disclosure: no position open yet.