Will the market respond to economic adventuring?

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5 March 2009

Great Britain has a long and proud history of venturing into the unknown, Cook, Scott, Shackleton, Fiennes have all ventured into unchartered territories through the ages. As interest rates plunge to new lows and the unprecedented step of quantitative easing is introduced can we add Brown, Darling and King to the list of Britons who have led expeditions into the unknown? 

Nationwide and HBOS HPI

Both the Nationwide and Halifax House Price Indices have reported monthly drops of 1.8% and 2.3% respectively, equating to a 17.7% and 17.6% annual decrease and circa 20% from peak prices.  

A point of interest is the impact that this price retreat has had on affordability as the HBOS house price to income index has fallen to its lowest level in 6 years. The ratio now sits close to the February 2003 levels (4.41) at 4.42 down from a peak of 5.84 in July 2007. This is now not far above the long term average of 4.0.

Affordability is a key indicator of market sustainability so whilst market activity may be being constrained by issues of lending and deposits, a return to some normality in this regard may be the trigger required to open up the market at a level more accessible than at the market peak. It will be of interest to see if the announcement by the MPC today may have scope to affect this change.

BoE Announce Interest Rates down to 0.5%

With the announcement by the MPC to drop in rates by a further 0.5%, what impact will this have for the housing market?

Mark Coogan of the Council of Mortgage lenders has already responded saying that he believes that "margins are already squeezed as a result of previous reductions, leaving little scope to lower discretionary mortgage rates further" and that "Savings are the lifeblood of mortgage lending, and unless lenders can offer competitive rates to savers their ability to offer new mortgages is restricted."

This would seem to suggest that this most recent cut, as with other recent cuts, is unlikely to lead to a rapid change in the lending landscape as the banks still attempt to find a sustainable balance between recapitalisation and lending, but what about quantitative easing?

Quantitative Easing

While Adam Smith's 'The Wealth of Nations' may be seen as the birth of the science of economics there seems to have been a great deal of pre-enlightment thinking involved in the fervour focused on financial alchemy in the past decade, in this context maybe we should think of quantitative easing as a form economic necromancy?

The quantitative easing package will introduce an initial investment of £75bn for asset purchases, which it is suggested will make its way in to the system in the next 3 months.

The scale and requirement of this package has been a point of much disagreement with figures ranging from as little £10bn to in excess of £200bn being proposed as being sufficient to have a real world impact. Such disagreement is to be expected in such testing times and where the application of theory is more art than science. The challenge in the application of quantitative easing was experienced in the 1990s by Japan and its success is a point of dispute. What is also likely is that the announced £75bn is to be the beginning point for future investment.

It will be over the coming months that we will have to wait and see if quantitative easing hits the mark that previous measure failed to reach, but with low interest rates giving little incentive to savers, continued volatility in many investment classes and as house price reaching new lows and affordability returning, it maybe nearing the time to re-enter the market before transaction volumes return and the buying power and dominance of the sole cash buyer is materially weakened by returning competition, especially in traditionally desirable areas. 

Tesco's Announce 200 Jobs for Edinburgh Haymarket Financial Services HQ

Recently there has been much doom and gloom surrounding the future of Edinburgh's financial service sector as both RBS and HBOS have gone from weakness to weakness and news of potential job cuts menaces the headlines. It has therefore been a welcome break to hear news that Tesco's has announced the creation of 200 jobs in their personal finance headquarters to be located in the InterPoint office at Haymarket.

It is worth taking this opportunity to remind ourselves of the strong underlying fundamentals that have driven the Edinburgh economy over the past decade and strong skill base that has attracted many companies to relocate. The high qualified and skilled workforce (the product of leading educational institutions) have been a central driver that has attracted many companies who have been able to source and retain a highly skilled workforce due to the high quality of life and business facilities of the capital.  We should therefore have some optimism that Edinburgh has many traits that will enable future recovery and growth. 

The Cost of Travel

Travelling without moving

Edinburgh infrastructure finance seems to be an issue of late as contract disputes for the Edinburgh Tram scheme rumble on with TIE (Transport Initiative Edinburgh) accuse Bilfinger Berger, the contractors, of imposing conditions that could add £80m on to the £500m project. However, if the tram does eventually get built it could prove popular as over 22,000 people are reported to have entered the mock up Tram that has been located in Princes Street until the 14th March.

The new Forth Road Bridge has been another infrastructure project that has been having funding issues as an SNP plan proposing a 20 year loan for funding was rejected by Westminster but a £1bn "lifeline" has been offered for funding.

As part of the new planning hierarchy there are 12 National Developments identified in the Second National Planning Framework:

Links

TIE - Edinburgh's Trams

MPC - full statement from the BoE

Alchemy - The occult art defined by Wikipedia definition

Princes Street Redevelopment - Evening News Story

Sir Ranulph Fiennes - Greatest Living Explorer 

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Andrew Meehan
Researcher
t: 0131 624 9051
e: andrew@rettie.co.uk

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