Housing Treasury – Financing Risk Plenary one: Economic overview and the development of social housing Speaker:Philip Coggan Buttonwood Columnist The Economist

National Housing Federation Economic outlook Philip Coggan Buttonwood columnist The Economist

Slow growth Five year average of nominal global GDP growth is the lowest since the 1930s Nominal GDP growth important since debt is repaid in nominal GDP terms British nominal GDP is up, but only 8% In real terms, it is down 3% on the first quarter of 2008

So still too much debt US non-financial debt* still 250% of GDP Eurozone debt nearly 250% UK above both at 285% but below.. Japan non-financial debt at 375% of GDP Source: Chris Watling, Longview Economics * i.e. everything but the banks

Will growth accelerate? The big western problem is demography Economic growth equals more workers plus more productivity But what if there are fewer workers? Between 2010 and 2035, there will be a 20% fall in Germans and Japanese of working age (15- 64), 10% fall in Italians and Dutch, French flat, Britain tiny increase All the growth must come from productivity

The old age burden The baby boomers retire Ratio of those of working age to elderly deteriorates Britain 1970 (4.3), 2010 (3.6), 2050 (2.4) Germany 1970 (4.1), 2010 (3), 2050 (1.6) Japan 1970 (8.6), 2010 (2.6), 2050 (1.2) In UK, there were 7.2m people over 65 in Now there are 10.7m, by m and by 2050, 16.6m In OECD, there were 85m pensioners in 1970, by 2050 there will be 350m

So what will central banks do? From 1945 to mid 1970s, focus of economic policy was unemployment From 1979, Paul Volcker switched to inflation Late Greenspan/early Bernanke era, avoiding all recessions and stabilising financial system Now Fed and Bank of England have unemployment targets

Evolution since 2008 Rates cut to 0.5% in UK, lowest level in BofE’s history Then quantitative easing, massive expansion of balance sheet, BofE owns a third of all gilts Now forward guidance

Taper tiger Fed hinted at tapering in May, bond yields rose, emerging markets fell So Fed retreated in September Don’t want to repeat past mistakes, 1937 (US) or 1997 (Japan). So tapering may start but it will stop if markets wobble

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

Why hasn’t QE caused inflation? Bath analogy Money supply hasn’t grown But ketchup issue. When the first rate rise occurs, markets will price in lots more 1994 saw Fed tighten rates after long pause and was worst year for bond markets since 1927

Make hay while sun shines Record year for junk bond issuance Many junk bonds trade above par Largest ever bond issue (Verizon), largest ever junk bond (Sprint) European companies now moving away from bank funding and using bond market

So what about property? Good news when rental yields are higher than base rates UK Commercial property Biggest positive gap between yields and rates, the annual return was 12% Lowest gap, annual yield was 2%

Residential A new bubble? Rightmove says inner London asking prices rose 10% in a month London safe haven for global elite, first Europeans, then Africans and Latin Americans Help to buy scheme, very reminiscent of Fannie Mae and Freddie Mac

Valuation Nationwide first time buyer price-to- earnings ratio 30 year average 3.4 Peak in 2007 was 5.4 Low in 1995 was 2.1 Since crisis, the ratio never fell below 4.1 Now 4.6, higher than at any point before 2004

Not rocket science Supply versus demand balance Between 1971 and 1981 censuses, British population grew by 500,000 while 2.9m homes were built Between 1981 and 1991, population rose 1m while 2.1m homes built Between 1991 and 2001, population rose 1.7m while 1.86m homes built Between 2001 and 2011, population grew 3.5m while just 1.88m homes built

Other factors There were 25.5 million households in Great Britain in 2011, an increase of 1.6 million since Average household size in Great Britain has decreased from 3.1 persons in 1961 to 2.4 in But there is only one answer; build more houses, build more flats, and not just for rich expats!