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MPC member Stephen Nickell recently gave his annual speech on the state of the British economy. James Ferguson reports
This week, economics professor and Monetary Policy Committee (MPC) member Stephen Nickell gave his annual September speech at the British Academy. This dealt with household debt, house prices and consumption, and was an almost exact replica of last year’s speech. Even the charts hadn’t changed from last year – many came to an abrupt halt in 2004, or even 2003. Nickel is considered one of the more dovish members of the MPC: he doesn’t believe there’s a housing bubble and voted in favour of the last interest-rate cut. On Tuesday he revealed why.
No credit-fuelled spending boom?Professor Nickell argues that there has not been a credit-fuelled spending boom: household debt may have ballooned, but spending (as a percentage of disposable income) isn’t really any higher than it was in the past. Look at Mortgage Equity Withdrawal (MEW), he says. MEW rose to over 10% of post-tax income in 2003, but real consumption growth was flat at about 3%.
If the increase in household debt isn’t financing consumption, what are we spending it on? Simple, says Nickell, the purchase of financial assets. This has risen from 7.9% of post-tax income in 1998 to 15.3% in 2003, almost exactly the same as the rise in debt as a percentage of post-tax income, which has risen from 7.8% to 17.3% in the same period. If debt is being used to buy financial assets, then consumption won’t drop when debt (specifically MEW) falls. But Nickell is cherry-picking his numbers: from 1993 to 1997 total household assets (housing and financial) were growing by more than 10% of post-tax income every year, net of the increase in household debt. But since 1998, net asset growth has been lucky to be above 5% of income. This is not the matching of debt to financial assets that Nickell would have us believe. It’s a clear worsening of the household sector’s financial environment.
MEW is now falling, and precipitously at that, as real house prices have turned negative and housing transactions have dropped by a third. The relationship between the housing market and consumption, which Nickell was saying had broken down, appears to be firmly back on track again (see chart above). Real house prices turning down has had an immediate result on spending. But because Nickell’s charts didn’t include 2004 or 2005 data, he seemed blissfully unconcerned, or perhaps even unaware, of more recent developments.
A housing bubble?
“Bubbles,” says Nickell, “are hard to identify.” Alan Greenspan, US Federal Reserve governor, famously said the same thing when commenting on the dotcom bubble. Yet almost all bubbles are caused by central banks being too accommodative with their provision of credit. To hear Greenspan then and Nickell currently abrogate their responsibilities in this way is nothing short of scary.
Nickell is content to observe that property’s equilibrium (very long-term) price has probably risen, but that he’s “no idea where the new equilibrium is”. But he did approvingly quote Phil Spencer, of TV’s Location, Location, Location, saying at the end of last year that “public sentiment has finally accepted there will not be a crash”. And I always thought the Bank of England was privy to sources not open to the rest of us. However, if it isn’t the case that the equilibrium price of houses has gone up, but that they have risen due to long-term cyclical factors, then, if they unravel, house prices will head south. Even Nickell admits, “maybe in the future we will have a crash but so far it doesn’t seem worth it [to have pricked the bubble early with higher rates].” Well, so far, no, I’d agree, but what about what happens next?
If it all turns out badly, the Chancellor’s switch from the RPIX measure of inflation (which was above target at the time) to the CPI (which was well below target) will look even fishier. Nickell admits the CPI averages 0.8% below RPIX. So when the new target was set just 0.5% below the old one, the Bank of England was, in effect, receiving a stimulative hike in inflation tolerances, meaning interest rates might have been set too low.
Conclusion
If Nickell’s views are indicative of how MPC members think, then we should never have expected them to forestall an asset-price bubble (nor admit it was their policy that created it). The Bank’s role is either to respond to changes in the present environment, or to effect policy to change the outlook for goods price inflation. Since they don’t believe debt affects consumption, they don’t feel low rates have caused a bubble, nor presumably do they fear that a collapse of that consumer-debt bubble will trigger demand recession.
Nickell listed many bearish quotes from property and economy bears while comforting his audience that house prices are still higher than a year ago. The fact that real house prices are already negative and that a year ago house prices had been growing by 20% wasn’t mentioned: complacency is not one of the attributes I want my central bankers to exhibit. Still, Nickell retires from the MPC next year and takes up residence as warden of Nuffield College, Oxford. I suspect that, like Alan Greenspan, he doesn’t really care as long as it’s not happening on his watch.
James Ferguson is economist and stockbroker with Pali Internnational
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