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Bland Unsight

Office For Budget Responsibility Household Gross Debt To Income

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One of the numbers that comes out of the OBR that we've noted here and has given me cause to reflect on its significance is the forecast of household gross debt to income.

Household_debt_to__3127662b.jpg

This graph, taken from the December 2014 Economic and Fiscal Outlook, was interpreted by Jeremy Warner at the Telegraph in an article entitled "The Chancellor is banking on another house price bubble", published December 4, 2014.

The OBR have now been issuing these forecasts long enough that we can start to compare how things turn out with what is forecast. The OBR make public the Excel spreadsheet that generated the charts, hence one can tinker, if so minded.

obr%2Bdebt%2Bto%2Bincome.png

Source: OBR

It reminded me of this, which despite being a year old, is still doing the rounds in the twitterverse

slok_rates.png

So, according to UK technocrats and policy makers, UK household debt to income levels are forever about to zoom off to the stars (and yet they never do) and at the same time the interest rates that would be payable on these enormous debts are, according to the market participants whose decisions generate the price of futures, always about to take off too (and yet they also never do).

Edited by Bland Unsight

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It occurs to me that for all the fiscal talk of "deficit denial" the government are arguably in denial about the ability of households to support the debts that they've already taken on, even at these interest rates, and perhaps also in denial about the willingness of debt-free renter savers to convert themselves into debt slaves at these prices, given the shit housing on offer. We shall see.

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The failure of the one prediction (inferring expectations of BoE base rate movements from those of the Fed) contributes to the failure of the other? Record low base rates allow those with pre-existing debt to pay it down quicker whilst simultaneously contributing to asset-bubbles that, in the case of housing and MMR-constrained owner occupiers, actively prevent the expansion of further debt once they pass a given point in relation to wages.

Alternatively - and given Carney is on record as expecting a significant increase in the spread between market rates and base rates, and there is a clear direction of travel in regards to loose lending into the residential UK housing market - perhaps the OBR forecasts are, if not predicated on then at least equally well served by, the exact opposite explanation as that given by the BTLegraph? A real terms crash in house prices and an increase in owner occupation in younger cohorts could create a significant increase in the number of mortgaged households and thereby increase average household indebtedness without excessively increasing indebtedness for individual households.

Conceivably the OBR's forecasts may be relatively agnostic on house prices but instead a perpetual failure to correctly predict when transaction volumes are likely to pick up?

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http://www.housepricecrash.co.uk/forum/index.php?/topic/205403-richard-vague-private-debt-to-gdp-ratios/

http://www.amazon.co.uk/Next-Economic-Disaster-Coming-Avoid/dp/0812247043/ref=sr_1_sc_1?ie=UTF8&qid=1435434321&sr=8-1-spell&keywords=richard+bvague

Just been flicking through this. Basic premise is if private debt to GDP expand by more than 18% in a 5 year period and total private debt to GDP exceeds 150% then there is a strong possibility that a financial crisis will occur.

And according to the book the UK ratio was 24% in the 5 years preceding the crisis and was at 208% total private debt to GDP.

http://debt-economics.org/

The appendixes can be reviewed here.

Genius plan. You really can't fault wanting to increase the private debt to GDP ratio. What could possible go wrong.

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Maybe they don't mind so much about personal debt.....buying stuff with debt keeps people in jobs...also incentives people to work harder and for longer.....the people you buy from using debt are only too happy that you have access to it, they don't even care if you don't pay it back.......debt=wealth. ;)

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Err immigration is the answer, lend them all money and the economy grows, simples

A great answer, except that if it worked it would be working already, but it isn't.

fig1_tcm77-414707.png

Source: Migration Statistics Quarterly Report, August 2015

I think the problem with your "simples" analysis may be the bit where the immigrants borrow tens of billions of pounds. In order to take out secured loans they'd need to be able to conjure enormous deposits (which they can't) and service the massive mortgages with blisteringly good earnings (which they don't have).

I'd guess that economic immigrants are often net savers and may not even go in for a great deal of unsecured lending. If anything by swelling the total value of the denominator (household income) without taking out much debt (the numerator) we might at first glance suppose that immigration will drive down the ratio. Simples.

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The failure of the one prediction (inferring expectations of BoE base rate movements from those of the Fed) contributes to the failure of the other?

Just skimmed OBR Working paper No.6 Forecasting house prices Toby Auterson July 2014. They appear to have a glorious mathematical model for house prices which, and making a perhaps somewhat ungenerous reading of the paper, is not too reliable when the market is changing rapidly and is not too reliable if you try to predict more than a couple of years out. It includes measures of expected capital gains and mortgage rationing (which is used to explain the difference between what a "a generic, infinitely-lived household (and existing owner of housing assets) [maximising] the sum of discounted utility over an infinite horizon" ought to be prepared to borrow and what households actually to borrow).

I like this figure. The model has terms so that it fixes itself as new data comes in.

Eh.png

Charts 4.1 and 4.2 show model simulations of house price levels and growth over the past 30 years. The ‘dynamic-5-year’ green lines show what the model would have predicted given only price data up to five years before the prediction (the capital gains and credit rationing terms of the discount rate are also driven by predicted price growth). Chart 4.1 shows that in the long term the model predicts price levels well, but is slow to catch up with periods of rapid acceleration or deceleration. However, Chart 4.2 shows that the model is less successful at predicting the short-run dynamics of house prices, particularly in the period from 2005 to 2010, with peaks and troughs of predicted growth rates often lagging the data by around 4 quarters.

...
The charts above also show a 2-year ahead dynamic forecast: each point on the blue lines is the model’s prediction given the previous 8 quarters’ price predictions and actual data before that. Therefore, the model is allowed to correct itself for actual price data with a 2-year lag. The resulting forecast matches the data more closely, particularly on price growth, although still with a lag of 2 to 3 quarters. By limiting the model’s prediction to just two years ahead, we improve the dynamic performance of the model.
...
To reduce the lag between the model’s dynamic prediction and actual data even further, we use a range of short-term indicators for the first quarter of the forecast. Chart 4.3 compares a swathe of indicators (such as RICS measures of price expectations, market capacity, stock levels), standardised for mean and variance, to actual price growth.
I'm not sure that what it has to say about house price in 2018 is to be taken too seriously and therefore borrowing assumptions built on those house price predictions ought to be treated with similar caution. I've got to say that it looks like a predictive model that follows the actual data, which is of course as it should be. Anybody who could actually predict the market would be more than a little foolish to hand over the fruits of their intellectual endeavours to the ONS for a civil servant's wage. That really would be a below market value transaction.
Edited by Bland Unsight

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The 'prediction', nay, necessity, of the OBR numbers on increases in household debt:income (and also 8% y-o-y increases in business borrowing) to make Ozzy's numbers look straight over the past several years has been one of the most outrageously overlooked lies in recent years. Good on you for highlighting it again.

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Just skimmed OBR Working paper No.6 Forecasting house prices Toby Auterson July 2014. They appear to have a glorious mathematical model for house prices which, and making a perhaps somewhat ungenerous reading of the paper, is not too reliable when the market is changing rapidly and is not to reliable if you try to predict more than a couple of years out. It includes measures of expected capital gains and mortgage rationing (which is used to explain the difference between what a "a generic, infinitely-lived household (and existing owner of housing assets) [maximising] the sum of discounted utility over an infinite horizon" ought to be prepared to borrow and what households actually to borrow).

I like this figure. The model has terms so that it fixes itself as new data comes in.

Eh.png

I'm not sure that what it has to say about house price in 2018 is to be taken too seriously and therefore borrowing assumptions built on those house price predictions ought to be treated with similar caution. I've got to say that it looks like a predictive model that follows the actual data, which is of course as it should be. Anybody who could actually predict the market would be more than a little foolish to hand over the fruits of their intellectual endeavours to the ONS for a civil servants wage. That really would be a below market value transaction.

It would also imply that the housing market was actually predictable at that kind of level (i.e. in terms of timing and velocity as well as general direction and/or sustainability) with fundamental rules that give set outputs for set inputs. Given the level of human psychology involved, and the fact that beyond the physical houses themselves the underlying economic structures around which the idea of a housing market is built lack any intrinsic independent reality and are often haphazard in their construction, this is highly unlikely to be the case.

From a totally superficial glance through it looks like the range of indicators the OBR relies on may also be prone to overplaying price rises and underplaying price falls:

2utsy9j.jpg

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AFAIK Chote and co. use the Treasury's Computable General Equilibrium (CGE) model originally developed around 1970 (!) and penked around with most recently by one Adam Blake who currently rejoices in the title Professor of Economics at the School of Tourism, Bournemouth University. I kid you not!

http://staffprofiles.bournemouth.ac.uk/display/ablake

CGE models differ from DSGE models such as the Bank of England's COMPASS in that DSGE models attempt to capture the differences between business cycles whereas CGE models focus more on long-run analysis and household finances. Also, DSGE models admit stochastic variation whereas CGE models are wholly deterministic, with agents facing no uncertainty about the future. :lol:

Since equilibrium is never observed in any real market it's usefulness as a concept in economics/econometrics is essentially nil, something that's been known since 1958 or thereabouts when the physicist Maury Osborne observed that actual microeconomic supply and demand curves are non-integrable. In 1968, Radner proved that even if a general market equilibrium could be proved to exist mathematically it would be uncomputable and speculated that money arises out of computational uncertainty. With perfect foresight, perfect planning into an infinite future, there is no liquidity demand since every sale is matched faultlessly to a buyer. In real markets, for contrast, we have finite computational horizons and pure nonGaussian noise. In other words, almost total ignorance.

Edited by zugzwang

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Actually, it all comes down to how much banks will lend and how much buyers will borrow, currently the banks will lend but buyers can't borrow as they don't have enough cash.

This isn't going to change now

The anomaly is the UK housing market which appears to be the only place where money can literally be conjured out of thin air. Hence the change in BTL.

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I've checked the latest BoE data and there are signs that MEWing is back. The "recovery" in 2012 was initially funded by savings then the housing market revived, now savings withdrawals dropped to zero but remortgaging is up. We are back to the old tested way of generating the growth by credit expansion backed by rising house prices.

Does anyone know what drives this MEWing revival? Is it just an opportunistic behaviour, higher house equity and low mortgage rates?

wbtnyo.jpg

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The OBR chart is predicated on the projected level of output & Osbornes projected fiscal plan.

All else equal, if Osborne reduces govt indebtedness then as a corollary, for a projected level of output, that borrowing must come from either the corporate sector or the household sector.

Its a fairly simple & straightforward relationship. Osborne cutting spending will likely result in one of the other sectors increasing indebtedness. OBR are projecting it will be the household sector which in essence = mortgage debt.

Obviously an alternative outcome would be that output is lower, Osborne doesnt reduce govt borrowing as per plan & household debt is consequentially lower.

Since there is no imperative (apart from Osbornes self-imposed one) to slash govt debt to gdp, it would have made more sense to do that over a much longer timescale, run higher output and allowed the household sector to delever further first. Interest rates would likely be a bit higher too which would enable BoE to get off the zero bound.

Edited by R K

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I think this may be another favourite house price bubble and financial crisis graph. I updated for the numbers in the November 2015 Economic and fiscal outlook as released with the Autumn statement, stripped out some of the earlier data series to make the graph less cluttered and put some vertical lines in to show where each series enters its forecast period.

Basically the OBR forecast that the gross debt to income ratio rises, so on the occasions since March 2012 when it actually did, their forecast nailed it.

Unfortunately it has only risen in 4 of the 14 quarters for which they've forecast.

More%2BOBR.png

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You've got to figure that if your model says something always rises and yet it generally doesn't, there's something seriously f**king wrong with your model.

Edited by Bland Unsight

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This is priceless.

I saw the below chart on the twitters (it was actually on the personal twitter feed of a CML economist). The chart is the secured debt to income chart which appears in the OBR Economic and Fiscal Outlook (EFO) which is released with the Autumn Statement.

OBR comedy.png

My first reaction was that it was a joke and that he'd just doctored a legit OBR chart in MS Paint for comic effect, but in fact this is the real chart and appears in Box 3.3 (the box begins on page 74) of the latest EFO.

The whole box itself is worth a read as it details a major revision to how they forecast secured lending, but here's a taster.

Quote

These previous forecasts were consistent with our house price and property transactions forecasts at the time. They were also based on an assumption that mortgage rationing would ease over the forecast period, thereby leading to a gradual increase in the ratio of secured debt to the value of the housing stock (Chart B).


In light of the systematic forecast errors, and since we have not used our house price model in this forecast, we have used a different approach in this EFO.

(Emphasis added.)

Anyway, here's my own chart updated with the new EFO forecast data.

OBR Gross debt to income November 2016.png

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The OBR need to go on one of those reality TV shows where you are given a fixed amount of cash to live on. They seem to think everyone will get the same sort of pay rise as them.

The real worry is that they actually have no idea what is going and their dogma results in another financial crisis.

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19 hours ago, Bland Unsight said:

This is priceless.

I saw the below chart on the twitters (it was actually on the personal twitter feed of a CML economist). The chart is the secured debt to income chart which appears in the OBR Economic and Fiscal Outlook (EFO) which is released with the Autumn Statement.

OBR comedy.png

My first reaction was that it was a joke and that he'd just doctored a legit OBR chart in MS Paint for comic effect, but in fact this is the real chart and appears in Box 3.3 (the box begins on page 74) of the latest EFO.

The whole box itself is worth a read as it details a major revision to how they forecast secured lending, but here's a taster.

(Emphasis added.)

Anyway, here's my own chart updated with the new EFO forecast data.

OBR Gross debt to income November 2016.png

So Osborne's definition of 'mortgage rationing' was anything short of northern rock lending 100% self certified to a dead hamster?

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16 hours ago, interestrateripoff said:

They should add in Richard Vagues work which shows that once private debt to GDP exceeds 150% you then have a financial crisis.

Crisis about to kick off then ?


We've been expending it for a few weeks now

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14 hours ago, hotairmail said:

Historically, mortgages were and are the major component of household debt (otherwise known as "getting credit into the economy cash into the bankers pockets ").

 

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