The national accounts rental yield – actual plus imputed owner-occupier rents expressed as a percentage of the value of the housing stock – stood at an estimated* 4.0% at the end of the fourth quarter of 2012, the highest since 1999. This compares with a long-run average of 3.6%, suggesting that house prices are undervalued by about 10% relative to rents – see chart.

The rise in the yield from 3.9% a year earlier (i.e. in the fourth quarter of 2011) reflects a 7.3% increase in rents in the latest four quarters from the previous year offset by an estimated 3.3% growth in housing stock value.

The merits of the rental yield as a valuation metric were discussed in a previous post.

*The value of the housing stock is estimated after end-2011 by linking to the ONS (previously DCLG) house price index.

UK money supply trends remain encouraging despite the suspension of QE and ongoing weakness in bank credit. Consensus focus on the latter is misplaced since money leads the economy while credit is, at best, a coincident indicator.

The monetary aggregates favoured here are broad money M4 and narrow money M1 excluding holdings of financial institutions – such holdings are volatile and can be difficult to interpret. Annual growth of the two measures rose further to new post-recession highs of 5.4% and 8.3% respectively in February – see first chart.

The pick-up has been concentrated in the company sector – stronger corporate liquidity is typically associated with increased investment, hiring and M&A. M4 holdings of private non-financial companies rose by an annual 7.8% in February but this understates the liquidity build-up because it excludes an increase in their foreign-currency deposits – total money balances grew by 9.3%. Corporate cash continues to expand more strongly in the UK than elsewhere – second chart.

The corporate liquidity surge partly reflects strong bond issuance – £20.6 billion in the 12 months to February versus £17.1 billion in the year to February 2012 and just £400 million in the prior year.

Ample liquidity and substantial fund-raising in bond markets suggest that a continued fall in corporate bank borrowing is largely voluntary and of limited significance for economic prospects.