With average UK house prices nearly double US prices and, I suspect, house sizes approximately half those in the US, we are looking at prices per sq ft in the UK 3 to 4 times the US level. With some 90% of the UK still not built on, how long will it be before pressure from the younger generation demand a wholesale rethink of restrictive planning policies that have artificially inflated UK prices to extortionate levels?
David Cardale
The weather folk said the US was in for a mild winter, but they are not so positive about the next few weeks.
The US weather centre is expecting a cold snap in early December, and that means the heating will go up.
As a result oil had risen all the way back up to $62.42 by the time we took our daily reading this morning. That’s the highest price we have recorded since the 3rd October.
What next for the UK property market? If data on mortgage lending is anything to go by, the answer is up.
According to the latest research from the Bank of England, lending on secured dwellings rose to £9.8 billion last month, that’s the biggest monthly rise since September 2003.
If net lending gives an indication of where house prices will be soon, mortgage approvals should give an indication of market strength even further into the future. The Bank of England data also revealed that mortgage approvals for house purchases rose to 128,000 last month, the highest since December 2003. To put this in context, the long run average is 97,000.
It’s been a bit of a mixed bag this week in the US. Yesterday official data was released to show Uncle Sam performed a lot better in the third quarter of this year than we previously thought. A few weeks ago, the official compiler of stats state side had annualised GDP in the third quarter running at a somewhat anaemic 1.6 percent. Yesterday, however, it revised its work, and upped the score, saying that the economy did in fact grow by an almost respectable 2.2 percent.
Economists expect the US economy to slow significantly over the next few quarters and the period just gone was thought to represent the beginning of this precarious period, but the revised data gave economists some relief. And ‘phew’ went markets too, as the dollar ended its falling run, picking up from another 20 month low, seen before the data was released.
Yet, the confidence of the poor old US consumer is still on the ebb. Earlier in the week, the US Conference Board revealed the latest instalment in its Consumer Confidence Index. Analysts had expected the index to rise, from last month’s score of 105.1, to around 106. But alas, they were wrong. It fell all the way down to 102.9.
What with the October housing market seeing the biggest fall in the median price of houses ever recorded (see yesterday’s issue), it would seem inevitable that the weak consumer confidence and housing data will lead to much bigger falls in GDP in the quarters ahead.
But, before we close on this theme, here is a thought for further analysis at a later date. The US consumer is in debt - we all know that. The UK consumer might face historically high levels of net borrowing, but actually it’s quite modest compared to the typical US debt. It’s tempting to conclude, therefore, that the US consumer is in even more difficultly that the average Brit. But there is another way of looking at this. By net debt we mean borrowings minus value of assets. But what do we mean by value of assets? Is wealth boosted by high property valuation? In the US the median price of a home is $221,000, almost half the level seen in the UK. As one of our readers pointed out, see letter below, your typical US home is much larger than the average British home too, meaning that in terms of price per square foot of US property in comparison to a British home, it is lower still. Maybe, the US citizen can afford higher net borrowing, because mortgages don’t have to be so high.
Maybe fears that a smoking ban will damage the pub business have gone up in flames. Earlier this month JD Wetherspoon revealed a 5.2 percent rise in like for like sales in Scottish pubs where smoking is banned. But, perhaps an even more telling statistic announced by the company is this: Sales in the pubs where smoking has been banned for a year have grown by 11.8 percent. But across the whole group, like for like were up by less, 9.2 percent.
Now another pub chain has revealed data to blow more fresh air on the debate. Over the last seven weeks food sales at Mitchells Butlers’ 80 Scottish pubs have soared seven percent, while drink sales were down two percent. The company’s boss, Tim Clarke, reckons that pubs that generate a substantial proportion of business from food will not be seriously affected by the ban, and that they may even see sales rise, but sales in drinks focused pubs might suffer.
That old ad slogan that the car in front is a Toyota could never be more apt when applied to hybrid cars. Okay, Honda might have a thing or two to say about that statement, but when you compare Japan’s number one automobile maker with the big three US car makers, you will see what we mean.
GM has been suffering with its big thirsty monsters of the highway apparently going the way of the dinosaurs, while the sleek Toyotas seem to be natural selection’s answer.
But this week has seen something of a change. First of all GM announced it plans to move into hybrids yesterday, with its chief executive, Rick Wagoner, who was at the Los Angeles Auto Show saying: “I can tell you that is a major priority for General Motors”.
It’s not so much what Mr Wagoner said, it was more the timing and location that had the industry sitting up. GM is not popular in California. It’s the state where hybrids are especially popular, and recently, while Brits have been queuing to see the latest blonde Bond, in California the documentary, “Who killed the electric car”? is all the rage at the flicks. The film, produced by Chris Paine, interviews a host of electric car fans including Mel Gibson and Tom Hanks, and leaves GM, which had its own hybrid car in the ’90s which it then ditched, looking less than - how can we put it tactfully, environmentally pro active.
Yet, while GM starts making hybrid noises, Toyota may have stalled. Apparently, October saw the lowest level of Toyota hybrid car sales since March. Just two months ago, they were queuing round the block for the vehicle; this time the company actually produced more cars than it sold.
The US government gets the blame. There’s a big tax break for purchasers of hybrids, but there’s a snag. The tax credit only applies to the first 60,000 vehicles a car manufacturer can shift, and Toyota passed that milestone in the summer, and with that, sales have fallen like a British Leyland car off the edge of a cliff - actually that’s a little harsh, sales were still 15,000 in the month; it’s just that the company was doing a lot better.
There’s talk the legislation may be revised so that once again Toyota can get the tax break.
The hybrid car has its critics. They say that the electricity it uses is just as damaging on the environment as gas. It’s just that the point of damage is changed. With gas, it’s obvious you can virtually see the pollution as the car trundles along. With electricity, the carbon dioxide is released at the point of production. This argument misses an important point however. Wind, solar (see Monday’s article Desert provides panacea to energy crisis), nuclear, even tide power can all provide a greener and sustainable way of generating electricity. However many alternatives to oil have drawbacks. The use of bio fuel can also damage the environment, while hydrogen cars are said to be a long way off.
Still with cars, but away from the environment, nearly half of workers at Ford have accepted its redundancy plans. Cost slashing Ford need to get rid of 30,000 of its US staff, and has earmarked around $7billion to fund the job cuts. Yesterday, news broke that over 38,000 workers had accepted the redundancy offer - more than the company targeted. A meaner sleeker Ford may be better suited to take on the world, but it will need sleeker cars, meaner with gas as well as cost cuts, if it is to be successful.
When Sony and Bertelsmann agreed to merge their music arms, it was thought that a new wave of mergers was about to begin. The music industry is dominated by the big four: Sony BMG, Warner Music, Universal Music and EMI, and the most obvious candidates for a merger are EMI and Warner, or so it appeared, with EMI making one offer after another, and amidst all the talk of EMI buying Warner, the US company then went along and made a bid for EMI.
But then it all changed. The European Court of First Instance sent everything back to the drawing board, when it rejected an earlier decision to allow the merger of Sony and Bertelsmann, saying regulators needed more time and information to examine the merger.
That rather left the EMI and Warner plans out in the cold, and since then, while the regulators deliberate, merger seem to be off the agenda.
But does that mean EMI will be left to carry on as it is? Not on your nelly does it mean that. This is the era of private equity, and yesterday rumour, counter rumour and finally a confirmation of sorts, pushed EMI shares up ten percent as the City decided the music label was going to private equity.
The FT first revealed the story first, with the Times and Independent not far behind.
It is thought private equity firms Permira and Apollo have both made an approach, but all EMI would do is confirm interest had been expressed and that it “may, or may not, lead to an offer being made for the company.”
The EMI music label holds such illustrious names as Robbie Williams, Coldplay, Gorillaz and the Rolling Stones and after yesterday’s share price rises it has a market valuation of £2.29 billion.
Do you remember Nigel Lawson? The UK’s chancellor under Mrs T’s boom then bust period, had one big weapon for fighting inflation. He believed the secret to low inflation was a stable currency, and even before the UK joined the ERM, adopted a policy of shadowing the DeutschMark . He managed this by using the rate of interest, the theory being: the higher rates, the stronger the pound. A theory that was dashed a little when sterling was ejected form the ERM on that torrid and famous day in 1992.
But, if Mr Lawson was half right, a falling currency should lead to inflation. So a relatively high rate of interest will not only fight inflation directly, it should also strengthen the local currency, effectively giving rate setters a double sided blade for tackling rising prices.
This takes us on to the US. They have been predicting a fall in the dollar for some time, and over recent weeks, the greenback has been obliging. This morning, when we took our daily reading there were 1.9522 dollars to the pound. That’s a twenty-month record, but just a whisker short of a 16 year high. In December 2004 the dollar stood at $1.9548, a few tenths of a cent higher than the price we described above, and that 2004 peak was the highest level since the pound was ejected from the ERM.
With the US suffering from such a massive balance of payments deficit, it’s no surprise the dollar is falling, but what effect will this have on the US?
There are advantages and disadvantages of a falling currency, but from Uncle Sam’s point of view, the advantages are great, the disadvantages quite small. The big plus side is obvious: a lower dollar will boost US exporters. As for the main negative, that a falling dollar will lead to higher inflation and higher rates, well maybe it’s not so bad. The US is a relatively closed economy, in fact imports of goods and services account for only 15% of US GDP, compared to 30% in the UK. So a fall in the currency is unlikely to lead to a big jump in inflation, so rates should not have to rise by much at all.
As for the rest of the world? A lower dollar means it’s tougher for companies to export their wares into the US. In another era this would have had a catastrophic effect, but we are not so reliant on the US for trade these days. As that august economic consultancy, Capital Economics said: ” if the dollar is falling across the board, as we expect, the burden would be more evenly spread. For example, the impact on the euro-zone economy of a rise in the euro to 1.40 against the dollar will be much less if the dollar is also falling against other European and Asian currencies, than if that move purely reflected euro strength. On this occasion we expect China in particular to respond to broad-based weakness in the dollar by allowing a more rapid appreciation in the renminbi against the US currency. This will spread the burden further.”
.Besides, we have seen worse. Once again, we are letting Capital Economics have their say: “The dollar had already weakened by more than 25% between 2002 and 2004. And there was an even bigger fall - around 40% - after the Plaza Accord in 1985. During these periods, the global economy and financial markets performed reasonably well. ”
So you see, while many think a fall in the dollar is inevitable, that’s no reason to predict doom.
Maybe then, the SS US economy, the unsinkable economy has just hit that iceberg.
According to The National Association of Realtors (NAR), the median price of existing US homes fell by 3.5 percent in the year to October, taking the average price to $221,000. It was the biggest fall ever recorded. The previous record was set in November 1990 when prices fell 2.1 percent.
The US property market appears to be about 18 months behind the UK market, and many are saying there will be no crash, just a soft landing. But remember, the US consumer is even more indebted than your average Brit, and therefore the chances of a crash would seem higher. Should this occur and the October annual fall becomes a pattern, then woe betide the US economy.
The October fall also shows a remarkable change. A year ago the median price of existing homes was up 16.8 percent.
Then again……
In the release produced by NAR for October, it was actually quite bullish. It said October 05 was a remarkably good month, seeing the fourth highest annual change ever, so the year on year figures are distorted by that exceptional period from 12 months ago. Prices are in fact unchanged from September, suggesting maybe the period of a falling market is already over.
Perhaps, for the underlying trend, we should look at sales, and here there was encouraging news. Total existing-home sales rose during the month, up 0.5 percent from September to a seasonally adjusted annual rate of 6.24 million units in October from an upwardly revised pace of 6.21 million in September.
David Lereah, NAR’s chief economist, said market fundamentals are improving. “The present level of home sales demonstrates some confidence in the market, but sales are lower than sustainable due to psychological factors. The demographics of our growing population, historically low and declining mortgage interest rates, and healthy job creation mean the wherewithal is there to buy homes in most of the country, but many buyers remain on the sidelines. After a period of price adjustment, we’ll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007.”
NAR may be right to have this optimistic view. Take into account, however, that a year ago sales activity was 11.5 percent up on the level seen in the month just gone. So while sales may have seen a mild pick up in October, they are still a long way short of where they should be.
Still, from a Brit’s point of view, an average price of $221,000 feels remarkably cheap, that’s almost half the level seen in the UK.
If there is one feather Apple wants in its iPod cap, more than anything else, it’s to sign up the Beatles. The Fab Four are not currently available online - legally, and considering the company that owns their music rights is called Apple Corp, it was felt that if they did agree an online deal, it wouldn’t be for the iPod. After all, the two companies have been arguing it out via their lawyers. It was a case, or so it appeared of “Love me don’t” between the two Apples.
But, according to an article for Fortune Magazine, it’s about to change, with the two companies about to hold each others hands. Fortune reckons the ’60s super group have agreed an exclusive deal with Apple, with iTunes being the only online stores where Beatle songs, performed by the Beatles, are available, for at least a while. There is even talk that the Liverpool group will feature in iPod TV ads.
With rivalry from Microsoft, with its Dune MP3 product and the growing popularity of mobile phones with MP3 capability, a tie up with the Beatles would be a massive coup for the computer company, especially as the band’s new album is expected to top the album charts worldwide soon, outselling all other albums sold in the year.
