August 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Over the last five years, house price inflation in the UK was 90 per cent. In Spain the inflation rate was 100 per cent, but everywhere else in the Eurozone, and in North America and Australia, it was lower - or so says the Halifax.

France enjoyed the third-highest house price inflation rate - says the Halifax - 73 per cent over the last five years, and Ireland saw 71 per cent. The Eurozone average was 40 per cent, and in Germany house prices fell by 5 per cent.

Meanwhile, down under, house price inflation over the last five years was 54 per cent, and in Canada and the US it was 36 per cent.

The average price of a house in the UK at the end of 2006 was £187,100. Houses were more expensive in the Netherlands and Ireland, but much cheaper elsewhere. For example, the average price in the US in 2006 was £132,600, and in France it was £119,300.

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August 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

And yet there are plenty of reasons to believe that the market is not quite as solid as so many of these experts are telling us.

For one thing, Land Registry figures recently published said that average house prices rose by just 0.1 per cent in July. In the West Midlands, Yorkshire Humberside and Wales, it has recorded a fall in average house prices for two months in a row now.

And, don’t forget, the FT recently predicted the recent crisis in the City could hit London’s house prices.
But, news that should really make the property market commentators sit up came from The Royal Institution of Chartered Surveyors (RICS) yesterday. In the second quarter of 2007 there were 5,120 residential properties sold at auction, the highest number of sales in over two years and a 22 per cent rise on the previous quarter. RICS reckons residential lots offered at auction should continue to pick up and it estimates that repossessions could rise to in excess of 45,000 in 2008, amounting to 124 repossessions per day.
But, what puzzles us is this. Why are there repossessions at all, at the moment? With house prices so much higher today than even a few months ago, any mortgage holder who gets into difficulty could solve the problem by selling up, or perhaps re-mortgaging,
The real crunch, though, will be what will happen when house price inflation drops. Even the bulls of the market expect single digit inflation in the sector this year and next. But in two years time, a property owner who gets into difficulty, might well find that lower rates of house price inflation mean they no longer have the option to re-mortgage, or to sell.
We suspect that industry forecasts have totally failed to take this into account when predicting future rates of repossessions.
Many in the industry are quick to point out that the sub-prime market in the UK is more modest than in the US and, goes the argument, UK lenders were more responsible with their lending. The US crisis will not, therefore, spread here, or so they say. But then read this comment from a report produced by ABN Amro back in April. “UK housing looks almost 50 per cent overvalued, compared with 25 per cent in the US. This seems difficult to rationalize, considering trends in employment, income and interest rates.

“Structural factors, such as a lack of supply and migration, don’t appear to explain the premium on UK housing as rents have remained subdued relative to prices.

“So why has the UK not experienced a US-type adjustment? Expectations appear to be crucial. In contrast to the Fed, the Bank of England reinforced expectations of continued rapid house-price gains. But with growing evidence of speculative activity,
the BoE has created the risk of a more disorderly correction in the future.

“The UK economy looks more vulnerable to a housing downturn than the US. Consumers depend more on housing as a source of wealth. The banking sector could also be exposed. Most worrying, if a housing correction undermines confidence in
sterling, the BoE might be unable to cut interest rates to soften the impact.”

But perhaps the most damming piece of news emerged yesterday, when mortgage lenders representing no less than 12 per cent of all UK mortgage lending either upped interest rate charges, or tightened lending criteria.

This is what Fionnuala Earley, chief economist at Nationwide said, “The same person trying to get a mortgage will find the situation more difficult now than three months ago#133;Some lenders will reassess how much they want to lend. You’re not going to stretch yourself for volume in a market you think is a little risky.”

And with those words, the market should be trembling. Mortgage lenders came under criticism when they upped their lending criteria so that they were willing to lend at 5 times income. But, even deals of that scale are not enough to enable many to jump on the property ladder. If lenders reduce their criteria, then for most non-home owners, house purchase becomes quite simply impossible.

It all depends on buy-to-let. The figures from Paragon described above suggest this is still a very profitable area. Some people, worried about their pension, especially in the light of recent market turmoil, might decide property investment is the thing for them, driving up the popularity of this form of investing.

But, figures published elsewhere contradict Paragon’s bullish findings. The FT recently said the average buy -to-let investors will enjoy net returns of just 3.5 per cent, after allowing for maintenance and voids. Given that the current rate of interest is 5.75 per cent, that will mean a very substantial deposit before a new buy-to-let investor can cover costs.

High house prices relative to income have created an illusion. They have made us feel better off than we really are. They have fuelled an unsustainable level of borrowings, a short-sighted attitude to pensions, and created inflationary pressure.

All that stands in the way of a dramatic fall in house prices is local authorities and their willingness to grant planning permission. Earlier this week, one tabloid newspaper headlined how house building will encroach on our green belt. And yes, it will; the alternative is homelessness. But if market forces are allowed to work, house prices will crash.

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August 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Better ordnance was given to the property bulls camp when the Bank of England released its latest report on mortgage approvals yesterday. 115,000 mortgages for house purchases were approved in July. The last time the monthly figure was higher than that was back in February.

The likes of the Halifax and Nationwide still insist that while house price inflation will slow down over the next year or so, the underlying fundamentals are good. Recently the Halifax said, “the estimated 2.8 million borrowers who took out a fixed rate mortgage in 2005 and 2006 account for around 25 per cent of all mortgage borrowers. The overwhelming majority of these borrowers are expected to be able to absorb the increase in payments. Most people’s earnings will have risen since they took out the mortgage - average earnings have risen by 7 per cent over the past two years in monetary terms - providing more income to finance the higher interest payments. In addition, most borrowers facing higher payments will have accumulated a significant cushion of housing equity as a result of house price inflation since they took out their mortgage.”

Note those two words, “monetary terms,” which were slipped into the comment above. The Halifax suggests that mortgage borrowers have seen their income rise by 7 per cent over the last year, therefore they can easily afford an increase in mortgage costs. But this reported 7 per cent increase in income was before inflation. In fact, wage increases have been lagging behind inflation. The Halifax report rather conveniently ignored all those other reports saying that our disposable income has actually been falling. See Investment and Business News 28 June .You have never had it so good - well actually you have.

The Halifax went on from its twist of facts to a twist of numbers. “A borrower with a £114,000 mortgage, the average in 2005, taken out at the average two-year fixed rate in 2005 of 5.08 per cent,” says the Halifax, “would be making monthly repayments of £669.02. When the deal expires this year, the new monthly repayments would be £733.72 - an increase of 10 per cent or £65 - assuming that the borrower moves onto the current average two-year fixed rate of 6.04 per cent.”

In other words, the official rate of interest has risen from 4.5 per cent to 5.75 per cent in two years, and yet an individual on a fixed rate when rates were 4.75 and then going variable today when rates are 5.75 per cent will see mortgages payments rise by just 10 per cent. It’s a mere £65 a month more on a £114,000 mortgage. How can that be? Well, the Halifax was not comparing like with like. If the mortgage borrowers chose instead to renew the fixed mortgage for another two years, then the repayments would have been a lot higher.

Also sitting in the bull camp, although not quite so firmly as the Halifax, is the Nationwide. Yesterday, it released its latest figures on house price inflation. It recorded a 0.6 per cent rise in the average house price in August, up from 0.1 per cent, in July. “The US sub-prime crisis has created turmoil in international financial markets, but this is unlikely to have a significant additional effect on the rate of growth of house prices in the UK in the short term. We still expect house price growth in 2007 to come in close to the middle of our forecast range of between 5 per cent and 8 per cent.”

To cap all these bullish reports, National Housing and Planning Advice Unit recently said that the average house prices will soar to £300,000 by 2012, that’s ten times average income by 2012.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

August 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Paragon Mortgages released its latest report on the state of the rental market earlier this week. It was very positive, but then Paragon only seems to do bullish reports.

“With strong rental demand landlords are able to raise rents to cover their increased mortgage repayments. Rents rose by an average of 3.04 per cent over the past three months - an annualised growth rate of 12.7 per cent,” said Paragon.

Paragon added “yields have remained stable at around the 6 per cent mark for over a year - although when landlords’ gearing is taken into account the rental return is much higher. The average landlord property value rose 1 per cent during the month to £181,533, while annual total returns, including capital gains plus rental income, stood at 11.6 per cent - the highest level since April.”

And then, Paragon’s chief executive Nigel Terrington engaged in an impressive piece of twisted logic, “As owner occupiers are increasingly struggling under the weight of higher borrowing costs, buy-to-let landlords can provide accommodation for the growing number of young people who want a flexible lifestyle or who aren’t yet ready to step on the property ladder.”

It’s twisted logic, because actually, the real reason why people are renting, is because they can’t afford to buy, and the reason why house prices keep rising, when for most would-be first time buyers they are completely unaffordable, is due to the buy-to-let sector propping up demand.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

August 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

It’s difficult to imagine a bigger split on opinion. The last few days have seen a rush of new reports on the property market, and a glut of opinions ranging from woe to celebration.

At one extreme you have Paragon exclaiming how profitable buy-to-let investing is, and Halifax pooh-poohing fears that the recent rate of interest hikes will make mortgages unaffordable for some recent home buyers.

On the other hand, figures from the Land Registry suggest house price inflation has virtually ebbed away altogether, figures from the Royal Institution of Chartered Surveyors paint a very disturbing picture on repossessions, and even more telling, there are signs mortgage lenders are reacting to the recent crisis in credit markets by tightening mortgage lending criteria.

Which way will it go? Read on#133;
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August 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Wednesday saw the Dow soar by 247 points: only 33 points short of making up for Tuesday’s falls. You may recall, yesterday we said there was no good reason for the sell-off in shares seen on Tuesday. And, today, we say that on Wednesday, there seems to have been no good reason for the share buying binge that took place.

One reason given was the fall in the value of the yen. The day saw the Japanese currency suffer its biggest one-day drop against the euro in three years, and the biggest fall against the dollar in two years. At the moment, investors like to see the currency of the rising sun fall in value, as a falling yen makes the carry trade more profitable. The carry trade is where investors borrow in Japan where the rate of interest is very low, and then lend money in the US and Europe where rates are much higher.

Some have argued that an apparent unwinding of the carry trade has been one the factors behind the recent drying up of credit and so conversely, a weaker yen means debts held in Japan become cheaper, making the carry trade more profitable, enabling it to wind back up again.

Another explanation put forward for yesterday’s rises in the Dow was simply that investors felt shares had become too cheap: they smelt a bargain.

At the time of writing, the FTSE 100 was picking up, and it would appear today will see rises in London mirroring the New York experience of yesterday. You may know more when you get to read this.

But it seems the best explanation for this week’s volatility is simple. It’s the end of August. Half the City is on holiday, and this is a notoriously volatile time of the year.

Readers of Investment and Business News had to suffer the agony of no issues for two weeks while we took our August break, and while any pain suffered by investors over the recent market turmoil is trivial in comparison to the suffering of our readers, it appears the real business will get under way next week. Only then will we be able to judge whether we have just witnessed a quite spectacular example of the dictum “sell in May and go away”, or whether this is something more serious.

Talking of more serious, another Hedge fund is in trouble. Cheyne Finance PLC has suffered big losses in its investment portfolio, and yesterday said, “We have been actively selling assets and reducing the size of the portfolio, and have raised sufficient cash to cover projected liabilities for the next few months.”

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August 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

You may recall yesterday we told how shares in Barclays fell after a report suggested the bank might have got itself into difficulty with something called SIV-lites.

The current liquidity crisis seems to rotate around horrible jargon and acronyms.

Sub-prime is bad enough; it refers to mortgages for people with poor credit records. Then there are CDOs, which parcel various forms of debt and provide various routes for investors to buy into the debt. Then, to cap it all, there are SIV-lites. They are a lot like CDOs, but raise money via the short term credit markets.

It was a Barclays man, Edward Cahill, who came up with the idea of these SIV-lites, and the bank has been helping other banks and funds set up these vehicles.

But over the last few days, it seems to have all gone pear-shaped. First, Mr. Cahill has resigned. No one seems to know why, but we suspect it is quite easy to take a pretty good guess. Then, the German state owned bank, SachsenLB went close to collapse after if got itself mixed up with SIV-lites, set up with the help of Barclays. Some rumours suggest Barclays might be forced to throw in a fair chunk of money, several hundred million dollars, or so say the rumours.

And with all that talk, the Barclays share price falls.

It’s significant, because the Barclays offer from ABN Amro includes an element of share swap, and if their shares fall in value, the ABN offer becomes less valuable. Since Barclays made its bid for ABN, its share price has fallen by 16 per cent.

In all, the Barclays bid is now worth around 60 billion euros, compared to the RBS, Fortis and Santander offer, which has a much larger cash portion, worth around 71 billion euros.

Refer to our article above, in which Standard and Poor’s has suggested bank profits could plummet. If you were a shareholder in ABN, then right now you would probably want cash for your shares and be most unhappy with the idea of acquiring shares in another bank.

It appears that Barclays finds itself with an uphill struggle.

When Barclays first made its bid for ABN, it was said that if it was unsuccessful, the Bank will itself fall under the radar of predators and might well become the subject of an offer. In the current environment, it is difficult to believe anyone would be able to buy a bank like Barclays. The only investor out there who could easily find the money is China. With its massive foreign reserves, it’s looking for places to put its money and has already talked about investing into Barclays.

A Chinese buy of Barclays would raise political hackles, however, and it seems this is unlikely to happen unless, that is, things get desperate.

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August 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Douglas Adams once wrote that “It can hardly be a coincidence that no language on Earth has ever produced the phrase, ‘as pretty as an airport’.” We don’t like airports: they are noisy chaotic beasts. But, if there is one group of airports that seem to take the biscuit it’s those British air terminals run by BAA.

The press, the public and the airlines seem to queue up to make their criticisms of BAA. London mayor Ken Livingstone, for example, has said Heathrow “shames” London.

Now, to cap it all off, news has broken indicating it could get even worse.

The latest snag with BAA is this. When Spanish company Ferrovial bought the private monopoly, it took on a lot of debt. Remember that word? Debt. It’s odd that BAA is struggling under a mountain of debt, and no one is yet drawing comparisons with the current liquidity crisis: the sub-prime market is not the only point of origin for debt fears.

The debt burden held by Ferrovial is making it difficult to generate sufficient profits to cover interest. And so what does that mean? Cost cuts.

The Times newspaper has reported that BAA is preparing to shed 2,000 jobs, which is quite a chunk, given the company only employs 15,000 people world-wide, 13,000 of them in the UK. According to the Times, of the UK’s 13,000-strong work force, 4,000 work in security, and one assumes these jobs are safe, so the pool of jobs available from which to take these cuts is actually quite modest.

Of course, fears have grown over how that will affect service. EasyJet has already slammed BAA. Expect more to follow.

There is even talk that BAA might actually sell some of its airports. Now there would be a fine thing: it might actually lead to the creation of some competition.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

August 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

1998 was a bad year for the banks. This was the year that Russia defaulted on its debts, and the hedge fund Long Term Capital Management collapsed. In the wake of the year’s turbulence banks’ profits plummeted, with investment banking and trading revenue down 31 percent in the second half, or so says Standard and Poor’s.

Forward wind the clock to today and we could see a re-run, or it could be even worse, warns Standard and Poor’s. The rating company conducted what it called a stress test into the banking scene and said, “There is a sense of déj#224; vu about the current environment for securities firms, which bears many similarities to that of the late summer and fall of 1998.” In fact, it suggested that this time it could be even worse.

“It concluded that this time around the largest investment banks could see revenue fall by as much as 47 per cent, and profits could collapse 70 per cent.

The Standard and Poor’s statement said, “Once again, we see sharp falls in stock markets following a strong run, a jump in volatility, sizeable losses at some large hedge funds, higher risk premia on bank debt, a liquidity crunch, asset valuation problems, and rumours of banks and broker-dealers getting into difficulties.”

Of course, the inevitable consequence of a fall in investment banking profits will be cuts in city bonuses, which according to the Guardian are up 30 per cent this year. And with that, maybe we will see the long awaited fall in the price of properties based in London’s more expensive areas.

There are many, of course, who will be quite happy to see the city boys’ fat bonuses shed a few pounds, but don’t expect the fallout to last.

1998 might have seemed like a major crisis at the time, but the business world soldiered on. And this time around Standard and Poor’s is pretty bullish about the medium term. “Given the still-favourable economic fundamentals, an extended downturn seems unlikely at present.”

It seems odd that we keep seeing comparisons being drawn with 1998, a blip year in a bull cycle. The real crisis occurred in the first few years of this century. Perhaps the underlying problem is that investment into business which adds to our ability to produce has gone out of fashion. Instead, low interest rates have encouraged us to pour out money into non-productive assets such as properties and provide funds for management buyouts.

While property prices to income ratios soar to new all-time highs, while debt reaches unprecedented heights, equity valuations to profits sit at their lowest level for around 15 years.

We have been having a jolly based on paper. The real economic growth story is occurring elsewhere, in China and in other developing countries, and we are living off that growth. The city does to an extent provide a legitimate service to the growing global economy but the build-up of so much debt brings with it problems for the future. The recent crisis in liquidity is just the first sneeze.
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August 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Not much happened yesterday, so markets panicked.

Sure, there were reasons for the panic. It’s just that under different circumstances yesterday’s news might not have led to a fall in share prices at all.

First of all there was the Fed. It seemed somehow irrelevant. The minutes for the last regular meeting of its monetary policy committee were released yesterday. This was the meeting that chose to leave rates alone, and made an announcement at the time that was nearly identical to the announcements made every month this year.
As for what the minutes said? Well, it appears the Fed nearly got it right. It was still worried about inflation, but said, “#133;the recent strains in financial markets posed additional downside risks to economic growth. Members expected a return to more normal market conditions, but recognized that the process would take some time, particularly in markets related to sub-prime mortgages.”
“However,” added the Fed minutes, “a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully.”
Of course, since the meeting those minutes relate to, it was indeed forced to do exactly what it said it might have to do: it lowered the discount rate of interest stating that the downside risks to economic growth “have increased appreciably.”
So, there was really precious little in yesterday’s minutes which wasn’t implied by the later meeting and announcement.
You can have a better understanding of market reaction when you examine the second piece of news that spooked traders. Sales of existing US homes fell to a five-and-a-half-year low in July, at the same time the monthly supply of unsold homes was at a 17-year high. House prices fell by 0.6 per cent in the year to July. Sure, that’s all pretty worrying, but hardly new. Home sales were down to 5.76 million, but then in the month before they were 5.75 million: a tiny drop over the four-week period.
Finally, there was the latest consumer confidence index. Some news reports have made much of this. The US consumer confidence index published by the Conference Board fell to 10.5 in August, from 11.9 in July. It’s a big drop, but then when you consider that actually the real anomaly here was the consumer confidence index last month, which hit the highest level for many years - in fact August’s score of 10.5, was only a tad lower than the score seen in June. And while it is true to say the index stood at its lowest level this month for a year, given what’s been going on of late you would have thought the markets would be pleased to see the index remain so solidly above the zero growth level of 100.

Perhaps a better explanation for yesterday’s falls was profit taking, with traders keen to cash in after last week’s comeback.
But, overriding all these arguments, it seems we have moved to a situation in which markets interpret just about anything as being bad news. Not so long ago it was the other way round. Markets seemed to soar whichever way the coin fell, now the nerves are very taut. One whiff of bad news and selling becomes the order of the day.
Let’s just hope we don’t see some really bad news.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved