oil
| Rates | Close | Change |
|---|---|---|
| Oil | 48.7 | -4.34 |
| Gold | 749.5 | 16.00 |
| $ to £ | 1.4792 | -0.02 |
| € to £ | 1.1823 | -0.01 |
| $ to € | 1.251 | 0.00 |
ftse
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 3,874.99 | -130.69 |
| Dow | 7,705.61 | -291.67 |
| NASDAQ | 1,340.95 | -45.47 |
| Nilkkei | 7,703.04 | -570.18 |
| Hang Seng | 12,298.56 | -517.24 |
| CSI 300 | 1,932.43 | -20.73 |
| Sensex 300 | 8,451.01 | -322.77 |
| DAX | 4,220.20 | -133.89 |
The global housing crash, and what lesson can we draw for the UK
We all know house prices are falling in the UK. And they are declining in the US and Spain, too. But what about the rest of the world? Where else are you likely to see house prices fall, and by how much?
And then take a look at China. Use China as a kind of helicopter view, you will be surprised at the lesson we learn for the UK property market.
Top of the pack comes Ireland. The IMF has calculated that prices would need to fall by over 30 per cent to be restored to something like the level you would expect.
Next on the list is the UK – around 22 per cent overvalued, followed by Down Under, Norway, France and then Spain.
Capital Economics has taken its own look, formed a slightly different perspective, but comes to similar conclusions. It has looked at house prices and compared them to both incomes and rent. Prices are too high, measured by both yardsticks and by a similar amount. It then took the average overvaluation from the two measuring criteria and found that, in order of scale, Ireland, Australia, Spain, the UK, Denmark, Norway, Netherlands, France and Sweden all suffered from greater overvaluation than the US.
The IMF concedes that a part of the surging house prices can be explained by strong economic growth, rising immigration and low interest rates. But adds: “However, the expansion was also fueled by new financing techniques based on securitization and weakening lending standards, particularly in the United States where 40 per cent of new U.S. mortgages were nonprime mortgages, often with very high loan-to-value ratios and minimal documentation. In European countries, there is less evidence of declining lending standards, but, as in the United States, in several countries the availability of housing finance was sustained through the increased availability of wholesale financing, involving serious liquidity mismatches in some cases.”
Or, to put it another way, some of the rises in house prices could be explained by fundamentals, but equally the unsustainable availability of credit was clearly a major factor.
Capital Economics, however, goes further. Looking at the demographics argument, it concedes that two countries which have enjoyed especially large rises in house prices, Spain and Ireland, have also seen rapid increases in population. But, it asks, how do you explain house price rises in the US, Australia and the Netherlands, which have not seen a rise in population?
It also dismissed the low interest rates argument saying that, actually, after allowing for inflation, real interest rates were not as low as people thought, and pointed out that while low interest rates may make a mortgage cheaper in the short-term, in the long-term low inflation can actually mean the cost of repaying a mortgage as a proportion of income is actually higher.
But, at least the bad news isn’t everywhere.
In Asia, prices have shot up, too, but there is one big difference, so too have wages. As a result, it calculates that, with the exception of Hong Kong, and to a much lesser extent the Philippines and Taiwan, house prices in all the major economies in Asia are actually lower than one would expect. In the cases of China and Korea, it suggests house prices are more than 30 per cent undervalued.
It may be quite interesting to consider the long-term effect of cheap house prices today in China on future attitudes.
Imagine that, over the next 30 years, your average Chinese becomes three times better off – that is to say, average income trebles. Now assume house prices rise so that the 30 per cent overvaluation is corrected. Then assume inflation runs at 5 per cent a year. If you follow those assumptions, house prices in China would rise 164.6 times over. A house selling for the equivalent of £10,000 today, would sell for £1,646,000. (Don’t believe it? – do the sums.)
Now imagine what it will be like in China in thirty years’ time. People will say a house is the best investment you can possibly make. They will say: “Look at that data, it goes back 30 years, and you will see, house prices always go up.” You can imagine the Chinese talking about a property ladder, and saying, when you buy a house, buy the most expensive property you can possible afford – “You can’t go wrong.”
But then imagine, in thirty years’ time, economic growth slows right down, inflation drops to zero. You can imagine for several years, the experiences of previous years will encourage the Chinese to carry on buying. And as prices go up, they become even more confident the rise will continue. Some will say house prices are too high, but then that view will be laughed off, because they will say it’s different now. Because inflation is down to zero, interest rates will be low, and economists will say it is affordability that counts, not size of loan.
From that perspective, it is easy to see where things are going – the market is heading for crash.
Now apply that scenario to the UK, add in the effects of a credit boom, making mortgages with a loan to asset valuation of 120 per cent available. But in the case of the UK, let the story begin at the end of World War II, so that the story of house prices rising to correct for undervaluation in the 1930s, coupled with high growth and inflation, creates a 60-year boom. You can see how such a scenario would create the most remarkable of bubbles.
The US recession begins, global recession set to follow
The US is in recession. It’s about as official as you can get. In the last quarter, GDP contracted at an annualized rate of 0.3 per cent. Can anyone be surprised? Maybe the recently estranged from Mars might be a tad shocked; if you had been cryogenically frozen a couple of years ago, and just woken up, you may be surprised; but for the rest of us, it was about as predictable as Russell Brand’s resignation from the BBC. And yet, the latest set of data released yesterday is important nonetheless.
Just as important come the latest quite shocking forecasts for global economic performance from Capital Economics.
The real news in yesterday’s data release from the US Commerce Department was not so much the contraction in demand, rather the whopping 3.1 per cent contraction in consumer spending.
The great US consumer never tires – those who write off the resilience of the US consumer have been rushed to the great economic funny farm as fast as you can say John Maynard Keynes. And yet, in the quarter just gone, consumer spending contracted for the first time in 17 years. More to the point, it was the biggest contraction in consumer spending since 1980 – and provides more ammunition to show how wrong economists are when they say there is little correlation between consumer spending and house price growth.
In fairness, part of the fall in consumer spending was due to the effect of the year’s tax credit working its way out. In the previous quarter, the tax credit boosted consumer spending by 1.2 per cent, so in part the Q3 fall was just a correction of the previous quarter’s rise. Then again, with energy prices falling, you would have expected consumers to open up a bit – that they didn’t, shows how strapped they are.
Even the one bit of good news comes with a sting in its tail. Exports rose 5.9 per cent, after rising 12.3 per cent in the previous quarter. Meanwhile, imports fell 1.9 per cent.
But, since that period came to an end, the dollar has risen sharply. It seems unlikely the next few quarters will see a repeat of rising exports.
Capital Economics is now forecasting a 1.5 per cent contraction in 2009, and zero growth in 2010, which will make the recession the worst downturn in the US since the 1930s.
Strangely, markets rather liked the GDP report. They had expected worse. As a result, the Dow continues its recently upwards run. It does seem, however, as if markets are strangely divorced somehow from seeing the bigger picture. During the peak of the banking crisis, shares just went down and down. Now the worst of that particular crisis seems to have passed (fingers crossed), shares have started to climb back up. This was helped yesterday when official interest rates in Japan were cut to 0.3 per cent from 0.5 per cent, rekindling hope of a rebirth of the carry trade.
But the news from the real word, or as the Americans call it, Real Street, as opposed to Wall Street, has got a whole lot worse in the last few days.
In fact, even as this article is written, Capital Economics has revised its predictions for global growth in 2009. It has predicted a 1 per cent contraction in the G7 economies next year – the worst downturn since the end of World War II, and expects global growth of just 1.5 per cent in 2009, and 2.5 per cent in 2010 at purchasing power parity. If the forecast for global growth is proven right, then this would count as a global recession – since growth would have fallen so dramatically.
Given the worsening prospects of the global economy, it is difficult to explain why markets have become so buoyant in recent days.
We make that comment about equities with one caveat. The market valuation of a company is supposed to reflect all future dividends of that company into perpetuity, discounted to provide a net current value. Given this, you would not expect an economic recession to have that much of an effect on share price. One would assume future dividends from that company may be, say, one per cent lower, but surely no more. Indeed, if you belong to the school of thought that says recessions are a good thing in the long-term, because they enable economies to become more efficient, then if anything, US corporations may actually be stronger in future years because of this slowdown.
Given that, you could argue that the entire movement of shares in recent years, both up and down, has been totally irrational all the way through.
Porsche, the philanthropic saviour of the dispossessed hedge fund managers
Aren’t those people at Porsche ever so nice? You may know, shares in Volkswagen rose so higher earlier this week that for a few minutes it was the largest company in the world. Yesterday saw another twist in that tale, as hedge funds found themselves on the receiving end of Porsche’s philanthropy.
Porsche pulled off something of a masterstroke recently by building up an indirect stake in Volkswagen using cash-settled options. Hedge funds hadn’t seen it coming, speculated that the share price had risen too high, and shorted stock.
They had borrowed shares in Volkswagen and then sold them, on the expectation their price would then fall and they could then repay the borrowed shares at a lower price.
When they realized that Porsche had been building up a stake, and that the Volkswagen share price had been rising for good reasons, they panicked. They realized they were going to make a loss, so rushed in all at once, trying to buy shares in the company, pushing its price up and up and up.
The situation was exaggerated by this fact. Porsche and the Lower Saxony government were controlling over 90 per cent of Volkswagen, meaning that the proportion of shares in Volkswagen which were allowed to trade freely was relatively small. If you like, supply of shares was low. And whenever a small number of shares trade freely on the open markets, their price can be subject to extreme volatility.
Hedge funds were left nursing a massive loss, and it seemed many could go bust.
But then, those kindly people at Porsche agreed to sell options worth around 5 per cent of Volkswagen. Supply rose, price fell, and hedge funds found they were able to buy shares at a more reasonable price. Sure, they were going to lose money, but not as much as originally feared.
A Porsche spokesmen said: “We are trying to reduce the losses for those who are short, and if the share price cools down that should help all of us.”
So why so kind?
Porsche is a car maker, it is not a hedge fund. Its future lies in selling cars.
Now, consider who those car purchasers are likely to be. Yes, you have guessed it, hedge fund managers.
The last thing Porsche wants is to be seen as operating as a hedge fund itself – in competition with its very customers.
The economics of Ross and Brand
Okay, so what has the Jonathan Ross–Russell Brand affair got to do with economics and the credit crunch? Answer, well actually, quite a lot. No doubt you are sick of reading about it, but perhaps this slightly different twist on the affair can shine some light on the big danger the economy faces right now.
Let’s get this bit out of the way first. The BBC messed up, so did its stars. But, equally, we would argue the media backlash, and indeed the backlash from politicians, has not only been out of all proportion, it has been scary too.
One of the comments made as criticism of the BEEB is that neither of the stars in question are funny. This is a ridiculous and, frankly, irrelevant comment. Humour is subjective, millions of people think they are funny, and in a democracy that should count for something.
What we are seeing is an example of the demographic shift. Baby boomers, brought up on a diet of Monty Python and Pete and Dud, have become all moral in their old age. The kids like their humour to be on the edge, they always do. But these days, as the population ages, marketing is being geared more and more to an older audience. When the baby boomers retire, who do you think will pay their pension? Answer, the next generation. They won’t able to afford to do so, but that is too bad, for they will pay it nonetheless. And they will for this reason. There will be too many baby boomers, forming far too high a slice of the electorate, to allow it to be any different. The power balance in the UK is moving from the youth to older citizens.
The furore over the Ross and Brand affair is an example of this. We have seen a clear generation divide in opinion.
Another interesting development of recent years has been the rise in the power of the press. These days, our leading politicians dance to a tune played by the media. Gordon Brown’s first year as premier was characterized by U-turn after U-turn, whenever the media disagreed with him. It was as if our prime minister had said: “To those waiting with bated breath for that favourite media catchphrase, the U-turn, I have only one thing to say, you turn and I will follow.”
But then, this week, both Gordon and David Cameron made statements on the Ross–Brand matter. Can you believe that? We are in the time of an economic crisis – and our two leading politicians jostle with each other over who can sidle up the closest to the tabloids.
But the key issue is this. Risk is the building block of progress. Without risk we would never have left the trees. Not all risks come off. But history tells us that the benefits from the small number of risks that do come off, easily make up for all the failures.
The same argument applies to comedy. For every Monty Python, Black Adder and Fawlty Towers, there was a mountain of dross.
Comedy is not a science. You don’t really know what will work, and what won’t. Comedians take their cue from their audience. They are funny if their audience think they are.
The BBC should have acted quicker.
But we live in a world where those who take risks that don’t work are being pummelled like never before.
The media won‘t forgive risks that go wrong. But you can’t have innovation without failure. If we move into a world in which no one does anything unless they are sure it will work, we will find ourselves living in a world of decline, and a backwards march to a new Stone Age.
Risk is the building block of progress, and we are living in a world of politically correct dictatorship – a world ruled by media that have no intention of providing balance to any debate.
The backlash we are seeing today against risk is the single-biggest threat to future economic prosperity.
oil
| Rates | Close | Change |
|---|---|---|
| Oil | 48.7 | -4.34 |
| Gold | 749.5 | 16.00 |
| $ to £ | 1.4792 | -0.02 |
| € to £ | 1.1823 | -0.01 |
| $ to € | 1.251 | 0.00 |
FTSE
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 3,874.99 | -130.69 |
| Dow | 7,705.61 | -291.67 |
| NASDAQ | 1,340.95 | -45.47 |
| Nilkkei | 7,703.04 | -570.18 |
| Hang Seng | 12,298.56 | -517.24 |
| CSI 300 | 1,932.43 | -20.73 |
| Sensex 300 | 8,451.01 | -322.77 |
| DAX | 4,220.20 | -133.89 |