| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5,450.20 | -4.6 |
| Dow | 11,479.39 | -180.51 |
| NASDAQ | 2,416.98 | -35.54 |
| Nilkkei | 13,165.45 | 146.04 |
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| DAX | 6,432.88 | -13.14 |
ftse
No issues of IABN Wednesday and Thursday
We will be carrying out essential maintenance work to our server tomorrow and Thursday. As a result, there will be no issue of Investment and Business News for these two days.
oil
| Rates | Close | Change |
|---|---|---|
| Oil | 112.11 | -2.9 |
| Gold | 795.60 | -6.9 |
| $ to £ | 1.87 | 1.858 |
| € to £ | 2.27 | 1.2672 |
| $ to € | 1.47 | 1.4662 |
House price crash; when will it end?
Denial seems to be rife in the world of property.
Last week, the Halifax told its latest tail of woe, but at the same time put so much spin on the story, that the bank must fear its economic team could be snatched up to play cricket in the Indian Premier League any day.
The Halifax, Hometrack and Nationwide have all now released data on house prices for June. In some ways the most spectacular drop was recorded by Hometrack. It had prices down 1 per cent. That may not sound that spectacular to you, but Hometrack data is typically much less volatile than data from the big two. Frustratingly, Hometrack did not say how long it is since it has recorded a bigger monthly fall, but we have been keeping tabs on its data now since November 2003, and the month just gone saw by far the highest monthly drop in that time.
As for Halifax, it had prices down 2 per cent. More to the point, it recorded a 5.5 per cent drop in the second quarter, easily the biggest quarterly fall it has ever recorded. It now has average house prices down by 9 per cent from last August’s peak.
Yet still we hear reasons why the housing market is in fine shape, really.
“The housing market continues to be underpinned by sound fundamentals. All our research indicates that the labour market is the key driver of the housing market. Employment is at a record high of 29.55 million. Total employment increased by 76,000 over the three months to April compared with the previous quarter and by 446,000 over the past year,” said the Halifax.
Meanwhile, the Royal Institution of Chartered Surveyors stuck to that line that falling house prices won’t help first time buyers. David Stubbs, senior economist at RICS said, “Access to the housing market has deteriorated as the credit crunch has taken hold of the mortgage lending sector…With mortgage approvals declining, the picture does not look like improving in the latter part of 2008, and first-time buyers will find their path to home ownership increasingly blocked.”
And still the property bulls say it is all just down to the credit crunch. House prices are falling because of a shortage of credit. It has nothing to do with prices being too high in the first place. Although, to give Halifax some credit, it did talk about a “squeeze on spending power” and “affordability difficulties due to the rapid rise in house prices in the last few years.”
But the bulls miss the point. It was surging house prices that encouraged lending in the first place. We are also told that first time buyers are being hit especially hard by the credit crunch. That for as long as credit is tight, they won‘t be able to get back on.
Yet, consider this. First time buyer numbers have been falling steadily for years. According to data from the Council of Mortgage Lenders, the total number of loans to first time buyers in 2007 was at its lowest level since 1991. For that matter, the five years from 2003 to 2007 saw the lowest number of loans to first time buyers over any five-year period since the 1970s.
Okay, first time buyer mortgage numbers have fallen even lower since then. May saw 19,200 first time buyer mortgages, compared to 32,800 in May 2007. The first quarter of this year saw 53,200 mortgages for first time buyers, compared to 84,000 in Q1 2007. But then again, in the third quarter of 2001 the number was 167,000.
What we are really seeing in 2008, is the continuation of a trend seen for several years. House prices were propped up by buy-to-let investors. As was told here last week, a new breed of amateur landlords is being created, as people who can not sell their home, but have to move, are being forced to let it out.
There is also a glut of unsold two bedroom flats for sale – precisely the properties that were supposed to be required to meet the demographic shift which was supposed to be pushing prices up. So, whereas the bulls say buy-to-let investors will move in and push prices up as high rents make it more profitable for them, in fact it is far from certain this will mean higher rents in the longer-term at all.
It seems far more likely that more and more buy-to-let investors will sell. This will push prices down further as we see the opposite of the mad speculative bubble that pushed prices up in the first place, push prices down too low.
When Barratt/Taylor Wimpey/Persimmon and Co start selling off their city flats at rock bottom prices to clear their books, landlords with spare cash will clean up. What they won’t be able to do, however, is charge extortionate rents – they will charge a decent rent based on what they paid for the flats plus a bit more for profit.
If this happens, then all those other buy-to-let landlords out there will struggle to keep rents up at a high level, making their investments even less attractive.
It is possible that the glut of properties left over on house builders’ books might serve to keep rents down and further damage the market.
The market will hit bottom when prices are so low, that rental yield makes buy-to-let irresistible, even if prices are falling. Prices will also fall to a level that will make it practical for someone on an average salary to save up a 10 per cent deposit for an average property. This will occur when average house prices are around three times average salary. In April, the Halifax recorded an average house price to average wage for full time male employees of 5.43.
But, the inevitable fall in house prices is not bad news, at least not in the longer-term. Sure, it will hit an economy which finds it can no longer grow through consumer borrowing. But in the longer-term this will create an economy that hinges on sustainable factors.
Above all, we will see the end of the myth that house prices always go up. As this myth is finally, and once and for all, proved to be false, maybe people will start grappling with more serious problems, such as the impending pension time bomb, and we may, at last, see saving levels rise.
Now house equity withdrawals collapse; does it matter?
So house prices are falling, but does it matter? Clearly it matters if you are looking to downsize, or you were hoping to use the equity in your house as a kind of pension. But will consumers really spend less because house prices are falling?
The Bank of England doesn’t seem to think it matters too much. When prices were going up, it was pretty relaxed about it. Sure there was an increase in the number of equity withdrawals, but the bank used to say the money was used to buy assets, or pay off other debt, so it was not a cause for concern.
For that matter, it has managed to produce some analytical evidence to suggest consumer spending and house prices are not correlated. Earlier this decade, when house prices went up, consumer spending did not rise so fast, ergo went the conclusion, there is no link.
More recently, it has said that there is so much spare equity in our housing stock, that even if house prices were to fall 10 or even 15 per cent, most home owners would still have a lot of spare equity in their home.
According to a recent report in the FT, if house prices fell 15 per cent, only half a million homes would be worth less than the mortgage issued against them. Even if house prices fell 20 per cent, there would be 1.2 million households with negative equity. In fact, calculated the FT, prices would need to fall by almost 30 per cent for negative equity numbers to reach 2 million.
And yet, explain this. During the first quarter of this year, house equity withdrawals fell from £7.4bn in the last quarter of last year to £5.0bn in Q1, so says recent data from the Bank of England.
To put this in context, at the beginning of last year, house equity withdrawals accounted for around 6.5 per cent of disposable income; in the first quarter of this year they were down to just 2.3 per cent of disposable income.
Furthermore, Capital Economics reckons that by next year house equity withdrawals will fall to zero.
Vicky Redwood, from Capital Economics said: “Admittedly, the impact of falling equity withdrawal on the wider economy is limited by the fact that not all of it is spent. Equity withdrawal includes the money released by last-time sellers exiting the housing market, who are likely to put the money straight onto deposit. Nonetheless, even if only one fifth of withdrawn equity is spent, Q1’s fall would have shaved £0.5bn off households’ spending power, the equivalent of 0.2 per cent of household income. While not a huge amount, this is hardly helpful when income growth is already so weak.
“We therefore continue to think that the housing slowdown will have a direct impact on consumer spending, in part through the resulting fall in equity withdrawal.”
It has long been a puzzle to us as to why the Bank of England does not believe there is a link. The data might suggest there is no correlation, but common sense says there is.
As was said by a reader on our blog, maybe the chiefs at the Bank of England are just too out of touch with how ordinary people behave.
If your house is going up in value, you are that little bit more willing to take a risk. To put money on your credit card, that you really shouldn’t be spending, but “hey, my house has gone up by £100,00 this year, so who cares if I spend a couple of grand more than I should?”
The most likely explanation for the breakdown in correlation earlier this decade is this: Consumer spending hit unsustainable levels in the late 1990s. It should have crashed. But rising house prices stopped this from happening.
The next year or so will show who is right.
Mervyn King: Party pooper or party planner?
Hosting a party is not easy. Provide drink, sure, but if the guests start getting too drunk, take it away quick. It’s a delicate balancing act: provide the lubrication required to get the party moving, remove it before it gets out of hand.
It’s a bit like being a central banker. As Mervyn King said yesterday, “It is often said that the role of a central bank is to take the punch bowl away just as the party is getting going.”
But, returning to the party of revellers, what happens if you remove the drink, only to discover the guests have brought along their own Party 7s, Babycham and warm Lambrusco?
Well, it is like that at the moment, only the drink supplied is more akin to Dom Perignon. Yesterday, Mervyn King told the British Banking Association that all those efforts by the central bank to quieten things down will come to naught if the opposite applies to the financial sector. “If banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become wilder and wilder.”
“That might not matter were the consequences limited to the party-goers. But they are not. When the party ends, some innocent bystanders may lose their homes altogether. Moreover, the party-goers aren’t just deposit-taking banks. A wide range of financial institutions, including investment banks, monoline insurers, even hedge funds, have the potential to cause significant damage to the rest of the economy in the wake of their demise. Are they all to be helped to get home safely when the party ends? If so, will they all be regulated in the same way as banks? If not, how can we limit the potential cost to the taxpayer? Add to this the problem that many of these institutions are global in scope, but the responsibility for both regulation and rescue remains firmly at national level, and you can see why policy-makers get headaches as bad as the party-goers.”
Earlier in the speech he touched on moral hazard. “Banks should be allowed to ‘fail’ so as to preserve market discipline on financial institutions,” he said.
But in his conclusion he talked about the. “… intractable problem of how to change the incentives of both private and public actors to reduce the frequency and cost of financial crises. For that we will all need to do a lot more thinking. It is important that we do find the right solution. An efficient and thriving banking sector which can intermediate saving and investment, both domestically and internationally, is essential to our economic prosperity.”
And in his speech he really summed up the specifics of what will become a hotly debated topic over the next few years.
The danger has to be that both banks and policy-makers act in sync. Banks become more cautious – perhaps too cautious, at the same time new regulations create a tightrope around their necks. So the danger then becomes too much regulation.
In the wake of the Enron and WorldCom collapse the Sarbanes Oxley Act was passed in the US to try and ensure no repeat of those disasters. But the Act itself was a disaster for the US financial sector, such that when former London Mayor Ken Livingstone was in New York a few years ago, and was asked why London was doing so well, he said, “Two words: Sarbanes Oxley.”
Banks must learn their lesson, it is true, but the time to put that lesson into practice is during the height of the next boom, which won’t be for quite a few years.
Woe and glee hit house prices and High Street
It’s another of those days of conflicting evidence. Imagine economic news sat on a pair of kitchen scales: good one side, bad the other. This morning, the weights seem to balance on both sides.
House prices are crashing: the latest evidence to support this claim came from the Royal Institution of Charted Surveyors, which released its May housing survey this morning. The RICS monthly surveys are, in our opinion, the best guides out there for measuring the underlying strength in the housing market – so the release of this report is always significant, and this time round, well, read the article further down.
Actually, it is debatable whether news of falling house prices is good or bad. But there’s no debate over the last data on inflation at the factory gate. It’s awful, see below.
But on the other side of the scales, retail sales saw a surprise pick up in May. Meanwhile, from the US, news broke to suggest the US housing market may be reaching turning point. The US market seems to be running around a year or so ahead of the UK, so this provides room for optimism.
But to get the stories told how they should be, read the next few articles.
The offshoring myth
The growing trend for British firms to send jobs overseas has actually helped boost employment in the UK, creating thousands of jobs, according to new research.
Economists at the Globalisation and Economic Policy Centre (GEP) at the University of Nottingham say their research contradicts common perceptions that British firms are exporting jobs overseas to India and China simply to cut costs, leaving many here unemployed.
GEP economists analysed data from more than 66,000 UK firms over a period from 1996 to 2005. The results of the study – the largest ever carried out into the “offshoring” phenomenon – showed that far from increasing unemployment in the UK, the policy had resulted in the creation of 100,000 extra jobs and an increase of £10bn in company turnover.
GEP Centre Director, Professor David Greenaway said: “People fear their jobs are being exported to countries like India and China where labour is cheaper, but the picture is far more complex than that and much more positive.
“It would seem that firms that offshore part of their production process or service provision overseas become more efficient. This boosts productivity and turnover and as a result these firms grow and end up employing more people at home, not fewer.”
But Professor Greenaway said there were losers from the offshoring phenomenon. He said: “Offshoring does lead to increased job turnover and a change in the skill mix in a firm. The winners are those who have the skills required by firms that are offshoring and growing; the losers are those who cannot adapt.
“The lesson for policymakers is that offshoring is to be embraced, not feared, but that we need to continually invest in upgrading the skills of British workers to increase their adaptability and help smooth the transition from one job to another.”
The research also exploded another offshoring myth. Report co-author, Dr Richard Kneller said: “The common perception of offshoring is that it’s largely low paid call centre jobs being exported to lower wage economies like China and India, but that’s not the case.
“If you think of manufacturing and the production of parts, then it is skilled work. If you look at car manufacturing, Ford may make engines at Dagenham but gear boxes in Spain; if you think of Airbus – Britain makes the wings and engines, France the bodies. Most offshoring is actually to similarly developed European nations and the US, where the language skills are better.”
And he said Britain is also a major beneficiary of offshoring. “In the services sector Britain has a reputation for areas like finance and creative media and overseas firms will offshore work in this area to UK firms.”