October 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Cast your mind back to the late ’80s. The chancellor was changing the tax breaks on mortgages taken out by couples and there was a rush to buy a home. House prices became artificially inflated, and then the rate of interest started to rise, and crash went the market.

The question is this: is there any danger, or for that matter, if you re a first time buyer, - hope, that this process will repeat itself?

This time, though, there is no artificial factor propping up house prices; it’s all down to supply and demand, and the low rate of interest.

Interestingly, a recent survey carried out by Abbey, which said there are 17.3 million adults who are not currently able to get on the property ladder, revealed that of this total, 6,876,000 say the factor holding them back is not that they can’t afford the mortgage payments, rather it’s they can’t rustle up the deposit. In a way then, this would imply there’s pent up demand, and as mortgage lenders start lending out higher and higher income multiples, as they appear to be doing, or as parents lend the money to first time buyers to pay for the deposit, by topping up their mortgages, (and there is evidence to suggest this is happening too) the demand for property would seem likely to grow.
But then, an even higher number of people, or so Abbey reckons, are being held back by the cost of the mortgage. The same survey indicated that 7,404,000 said they simply could not afford the house prices in the area. Also lurking in the Abbey data was one fascinating piece of data; that 3,365,000 are waiting for prices to fall.
Other reasons cited for not moving onto the property ladder include: “Don’t want the commitment right now” (5,612,000); “Job is not secure enough” (2,963,000) and; “Don’t know where to start the house buying process” (2,585,000). Meanwhile, two a half million of us are apparently just too busy, with “not enough time” also showing up as a popular reason not to buy.
It’s not surprising First Time Buyers are finding things tough. According to AllianceTrust, the ratio of house prices to income has risen by an average 60% in the UK between 1970 and today.
But if house prices are out of reach for First Time Buyers, there’s no sign of a let up to the growth in prices. According to Hometrack, in the 12 months to October, average house prices rose by 4.9 percent. That, says Hometrack, is the fastest annual rate of house price inflation since August 2004. Perhaps the problem is that while house prices move upwards, so does the cost of renting, with research carried out by Nationwide recently finding that with a typical loan-to-value ratio for a first-time-buyer of 90%, mortgage rates would need to increase to around 7% before monthly outgoings on a mortgage exceed rent.
As for the last ten years, according to data released by the Halifax yesterday, house prices have risen by an average of 187% across the UK since the housing market recovered in February 1996. The average UK house price has risen from £62,453 in Q1 1996 to £179,425 in Q3 2006 - an average increase of 10.6% per annum.

The truth is, while FTBs are being squeezed out, Buy to Let investors, who are not so hampered by the barriers to raising the mortgage, (they can, after all, borrow against the capital gain they have enjoyed in other properties in their portfolio) are moving in. And the Halifax research gives a good reason. Apparently, while house prices have risen on average by over 10 percent a year since 1996, the stock market grew by a mere “4.6% p.a. Nominal earnings increased by 54% or 4.2% p.a., while retail prices rose 31% or 2.6% p.a., says the report.
And yet… we know that in recent times the resurgent market has been led by London and the South East. The booming capital, and the city types with their fat bonuses, not to mention the influx of well paid immigrants into the capital, are helping lift house prices upwards. But maybe there are signs this is coming to an end. According to Hometrack’s Richard Donnell, the month just gone saw the first increase in the number of new homes up for sale and “A flood of potentially over-priced properties coming to the market would certainly put an end to the recent level of price rises.” Donnell said: “There are clear signs that the momentum in the London market is starting to slow and this is likely to continue in the run-up to the New Year.”
The truth is, while the tabloid papers like to tell us about the buoyant property market, and it is tempting to conclude there is no end in sight, there is more to the tale than all this hype.
First hint that the underlying fundamentals are not as strong as the property market analysts would have us believe lies within the Nationwide data comparing the cost of renting with buying. In little more than a footnote, Nationwide says that, if you include within the costs of servicing the mortgage, the cost of repaying the mortgage, than renting becomes the cheaper option.
And that brings us to the main factor which is often overlooked. In this era of lower inflation, the cost of repaying the mortgage is more significant than it used to be. We can no longer rely on triple digit inflation steadily eroding the true value of our debts, like it used to. And in that respect, the key advantage of buying a home over renting no longer forms the no-brainer the way it used to.
And then, if you look outside of London and the South East, things are nowhere near so good. As Hometrack’s Richard Donnell also said: “The reality for many home owners is that house price growth across large swathes of the country has been extremely modest over the last 12 months. ”
While we fret about our future pensions, the Buy to Let investors see their property portfolio as their retirement nest egg. And it’s been a golden decade for these investors. But to compare the return with stock prices over the last decade is a little misleading. After all, markets did see their biggest crash since the 1920s during the middle of this period, and it took roughly the first half of this ten year period before house prices had recovered to the levels seen in the late ’80s.

The truth is that there are more certain things in life than a rise in the rate of interest next month - but not many. And an increasing body of opinion is now predicting at least one additional hike to follow. Will the market be able to withstand these shocks? The answer may lie with some Buy to Let investors who, faced with the probability that the next ten years is less likely to offer such remarkable returns, may turn to the stock market instead. Should the FTSE 100 follow the Dow and its little cousin, the FSTE 250, and pass its all time high, maybe stock market investing will be fashionable again, and that could be enough to tip the property market down, down and down.

October 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

In all the TV and press coverage given to the Stern report there was one quote that stood out above all others that seemed to be the most telling.

We are sure, the Brits have got the message by now. Climate change is a serious issue, and headlines comparing the impact of global warming with the effect of a world war are very powerful.

Still there is not much understanding of the fact that taxes must rise so that the price reflects the true cost of production, and to make greener alternatives more palatable. But even in this respect, there seems to a growing feeling that we have all got to pay somehow to save the planet Most were grudgingly admitting that tax is an obvious solution.

But the quote we saw, which, to our way of thinking, is the most alarming was published in the FT. And it’s not so much what was said but rather what was not said that should be ringing alarm bells. It quoted Kristen Hellmer, spokeswoman at the Council on Environmental Quality, which advises the White House as saying: “The president has long recognised that climate change is a serious issue, and he has committed the US to advancing and investing in new technologies to help address this problem. The US government has produced an abundance of economic analysis on the issue of climate change. The Stern report is another contribution to that effort.” And that was it. The mighty FT could apparantly find no other quote from anyone more senior.

And while we are still with the US, we could find no reference to the Stern report on the CNNMoney, or CBS market watch, or Business Week sites - (the three US web sites we monitor most closely).

The Voice of America publication published the news of the report all right, but its headline read: “Environmental Skeptic Questions British Climate Report”

The most famous sceptic on global warming is Danish scientist, Bjorn Lomborg, He was quoted in Voice of America as saying: “The main issue here is not to say that climate change is not an important issue, and that it will have serious consequences, but the question is to ask, with limited resources, where can you do the most good. If you invest in climate change policies, you will help especially third world countries a hundred years from now, but if you invest in some of the other things, you will help people right now.”

We are not saying that the sceptics such as Lomborg should not have their views aired. Rather, it’s the emphasis that is placed on them which is worrying. When high profile publications lead with this story, over the conclusions of the Stern report, then it suggests that there is still a desire in the US to bury its head in the sand.

Still, at least if the US does choose to ignore reports like this, there will be plenty more sand for it to bury its head in, during the years to come.

October 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

And finally, on this day of Halloween, we thought we would bring news of a potential new medical treatment developed by German company, Paion.

The drug uses saliva from Vampire bats.

In fact, last week the drug’s trial was put on hold over safety fears, but yesterday, news broke that the trials had re-started.

October 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Recently Britain’s biggest insurer Aviva announced a record nine months in the UK, with its British subsidiary, Norwich Union, seeing total sales of insurance savings products leaping 39 percent. And while the UK was the pick of its regions, it wasn’t half a bad period all round, with global sales up 22 percent to £22.7 billion. In addition to the UK, Ireland, Italy and Poland all saw substantial growth.

Then, last week, the UK’s number four insurer, the Legal General Group, announced a 22 percent rise in sales with annuities and home protection policies leading the way.

Legal and General’s chief executive, Tim Breedon, talked about the favourable UK climate, and said: “We believe this environment is set to continue.”
Then this morning, it was Friends Provident’s turn. It’s the UK’s fourth largest money manager, and announced a 40 percent rise in third quarter sales.
It has set itself the no mean target of tripling the value of new business over the next year.

October 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

This weekend an extraordinarily simplistic and frequently incorrect view of the global economy and the huge challenge it faces in climate change, made its way into the mass media.

The Mail on Sunday talked about Gordon Brown introducing a stealth tax to fight global warming, and said families with big cars would have to pay an extra £1,000 per year in tax. While on the Andrew Marr programme some guests seemed to think that taxes would have to be raised in order to fund the £3.6 trillion hit the global economy is expected to take from global warming. In fact, this is not the case at all.

The reality is that taxes are required to give consumers choice, the freedom to decide how important their need for energy is, and balance this against the cost of global warming.

The earliest economic theories said the price mechanism, in which price reflected the coming together of demand and supply, was the most efficient way for allocating scarce resources, but that sometimes, admitted these theories, there’s failure. Sometimes, when the producer does not pay the full cost of producing a product, price is not a fair reflection of the true forces of demand and supply, and to even the balance, taxes must be paid. And whether the producer swallows these taxes and its profits fall, or whether it passes them on to the consumer, depends on the alternatives out there.

So when the Mail on Sunday expresses the view that some families will have to pay £1,000 a year on extra tax for a car, it is doing no more than describing a capitalist system working. Why then was the tone of language, in this supposedly pro free market paper, so stacked against tax? To describe Gordon Brown as planning a stealth tax, when the reality is that any tax on pollution is likely to be made in the full glare of publicity, also seems a little odd.

While the Stern report is not yet out, (but by the time you read this it may well be) there’s no shortage of press reports telling us what it will say. Yesterday’s Observer led with the headline: “£3.68 trillion - the price of failing to act on climate change” and says that the report will warn that unless the world takes appropriate action, the cost will be £3.68 trillion. But if we were to tackle this problem head on today, the cost of avoiding it would be round £184 billion.

Reuters said that the Stern report will warn that climate change will plunge the global economy into a 1930s style depression unless measures are taken to avoid it.

And one very important statistic, that is expected to be revealed, but which most press reports have passed over, is that Deforestation is expected to account for 18 per cent of global emissions. Apparently, the entire transport sector including the bogey man of green protestors, air travel, will only account for half that amount. It’s a sobering thought, that of all the economies in the world, the most advanced user of bio fuel is Brazil, but it’s cutting down trees to grow the sugar to sweeten up its car’s use of oil.
Earlier this month, PWC, published a report saying the cost of measures designed to fight global warming is likely to come in at no more than two to three times the total GDP by 2050, a cost that the Independent reckoned would add up to 1 trillion dollars.
It’s difficult to make a direct comparison between the cost of fighting global warming and the cost of doing nothing. For one thing, the cost of fighting it is largely an upfront expenditure, whereas the cost of doing nothing will be felt over hundreds of years. This begs the question should you apply a rate of interest computation to the comparison. After all if you were to discount the future cost of global warming, using perhaps the same kind of formulas that an accountant would apply to future earning when valuing a company, then in today’s terms the cost of global warming falls.
Others argue that we owe the generations of the future more than that. That simply applying a discount rate to future costs that we incurred is morally repugnant.
The Stern report, however, may condemn this debate to the dustbin as it is expected to say the cost of fighting climate change is likely to be 1 percent of global output, and the cost of doing nothing is likely to be between five and 20 percent. And that would be something of a no brainier.
Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes.” For a global economy that is literally overheating, thanks to green house gases, it would appear two things are certain if this danger is going to be beaten. One is taxes, and two, for companies that operate in renewables, an extraordinary business opportunity awaits.

October 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Uncle Sam’s Housing market is slowing so fast, that the slump in homebuilding knocked 1.1% off annualized economic growth.in the US in the third quarter of this year.

In all, the US could manage an annual growth rate of just 1.6 percent, compared to 2.6 percent in the previous quarter and a storming 5.6 percent at the beginning of the year.

And yet, despite the fall in growth and the decline in the US housing market, consumption is still moving full steam ahead, growing by 3.1 percent in the third quarter.

The question then is will consumption start to fall? Most seem to think it will. After all, it seems inconceivable that the US can avoid such a dramatic fall in the property market, and yet see consumers continue to spend away. The UK experience, of course, was for consumer spending to slow dramatically. If this experience is repeated stateside, then that, in combination with the fact GDP is falling anyway, could mean a very poor prognosis.

But, the rate of interest could come to the rescue. Most economists believe that the Fed will be able to reduce the rate of interest next year. The hope is that the falling property market, and the lower price of oil, will lead to a relief in inflationary pressure, enabling the Fed to re-ignite the economy just in time.

The danger lies in the fear that inflation will prove more deeply embedded than is thought, and that the full impact of the rises in oil over the last few years have yet to be felt.

#93;

October 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

We all know it won’t happen. Gordon Brown will change the rules, but his beloved golden rule, as it is currently defined will be broken over the next economic cycle says the National Institute of Economic and Social Research.

The NIESR report, which is published every quarter, also reckons that UK plc is set to settle down to a growth rate of 2.5 percent this year, and 2.7 percent next, but with inflation expected to stay above target for the next few months, it has predicted that the rate of interest will not only jump to 5 percent, as every one else believes, but will then jump again to 5 .25 percent. Beyond that, says NIESR, there is unlikely to be room for more than a very small eventual reduction in interest rates, and it predicts rates will stay at or above 5 per cent per annum.

October 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The UK economy is 3 percent bigger today than it would have been if it wasn’t for immigration since 1997. But the impact is getting more significant, with immigration accounting for no less than 1 percent of GDP in 2005/06, says the NATIONAL INSTITUTE ECONOMIC REVIEW.

And since most immigrants do not draw on public spending, they are likely to make a net life-time contribution to the exchequer and thus contribute to the welfare of the rest of the population.

But, while the economic effect of immigration has been good for the UK for a while, some areas are worse off, says the NIESR report. 27.6 per cent of post-1997 immigrants work in elementary occupations as compared to 18.9 per cent of the population as a whole. This difference is largely because recent immigrants from Central and Eastern Europe have disproportionately entered low-skill occupations Given the employment structure of these immigrants, it is likely to depress wages in low-skill posts. Depending on the eventual occupational structure of these immigrants, it may interact with the minimum wage and other labour market rigidities to lead to a small long-term effect on unemployment.

October 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

At last some good news from Airbus and its giant A380 aircraft. With delays building upon delays, with the comings and goings in the management structure at EADS and Airbus almost matching the complexity of the A380 electronics, (which has often been held out as the reason for each delay), the company needed good news like its directors must need a drink after a day at the office. And this morning the tonic was revealed. Australian airline Qantas has ordered another 8 aircraft, taking its total order to 20.

Apparently, Qantas felt the A380 was ideal for the long haul flights from down under to Europe and the US.

EADS, Airbus’ parent company, previously said it needs to sell 420 A380s just to beak even. So twenty units sold to Qantas is good news, but there’s still a long way to go.

October 27, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Twenty five years, that’s how long it took the
Dow Jones Industrial average to regain the levels seen just before the 1929 crash.
And when markets crashed in 2000, parallels were drawn. For just a couple of years,
it seemed like history would indeed repeat itself, as the growth in the number of bears
selling and spreading their tales of woe, seemed only matched by the growth in what
had only recently been an obscure Internet company called Google.

But now all that pessimism seems ridiculous. The FTSE 250 hit an all time high
last year, and keeps on growing. This month, the Dow has soared past the previous all
time high set in 2000, and even the FTSE 100, which for so long looked jaded, is now
within sight of its all time high (at least it’s only 700 points away now). And then
there’s the NASDAQ#133;.Well, er, actually this index still seems to be in bear land.

Yesterday the NASDAQ hit a five and a half year high. “NASDAQ joins the
party,” said CNNMoney, and quoted analysts saying this time it’s down to solid
fundamentals. And let’s face it the tech companies are soaring, with the likes of Apple
and Google enjoying growth in profit, which seem on course for the stratosphere.
When Alan Greenspan talked about irrational exuberance, it appears he was right only
up to a point. Stocks became overvalued, they fell, then the Internet started to deliver.
The exuberance wasn’t so much irrational, more a tad hasty.

At least that would, on the face of it, appear to be the argument. But in fact,
despite the euphoria, the NASDAQ is still only half the all time high of 5132 set on
March 10th 2000. Later that year, in October to be precise, it was down to just 1108.
The decline seemed to mirror the decline seen with the Dow in 1929 and 1930, with
theories doing the rounds a couple of years ago, which showed a clear correlation
between the NASDAQ from 2000 to 2003, and the Dow from 1929 to 1931.

How can this be? First of all, the exuberance of the late ’90s really was quite
something. It didn’t just permeate markets, but all things Internet. In the UK, we have
enjoyed a startling rise in Internet advertising, but in the US it’s not been so
impressive. Back in 2000, US Internet advertising was worth $8bn, with display
advertising reaching only half that total. Five years on, and it’s grown, but not by as
much as you would have thought. It’s now worth $12 billion a year, while display
advertising has actually fallen to just $1.5 billion today. Search based advertising has
been the big change, of course, but then the lion’s share is Google’s - a company that
barely figured in the late ’90s. So it appears that, in addition to market traders, maybe
media buyers were irrational back then too.

Then there’s Sarbanes Oxley. With the collapse of Enron, regulatory
requirements became tougher. For the giants of the Dow this was hard, but for smaller
companies looking to IPO this made things all but impossible.

So, last night when the index closed at 2379, you can understand the press
celebrating the fact the index had doubled from its decade low. But frankly, as it is
still a long way short of the highs seen in 2000, there’s still plenty of reasons to be
glum. Funnily enough, back in the ’30s, the Dow achieved mini recoveries, and, in
fact, managed to double its level from the crash low in less time than it took the
NASDAQ.

So just remember that, as of today, there is no evidence to suggest the NASDAQ
has put its troubles behind itself. And actually, despite the recent euphoria, and
despite the way the Internet has, in so many ways, lived up to the dreams of its earlier
bull advocates, the NASDAQ is still a bear market. And until it starts to draw a lot
closer to the 2000 highs, it will remain that way.

Retreating ice caps might threaten the polar bear, but on Wall Street, the bear is
still alive and well.