The housing market has been giving out some very mixed signals recently.
On the one hand, we had a bullish little report from the Centre for Economics and Business Research (CEBR), saying that the average UK house price would return to its 2007 peak of £198,000 in 2012, a year earlier than the CEBR had previously thought.
But then yesterday, we learned that there was a surprise fall in approvals for home loans for new house purchases in December. The number dipped from 60,000 in November to 59,000. It was the first monthly fall in a year.
Now I wouldn’t read too much into this. It’s December – hardly a wild month for house purchases. And approvals have been recovering steadily. They were due a stumble.
But that doesn’t mean you should pile in. The main problem with UK property is that at current prices it looks like a losing deal, regardless of whether we face recovery or bust. And it’s not the only asset class in that position…
Special FREE report from MoneyWeek magazine: When will house prices bottom out – and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
Keep away from UK property
As Benjamin Williamson of the CEBR puts it, the bounce in house prices over the past year is easily explained with hindsight. “With the rate of lending more than doubling [since bottoming at 33,000 approvals or so], a shortage of new properties on the market, low rates and unemployment not rising nearly as fast as expected, it is easy to see how prices have moved so quickly.”
That’s all very well. But to say that this means recovery is going to continue seems a stretch. Because all of these factors are temporary. If we have a strong recovery, then more houses will come on to the market, as people become more confident about selling, and more people have to move house as the job market picks up again. So supply will rise. And at the same time, interest rates will have to go up. That’ll batter affordability.
On the other hand, if we end up with a double-dip, rates may stay low (let’s ignore all the concerns about gilts for the purposes of this argument). But unemployment will pick up again, particularly as public spending will have to be slashed. That means more forced selling, which again will hit prices.
So no change here – we still wouldn’t be investing in UK property right now. And as always, if you are buying a place to live, then make sure that you know you can afford the payments even if there are quite substantial rises in your monthly bill. At times like these, it’s worth building in an extra-wide margin of safety when making big financial decisions.
And steer clear of corporate bonds too
So much for property. But there’s another popular asset class which also looks set to suffer, regardless of what happens in the wider economy. The other big news yesterday was the launch of a retail platform for trading corporate bonds. In other words, it’s going to be easier for private investors to buy and sell individual corporate bonds, rather than just buying funds.
Overall, this is good news. It’ll make the corporate bond market much more accessible. But the timing is less fortunate. The old saying goes that no one rings a bell at the top or bottom of a market. But some signals are just as hard to ignore. And this is one of them.
Corporate bond funds were one of the most popular asset classes in 2009. For 10 months in a row, corporate bonds were the best selling funds sector, according to the Investment Management Association (IMA). This sort of thing is usually a warning sign. But just because an asset class is popular, that doesn’t mean it’s on the turn. After all, commercial property managed to be among the most popular asset classes for several years before it actually bankrupted anyone.
However, the main reason for buying corporate bonds has now pretty much unwound. When the credit crisis blew up, the yield on corporate bonds shot up, to levels way beyond the yield on government debt. That’s because people were worried about companies going bust, whereas they didn’t think governments would.
That was a good time to buy corporate bonds. And as investors have relaxed, the yields they demand to invest in corporate bonds have fallen (in other words, the prices of bonds have risen). So anyone who bought when spreads first ‘blew out’ has seen a capital gain, as well as any income earned on the bond.
But now the gap (or ‘spread’) between government debt and corporate debt has shrunk back to more normal levels. So the chances of more gains from ‘yield compression’ are slim. And now, as with property, the risks look very much to the downside, regardless of which route the economy takes.
How the Bank of England could drive up bond yields
As a recent newsletter from Blue Sky Asset Management points out, if we suffer a double dip then “rates and government bond yields may remain low, but the spread on corporate bond yields could widen because of investors’ concerns about the impact of the slowing economy on default risk.” In other words, people will become concerned that more companies will go bust, which in turn will push up the yield they demand on corporate bonds compared to ‘safer’ government debt, driving the price down.
On the other hand, if the recovery continues, then “the monetary stimulus currently provided by the governments in various forms will come to an end.” In Britain, that means the Bank of England will stop buying gilts. That will more than likely hit prices, and push up gilt yields. That in turn will push up yields on corporate bonds too. “To us, it looks like it could be lose/lose time for corporate bonds, in the current environment.”
We’ve had corporate bonds in MoneyWeek magazine’s strategic portfolio (which gives a rough monthly guide to the sectors we believe are the best places for your assets at that given time) since February last year and they’ve done pretty well – the IMA sector has risen by around 14% over that time. But we’ll be taking them out of the portfolio in this week’s issue (out on Friday). If you’re not already a subscriber, you can claim your first three issues free.
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