Property pundits in the UK seem a little more sophisticated than in the US. In the States, everyone from house builders to estate agents are, frankly, panicking. There’s no pretence of everything being OK – there’s talk of the worst slump in decades, markets in freefall – it’s bad out there and they know it.
But here in the UK, the pundits know how to play it. When the Bank of England raised interest rates, the tone of housing reports changed suddenly from declaring the return of the ‘mini-boom’, to warning of a slowdown and declarations that “no further rate hikes are needed.”
The trouble is, their attempts to massage reality are in vain. Here’s why…
Many people – especially those who work within the media – have an overblown sense of the importance of press and television coverage in influencing economic events.
There seems to be this idea that as long as we all pretend that everything’s OK, then everything actually will be OK. It’s as if there’s no real underlying economic picture at all – the actual amount of money in our bank accounts and debt on our credit cards doesn’t matter. As long as we close our eyes and believe we can afford to keep spending, we can.
There was a good example of this in the mainstream press earlier this week. The Guardian published a rather self-righteous piece entitled “The myth of middle-class inflation.” The writer in question took issue with the idea that the consumer price index is understating inflation. “The notion, particularly espoused in the rightwing press, is that the middle classes are having to pay inflation-busting increases in private school fees, council tax, electricity and gas, and petrol, and that ‘their’ inflation rate is more like 10% than the 2.5%-odd official rate.”
Funnily enough, we thought that everyone had to pay council tax and energy bills, not just ’middle-class’ people (which presumably include the columnist – after all, you don’t get paid minimum wage to write opinion pieces for national newspapers).
In any case, he says one of the reasons that these selfish middle-class people should stop criticising poor Gordon Brown and the National Statistics office is because it undermines faith in the inflation measure. “If people believe that [the Bank of England] has lost control of inflation, they could demand higher pay rises, and thereby create a genuine inflationary risk.” So there we go – if we’d just believe and do exactly what the Government says, we’d be fine. If we start to doubt them, we’ve only ourselves to blame when things go wrong.
When our national newspapers are peddling this tripe, it’s no surprise that PR people and estate agents and governments start to believe that they can fool the population simply by sticking a smile on their faces at all times.
But it doesn’t work. The reason people are starting to believe that inflation is a lot higher than official figures show is simple – it is. Even the most economically illiterate person has a good idea of whether or not their wages are buying as much this year as they did last.
You can quibble over how inflation affects individual sections of the population, but even going on official statistics, the only things that have fallen in price over the past 12 months are clothes, shoes, TVs and furniture. The cost of food, booze, cigarettes, energy, housing, health costs, transport, school fees, eating out, staying at hotels, and getting a haircut (to mention a few) have all gone up. The straightforward truth is that most things are getting more expensive – especially items that people can‘t avoid paying, like energy bills.
So pushing the spin aside, what’s the underlying reality of the housing market? The market recovered last year because interest rates fell – but importantly, also because lending was relaxed. More money was made available, so people took advantage of it and dived into buy-to-let and got on the ladder by taking out interest-only mortgages with no way of paying back the capital.
Lenders are still finding ‘creative’ ways of slackening lending criteria. Kent Reliance building society’s concept of the ‘deathbed’ mortgage, whereby you pass your mortgage onto your children, is one innovation. Another is the gradual acceptance of the idea that borrowing over 30, or maybe even 40 years is perfectly reasonable.
And people still believe that house prices will keep rising. Why? Because they’ve been rising for about 10 years now. It’s exactly the same as in early 2000 – people thought stocks and shares would keep rising. They had done in the past – why change now?
The trouble is, people are now making very expensive investment decisions based on the notion that house prices will keep rising. In The Telegraph at the weekend, they spoke to one amateur buy-to-let couple who freely admitted that their first investment property – a two-bedroom flat in Bournemouth – would be costing them about £50 to £100 a month as the rent didn’t cover maintenance and mortgage costs.
“It‘s such a good investment,” they said.
This is like buying a share and paying the company an annual dividend to hold onto it, simply because you believe the capital growth will outweigh the costs in the long-term. Sounds ridiculous – but my colleague Cris Sholto Heaton reliably informs me that something very similar to this actually happened in Japan. When? Just before the stock market bubble burst in the early 1990s, of course.
Deathbed mortgages, “good investments” that cost you £100 a month to subsidise someone else’s living costs – property investors have lost their grip on reality. But with interest rates rising, unemployment rising and the world’s biggest economy heading for a massive slump, reality is about to bite back hard.
And all the spin in the world won’t make a bit of difference.
Turning to the stock markets…
The FTSE 100 closed 23 points lower at 5,906 yesterday – although the index managed to recover from an afternoon low of 5,895 – as a strong start fizzled out following the weak opening on Wall Street. Miners were mixed, with Antofagasta making Thursday’s biggest gains on the strength of rising copper prices, whilst others – most notably Anglo-American – fell on profit-taking. Beverages group Diageo was one of the days biggest fallers after it announced solid but uninspiring results. For a full market report, see: London market close (/file/mwu/1/17622/london-close-footsie-slides-backwards.html)
Elsewhere in Europe, the Paris Cac-40 was down 17 points to 5,156, although cosmetics giant L’Oreal bucked the downward trend with a 2% share price rise. In Frankfurt, the Dax-30 was down 7 points to 5,859.
After early losses on Wall Street, US stocks ended the day flat. The Dow Jones and Nasdaq were both down 1 point to 11,381 and 2,183 respectively, whilst the S&P 500 ended the day a fraction of a point lower at 1,303.
In Asia, the Nikkei ended a quiet session 6 points lower, at 16,134.
The price of crude oil crept up again slightly this morning, last trading at $70.40 a barrel. In London, Brent spot was most recently traded at $69.70.
Silver hit a a three-month high of $12.89 yesterday, but was down to $12.84 this morning. Spot gold last traded at $627.30.
A survey by estate agents Ellis Hamptons has shown that London is the most expensive place in the world to buy a luxury home as a result of the strong pound and an influx of wealthy foreigners. The weak dollar has seen former number 1 New York slip into second place. Real estate in areas such as Chelsea and Notting Hill now costs around £1200 per square foot, the survey revealed. Also in London, trading began on a cautious note today ahead of this afternoon’s jobs figures from the US.
And our two recommended articles for today…
Where next as the US housing bubble bursts?
– When the equity bubble popped at the start of the decade, the US economy – followed by the rest of the world – slid into recession. This time it’s the US property market, says Morgan Stanley economist Stephen Roach. So can we expect another post-bubble shakeout? For more on which markets will be affected next by the knock-on effect of the housing correction, read: Where next as the US housing bubble bursts?
How the Fed rate pause will affect the gold price
– What will the Fed’s decision to pause its rate rising cycle mean for gold? History can provide some insights, says John Lee of Mau Capital. And he has some important advice for gold investors – keep an eye on the equity and precious metals markets. To find out how these – and gold – are likely to perform in coming months, see: How the Fed rate pause will affect the gold price