I RECEIVED an interesting e-mail from a reader this week. Did I know, he asked, that “it has suddenly become almost impossible to sell a horse”? Apparently since February the price of the average riding horse has fallen by “a quarter and often by a third.”
This caught my attention largely because I had a conversation about mid-range boats with a boat broker friend a few weeks ago, and he told me that demand appeared to have dropped off significantly, although he was still selling well at the very top end.
The two things are connected because they are both nonessential luxuries and selling them not only releases a cash lump sum but also instantly eases a family’s cashflow: boats and horses come with cripplingly regular overheads (moorings and stabling).
I’ve had other interesting conversations this week too. One was with a woman who told me that she and her husband had interest-only mortgages on both a London house and a country house that they were struggling to pay. Another was with a woman who told me that her buy-to-let investment (which she considers her pension) was actually costing her a whopping £600 a month.
Then there was a talk with a retired stockbroker who lives in Notting Hill. Eighteen months ago he and his wife thought they might move to the country so they put their house on the market for £850,000. They got no response so they decided to stay put. Last week, after a visit from their local estate agent they changed their mind again – and their house is now on the market for £1.65m.
The stockbroker, on the basis of his chat with the estate agent and the regular headlines about the never-ending housing boom was smugly convinced that the house would go straight to sealed bids and he’d be happily (and richly) ensconced in his country cottage by the middle of July. So far so bad: he hasn’t had much in the way of interest – let alone an offer.
What this tells us, albeit in an anecdotal way, is that Britain’s middle classes may be starting to feel the pinch. This should come as no great surprise. There have been four rate rises in the past 10 months and we know there are going to be more. Last week’s numbers showed inflation slowing a bit, but the danger is still very much out there.
When Mervyn King, governor of the Bank of England, warned that we should expect another rise soon, he might have had his eye on the fact that food prices here are rising at 5% a year. Or that core inflation (which strips out food, energy, drink and tobacco) is at its highest since 1997. Or perhaps he had his eye on the fact that in China wages are rising at about 17% a year in the countryside and 20% in urban areas and that the price of a live pig bought in Shanghai has gone up 71% in a year.
Chinese inflation is very important: as it rises, so will the price of the millions of manufactured goods we import and so will our overall inflation rate. And so, of course, will our interest rates.
Given that, according to the Council of Mortgage Lenders, interest payments on mortgages are already at their highest levels for 15 years and that UK consumers currently owe the equivalent of 159% of their annual disposable income, I think we can expect the supply of unwanted riding horses, yachts and recently purchased second homes to keep rising at the same time.
Note, by the way, that the situation is similar in America: bond yields are rising, the housing boom is over and consumers are too deeply in debt to cope much longer. US economic growth slowed to a pretty pathetic annualised rate of 0.6% in the first quarter of this year and has grown only 1.9% in the past 12 months.
So what does this mean for investors? You might think about cutting back investments in companies selling things that address consumer wants rather than needs: first people sell their horses, next they might considering cutting back on imported tropical fruit and £250 handbags. There’s no need to be invested in most of the retail sector, in the leisure sector and in most consumer-goods firms.
I’ve mentioned the relative cheapness of some of the mega companies here before (nobody wants them because they aren’t likely to be taken over) and I still think you are relatively safe in the likes of Shell and Glaxo Smith Kline. Given the fact that much of the current trouble is coming from food prices, now might also be a good time to look at buying into the London-listed exchange-traded commodities tracking grain and other soft commodity prices.
Otherwise you might want to play it safe, and join in the new drive to save – deposits at Hali-fax broke through the £100 billion barrier for the first time last week – and start stashing more cash in a deposit account. This isn’t a bad time to do so: competition appears to be hotting up and ICICI’s Hisave account pays 6.05%.
First published in The Sunday Times 17/6/07