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There’s safety in numbers, so the saying goes.
Maybe that’s why UK house builders are clamouring to hook up with each other like there’s no tomorrow. George Wimpey and Taylor Woodrow are headed for a £5.4bn merger – though many believe that FTSE 100 house builder Persimmon may gatecrash the party.
The aim is to cut costs and improve profit margins – Wimpey and Woodrow have some of the worst margins and smallest land banks of any UK builders. A source quoted in The Telegraph described the companies as being like “two drunks propping each other up at the bar.” But their biggest problem lies far away from the UK’s ever-increasing property prices.
Both have large US housing units, and as we all know, the US is not currently the best place to be a homebuilder – and it just get worse…
The US property market isn’t getting any better, despite the hopes and dreams of the optimists.
A rise in existing home sales earlier in the month got the bulls all excited again, but sales of newly built homes just keep falling, collapsing to a seven-year low in February, confounding hopes for a bounce. Sales fell to an annualised rate of 848,000, whereas analysts had hoped for a rise to one million.
Sales were down 18.3% on the same time last year, while the number of unsold homes hit 546,000. That’s an 8.1 month supply, the highest in relation to sales since January 1991. The backlog of homes has risen 27% in the past year, while the median price was down 0.3% on last year at $250,000.
The thing is, the real figures are almost certainly worse. As the statistics themselves point out, the figures are based on the number of sales signed off – they don’t take account of cancellations. In fact, in every month since November, the number of sales has been revised lower at a later date.
Not everyone has their eyes closed about this. Morgan Stanley analysts Teun Draaisma and Graham Secker have warned that the trouble in the sub-prime sector has ‘knocked away the ‘cornerstone’ of US consumption’ reports Ambrose Evans-Pritchard in The Telegraph.
Worse still, ‘while the US economy seems to be slowing down, there has been overheating elsewhere in the world, and monetary tightening in Japan, India, China, UK and Euroland. These may be the early signs of a classical boom-bust scenario.’
The bank also warned that the stock market correction which started in February – and which, to many, now seems to be over – had been too short and sweet for their liking. Apparently, the average fall of the MSCI index of European stocks during past corrections dating back to the mid-1980s has been 19% over 48 days. So far, after 24 days, the MSCI index has fallen just 1.5% – so we could be in for another downleg over the next month or so.
MoneyWeek’s own James Ferguson very much agrees with Morgan Stanley on this one. He reckons that the backlog of US new-builds could take years to clear – and that means we can’t expect to see much improvement in the US property market for all that time. And of course, with US consumption being propped up by the housing market, that means US consumers will have to cut back. And that’ll be bad news – at least in the short-term – for stock markets everywhere.
You can read more from James, and read about his email service, Model Investor, by clicking here: James Ferguson.
Meanwhile, in the UK everything’s just fine in the property market. Well, mostly fine. In the US, about 40% of mortgages sold in 2005 and 2006 were sub-prime or low documentation loans. Here in the UK, according to S&P, about 58% of mortgages sold last year were ‘specialist’ loans. Now that includes buy-to-let as well as sub-prime and ‘self-certification‘ (what the Americans know as ‘liar loans‘), so it‘s not directly comparable to the US sub-prime figures.
However, it still shows that more than half of the properties sold last year were either to short-term investors (buy-to-letters who bought last year will almost certainly be earning either very little yield, or actually be facing negative cash flow – so their investment is short-term, even if they don’t know it yet), or people on a shaky financial foundation. So the demand dynamic propping up our property market may not be as solid as we like to think.
And the other day we were having a very interesting conversation with a surveyor, one Richard Sexton of e.Surv. We’ll fill you in on the detail later this week, but apparently, in the city centres where developers have been going mad with new builds – you know, blocks full of two-bed bachelor pads in the centre of Manchester, Cardiff and Leeds, among others – buy-to-let buyers who’ve failed to rent out their properties are having them repossessed in ever increasing numbers.
We like to pretend we don’t have a problem in this country, and that supply and demand will keep UK property prices rising forever – but as those hopeful city-living BTL-ers are finding out, the supply and demand dynamic can turn very rapidly, particularly when it turns out that everyone’s been building the wrong sort of property in the wrong sort of place.
Turning to the stock markets…
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London stocks fell sharply in afternoon trading yesterday as Wall Street got off to a poor start. The FTSE 100 slipped 47 points to end the day at 6,291 as the likes of Prudential, British Airways and Whitbread registered losses. However, news of a proposed merger between homebuilders Wimpey and Taylor Woodrow saw property stocks in demand, including the day’s best performer, Persimmon. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 closed 58 points lower, at 5,576, as negative US economic data weighed. In Frankfurt, the DAX-30 also ended the day lower, losing 70 points to close at 6,828.
On Wall Street, news that new home sales had fallen to a seven-year low hit investor sentiment in early trading, but the major indices clawed back most of their losses later in the session. The Dow Jones closed at 12,496 – an 11-point fall – having slumped as low as 12,368 in intra-day trading. The Nasdaq ended the day 6 points higher, at 2,455, and the broader S&P 500 closed one point higher, at 1,437.
In Asia, the Japanese Nikkei closed down 156 points at 17,365, whilst the Hong Kong Hang Seng ended the day 73 points lower, at 19,692.
Crude oil futures reached their highest level since mid-December – $63.30 – in intra-day trading yesterday as exporter Iran continued to hold 15 captured British naval personnel. However, crude remained below the $63 mark this morning, last trading at $62.89. In London, Brent spot was at $64.77 a barrel.
Spot gold was last quoted at $663.75 this morning and silver was at $13.34.
And in London this morning, oil explorer Cairn Energy posted an $82m loss for 2006, despite rising revenues, as the company was hit by falling production and a write-down on its Sangu project in eastern India. Shares had fallen by as much as 10p in early trading.
And our two recommended articles for today…
Two ways to profit and save the planet
– Merryn Somerset Webb reveals two shares that will ease your conscience and make you money. And they’re likely to do more good than Gordon Brown’s fiddling with taxes. To find out how to benefit both the environment and your bank account, read: Two ways to profit and save the planet
Could gold ownership be outlawed?
– In the past, governments have tried massive interest rate hikes (Britain’s Black Wednesday) and the outlawing of gold ownership (Depression-era America) in order to protect their currency. But what can be done this time to restore investors’ faith in cash? For more on why Adrian Ash thinks investors should mistrust money at any price – and put their faith in gold, read: Is it time to outlaw gold ownership?