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The US housing market shows no sign of improvement.
Don’t take our word for it. The chief executive of builders’ merchant Wolseley, Chip Hornsby, said yesterday that it’s quite possible that things will get worse before they get better.
“There are no signs yet of any upturn in the US housing market and the repairs, maintenance and improvement market is beginning to soften.” The group’s pre-tax profits for the year to July 31st fell 17.6% to £634m, even though sales rose 14.6% to £16.2m.
The bad news for the likes of Wolseley is that it’s not just the US that’s facing trouble in the property markets…
The International Monetary Fund reckons that the subprime problem in the US is going to keep unfolding for much longer than most commentators currently suspect. It will continue “at least through 2008”, with many more defaults to come as more ‘teaser’ interest rates reset to higher levels.
Moreover, even if house prices were to fall by just 5% and then stabilise, losses from subprime defaults would still hit $170bn – a quarter of which would fall on the banks, and 75% on those holding mortgage-backed securities, says The Telegraph.
It puts the blame for the current crisis on opaque credit derivatives, globalisation meaning we don’t know where these derivatives end up, and an over-reliance on credit rating agencies to tell us that these derivatives are safe (when in fact they’re lethal). So far, so what. We know all this, and most people in fact knew it before it all blew up – they just wanted to make as much money as they could before the music stopped.
But what many people might be surprised by is the IMF’s assertion that the UK has a similar subprime problem to the US. According to Edmund Conway in The Telegraph, the IMF “singled out the UK’s low-income mortgage market as a key area of risk for the financial system.”
The report says “the UK non-conforming mortgage market is somewhat comparable to the US subprime market, though about one half of the outstandings.” For the IMF – which is hardly the most sensationalist organisation – that’s pretty strong stuff.
We looked at the UK’s subprime problem – particularly buy-to-let buyers, which as James Ferguson points out, have a very similar profile to subprime borrowers – in a recent issue of MoneyWeek. You can read the piece here: Stand by for a British subprime crunch (/file/34220/stand-by-for-a-british-subprime-crunch.html).
James has also written about why buy-to-letters are exactly like US subprime borrowers in recent issues of his investment service Model Investor – if you’d like to know more, click here: Model Investor (https://www.fsponline-recommends.co.uk/mdiadv1?XMDIC301)
All in all, this is not the ideal time to be heavily in debt. But that’s exactly what Britain is. Public borrowing hit its highest level for the month of August since records began. It’s another low note to kick off Alistair Darling’s time as Chancellor – though he’ll probably be less worried about this than he was about the queues outside Northern Rock. Just like Ben Bernanke, Darling has taken over just as all the consequences of his predecessor’s lax policies are hitting home.
But let’s not feel too sorry for him. After all, regardless of whichever cloud he leaves office under, he’ll have a juicy minister’s pension to look forward to. But that’s not something that most of the rest of us can rely on – so what should you do about your own investments? Well, at the end of last week I wrote about which sectors still look good value (Forget banks – here are some real investment opportunities), and in this week’s issue of MoneyWeek we’ll be looking at whether Asian markets will be able to pick up the slack if the US economy falters.
And Tom Stevenson also has rather a good column in this morning’s Telegraph which I suggest you read. It nicely sums up the big issues we should all be worrying about, and the investment strategies to deal with them – you can read it here: https://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/25/ccinv125.xml
Turning to the wider markets…
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Despite an early slide, the FTSE 100 added 9 points to end yesterday at 6,465. It was a good day for miners including Antofagasta and BHP Billiton, whilst at the opposite end of the spectrum Northern Rock fell another 11%. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was up 6 points to 5,692, and the German DAX-30 was 10 points higher, at 7,787.
Across the Atlantic, most US stocks fell yesterday as investors consolidated gains made at the end of last week. The Dow Jones fell 61 points to end the day at 13,759. The broader S&P 500 was down 8 points, at 1,517. And the tech-heavy Nasdaq was 3 points lower, at 2,667.
In Asia, the Japanese Nikkei 225 climbed 89 points to close at 16,401. However, in Hong Kong the Hang Seng was down 121 points, at 26,430, at the time of writing.
Crude oil was nearly 1% lower, at $80.20 this morning. And in London, Brent spot was at $77.89.
Spot gold had slipped to $727.30 this morning, off yesterday’s intra-day high of $731.70. And silver had risen to $13.35/oz.
Turning to the currency markets, the pound was at 2.0123 against the dollar and 1.4290 against the euro today. And the dollar was at 0.7099 against the euro and 114.69 against the Japanese yen.
And in London this morning, hedge fund manager Man Group said H1 net fee income would climb 15% as it added an extra $3.5bn in clients’ money despite troubles in the subprime mortgage market. Man Group shares were up by as much as 3.5% in early trading.
And our recommended article for today…
How the credit crisis transferred to the wider economy
– Abbey National’s new 125% mortgage may be designed to pick up some of Northern Rock’s business but they’re missing the point, says Merryn Somerset Webb. Right now people are becoming more cautious about their borrowing – and their spending. To find out why that’s bad news for the economy as a whole, read: How the credit crisis transferred to the wider economy