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No one can deny that the housing market’s in trouble – and it seems no one’s trying to anymore.
The Halifax reported that house prices fell by 1.1% in November. It’s the largest monthly fall this year, and the first time since 1995 that prices have fallen for three months in a row. Annual prices are still up 6.3%, but that was down from 8.9% in October.
And it’s not just the housing market that looks wobbly. The service sector saw its slowest growth in four years last month, according to the Chartered Institute of Purchasing and Supply.
It is always quite astounding how rapidly sentiment can turn around. In the space of a couple of weeks, commentary in the press has gone from “it couldn’t happen here” and “recession? – don’t be daft”; to “cut rates now or we’re all doomed.”
Here’s the bad news – we’re doomed regardless of what the bank does…
Headlines this morning are screaming for the Bank of England to cut interest rates.
Alan Clarke at investment bank BNP told The Telegraph: “A [UK] recession is absolutely not an outlandish possibility.” He reckons that if the Bank doesn’t cut, there’s a 50% chance of recession, and that even if it does, and eventually cuts to 4.5%, there’s still a one-in-three chance. The Bank, he says, “must act now if it is to prevent steep falls in house prices.”
How the Bank could have saved the housing market
But Mr Clarke – while he may be right about recession – is wrong about the property market. If the bank wanted to prevent sharp falls in house prices, it should have prevented the sharp rise in house prices. Houses are now more overvalued – by almost any measure – than they ever have been.
We’ve heard a lot of estimates in recent months – HSBC recently said they were 30% overvalued, David Miles at Morgan Stanley reckons they’ll fall by 10% next year – so we’re not the only ones who think that house prices have run ahead of themselves somewhat.
It’s also now clear – as we’ve also been pointing out for quite some time – that the only thing propping the market up has been cheap money, rather than the nonsense supply and demand argument.
What goes up must come down. Falling house prices will hurt – I‘m not going to deny it. A house price boom is not a good thing – it creates all sorts of distortions in the economy. But that’s the trouble. Our economy has been propped up by house prices and the availability of cheap debt for so long that as it ends, the unwinding of all those distortions will be very painful.
As Michael Saunders of Citi European Economics told The Independent, “the correlation between house prices and consumer spending is about 80%. Thus housing weakness is likely to be accompanied and followed by a sharp slowdown in consumer spending.”
So all those jobs that depend on housing, all those retail sales that depend on people being able to borrow more than they earn, all those buy-to-let landlords who’d focused on their £2m in equity rather than their £8m in debt – they’re going to be in trouble. And as they account for a hefty chunk of the economy, so’s the economy.
But the boom had to end some time. I hate to seem old-fashioned, but if prices go up too far, then you have to expect them to come down – probably too far as well. A fall, in real terms, of at least 30% would be pretty much what we can expect judging by the last two house price troughs (in the early ‘90s and mid-’70s).
Why the Bank can’t save us now
So why can’t the Bank bail us out? Well, I suspect the Bank may well cut rates today, with governor Mervyn King outvoted by the more easily swayed members of the Monetary Policy Committee. But the reality is that the Bank has lost control of interest rates.
The collapse of US subprime has reintroduced the concept of risk to banks. They finally realised that there are some people to whom you just can’t lend money (unless you don‘t mind never getting it back). Now they’re terrified that they’ve taken on too many dodgy liabilities and could go the way of Northern Rock.
So now they’re prioritising profits and caution over market share, and they‘re certainly not keen to lend to one another – the one month interbank lending rate hit a nine-year high on Monday. And the Financial Services Authority warned earlier this week that banks should assume that market conditions will remain tight. “It is very unlikely that we will return to the conditions that prevailed before August… it is clear that some business models are no longer as economically viable as they used to be.”
UK consumers and businesses are about to find out – just as their Japanese counterparts did in the nineties – that it doesn’t matter how low your central bank cuts interest rates if your banking system doesn’t have any money left to lend.
Remember inflation, anyone?
By the way, inflation is still a problem. Food prices rose at their fastest annual rate all year last month, hitting a new high of 4.3%, according to the British Retail Consortium, from 3.7% in October. And British Gas has just lifted one of its less widely used electricity tariffs by 15%, and gas by 13% (the tariff tracks the wholesale markets). But then, who cares if you can‘t afford to eat or heat your home, as long as house prices keep rising?
Turning to the wider markets…
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Housebuilders lead FTSE higher on rate-cut hopes
In London, the possibility of an interest rate cut today saw the blue-chip FTSE 100 index jump 178 points to end the day at 6,493. Housebuilder Taylor Wimpey led the charge, with peers Barratt Developments and Persimmon, plus REITs including Liberty International, also amongst the day’s top gainers, reversing Tuesday’s losses. For a full market report, see: London market close.
Elsewhere in Europe, a strong start on Wall Street gave markets a boost. In Paris, the CAC-40 rose 111 points to end the day at 5,659. And in Frankfurt, the DAX-30 closed 135 points higher, at 7,944.
Across the Atlantic, data showing that the private sector had expanded in November – which is good news for consumer spending – saw US stocks end the day with strong gains. Tech stocks led the advance, with the Nasdaq up 46 points to 2,666.
The Dow Jones industrials index added 196 points to close at 13,445, with insurer American International Group the day’s top gainer on reassuring words from its CEO as to the extent of the company’s subprime losses. The broader S&P 500 was also higher, at 1,485 – a 22-point gain.
In Asia, investors took their cue from the strength in European and US markets today. The Japanese Nikkei added 265 points to close at 15,874 today as technology and financial stocks rose. There were more modest gains for the Hang Seng, which added 213 points to end the day at 29,558.
Gold back below $800
After dropping below $88 a barrel in New York yesterday as Opec announced its intention to keep production levels stable, crude oil had fallen over 1% this morning to $86.57. Brent spot was at $88.20 in London.
Weaker crude – along with a firmer dollar – saw spot gold fall below the $800 mark yesterday, and the yellow metal had fallen further, to $792.70, today.
In the currency markets, sterling hit a one-month low of $2.0219 against the dollar this morning as investors anticipated an interest rate cut later today, before edging back up to 2.0245. And sterling remained around multi year lows – at 1.3889 – against the euro. The dollar, meanwhile, was at 0.6860 against the euro and 110.73 against the Japanese yen.
And in London this morning, a trading update from the Royal Bank of Scotland suggested that the bank’s exposure to subprime losses wasn’t as bad as investors had feared. RBS reported $1.5bn of writedowns caused by credit market turmoil this year, in line with forecasts, and also said that it expected results to exceed analysts’ estimates as operating profits came in ‘well ahead’ of forecasts. RBS shares had risen by as much as 7.5% in early trade.
Finally, our recommended articles for today…
The goose is getting fat – at far greater expense
– Two years ago, buying a goose for Christmas dinner would set you back £35, this year it’s more like £70. Merryn Somerset Webb looks at the soft commodities boom that’s pushing up the cost of Christmas, plus how you could make some money to put towards the cost of next year’s dinner here:
The goose is getting fat – at far greater expense
Why bottled water spells environmental disaster
– Next time you’re feeling thirsty, why not just turn on the tap? Our obsession with bottled water makes neither economic nor environmental sense, says Garry White. For more on why giving up our mineral water habit could be one of the most pain-free ways to green our lifestyles, click here:
Why bottled water spells environmental disaster