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The difference between good and bad bubbles..
Britain is sinking ever deeper into the gloom.
Yesterday’s big piece of bad news was that service sector activity fell last month, in the worst showing for the sector since September 2001. As services account for about 70% of the economy, and manufacturing and construction are both in the doldrums too, it’s not hard to jump to the conclusion that the entire country is in deep trouble.
But things could always be worse. Bloomberg reports on a rather worrying side effect of the housing slump that is now spreading across the States.
First they had the housing boom. Then they had the foreclosure boom. And that, it seems, has lead to a boom in arson…
I’ve mentioned before the interesting theory that not all bubbles are bad for the economy. The internet bubble helped deliver the infrastructure needed for broadband, wireless access, globalised communication and all the other good things we associate with the digital age. And hopefully the current oil price spike is a dry run for a genuine end-of-the-world emergency that will encourage us to find alternatives while we still can (see: The bright side to high oil prices)
But you can take this argument too far. I’ve seen people try to say that the property boom was good because it will deliver us cheap housing. I’m not so sure. If all it delivers you is a deluge of flats that no one likes, in a part of town where no one wants to live, then that’s just a waste of land, pure and simple. It’s a misallocation of resources which will have to be rectified at a later date, probably with a wrecking ball and possibly at the expense of the taxpayer.
That, of course, is assuming that the unwanted properties don’t simply burn down first.
That, hard as it may seem to believe at first hearing, is what’s happening in the US. Apparently these things follow a distinct pattern. James Quiggle of the Coalition against Insurance Fraud in Washington tells Bloomberg: “Home arsons follow foreclosure trends, with a lag.” He points to a bounce in arson during the last housing slump in the 1990s, when the number of fires jumped to 116,600 in 1992 from 111,900 in 1990.
Trouble is, a lot more people are facing foreclosure now that did in the 1990s. “We’re facing a potential spike in arson like we’ve never seen before,” says Quiggle.
The majority of these fires are not even about dodgy insurance claims, says Quiggle. After all, “the policy holder… would be first on any suspect list.” Instead it comes down to vandalism or pure accidental damage. “It doesn’t take much for a squatter to knock over a candle or for some kids to set a fire when a building is vacant.”
Because no one’s in an empty home to raise the alarm, the fires tend to be more serious. And that means there’s more risk to fire fighters – in the US, reports Bloomberg, there are 3.7 injuries per 100 firefighters in vacant buildings, compared to 1.9 per 100 for fires overall.
So rather than leaving America with lots of much-needed cheap housing, as the optimists like to argue, the property bubble has in fact resulted in a rising number of derelict homes which are good for nothing but attracting crime and injuring firefighters.
This is the rub. Sound investment takes planning. And planning is something that was notably absent during the property bubble. Builders were fulfilling demand from amateur landlords, not from people with a genuine need for housing. At the height of the boom, you could have built a block of flats in the middle of the Gobi Desert and you’d still have had idiots queuing up to buy them off plan.
But without roads, or schools, or green space, or all the other bits and pieces of infrastructure that are needed to make a home desirable or worth having, then a house is just a pile of bricks and mortar. And those are depreciating assets. If you take all the bricks, concrete, and piping that it takes to build a house and stick them in a warehouse somewhere, you’re not going to come back ten years later and find that they’ve doubled in value (certainly not in real terms anyway).
None of the stuff that a house is built from gets more valuable with age. The only bit that’s really worth anything – the only part of your property that is becoming scarcer – is the land the property is built on.
If you use that resource well – if you use it to build a high-speed railway, for example, that allows your economy to stop being almost entirely reliant on one small, overcrowded corner of the country – then that’s great. You might not see the benefits right away. You may even be one of the unlucky ones who gets caught up in the boom and loses all your money. But in the long run, the broader economy will get a productivity pay-out.
But if you just use the land to build blocks of flats that will never amount to anything more than demolition fodder – well, that’s just a waste of an important resource. And it’ll cost money to clear up that waste.
The reality is that the housing boom was based on consumption, not productive investment. Buy-to-let flats were overpriced consumer goods that have now gone out of fashion. Like a warehouse full of leftover models of last year’s must-have Christmas toy, all they’re doing is taking up valuable space that could be better devoted to something else.
And even if there ever was a genuine housing shortage, the boom hasn’t helped. House builders are now so damaged by the collapse in the market, that they’ll build fewer homes this year than in the last 50 or more.
The only good thing to come out of this bubble is that, as Anthony Hilton said in the Evening Standard the other day, they might think twice about what they build next time round.
Turning to the wider markets…
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The FTSE 100 headed higher, climbing 50 points to 5,476. Banks rebounded, helped by positive comments from UBS, while drugs groups GlaxoSmithKline and AstraZeneca remained in favour.
Over in Europe, the Paris CAC 40 gained 47 points to end at 4,343. Meanwhile, the German Xetra Dax was up 48 points at 6,353.
In the US, the Dow Jones Industrial Average clawed back some ground, even though unemployment figures for June came in worse than expected. The blue-chip index rose 73 points to close at 11,288, while the wider S&P 500 gained 1 point to 1,262. But the tech-heavy Nasdaq Composite fell 6 points to 2,245.
Overnight, in Japan, the Nikkei 225 fell for the twelfth session in a row, amid continued fears over high oil prices. The index lost 27 points to 13,237.
Brent spot was trading this morning at $145.82, and in New York, crude oil was at $145.68. Spot gold was trading at $934 an ounce. Silver was trading at $18.19 and Platinum was at $2,017.
In the forex markets this morning, sterling was trading against the US dollar at 1.9835 and against the euro at 1.2615. The dollar was trading at 0.6361 against the euro and 106.72 against the Japanese yen.
And this morning, Bradford & Bingley has run into more problems. Credit rating agency Moody’s slashed its credit rating, resulting in private equity group TPG withdrawing its offer to take a stake in the bank. The group is now planning to raise £400m in new capital without TPG.