After the recent strong rally, stock markets around the world had a miserable day yesterday.
One of the main reasons for the big fall was the return of concerns about the global financial sector. Spain bailed out its first bank, while US Treasury Secretary Tim Geithner warned that other US banks might need more help. And of course, the UK saw the demise of another financial institution – Dunfermline building society. Meanwhile, Ireland had its credit rating downgraded by S&P, from AAA to AA+.
In the good old days before the credit crunch, any of these stories would have been front-page news. But now they’re just another dollop of misery to add to the pile.
And besides, something much more important happened yesterday. The number of people buying new houses went up…
This won’t be the last Spanish bank to be bailed-out
In Spain, the fallout from the country’s property bubble is really starting to hurt. The government has had to bail out regional lender Caja Castilla, to the tune of £2.8bn. It also had to guarantee nearly £9bn-worth of loans.
As Ambrose Evans-Pritchard points out in The Telegraph, Spanish banks have stood up pretty well so far because tough regulations meant they didn’t get involved in sub-prime. But with the economy collapsing around them, there’s only so much pain even the strongest lenders can take.
Homes are still massively overvalued at 7.2 times family earnings, according to Credit Suisse. Unemployment is already nearly 15%, and is expected to rise to nearly 20% next year. This won’t be the last Spanish bank to be bailed out.
In Britain too, the property bubble claimed another victim. Dunfermline building society was split in two. To cut a long story short, Nationwide got the good bits, and the taxpayer got the bad bits. To be fair, this is a tiny collapse compared to the other big busts, and the eventual loss to the taxpayer will probably end up in the tens of millions – practically loose change in the big scheme of banking bail-outs.
The rise in house sales is not a turning point
But never mind all that. The big news was that Bank of England data showed the number of mortgage approvals for new house purchase jumped to nearly 38,000 in February, up 19% on January, and the highest level seen since last May. On top of that consumer confidence picked up, again to the highest level since last May.
So is this a turning point? Well, I wouldn’t bet on it. I think “dead cat bounce” is the more appropriate term. The point is, once things fall far enough, they will rebound at some point. There’s only so low you can go.
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Mortgage approvals have been hitting ever more shocking lows for months now. They had to go up some time. As James Ferguson points out in his Model Investor newsletter, even now, mortgage approvals are a good bit lower than when they bottomed out during the 1990s housing crash (they never fell below the 60,000 mark back then). And they are still 44% down year-on-year. That gives you some idea of the scale of the slump we’ve seen.
As Vicky Redwood at Capital Economics put it, “approvals have a long way to go before they get to levels that are no longer consistent with falling house prices.”
The pick-up in consumer confidence is of a similar nature – the balance rose from minus 35, to minus 30. You’d be surprised if it had weakened any further from those levels, particularly as anyone with a mortgage has probably found its cost falling in recent months. As Rachael Joy, a spokesperson for GfK NOP (who carry out the consumer confidence survey), put it, “lower interest rates and a better picture for household bills are restoring some confidence among UK consumers.”
But the other interesting point from the Bank of England’s lending figures was that consumers are clearly still not keen to borrow or spend. They repaid £245m of credit card or other non-mortgage debt last month, the highest level since records began in 1993. So confidence is still way too low to translate into any pick-up in high street spending.
And with unemployment continuing to rise, and repossessions set to keep ticking up, there’ll be plenty of housing supply to keep pushing prices lower.
Keep avoiding property for now
There’s a bigger risk in the future too. While low interest rates might inspire a few people to jump back into the housing market (assuming they can get a mortgage), they should be careful. As participants at our most recent Roundtable pointed out (Fourteen investments to see you through the recession, if you’re not already a subscriber to MoneyWeek, subscribe to MoneyWeek magazine), if there is a recovery in the economy – or a surge in inflation at least – then the Bank of England will rapidly have to reverse its quantitative easing and also start to hike interest rates. That could absolutely hammer anyone who buys now, imagining that today’s rates, or even say 5%, will provide a ceiling for the foreseeable future.
Suffice to say, we’d still be avoiding property for now.
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