Are there any similarities between today and 2007? That was the last question asked at an investment seminar I spoke at this week. I imagine the questioner – alongside all the other investment professionals in the room – rather hoped that, five years into the crisis, the answer would be no. It isn’t.
Wherever you look you see similarities. They are there in stock valuations that are in no way supported by fundamentals – profits are falling but prices are rising . They are there in the ludicrously low rates at which risky countries and companies can borrow (is it really a good idea to buy a Rwanda ten-year bond on a yield of below 7%?).
They are there in the huge surge in share buybacks in America. Companies almost always buy their own shares at the wrong time, so the fact that they are now not far off the levels of 2007 is not a good thing. They are there in the obsessive way in which we are all watching and acting on the most tedious of words from anyone even vaguely connected to the Fed (see page 6) and in the volatility that is producing. They are there in the sharp rise in investing in margin (ie, with borrowed money) in America to match previous highs. As Troy’s Sebastian Lyon points out, “this evidence of speculation has traditionally been a contrary indicator” – past peaks came in 2000 and 2007.
But in Britain we have our own special similarity: our house price bubble. The Economic Research Council (ERC) ran a debate on the state of the property market this week, which our own James Ferguson took part in. No one was nuts enough to suggest it isn’t overpriced. Rich-country think tank the OCED suggests that prices are 20%-30% too high and most of the commonly used measures suggest something similar.
So how do prices come down again? Most people at the ERC were convinced it isn’t a big deal. They’ll fall a little in real terms (after inflation) each year, until we get to the right place, they said, in a soothing way. However, as regular readers know, James doesn’t do soothing. Instead, he noted that for the last 20 years interest rates have been sliding from a near-record high of 15% to the current low of 0.5%. Look at a chart of rates and prices, and you will see an all but perfect correlation. Falling rates didn’t raise the level of homeownership, nor the absolute number of houses with mortgages on them. But they did push up prices. Rates down. Prices up. Simple.
But it’s all over now. There is only one way rates can go from here and so only one way prices can go (whatever the government does to try to stop it). Don’t let yourself be so bamboozled by low rates and state interference, said James to his packed room of terrified estate agents, that you forget we are “sitting on top of the biggest bubble we will see in our lifetimes”. Just as we were in 2007.