Archive for the ‘UK House Prices’ Category
The celebrated demographics forecaster Harry S. Dent Jr forecasts a stock market crash by the end of February in his New York Times Bestseller ‘The Great Depression Ahead: How to prosper in the debt crisis of 2010-12’.
From around 10,000 today he has two scenarios for the Dow Jones in 2010: one, a fall to 3,300-4,600 in a broad crash also taking down real estate and commodities, including gold and oil; second, for the Dow to go even lower to 2,200-3,500.
Both are apocalyptic for stock market investors. Harry Dent made his name in the early 90s with a counter-consensus and very accurate, super bullish prediction about the outlook for stocks. His specialty is the study of demographics, or population trends, as a means of forecasting the future.
In his current book he apologizes some past errors, with a real howler being a stock market bubble in the late 2000s that just never happened or came close. Indeed, he is almost humble about noting the complexity of intermingled cycles that make forecasting tough.
Yet he has made some good calls in the past and his use of demographics is original and based in solid statistical information about population trends. There is also truth in his contention that the broad trends he mapped in his first forecasting coup in the early 90s did include an big downturn in 2009-2012.
Aside from his demographic analysis, Mr. Dent stands as a deflationist. He cooly says that all the government spending in the world will not offset the deflationary impact of a private sector collapse in business activity and trade, driven by falling consumption and a house price implosion.
Sometimes the simplest observations prove to be the best guides to future stock movements. For if this statement on deflation stands up then financial markets are currently way overvalued and heading for an imminent fall.
What is surely interesting for stock market investors is that Harry Dent is standing back from the day-to-day noise of the market. He is not talking about Greek or Dubai debt. He is not worrying about the latest unemployment or housing figures. His analytical model saw this coming twenty years ago.
For the full analysis you should read his very cogent book. But the obvious immediate implication is that stock market investors should sell now and not dally around. It is probably too late to sell real estate but certainly do not buy anymore.
Mr. Dent is negative on the immediate outlook for gold as he thinks the yellow metal will suffer along with all commodities in a rush to cash and short-term bonds. Thereafter Dent thinks there will be some great opportunities to buy long-term US bonds at high yields but curiously he does not foresee a rush to gold as bonds crash.
Harry S. Dent has been very wrong in his forecasts in the late 2000s but he seems on much more solid ground now with the Dow dipping under 10,000 last week. It is just very hard to come up with a positive alternative scenario that would save the long rally.
It is fairly easy to understand the obvious link between the greater availability of credit and rising asset prices. But less obvious is the rolling up effect or compounding of relatively small annual gains in value over very long periods of time in a credit boom.
In June this correspondent will go for a reunion of alumni in Oxford after almost 30 years of absence. Since then the price of a cup of tea on British Rail is up six-fold. The value of our former family home by a factor of 18.
Precious metal prices static
Silver is actually worth less than it was in 1980 and gold is only slightly higher. Graduates are paid around five or six times more than in 1980 when they start their first job.
Share prices are another interesting comparison to make, up around 12-fold since then but unchanged over the past decade. Houses do seem to stand out as exceptionally overvalued, at least in relation to precious metals, British Rail tea, average incomes and even stocks.
The UK housing market is a classic credit-driven asset bubble. Over time the banks have worked tirelessly to keep mortgage debt at a constant proportion of income, thus most of the benefit of falling interest rates has been lost on the general population and pushed up house prices instead.
People have also been brain washed over time into thinking a home is your best investment and can not go down (despite the 1991-3 evidence to the contrary). It is a national mania for home ownership, and even in a massive recession people are very reluctant to let go of their dream home or loss-making investment.
Of course looking back to 1980 that was the very moment to buy a UK property and sell up gold and particularly silver – which were then in an investment bubble after a decade of inflation and recessionary conditions.
Sell property, buy gold
Is not the lesson now that those caught up in the global property bubble – which is still only in its early stages of deflating if history is any guide – ought to be selling up and buying precious metals next for the upcoming multi-year upward compounding of gold and silver prices?
It is never a straight line up for any asset class. But for example that nasty 1991-93 phase in UK housing only looks a blip on the chart, although it bankrupted many young property owners at the time.
However, getting on the right side of the rising trend (and getting out of a falling trend) is the key to successful long-term investing. Ask anybody who bought a house in Britain over the past 30 years. But a rising trend is never without an end.
For stock market investors the long-term trend is surely also a warning sign. The credit inflation of the 2000s has barely managed to support price levels, so how can they possibly be maintained in an era of de-leveraging and tight credit?
Surely anybody can see that near zero rate interest rates cannot last forever. And if asset prices are only being held up by low interest rates what will happen when they go up? Asset prices have to come down. This is a selling opportunity for property and stocks, and a buying opportunity for gold and silver.
If the Dow Jones Index is expressed in the only currency that does not inflate over time then the ongoing bear market is very clearly visible, with the rally of last year nothing more than that, and we have to ask how will this ratio proceed until it reverts to the bottom of one last seen in 1980.
Then the gold price was $850 an ounce and the Dow index highly depressed during the last big US recession. Looking at this chart and extrapolating forward then gold prices look to be going much higher, while the Dow Jones is in for another downturn.
Simply stated it can be noted that over time gold, oil and other commodities have a reverse correlation to stock and real estate markets. One is rising while the other is falling, and vice-versa. The Dow:Gold chart shows this inter-relation very neatly.
So to revert to the long-term low point of one on this index almost certainly requires a combination of gold heading much higher in price and the Dow taking a tumble. And is that not what the bearish noises on Wall Street and the bullish babble from gold bugs is telling us?
Are we not heading into a couple of years of near depression like 1980-2 with stock market prices too high right now? Is gold not increasingly attractive to investors with bond prices looking very vulnerable in particular, once stocks have corrected?
Try to turn it the other way round – which is also a way to the index point of one. Then stocks would have to fall by almost 90 per cent just to get to the current gold price, or the gold price would have to surge by a factor of ten to meet the current Dow.
Interestingly none of these scenarios is negative for the gold price. You would need to see the Dow:Gold trend broken entirely for that to happen, and what on earth could do that? Long-term trends in major asset classes are among the most reliable of indicators.
Given that the trend is your friend until it is not, then the Dow:Gold chart is a guide to serious investors about where to put your money for the next few years. Of course, this is a long-term trend, so a short-term setback for the gold price can still happen as the Dow first sinks, and might be expected as the dollar would rally strongly.
Goldman Sachs is forecasting a stronger than average turnaround in the fortunes of the UK economy this year but only because the value of everything in Britain has been devalued by 25 per cent with the collapse of the pound.
This seems a high price to pay for 3.4 per cent growth which Goldman thinks the UK will achieve in 2010, although not many other forecasters are as optimistic. This will compare to 2.4 per cent growth in the USA and 1.9 per cent in the eurozone.
The fall in the value of sterling is expected to boost export growth, and attract inward investment from overseas. There are also hopes that the important UK financial sector will revive investment spending after last year recording the lowest level since the 30s.
However, export volumes will first have to make good the value lost in depreciation. Then there is a reliance on a continued upward movement in the global economy to support rising exports and inward investment. A double-dip US or eurozone recession would sink this prospect, and keep the UK financial sector on its knees.
The Goldman forecast is also predicated on a much longer period of ultra-low US interest rates than most economists accept, with effective zero rates until 2012. This would help to keep the pressure off the Bank of England to raise its rates.
However, foreign currency traders say the pound’s weakness may not last for long, and UBS is telling its clients to buy the pound against the euro. In that case the window of opportunity for UK exporters may close as quickly as it opened.
UK house prices
Some recovery in the UK housing market recently might also be seen as a harbinger of higher growth rates, with investment from overseas a factor at the top-end. But equally this is a sign of interest rates now set at dangerously low levels that are bound to result in unsustainable asset price inflation.
That is to say house prices that will come down quickly when interest rates finally go up. However, 2010 is surely a year of two halves for the UK economy: before and after the general election expected in May and by the latest in June.
Whichever party or coalition of parties is elected is going to have to raise taxes and drastically cut public spending and borrowing. That will dampen demand and return the economy to conditions that feel like a recession even if it is technically avoided. For no economy in history has ever devalued its way to growth in the long run.
While the focus within the Eurozone is directed on the highly unlikely succession of Greece, Portugal, Ireland and Spain, perhaps more attention ought to be paid of the far more predictable sterling crisis that might even result in a ditching of the pound sterling.
Times of financial crisis are often periods of forced action and major realignments. It is next to unthinkable that the proud British nation will willingly give up its currency. But if it appeared the best of a bad set of alternatives then it might do so.
What could happen to make things that bad? Well, it is no secret that the UK has by far the worst balance sheet of any major nation with a debt to GDP ratio in a class of its own.
Its response to the global financial crisis – yet more borrowing and printing money – has only made this problem worse and not better. Sterling has been devalued in global financial markets despite the pressure on rival currencies at the same time.
Coming up this year is a possible UK domestic political crisis that could seal the fate of the pound. A hung parliament – with no party commanding an overall majority – would leave the ship of state without a rudder in perilous global currency markets.
The rats would abandon the sinking ship and take sterling down with it. But events may not have to be this dramatic.
Age of austerity
The most likely replacement for Gordon Brown’s discredited crew is a party that will quickly go about slashing UK public spending. Yet without this prop the economy will rapidly sink back into a recession – again hardly a vote of confidence in the national currency.
If it becomes a choice between years of austerity and devaluation and joining the euro then even the most anti-european of europeans will reluctantly begin to look to the European Central Bank for a solution. After all joining with a devalued currency would be a one-off opportunity to secure a once-in-a-generation boost to British productivity.
Would the ECB welcome a bankrupt Britain back into its fold? Given its record for haute politique the ECB would likely take a longer term view and welcome the return of the prodigal son whose gambling in financial markets proved its undoing.
But right now there is a simple and obvious truth that nobody cares to acknowledge: property values around the world are being held up by artificially low interest rates that we know can not last forever, and rental yields are, partly as a consequence, far too low.
Once interest rates again reflect market forces of supply and demand for capital, and not the artificial and always and inevitably temporary intervention of central banks, then the only way for property values to go is down.
For let us not forget the fundamentals of property ownership and mortgages. Namely that when money costs more to borrow then this decreases the ability to pay higher property prices, and exercises downward pressure on real estate prices.
Now when interest rates go up this also has an impact on rental yields. For a start less people will be able to afford to buy so that pushes rents up. Then investors in property will also demand a higher rental yield to pay the higher cost of money, or to at least to compensate them for what their money could be earning in a bank deposit.
But let us step back. Seeing an old friend of 30 years this holiday – who has a large and geographically diversified property portfolio – just got me thinking about long-term price trends in property, and whether we have just past something of a peak in a long-wave of over-valuation.
Over the past few decades the global banking system has worked to make it easier and easier to borrow money. And central banks have been suppressing interest rates for the past 10 years to avoid recessions. This has just kept property prices going up and up.
Yet in real terms we all know that property has become very expensive on any measure. For example, if you look at income after taxation compared to house prices these are still at historic highs, even after the price correction that began in the USA in 2006 and the UK in late 2007.
Now I will admit that US house prices do look far cheaper than a few years ago. The correction from the peak is ongoing, however, and markets generally overcorrect.
Indeed, the great unwinding of the US housing bubble is continuing and the resetting of millions of mortgages over the next couple of years is likely the final debacle of this long saga. But in many places around the world this process is only just getting underway, and if you think in terms of a 30-year up cycle in prices then the down cycle could take quite a number of years too.
Interest rate manipulation
In fact this process looks inevitable. Interest rates around the world are being artificially suppressed by central banks to prop up their economies, and we will not have seen the low point of real estate prices until interest rates have actually peaked. Real estate is always priced most cheaply when interest rates are highest.
That does seem a long way off with the Fed rates at close to zero, and 30-year mortgages at a record low!
Until this correction is done then investors should be weary of real estate. Trying to catch a falling knife is not something to do. Of course, buying a home to live in and avoid rent is different, although if substantial capital value falls are in prospect then renting makes good financial sense, even if your partner has a penchant for home ownership.
But on fundamentals it is hard to argue against low interest rates and low yields as reasons not to buy real estate, and as signals of overvaluation. The time to buy is when prices are low, rents high, and interest rates at the peak. Real estate cycles are simple. There is no reason to get them wrong. But cities may be in different phases of the same long-wave cycle.
And what about Dubai?
In Dubai you might argue that mortgage rates are peaking now, and are likely to fall when a new federally backed home lender is finally agreed. Prices have certainly adjusted downwards in Dubai – with the world’s worst price fall this year – but upcoming supply is a big issue. And rental yields in Dubai are high by global standards, although empty units have a zero yield and that is what over-supply will mean.
This would tend to support the argument that a further correction in prices is coming in 2010 in Dubai but the bottom in this market could be closer than some think.