Houseprices:stillfalling

InMayoflastyear,Iwarnedthatthehousingbubblewascomingtoanendandthenextstepwasahouse-pricebust。

Eighteenmonthsonandhousepriceshavecertainlystoppedgoingup;infact,somemeasureshavehadthemfallingmonth-on-monthformorethanayearnow。

Still,lastmonth,Nationwidereportedhousepriceswerestillup3。

2%inOctoberoverthesamemonthlastyear。

Asaresult,somecommentatorshavealreadydecidedthecorrectionisover。

But,astheNationwidehousepricegrowthchartbelowshows,onlyasupremeoptimistwouldcallthebottominthemarketontheevidenceofsuchatinyblipinthedata。

Evenifhousepricesreallyarerisingat3。

2%ayear(thedatafrommortgagelendersisabitconflicted),theyarestillrisingatlessthantherateofwageinflation,sonotexactlyprovidingthecapitalgrowththathomeownershavecometoregardastheirright。

Non-existentcapitalgrowthmeansthat,forbuy-to-letinvestors,atleast,themathematicsofcost-of-carrystartlookingverynasty。

Thecostofcarryisthetermusedinfinancialmarketstocoverthecostsinvolvedintakingaposition。

Inproperty,thesecostsarethemortgagerateonthedebt,fees,voidperiods,commissionsandmaintenance。

Debtservicecostsaloneexceed5%,whereasrentalyieldsinmostcitiesarenotmuchmorethan4。

5%。

ThereareevensomeflatstoletinLondon’sDocklandsadvertisedongrossyieldsaslowas3。

67%。

Aftercosts,agrossyieldof4。

5%willnetyouonlyalittlemorethan3%。

With£500goingoutforevery£300comingin,thesmartmoney(ifthereisanyleftinthemarket)muststartsellingsoon。

Consumption:theendofshopping

Thesharpslowdownintherateofhouse-priceappreciationhasalreadyhithouseholds’abilitytowithdrawequityfromtheirhomes。

AndasMortgageEquityWithdrawal(MEW)hasnose-dived,retailspendinghashititsworstpatchsincerecordsbegan。

ItseemsamazingnowtothinkthattheBankofEngland’sMonetaryPolicyCommittee(MPC)wasarguingayearagothattherelationshipbetweenMEWandconsumptionhadbrokendown,withtheobviousimplicationthatthesharpdropintheformershouldhavehadnomeasurableimpactonthelatter。

Well,wenowknowthatideatobehokum:evenastabilisationofhousepriceshasmeantfallingconsumption。

Thismattersbecauseconsumptionmakesupabouttwo-thirdsofGDP,soanythingthathassuchadramaticeffectonspendingcannotbutknockeconomic-growthforecaststoo。

Sureenough,GordonBrown’spie-in-the-skygrowthforecastof3。

5%forthisyearcouldinfactendupbeingundershotbyasmuchas2%,makinghisunrestrainedspendingplanslookdangerouslyirresponsible。

Ifgovernmentsspendwaybeyondtheirrevenues,theshortfallhastobeborrowed。

Governmentsborrowbysellinggilts,butanincreaseinthesupplyofbondsforanygivendemandrequiresahighercoupon(effectivelyahigherinterestrate)。

Thisinturnslowstheeconomyyetfurther。

Currently,thechancellor’sgettingabitofaget-out-of-jail-freecardfromincreasedoiltaxrevenuesonthebackofoilpricesgoingup,butwhilethatmaybemakinghisdebtforecastslooklessstupid,itisn’tdoingmuchforhisgrowthforecasts,particularlygivenhowhardtherestofusarebeinghitbyhigherpricesatthepumpandhigherfuelbillsthiswinter。

Thepoundandinterestrates

Oneimmediateconsequenceoftheslowdowningrowthistheeffectonthepound,whichhasbeenfallingprettysteadilyallyear。

Aweakpoundpushesupthecostofimportedgoodsandsonudgesupinflation(nowatanine-yearhigh)。

ThismakestheBankofEngland’sjobverydifficult。

Oratleastitwoulddoif,“asanumberofpeople”havebeensaying,saidMervynKinglastmonth,theBankwas“targetingtotaldemand,orevenmoreoddly,retailsalesandconsumerspending”。

Which,ofcourse,asKingconfirmed,itisn’t。

Instead,itsremitistokeepinflationascloselyaspossibleto2%。

CPIisalreadyrunningat2。

3%,whichmaynotsoundtooexciting,butrememberthatlasttimeinflationwasatthislevel,baserateswerearound6%。

Nownooneislookingforratestomoveto6%,butthisdoesmeanthattheMPCcan’tcutratestoheadofffallingconsumptionandgrowth。

Theresultofthisisthatshort-terminterestratesarenowhigherthanlong-termgiltyields。

Thisiscalledaninvertedyieldcurveandisquiteunusual(yieldsaresupposedtogethigherasthedurationoftheloanorbondincreasesbecause,allotherthingsbeingequal,thelongeryouhavetowaittogetyourmoneyback,theriskieritis)。

Whatthismeansisthatthebondmarketthinksshort-termrateswillhavetoremainsticky–becauseofcurrencyandinflationworries–eveninthefaceofworseningeconomicgrowth,whichinturnmeansthatlatertherewillbeaseriousdownturnthatreallywillrequiremuchlowerrates。

AccordingtoUSFederalReservestudiesintheUS,aninvertedyieldcurveisthemostreliableleadindicatorofrecessiontheyknowof。

Inflationandoil

Givenallthis,shouldn’ttheBankofEnglandtryandboosttheeconomywithlowerratesnow?

Maybe,butasKingsays,it’snotwhatthey’vebeenchargedwithdoing。

TheBanktargetsinflationandthepoundisn’ttheonlythingpushingthatup。

Oilpriceshavebeenrisingsteadilynowforyearsand,althoughatechnicalsell-offsincetheendofAugusthastakentheblackstuffofftheeveningnews,there’severyreasontoexpectittostartrallyingagainsoon。

Somepeopletakecomfortfromthefactthatoilpriceshavefallenasthenorthernhemispherehasgoneintoitswinterwhendemandforheatingoilpicksup。

Surelythismeanssupplyisagainsufficienttomeetdemand,theysay。

Unfortunately,thismisapprehensionisduetoaconfusionoverthetwobasictypesofcrudeoil。

Heatingoilforwinteruseiscalledheavy,sourcrude。

Thistypeofoilisnotinanymeaningfulshortsupply。

Whatwearetalkingaboutwhenwesay“theoilprice”arethelight,sweetcrudes,suchasWestTexasIntermediate(WTI),whicharerefinedintoperformancefuelssuchasgasoline。

LightsweetcrudeshaveaseasonaltroughindemandatthistimeofyearandthepriceoftenhitsitslowestpointaroundNovember,beforepickingupagain。

ThepeakindemandforthelikesofWTIisintheearlysummer。

Oilmaybelowtoday,butthere’sstillnothingtosuggestitwon’tbe$70byJune。

It’smuchthesamestorywithothercommodities。

TheCommoditiesResearchBureau(CRB)indexofallcommoditypriceshasalsogonequietinthelastcoupleofmonths,buttherehasbeennothingyettosuggestthisisanythingbutabriefrespitebeforewesetoffagain。

Leadingmetals,suchascopperandgold,havealreadyrecentlymadenewhighs,suggestingthenextmovefortheindexasawholewillalsobeup。

Thetrendsaren’tchanging

Westartedtheyearsayinghousepriceswouldcomeoffinsomestyle。

Well,thathasn’thappenedyet,butonlyabravemanwouldsayitwon’t,giventhecollapseingrowth。

However,tosomeextentthedamageisalreadydoneasthesharpfallinMEWhashitconsumptionhard。

Inturn,GordonBrown’seconomicgrowthforecastsareintatters。

SomecommentatorswerehopingthatbynowtheBankofEnglandwouldhavecutratesaggressivelytogetdemandbackontrack。

However,aswehavelongargued,ratecutsareoftentrickyatthisstageofthecycle,thankstoinflationarypressures。

Thistime,theseworrieshavebeenexacerbatedbytheriseintheoilprice。

AheadoftheOctobermeetingoftheMPC,analystswereunitedinexpectingaratecutattheNovembermeeting。

Sincethen,theconsensushasmovedandnow20%ofanalystssurveyedbyReuterssaidthenextmoveinrateswouldbeup。

Iseelittleatthemomenttochangethetrendswe’vealreadyseenestablished。

Theeconomywilldisappoint,inflationwillremainstubbornandbaserateswillverypossiblyhavetostartrisingagainuntilthecurrencyisfirmenoughtokeepinflationatbay。

ButIexpectsterlingwillweakenfurtherandanyincreasesinunemploymentwillonlydeepenthegloomforthestretchedhomeowners,whosemortgageratesmaygoupattheworstpossibletime。

I’mgladI’mnotGordonBrown。

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