The Halifax House Price Index recorded a 1.9% increase for January, offsetting December's 1.6% decline. In the last 12 months to January that puts the average price at £163,000. This, of course, came as a big surprise given the ten straight monthly price drops that preceded it. Even then, in February 2008, the ‘average’ house price only rose 0.6%. Halifax’s economist, Martin Ellis, admits, the picture is misleading:
Prices in the three months to January compared to the preceding three months, which provides a better indicator of the underlying trend, were 5.1% lower.
“It is always important not to place too much weight on any one month's figures. Historically, house prices have not moved in the same direction month after month even during a pronounced downturn.”
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Alas, despite the bullish column-inches attached to the rise, it appears to be little more than a bear market rally.
Beware the premature bounce
Consumer confidence is at record lows, business confidence is at record lows and, according to Education minister Ed Balls, we’re in the worst recession for 100 years. So whatever you’ve read about “green shoots” or “bottoming out” of the housing market, disregard.
There are broadly two types of buyers in the housing market. Savers with a big lump sum to put into a property and debtors that take out large interest-only mortgages in the hope that prices will improve.
Unfortunately, we are an island inhabited by far more of the latter than the former. According to a recent Money Facts survey, there has been a severe fall in the availability of mortgage products. Figures from the research group suggest a 90% decline, from 15,559 mortgage products at the peak of the market in 2007 to 1,542 products today.
As you can probably guess, the worst afflicted corner of the market is in high borrowing. In 2007 there were over 1,000 90+% mortgage products, for those investors with very little deposit.
Fast forward to the present day and only 113 such mortgage products available. And those that really need them, those with poor credit histories, struggle to have these deals approved. As you can see in the chart below, our economy is not predicated on prudence and saving like the Germans or even the French.
Debt-addicted – On average, UK consumers are highly leveraged
More and more, property investors are being asked to put down 25 – 40% on a new purchase and, until the crisis resolves itself or the bank nationalises the entire banking system that is likely to continue.
This would be a bad time to get into UK property and an even worse time to be buying the shares of UK housebuilders. Alistair Stewart of Dresdner Bank reckons that the latest housing starts – the amount of new homes on which construction has begun – paint a fair picture on the outlook:
“Housing in general and over-geared housebuilders in particular will lurch from crisis to catastrophe during 2009 and possibly well beyond.
“Housing transactions are crashing to post-war lows and we believe new starts will hit the lowest peacetime level since 1920. Some brave souls are predicting a recovery this year. We concur with the late Karen Carpenter: “We’ve only just begun”.”
Sadly, I agree that housing will not bounce in the near term and may not recover for considerably longer than that. Affordability may have improved and interest rates are undoubtedly favourable.
However, unless the British Government is about to step in and become an active player in the housing market we shouldn’t expect a property recovery in the near-term. There is no way that a sector founded on the now defunct ‘leverage economy’ will be the first out of the downturn.
Good investing,
Theo Casey
For The Right Side
Don't jump into renewables... yet
BY THEO CASEY
As we’ve mentioned, President Obama is keen on renewable energy. In the months ahead, investors will be looking to position themselves in the renewable energy markets to be there when it all takes off.
But given recent performance, we know that we need to tread carefully.
Renewables did even worse than the wider market in 2008, falling 60%. For investors that cherry-picked their positions in the last year, this is what a renewables portfolio looked like.
You can see from the graph below, the performance of Europe’s major renewable energy players. And, no, the graph is not upside down.
A bad time to far for renewables…
Source: Citi Investment Research
There will be money flowing into this sector.
But, as we have already mentioned, before we get excited too about the “bounceback” potential of any of these positions, let’s wait for positive signals from US policy, improved availability of finance (still not forthcoming and still expensive) and sustained oil price recovery before jumping into this sector.
The Daily Reckoning – DEPRESSION II... The Horror... coming soon to theatres near you!
BY BILL BONNER
“It’s gone deep. It’s gotten worse,” said the president.
We’ve seen so many shock and horror movies over the years. We recognize the dialogue. But this is no Hollywood thriller. This is real life.
It is like a Netscape News:
“WASHINGTON (AP) - On a single day filled with staggering sums, the Obama administration, Federal Reserve and Senate attacked the deepening economic crisis Tuesday with actions that could throw as much as $3 trillion more in government and private funds into the fight against frozen credit markets and rising joblessness.
“...Wall Street investors sent stocks plunging, objecting that new rescue details from the government were too sparse. The Dow Jones industrials dropped 382 points.
“...shortly after Senate passage of an $838 billion emergency economic stimulus bill cleared the way for talks with the House... Separately, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress, and the Federal Reserve announced it would commit up to $1 trillion to make loans more widely available to consumers.”
GM said it was cutting 10,000 jobs... and reducing executives’ pay.
Fannie and Freddie are likely to need $200 billion more to stay in business, say regulators.
And Tim Geithner’s new bank bailout program may cost $2 trillion.
Meanwhile, practically every business and every family in America is looking for ways to cut costs. Unfortunately, one person’s cost-cutting is another person’s income. So, incomes are going down too. Then, people have to cut costs even more.
“Let’s not mince words... this looks an awful lot like the beginning of the second Great Depression,” says Nobel-prize winning economist Paul Krugman.
Paul Krugman is wrong about a great many things; but he’s right about this. This is not a recession. It’s a depression.
You can read the Daily Reckoning in full here.
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