Tuesday, August 23, 2011

UK House Prices - Update

We have entered an interesting stage of the housing market with many factors beginning to influence different segments.

Nominal Prices vs Real Prices

Stagnant nominal prices mask continued falls in real terms. Pegged against gold, silver, corn etc then house prices continue downwards. However, most of us are not very adept in profiting from this dynamic. It is easier and appears less risky to trade the debt/house price dynamic. By this I mean that when most of us buy a house we are hoping that either the value of the house goes up or the real value of our debt goes down (or both). This speculation seems lower risk as we all have to pay rent if we do not buy so if rent for the next 12 months costs £8k then as long as our house does not go down by more than this we are similarly well off. There is more to it that this including interest payments or opportunity cost of capital but never the less it seems less scary to most than trading corn etfs.

First Time Buyers

This group is going to continue to struggle but will start to find opportunities. Whilst we will continue to hear about the prime London market raging, the blocks of new empty flats in towns outside the capital are more dependent on first time buyers and they should grind downwards. The bad news that anything with a bit of character like a two bed terraced cottage may be snapped up by a retiring baby boomer who can pay big bucks.

Baby Boomers

In many areas of the country, attractive properties for these guys moving out of London, Manchester etc will stay beyond the reach of most younger buyers. There are big numbers of these buyers coming through for the next ten years who have pretty big pockets and there probably aren't enough of the right kinds of houses around to satisfy demand. Foreign money pours into London to ensure that they can continue to achieve big values for their city houses.

Concentration of Wealth to Few

This trend shows no sign of slowing. This means that big country piles, adorable second homes, and mansions in London will get further out of the reach of most of us. There are a small number of people now making vast sums and can afford third and fourth homes whilst most of the population struggle. This type of buyer will do nothing to prop up the price of an inner city flat but will for desirable rural and prime city locations.

Safe Haven Status

Precious metals, treasury bonds and agricultural land are all benefiting from safe haven demand. Houses are still seen as a relatively safe investment and for good reason. They are a physical asset, as opposed to paper, and unlike gold produce a yield which over time tends to keep up with inflation.

A cash saver currently may get a yield of 2-3% but with inflation the capital is eroded by inflation at over 4% to leave a certain loss of 2% per annum. With increased uncertainty in the economy rather than holding off buying a property there is some sense in buying real estate.

What could go wrong?

The country debt woes in Europe and US are almost certainly going to lead to lenders losing out. Even if there are not absolute defaults there will surely be negotiated write downs. Countries, compared to consumers and companies who get into dire straights, can always raise debt after defaults but investors demand a higher risk premium. It seems unlikely that some European countries can postpone this debt default line in the way that Japan has managed since the 80's - Japan has had domestic savers willing to continually buy their country's debt. Higher interest rates could be something that no governments or central bank want but can do little to prevent happening. Maybe further quantative easing will avoid this but this is by no means certain. Interest rates are capable of climbing much higher and much quicker than market expectations. This has to be the the biggest cloud hanging over the housing market today.

Thursday, November 18, 2010

UK Recesson - Was That It?

Recessions are good. Not because of the human turmoil and unemployment they produce but because they are the only economic mechanism which correct poor resource allocation. Without this periodic "house-cleaning" nations accumulate wasteful companies, industries and institutions. The resulting inferior productivity costs jobs and wealth. It also engages workers in activity which are unsustainable. Arguably they are punished the hardest.

Here in the UK, our recession has appeared extremely mild so far as compared to the US.

Two Bullets - One to Come

We have actually had a bigger hit than most British people feel directly. Whilst nominal GDP has dipped mildly, "real" GDP has plunged massively. I believe the political definition of recessions is nonsensical. Nominal GDP does not take into consideration the massive loss of wealth of the nation from its currency devaluing.

Sterling has taken a caning against pretty much all currencies since 2007. It has almost halved against the Swiss Franc. Even against the much maligned USD, we are nearly 25% worse off. This does put the country in a hole - don't kid yourself that we are coming out of recession because there is 1% nominal GDP growth. If a British company wants to invest/enter a new international market, it will be 20-30% more expensive to so so than three years ago, just because of the weak pound. Put another way, that company has become 20-30% poorer on the international stage. The fall back position we are left with is to try and export our way out of trouble from a domestic base as now everything we produce is cheaper in a global market. Hopefully this will reduce our trade imbalance and help the country reduce its debt. If this happens, then Stirling will start to strengthen and real GDP can increase. That's quite a slog ahead and will take much longer than nominal GDP growth figures imply.

Second Bullet To Come

The second recessionary knock is naturally going to be the job losses in the public sector. It is difficult to see the private sector creating sufficient jobs next year to absorb these workers. Most concerning is that many of these workers have developed skills solely for the public sector which have little application in the private sector. Too many workers have been engaged in activity that just was not sustainable and it will take many years to integrate them into productive society.

My Beef With Nominal GDP Figures

Simply, it enables politicians to claim the economy is far healthier than it really is. It masks the fact that our economy plunged in 2007, and it will not recover for many years. Consumers increasingly feel this reality as they now have virtually no discretionary income due to soaring food and energy prices.