Among the recently spotted - ‘House Prices to fall by 33% by 2010’, ‘Home-owners facing negative equity’, and ‘House prices post biggest fall since 1993’! They are often intended to be dramatic (and sales inducing!) and are usually accompanied with that much clichéd photograph of the same residential street lined with For Sale signs. It always leaves me wondering if these newspapers have secret production designers who have staged a set somewhere or, if the said street does indeed exist, then I shall very much like to find it one day.
While all this talk of large-scale repossessions, falling house prices and negative equity might cause you to skip a heart beat or two, by no means should you allow it to feel like a cardiac arrest. Only a zen-like state, somewhere in between panic and complacency is appropriate. I shall aim to outline below some reasons which would aid in attaining such a state.
There are some obvious differences from the past housing crash of the 1990’s. The plainest to spot is the disparity between base interest rates which reached 15% then (and my CIO assures me she lived off a pound of mince a week!) but are much lower now at 5%. At this point during my investigation, our resident historian and sage (oh, and fellow investment manager!) - Peter Sleep, pipes up to mention that he clearly remembers paying 14% interest rate on his mortgage. The ensuing history lesson teaches me that tight monetary policy was installed to battle the uncomfortably high levels of inflation of above 8%. However, by mid-1992 inflation had tumbled by half but interest rates were kept artificially high (at 10%) to ensure Britain’s inclusion in the EMU. This implies that house prices may have been more depressed during the last crisis than they would have been without the double digit base rates. I am sure a broad spectrum of this column’s readers is all too familiar with sky high interest rates, but for many others this may seem unimaginable. And hopefully that shall remain the case for many a time to come! Interest rates are seen as doubtful to repeat history and will likely remain low as inflation is currently at a manageable 2.5%, though price pressures remain to the upside. The Bank of England is finding it hard to manoeuvre on rates as it faces more urgent calls to stabilise the housing market.
The 1990’s also saw a clear recession unfortunately timed with an unaffordable housing market. Recession right now seems at arm’s length and more troublesome to our neighbours across the pond. What we are facing is a credit crunch. With regards to that, the Bank of England has this week tried to reassure us that the credit markets have gone too far in their correction and “overstate the losses that will ultimately be felt by the financial system and the economy as a whole”. To what extent this is true remains to be seen but the overriding message seems to be ‘worry not!’
Distress levels are also currently lower than the last crash and repossessions are still some way from earlier peaks of 345,000 homes during a five year period of 1990-95. The number of unemployed has also fallen from 3 million during the height of the previous housing crisis to 843,000 now and is the lowest since the 1970’s. Although house prices are falling, average earnings are rising and averaged nearly 4% in 2007. For those of you that fall in the ‘above average’ category, housing remains very affordable.
It is also worth remembering that house prices are cyclical. We have evidenced years of increasing asset prices on everything from stocks and shares to oil and gold. Over the past decade low interest rates, easier lending criteria and a shortage of homes have contributed to a trebling in house prices. What we are seeing now is a much needed correction. So if you are as tired as I am of reading about it on your morning commute, now may perhaps be the best time to pick up a novel!
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And finally……… Globalisation may have been taken a step too far this week where Indians are concerned. American style burger bars, café culture and MTV have been a big hit but its cheer leaders have caused quite the controversy at the Indian Premier League - the newly launched cricket tournament based on the TwentyTwenty format. Conservative Indians have objected to their skimpy outfits and have been asked to cover up. Presumably they have now been handed a transparent wet sari as seen in many a Bollywood movie! Also a big shout out to my as yet undefeated home team – the Chennai Kings!
Have a good weekend,
Aparna Ram
Research Analyst