However, it all proved too elusive and many endured a sporting weekend of what can only be called a hatrick of horrors. Sadly City workers who came into work on Monday morning hoping to put said weekend (and perhaps losses at the betting shop!) behind them were treated to another trio of horrors – only this time concerning UK housing.
Firstly the IMF, in a report published in Washington, rained down on that great British institution otherwise known UK housing. In newspaper headlines that screamed something to the effect of “Property prices in Britain to crash” accompanied with that much clichéd photograph of a street lined with ‘For Sale’ signs, it was reported the IMF viewed property prices in the UK to be overvalued by as much as 40% and expected an inevitable correction that could prove much deeper than the current and ongoing one Stateside.
Although probably not as controversial as rugby’s disallowed try, it did attempt to shake many out of their slumberous thinking of my-property-price-will-keep-rising-forever! The IMF did not predict a crash in British property but merely stated that prices here have risen 40% more than can be explained by “relative movements in incomes, population or interest rates”. Perhaps a large part of this 40% could be explained with the British public’s obsession with bricks and mortar? Gone are the days of every woman’s home is her castle, it is now much more her investment portfolio and frequently used to top up her pension! This could indeed go some way to explaining why the average house prices have risen from £58,403 in 1997, according to the Nationwide building society to £172,065 at the end of last year with recent estimates from other lenders have put the average house price at more than £200,000. This illustrates how vulnerable the UK potentially is to a shakeout if the forces stimulating housing demand runs out of steam.
The second blow came through from our very own Old Lady of Threadneedle Street which, on the outlook for the real economy, echoed IMF’s view on housing but played down the possibility of an impending crash. The central bank in its Financial Stability Report, pointed out a host of “vulnerable UK households” including “adverse credit households, recent first-time buyers and some buy-to-let investors”. The bank estimates that adverse credit households will experience a 2.5% interest rate “shock”. For the average homeowner, this represents an estimated £360 extra outgoing a month, leading to sub-prime borrowers falling further behind in their payments, an increase in arrears, poorer domestic finance and lower consumer spending.
For recent first time buyers, the bank highlighted that the increase in property values alongside higher interest rates has resulted in interest payments reaching 20% of his or her average income, very close to all time highs. And finally for the buy-to-let investor, the bank warned that net rental yields remained negative and is 2.3% lower than the mortgage rate in Q3 2007. All three factors could further serve to ramp up the number of ‘for sale’ signs, not to mention an increase in earlier cited clichéd photographs!.and seriously undermine the state of UK housing even further.
They say bad news always comes in threes and it certainly did when Merrill shocked the market with news that it wrote off $7.9bn of mortgage related losses, significantly greater than the $4.5bn in write downs estimated not three weeks ago. The investment bank explained the increase in planned write offs by suggesting that it re-examined its holdings and decided to value them more conservatively. This begs the question – Just when you thought all was safe again, are we going to have a slow motion replay of Northern Rock all over again?!
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And finally……….As I get ready to step out for lunch and shall inevitably end up ordering that over-the-top size pasta portion that is too often much too big for my small appetite, I am reminded of the grey squirrel who hit recently hit the BBC website for much the same reason of ‘my eyes are bigger than my stomach’. Said squirrel had to be rescued from a bird feeder as it had gorged on so many nuts it could not squeeze back out through the bars. At just over six and a half stone, I probably have a fair way to go to find myself stuck in such a predicament!
Have a good week,
Aparna Ram
Research Analyst
Seven Investment Management