Wednesday, August 15, 2007
Dovish minutes, benign earnings
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee did not even contemplate a rate rise in its meeting earlier this month and members have no view on whether rates need to rise further. That is considerably more dovish than the inflation report, which pointed to a rise to 6%. Perhaps we should have listeneed a little more closely to Mervyn King when he said the inflation report gave no signal on interest rates. Details of the minutes here.

Meanwhile, average earnings growth continued extraordinarily benign - just 3.3%.

Comments

Hi

Seems Danny has been prooved right twice this week

1) The cut in interest rates in 2005, lead to the CPI being 1.9%
2) Wages have been benign just as he -Dispite doubts from other members of the MPC- said they would be.

Posted by: kingofnowhere at August 15, 2007 09:45 PM

David, we are in the midst of a market correction caused by the sub prime crisis.

Do you still hold to your view that 1) there has not been a property crash in the US? 2) That the UK property market is not exposed to the same kind of problems?

It appears that prices are falling sharply now in the US. With credit conditions tightening to exacerbate the fall. The uS market is soft and sweet compared to the UK. Our prices are twice as high. Anyone that wants a property can buy one on tick in UK Plc.

Is it time for an honest re-evaluation of the pitfalls facing our debt-based, property-based economy?

Posted by: t gumbrell at August 16, 2007 11:38 PM

David - going back to our earlier discussion, this was in bloomberg today - "Lenders across the country are providing fewer mortgages as the housing-industry slump deepens. U.S. home prices will fall this year, the first annual decline since the Great Depression of the 1930s, according to the National Association of Realtors, based in Chicago."

You countered me earlier, and said that prices had fallen in the US on several previous down-turns, but I have seen lots of reports that this is the first national price fall since the depression:are you sure your info is correct?

Posted by: t gumbrell at August 16, 2007 11:51 PM

The crisis in financial markets, as you know, goes well beyond subprime, though plainly has its origins in it. Has the US housing market crashed? In terms of activity, yes. In terms of prices, no. While there are big falls in some areas, national house prices are only marginally lower than a year ago. But then, as you say, falling house prices are rare in the US.

On your specific data point. I was saying on the site some months ago that house prices in the US hadn't fallen nationally since the 1930s. Then I came across some figures - which I can't now track down - suggesting they did so in the early 1990s. My latest response to you on this was that there had been plenty of significant real house price falls in the US in the post-war period but that nominal price falls, as in the UK, were very rare. The consensus now is that this is the sharpest fall in activity since the early 1990s, but the first fall in prices, if sustained, since the 1930s.

In terms of the UK housing market, the risk is an indirect one. If this turbulence were to seriously impact on the economy, house prices could be vulnerable. As I've said repeatedly, house prices only fall in the UK in recessions, and then not in all recessions. And - before anybody jumps in - the UK housing market does not lead us into recessions.

Posted by: David Smith at August 17, 2007 10:06 AM

UK sub-prime is alive and kicking

6x income lending multiples
Lie to buy self-cert mortgages (as exposed by Panorama)
Interest only mortgages

UK mortgage arrears, re-possessions and IVA's are all rising. The problem will only get worse as interest rates rise due to Chinese wage inflation, peak oil, climate change etc. Expect UK banks and building societies that have lent irresponsibly to go to the wall as more and more borrowers default. The credit crunch has only just started.

What we are now seeing is then end of a monster credit bubble that will affect the whole of the economy, not just the housing market. The result will be a severe recession / depression.

Posted by: Nigel Watson at August 17, 2007 11:38 AM

David - thanks for your comprehensive response. I appreciate your admission on US house prices. The latest figures I have seen suggest that nominal price falls in the US are c. 10% now. If you factor out the hidden non-cash incentives, the figure would be higher. Over 18 months, that's a real price fall of perhaps 16%.

I think it is now becoming obvious that the US property crash will soon be seen as the worst since the depression on most bases. The crash has occurred in the total and utter absence of any of the three factors you have highlighted as being necessary conditions. The crash is ocurring because a giant credit bubble grew beyond its sustainable volume, and popped of its own accord.

Nigel Watson - On balance I tend to agree with you. I think there is a high probabilty that the UK sub prime sector is worse than that in the US when all the dodgy loan platforms are looked at together. This is why have been asking David and others to identify any reliable comparable stats on this issue. Our property prices make US prices look ridiculously cheap.

The UK will be picked out by the markets as being the economy most built on debt, property, speculation, and credit. Sterling is already taking a hit, and this will cause inflation to shoot up unexpectedly, making it very difficult for the Bank to cut rates to ease the crisis that is now gaining serious momentum.

The Sub prime lenders in the UK are already closing up shop. Line of credit to mortgage lenders are becoming strained. The conditions are now surely in place for a property correction to take place in the UK in the absence of a recession for the first time in our history.

If that happens, it might also be the first time in our history that the property market leads the country into a recession. It would be one of the deepest and longest recessions ever experienced in the UK.

The boom is over.


Posted by: t gumbrell at August 17, 2007 12:07 PM

No time to respond to this today, though I disagree with much of it. But show me a reputable index showing US house prices - new and existing - are down by 10% on a year ago.

Posted by: David Smith at August 17, 2007 12:51 PM

Before I sign off for the day, I've found that source of falling house prices in 1991 - it was the Case-Shillerindex. This is from their latest commentary:

New York, July 31, 2007 – Data through May 2007, released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, shows the annual growth rate in prices of existing single family homes across the United States continue their decline, marking their 18th consecutive decline in the growth rate, beginning in December 2005.

The chart above (omitted), depicting the annual returns of the 10-City Composite and the 20-City Composite shows continued negative annual returns. The 10-City Composite’s annual decline of 3.4% is at levels not seen since the summer of 1991. The 20-City Composite’s annual decline is 2.8%.

“At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “Year-over-year price returns are continuing to either move deeper into negative territory or experience persistent diminishing returns. If there is any positive news in these numbers, it may be that in both May and April eight of the 20 markets showed positive monthly growth rates. This compares to only one or two of the 20 in the late winter and early spring. We need a few more months of data, however, to determine if this is the beginning of a national turnaround, since the national trend is still at a sharp deceleration.”

Posted by: David Smith at August 17, 2007 01:07 PM

Hi David

The S&P Schiller index is what you are after, and it shows falling in the 1990.

http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_May1235.xls

Don't know if this will work, but is shows US house prices falling from USD82.44 to US$75. 83 about the same time as our crash

October 1989 82.44
November 1989 82.43
December 1989 82.35
January 1990 82.29
February 1990 82.15
March 1990 82.02
April 1990 82.05
May 1990 82.01
June 1990 82.19
July 1990 82.10
August 1990 81.86
September 1990 81.39
October 1990 80.84
November 1990 80.09
December 1990 79.38
January 1991 78.53
February 1991 77.77
March 1991 77.00
April 1991 76.86
May 1991 77.31
June 1991 78.02
July 1991 78.61
August 1991 78.93
September 1991 78.88
October 1991 78.68
November 1991 78.31
December 1991 77.99
January 1992 77.74
February 1992 77.51
March 1992 77.31
April 1992 77.36
May 1992 77.62
June 1992 77.94
July 1992 77.95
August 1992 77.99
September 1992 77.76
October 1992 77.45
November 1992 77.09
December 1992 76.68
January 1993 76.56
February 1993 76.28
March 1993 75.91
April 1993 75.83

Posted by: kingofnowhereiii at August 17, 2007 02:12 PM

Thanks - for future reference - do you have the data link?

Posted by: David Smith at August 17, 2007 08:49 PM

Ignore that - you provided it earlier.

Posted by: David Smith at August 17, 2007 08:50 PM

Interesting that it took both the US and UK markets almost exactly the same time to get back to their previous highs - in each case late 1997/early 1998.

Posted by: David Smith at August 17, 2007 09:00 PM

Hi,
The pattern described above seems to be repeated for the individual confidence index in the US stock market:

http://icf.som.yale.edu/confidence.index/CrashIndex.shtml

A Japanese crash index is also reported, but sadly, not a UK one.
Costas

Posted by: Costas Milas at August 17, 2007 09:49 PM
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