Why no one will be buying houses this year
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Welcome back to Money Morning – I hope you had a great Christmas and a happy New Year.
And what a year 2008 promises to be. Of course, no one can predict the future, but even so, there’s an unusual level of trepidation in the air as the pundits and forecasters roll out their predictions for the months ahead.
That’s no surprise. After all, most forecasts are basically extrapolations of existing trends. That’s the fancy term used to describe the fact that most analysts just look at what happened last year, and predict that this year will see more of the same, give or take a few percentage points.
But in 2007, the world economy finally reached a turning point. The happy era of cheap money, soaring asset prices and rampant private equity dealing, is now over. A newer and far less forgiving world awaits us this year.
Ah well – at least we won’t be bored…
As we head into 2008, the optimists among us are still mourning the passing of the happy days before the credit crunch. In the first half of 2007, it was perfectly possible to say things like “sub-prime is a contained problem” and “there’s so much liquidity in the world, it’s hard to see how any one crisis could hurt the global economy” without people laughing in your face.
The second half of the year put a stop to all that, of course. But long-in-the-tooth bull markets – just like long-in-the-tooth bear markets – don’t die easy. There are plenty of people who are still hoping for a grand rebound in the second half of 2008, even if the first half is comparatively miserable.
Blackstone feels the effects of the credit crunch
I don’t buy it. The news over the past couple of days shows that the effects of the credit crunch are still being felt strongly across the world. The big story of New Year’s Day was that private equity giant Blackstone has had to pull out of a $1.8bn deal, after it had trouble securing financing.
The group was set to buy US mortgage and car rental business, PHH, in a joint venture with General Electric. But the deal was set up in March, way before the big crunch. In September, the bankers financing the deal warned that they might not be able to provide all the money requested. The financing hinged in part on the value of the mortgage loans portfolio. While PHH has no subprime exposure, the wider US housing crash of course means that its mortgage portfolio is simply not worth as much as it was at the start of last year.
It’s only the latest deal to fall through, but it won’t be the last. Banks are still trying to sell the debt taken on in other deals. As Iain Dey points out in The Telegraph, some are “now selling leveraged debt at knock-down prices to free up their balance sheets”, with investment banks selling “high-yield bonds and loans for as little as 90 cents in the dollar.”
It’s like the investment banking version of a New Year sale. The banks have all their capital tied up in stock that no one wants, and now they need to clear the shelves before they can buy in more. So it’s little wonder that few of them are keen to back even more debt that they won’t be able to shift.
Meanwhile, there’s no sign that lending conditions will become any easier. Another big story was the news that London Scottish Bank, the subprime lender, may have to cut its dividend and raise fresh capital after the Financial Services Authority ordered it to increase its reserves under the new Basle II banking regulations that came into force yesterday.
Part of LSB’s problem was down to unexpectedly high bad debts in its unsecured lending business. A natural side-effect of having to shore up its reserves is that the group will also have to cut back on new lending. LSB is hardly a major banking group, but its woes just go to show how much trouble could still be stored up in the banking sector, despite its apparent cheapness.
More bad news on the housing market
And lastly, to the UK housing market. The fear has spread as far as the mainstream press now, with gloomy predictions reported across the broadsheets. But the most telling indicator of the rapid turnaround in sentiment was a straw poll I noticed on the thisismoney.co.uk website.
The site asked readers what they thought would happen to house prices in 2008, with a wide range of answers from “they will rise by more than 11%” down to “they will fall by more than 11%”. When I last checked the count, nearly 90% of voters had opted for the worst-case option, and more than 20,000 people had voted.
Obviously these things aren’t scientific – but if anything like that proportion of the population genuinely believes that house prices will have fallen by 10% by this time next year, then there aren’t going to be many people looking to buy houses in 2008.
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Not such a bad thing of course, because banks probably won’t be able to afford to lend to them in any case.
Turning to the wider markets...
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Asia begins the year with losses
London's FTSE 100 ended Monday's half-day session 20 points lower, at 6,456. The benchmark index was also in the red for the year as a whole. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 slipped 7 points to end Monday at 5,614. In Frankfurt, the DAX-30 was closed.
On Wall Street, the Dow Jones closed at 13,264 on Monday, ending the day 101 points in the red but up on the year as a whole, despite registering a 4.5% fall in the fourth quarter. The S&P 500 was down 10 points, at 1,468, ending Q4 3.8% lower. And the tech-heavy Nasdaq closed 22 points lower, and down 1.8% for the quarter.
In Asia, the Hang Seng tracked Wall Street's losses to end the first session of the new year in the red. The Hong Kong index was down 252 points to close at 27,560. The Japanese market was closed today.
Sterling near all-time low against euro
Crude oil had risen to $96.37 this morning, and Brent spot was at $94.48 in London.
Spot gold was last trading at $835.70 this morning, having fallen back from Monday's seven-week high of $843.20. And silver had risen to $14.80.
Turning to the currency market, the pound had fallen to an all-time low against the euro and was last trading at 1.3535, the pound was also down against the dollar at 1.9835. And the dollar was at 0.6823 against the euro and 221.28 against the Japanese yen.
And in London this morning, Alliance and Leicester shares had risen by as much as 11% on reports that it had held takeover talks with Spain's Banco Santander SA. The mortgage bank has fallen 41% in the past six months, making it the UK's worst-performing bank stock.
Finally, our recommended article for today...
My best and worst tips of 2007
- Merryn Somerset Webb looks back over her recommendations of the last twelve months and picks out which went right, which went wrong - and why. For more on why small caps turned out to be a disappointment - plus the star stock that's definitely worth holding on to - read: My best and worst tips of 2007
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