MoneyWeek roundup: Why house prices have to keep falling
James McKeigue Aug 17, 2012
With the euro crisis taking a well-deserved summer break from the business pages markets enjoyed another optimistic week. The FTSE100 is back up near 12-month highs.
But there’s plenty wrong under the surface, says Phil Oakley. The most serious problem is inflated house prices: “High house prices, far from being a good thing, are stopping the economy from getting back on track. They suck money away from wealth-creating projects. They increase the cost of living, and make the UK an expensive place to do business.”
Unfortunately this situation is not going to change soon, as both the government and the Bank of England seem determined to keep prices high.
The reason? “High house prices are the main thing keeping the UK’s frail banking system afloat. A fresh crash in property prices would push up bad loans and hurt banks’ balance sheets.”
The Bank of England and the government might have good intentions, but their actions are causing real damage. That’s because the banks “are using the slack that’s been cut for them to build more buffers so they can cope with a day of reckoning. The trouble is, one of the best ways to do this is to cut back on lending.
“This means that good businesses that could create wealth and more jobs don’t get the funds they need. Either that, or any finance on offer costs too much.”
Phil thinks that, “no matter how painful it would be, we need houses to fall sharply in price”.
It might not happen soon but it will happen eventually. “The latest survey data suggests to us that the UK housing market is like a tyre with a slow puncture. You can keep putting air into it for a while, but no matter what you do, eventually it’s going to go down a lot.”
Moreover, the Bank of England can’t print money to manipulate the bond markets forever. Eventually there will be a bond market correction or a currency problem – or both, says Phil. The result? “Higher interest rates and lower house prices.” That might not sound good if you own a house, but “as far as we are concerned, the sooner this happens, the sooner the UK economy can recover”.
A strategy to weather euro gloom
The eurozone crisis might not be in the news, but Dr Mike Tubbs, author of the Research Investments newsletter, doesn’t think we can stop worrying.
Things might seem calm, says Mike in Tuesday’s edition, but behind the scenes problems are brewing. For example, there are “renewed concerns about Greece after its prime minister asked if the country’s agreed cuts could be spread over four years rather than the previously agreed two.” Part of the problem is the Greeks don’t know how far behind the rest of Europe they have fallen.
Mike quotes a Pew Research Centre finding: “Pew found that every one of the eight largest EU nations ranks Germany as the hardest working – except for Greece, which ranks itself as the hardest working. But five of the eight rank Greece as the least hardworking!”
Fortunately, amidst all this euro gloom Mike has developed a way to improve your investment performance. It’s an interesting strategy that I haven’t seen elsewhere, and well worth five minutes of your time. Click here to read more about it.
Why are we getting less productive?
Britain’s recent GDP figures are something of a mystery, says Merryn Somerset-Webb in her blog.
“We are in recession – or so we are told (GDP fell 0.7% in the last quarter). Yet the private sector appears to be in great shape – it has created over a million new jobs since 2010 and unemployment has now fallen for four months in a row. Total employment is now a mere 0.3% below its pre-crisis peak despite the fact that on official numbers output is 4.5% below the previous numbers.”
“So what’s going on”? asks Merryn. In many ways it depends if you’re an optimist or a pessimist. The optimist camp, led by Tom Miers of the Scotsman, thinks that the economy is doing better than GDP figures suggest. “Exports, services and manufacturing have all recorded decent figures in recent months”, says Tom. Add in positive employment numbers, good business surveys and a slow in the rise of the CPI, and it becomes clear that the economy is not contracting. It is growing.
“This makes some sense”, says Merryn. “But there might be another way of explaining the rise in employment and fall in GDP – falling productivity.” Optimists think this unlikely, given the shift (in the employment mix) from the public to the private sector. But pessimists, such as Nick Reid, think they have the answer.
Whether you approve of its particular brand of productivity or not, says Nick, “City activity is highly productive”, and in plain GDP terms one investment banker operating in a good environment is many times as productive as, say, a car plant worker.
So, concludes Merryn, “with some types of City activity knocking around a ten-year low, it might be no wonder that, in statistical terms at least, our productivity has fallen”. Of course, it might not matter, as you may feel that the City generates “one kind of production we can do without”. But “the idea could at least explain why we are employing more people but they are producing less”.
Readers were quick to add their views.
‘Jimtaylor’ notes “all jobs are not equal”. For example, “if someone loses a job earning e.g. £30k p.a. in the manufacturing industry due to cutbacks and then they find a job in the service sector earning £15k, they are still employed so the employment figures hold up, but they are earing less and so have less to spend so the GDP reduces.”
Meanwhile ‘Kent Man’ reasons that “if we have had loads of pretend growth in financial services, then we must have had some pretend increases in GDP”.
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A great internet infrastructure play
Just because the UK economy is struggling, doesn’t mean there aren’t great investment opportunities out there. Paul Hill is always on the look out for companies with good prospects, and in Tuesday’s edition of his Precision Guided Investments newsletter he explained his latest discovery.
“For decades, the average British family would indulge in a daily ritual”, says Hill. “We’d gather each night around a small box in our front room. We would sit silently as the box relayed programmes from the national broadcaster. And a thing called the TV guide would lay out the choices for us.”
But life’s not like that any more, says Paul: “The fact is that the way we consume entertainment has simply changed forever. In the morning, we flick through the news on our smartphones almost as soon as we wake up. Over lunch, we watch online videos. And at night, millions of people across the country stream TV and movies to their laptops.”
That might be sad if you’re a nostalgic sort, but this shift in our viewing patterns has created massive investment potential. “All this activity is placing tremendous demands on our telecom infrastructure. Cisco estimates that global web traffic will grow by an average of 29% a year between 2011 and 2016. Meanwhile, mobile data is set to soar at a pace of 78% per year!”
That places our existing internet infrastructure under massive strain says Paul. There are two solutions to the problem. One is to “build out the infrastructure. To dig up the roads, lay more cables, and to invest in more routers. But this can be very expensive, particularly at a time when most internet service providers (ISPs) are being forced to cut back in light of the tough macro backdrop”.
Another option looks far more cost effective: 'deep packet inspection' (DPI) technology. “In a nutshell, DPI technology can be used as a sort of traffic controller for the internet. And it is proving hugely popular with struggling ISPs. In fact the DPI sector is expected to expand on average by 43% a year between 2010-15, according to Infonetics.”
Paul has found a company that he thinks should benefit from the move to DPI. I can’t give away his tip here, but if you think you’d be interested in reading Paul’s newsletter more regularly, you can click here for more details.
Zombie banks are killing the economy
MoneyWeek's deputy editor, Tim Bennett, has just posted his latest video tutorial. The topic is ‘zombie banks’: they are sapping the life out of the global economy. Tim explains what they are, why they are allowed to exist and why they must be allowed to die.
A winning income strategy
And finally, before I go, I’d like to point you in the direction of MoneyWeek’s latest investment report. For a long-time we’ve warned that stock markets will continue to be choppy, and that building income is the best way to get a good return on your investments. Well, now we’ve gone a step further. Our best writers and analysts have pooled their thoughts and developed a new income strategy. It’s probably best if I let MoneyWeek editor John Stepek explain.
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