Fear and the Falling Housing Market
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Trading Features / Strategies from Simon Denham of Capital Spreads.
As you can see in today’s Spread Trading article we are looking to open FTSE 100 higher again, "as the effects of the Fed’s bail out of Bear Stearns and the lack of any really bad piece of news continues to bolster the Financial Sector and therefore (in the current situation) the rest of the indices component parts".
It is difficult to not to think of the current situation as a sort of ‘phoney war’ on the economic front line. After the initial bursts of activity over the past seven or eight months as the banks have been pummeled you could be forgiven for thinking ‘crisis what crisis’. Aside from the general squeeze on incomes (fuel, food, mortgage costs etc) the average wage earner will genuinely feel in no worse (or better) a situation than he was a year or two ago. And the fact that his/her house has not increased in value much in the period will only be of ancillary worry, after all you have to live somewhere.
The overriding factor that builds fear of the future is employment prospects. Up to now, this crucial lynch pin in the psyche of every employee has held firm as jobs have increased month by month, year on year throughout the last decade. We might fear for the quality, or in fact ‘reality’ (in the case of some public sector roles), but this has not impacted the general impression of ‘the man on the street’ that Labour and Gordon Brown have delivered a pretty good product. Whilst the Tories might revel in their large majority in opinion polls, the fact is that after eleven years people will always grumble but are often unwilling to change (remember John Major’s unexpected victory in 1992).
Unfortunately for the economy, much of the growth has been built upon some pretty shoddy foundations. With a Treasury that seems to consider robbing Peter to pay Paul as a sound fiscal stance, at some point the dead weight of much of the service and government sectors must topple the whole structure. Much of the expansion of the past decade has been built and financed by the rise in housing values as low earners have suddenly found themselves ‘well off’ and many middle income families are now, apparently, millionaires. Many have borrowed against the rising values of their property and whilst I would always argue that a property purchase is (in effect) a long term savings project this theory is defeated if the purchaser then re-mortgages merely to fund a new car or holiday.
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With inflation now (depending on how you calculate it) somewhere between 2.5% and 4% pc, if houses are now unchanged in value on last year they are in effect worth less (4% less). Of course, with mortgage rates squeezing higher whatever the Bank of England does with the base rate the affordability for anyone buying over the past two years must be a very difficult equation to justify. Over the past decades it has been the very bottom rung of the housing market that has propped up the rest (once on the ladder any further increases in value start to work in your favour rather than against you). Now that banks have started to demand 5% to 10% as a minimum deposit and have started to wipe out many of the teaser rates for ‘first time buyers’ this bottom tier has suddenly shifted beyond the reach of most. Soon builders will have to start cutting the prices of their starter homes/flats and the whole daisy chain could reverse as each rung feels the effects of the one below it.
It is the fear of what a falling housing market will do to the remainder of the economy that is filling the minds of the Treasury and the BOE at this time. Without the impetus of virtually free money being spent on everything from Benidorm to Jacuzzis the service sector will begin to look very fragile indeed and it cannot be long before the Phoney War of the last few months starts to gear up in earnest into a full blown conflict.
This is not necessarily terrible for the Equity markets, with the lure of the easy pickings from the property sector out of the way investors may very well turn back to the more usual forms of saving, Bonds, Banks and Shares.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Fear and the Falling Housing Market' edited by SD, updated 07-Apr-08
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