As a complement to
cskendrick's
must read diary on coming changes on credit card payments, and my own diary yesterday about the fact that
because of Bush's policies, US consumers lack a financial cushion to face the coming oil price shocks, here are some more news on the real estate front:
The weakest link (The Economist, 14 July 2005)
WHY in recent years have consumers in some countries spent as if there is no tomorrow, while others have kept their wallets firmly shut? The chart suggests that house prices have played a big role. It is surely no coincidence that the only two countries where house prices have fallen--Japan and Germany--have seen very weak consumer spending, while those with the strongest housing booms--Britain, Australia and Spain--have binged.
London House Prices Fall, Prompting U.K. Slowdown, Buyer Bribes (Bloomberg, via Fran)
Christian Holland, a fund manager at Cavendish Asset Management in London, set the asking price for his three-bedroom house in the southwest of the U.K. capital at 519,000 pounds ($940,000). Four months and two price cuts later, he's happy to accept an even lower offer.
``It's for 450,000 and I'm taking it,'' says Holland, 37, of the single bid he's received. ``The market is dreadful.''
London house prices, which more than tripled in the 10 years through June 2004, are falling, and they may bring a halt to the U.K.'s economic expansion under Prime Minister Tony Blair. Countrywide Plc, Britain's largest real estate company, has closed offices and cut its workforce. Developers such as George Wimpey Plc and Taylor Woodrow Plc are offering soccer tickets and property tax payments to entice new sales.
Interest rates have been kept too low, too long, and the bubble has grown and grown beyond reason; now that they are belatedly being rised, they are having a terrific effect on the economy - that is, on the economies that rely on debt to sustain growth.
The housing "treasure" is about to be empty - and will need to be paid back. and remember that the UK economy binged just like the US one, but that interest rates started increasing one year earlier (but slower than what Greenspan has done in the past year). So you can expect the same phenomenon in a few months in the US. Combined with the credit card move pointed out by cskendrick, and the increases in oil prices, it could be quite harsh.
And this is not just anectodal evidence coming from the frothiest markets in upscale London - it's widespread:
Housing wealth falls for first time in a decade
British net housing wealth has declined for the first time in a decade because of rising mortgage debt and falling house prices, according to an analysis by the Financial Times.
In the second quarter, the net wealth tied up in British homes dropped by over £60bn. This was because falling house prices wiped close to £40bn off the value of the housing stock and total mortgage debt rose by over £20bn. The last time net housing wealth fell was in the fourth quarter of 1995.
The decline could further slow consumer spending and exacerbate the economic slowdown.
Net housing wealth increased rapidly from 1995 and peaked at £2,400bn in the first quarter of this year - an average of £95,000 for each UK household.
Housing is by far the biggest asset held by most UK households and earlier this year was worth over 40 per cent more than accumulated pension rights and life insurance, according to the Pensions Commission.
The rapid rise in housing wealth encouraged many people to pin retirement incomes on home equity.
But housing wealth can only help resolve the pensions crisis if it continues to rise, which Adair Turner, chairman of the Pensions Commission, which is reviewing the UK's retirement provision, has stressed repeatedly.
The Treasury will also be concerned about the impact of falling housing wealth on the economy. In its 2003 assessment of the euro, Treasury officials noted that there was a "general consensus" that housing wealth had an impact on consumer spending.
After a statistical exercise, it concluded: "Perhaps the most notable result from this analysis is the strong estimated effect of housing wealth on consumption in the UK, both in an absolute sense and relative to the other countries in the sample."
Prof John Muellbauer of Nuffield College, Oxford, says a decline in housing wealth is already slowing the economy: "The decline in the growth rate of consumer expenditure is exactly what I would have expected and it has got further to run."
Financial excesses have been even bigger in the US than in the UK, so the backlash can expected to be all the stronger. Consumer spending is going to go down badly in the near future.
Again:
- pay all the debts you can;
- switch to fixed interest rates if you cannot
- invest what you can in energy saving devices (ideally starting with your car)
- blame Bush for the whole thing!
And remember Stirling Newberry's great quote in a
recent diary:
he energy is there, after 911, America convulsed and was so anxious to come to unity, that they placed their faith in the most inadequeate man to hold the Oval Office since Warren G. Harding. A petty, corrupt little man, who knows no other life than sitting around with his cronies finding new schemes to bilk money from others, and then enjoying the comfortable life comes from someone elses honest day's work. America surged together, only to find that when they gathered in one vast crowd, Bush had sent people to pick their pockets while they listened.