Posts Tagged 'recession graph'

Recession Graph 6 – UK house price 55% more to drop?

A well argued blog has come my way… not for looking in the rear view mirror, but for forecasting the next phase in house prices, inflation and the UK economy. Not pretty – but government softening, plus inflation will keep prices from dropping to 55% below today… while in real terms they will continue to take a battering of maybe 17% over the next two years

Could UK House Prices Crash Another 55%, As Per Telegraph Report?

By The Market Oracle on March 13, 2009 | More Posts By The Market Oracle |Author’s WebsiteThe mainstream press as illustrated by The Telegraph has run with a house price forecast by Numis Securities (NS) that states that UK house prices could fall by a further whopping 55%, that is a rather incredible forecast to make in light of the of 22% fall to date. NS states that a buy to let investor panic will trigger an avalanche of further selling. I am not aware of Numis Securities past forecasts, however analysis of the perma-bear Capital Economics that has consistently been cropping up with bearish house price forecasts since at least 2002 in the mainstream media illustrated the propensity to reprint press releases with-out checking the facts as to whether the forecast is actually probable or not.

The Telegraph writes: House prices ‘could fall by further 55 per cent

People who bought buy-to-let flats are expected to “begin panic selling” and the average home value could drop below £100,000.

Despite UK house prices already having fallen 21% from the peak, we do not believe that the correction is anywhere near over.

Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property…which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view.

UK house prices peaked in August 2007. The rate of decent peaked for December data at -19% and has now declined to -17.7% . The rise in UK house prices during January 09 brought a brief pause to the house price crash that resumed its bear market in February into its 19th month as the below graph illustrates which is per the updated house price forecast that covers the trend into 2012 which projects for a total drop from peak to trough of 38%.

However, as I have warned many times over the past 19 months, the government has in its power the ability to print money to bring nominal house price falls to standstill, this money printing is now quaintly termed as “Quantative Easing” so as to hide the truth and mask the continuing crash in house prices that despite the opinion of the mainstream press by the likes of Anatole Kaletsky and Ambrose Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained in the depth analysis of November 2008 – Bankrupt Britain Trending Towards Hyper-Inflation?, and updated more recently – Gordon Brown Bankrupting Britain as Tax Payer Liabilities Soar- Update

While I agree house prices are some distance away from a bottom, however UK House prices in U.S. dollars and euro terms have already crashed by more than 50%, and with sterling targeting parity to the U.S. Dollar that is another 30% shaved off of the real value of houses.

What this means is that the Labour government is engaged in a policy of devaluing sterling so as to mask the crash in UK house prices which therefore means that house prices in nominal terms are less likely to fall, this is being witnessed in the house price crash chart as the rate of decline is slowing.

Now if the British Pound has stayed put at £/$2.00 as a consequence of supportive monetary policy instead of the Zero Interest Rates Policy then yes we would be facing a further nominal house price fall of as much as 55%, but with the policy of quantitative inflation, the aim is to create the illusion of rising asset prices, that continue to fall in real-terms as the below graphs plainly illustrate.

The buy to let sector HAS ALREADY TRIGGERED A CRASH IN UK HOUSE PRICES, as I warned of in November 2007, that was forecast to begin in April 2008. To imply now, more than 18 months INTO the bear market that the buy to let sector will ACCELERATE the ongoing crash is frankly just an attempt to grab headlines, as the rate of decent is expected to slow during the year inline with the currency depreciation and return of inflation. The pertinent time to make such a forecast or observation was more than a year ago.

UK Housing Market Affordability and Interest Rates

The February rate cuts to 0.5% fulfills the forecast target for 2009, having entered Zero Interest Rates Policy, the government yesterday initiated the first stage of a £150 billion printing money run by the bank of England which further seeks to support asset prices by devaluing the value of sterling. These measures are having a positive impact on the affordability despite the recession and hence supportive of house prices.

The Labour governments primary objective remains to maximise its chances of winning the next election, this will be to the detriment of future growth as the consequences of printing money and the exploding debt burden risks a currency crash that at best means many years of stagflation and at worst hyperinflationary bankruptcy along the lines of the Weimar Republic and the most recent example of Iceland.

This is evidenced by the following graph of UK house prices in terms of inflation, and our key trading partner the United States (U.S. Dollar), with a similar fall observed against the Euro.

The above graphs clearly illustrate that the UK housing market has crashed by 25% (real terms) and over 40% (U.S. Dollar / Euro) which is having a severe impact on the UK economy as the real deflation of a 40% loss of value of house prices added to the more than 50% of that of stocks is tipping the UK economy towards economic depression. Therefore home buyers need to guard against the ILLUSION of stabilising house prices whilst the real terms crash in house prices continues.

UK Recession Forecast 2009-10

The following is the conclusion from the indepth analysis / forecast for the UK economy for the period 2009 to 2010 :

In the final analysis, the projected course of the recession over the next 2 years is as illustrated by the below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009 (small quarterly gain on the 3rd quarter), which will be followed by a recovery as the rate of annualised GDP contraction improves as government stimulus measures announced to date and deep interest rate cuts as well as future stimulus during 2009 kick into gear.

The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930’s Great Depression.

UK Recession Forecast 2009-2010

However the Labour government will do its up most to battle against the recession especially once GDP data shows contraction of more than 4% on annual basis, therefore the expectations are strong that the Labour government will sacrifice long-term growth for the short-term possibility of turning the economy around before the 2010 election. This also suggests that the 2010 recovery may not be able to take hold and therefore sets the scene for economic weakness during 2011-2012, perhaps suggesting a double dip recession. This is supportive of the view that UK house prices after bottoming in 2010 will enter a prolonged period of stagnation due to a possible stagflationary douple dip recession.

Fighting Deflation With Inflation

The government and the Bank of England are attempting to fight against the ongoing deflation as a consequence of the collapse of asset values, and the bankrupt financial institutions continuing to deleverage from as high as X60 of capital leveraged positions, which in the process requires the Government to step in and recapitalise the banks and take the toxic debts off the banks balance sheets.

My analysis of December 08 concluded that the UK is heading for real deflation during 2009, with the RPI inflation measure expected to go negative by mid 2009 by targeting -1.2%. The trend to date is ahead of expectations however the most recent data showed the CPI measure take a step towards trend by only registering a small drop by falling to 3% from 3.1%

The more money the government prints and the more sterling falls then the greater will be the bounce in inflation during the second half of 2009, i.e. greater than that which was originally forecast (as illustrated above) this will become much clearer by the middle of 2009, but is suggesting that investors need to increasingly gear themselves up towards much higher forward inflation.

As I pointed out in the December analysis, the fall in sterling will result in much higher high street consumer prices during 2009 as those retailers that have not gone bust seek to replenish stocks at much higher prices during 2009. This again suggests that the January Sales for Britons may prove to be more illusionary than real as the fall in sterling has already soaked up corporate margins, which again confirms that those UK shoppers seeking to make large purchases are probably better off to do so sooner rather than later. This therefore sends out mixed signals for consumer prices later in 2009.

This is now starting to be reflected in food prices as produce is being exported abroad and therefore resulting in less domestic supply, which will soon also be reflected in other goods and services as the price of imports soars and therefore confirms the view of much higher inflation during the second half of 2009.

Therefore the best outcome at this point from the credit crisis would be for a period of stagflation i.e. low economic growth with high inflation and interest rates. The high inflation will be a necessary evil so as to devalue the value of the record amounts of debt that the government is ratcheting up as illustrated below. The worst case scenario is that of hyperinflation and a collapse of the British currency / economy along the lines of where Iceland is today which has seen a collapse of some 30% in its annual GDP, again both of these scenerios imply support for nominal house prices.

UK Debt Liabilities

Britain’s growing liabilities as a consequence of bailing out of the bankrupt banks that already project to 300% of GDP as the below graph illustrates as per recent analysis.

Attempting to save the bankrupt banks has already saddled the tax payer with £1.2 trillion of liabilities and is expected to pass above £2 trillion by the end of 2009. The eventual amount of liabilities may extend to as high as £5 trillion if the whole banking system’s liabilities were dumped onto the British tax payer which would trigger far more Quantative Easing as the government instructs the Bank of England to print money to buy government debt due to the increasingly skeptical financial markets which would send the currency spiraling lower and inflation spiraling higher.

Therefore nominal house prices will be increasingly supported by the highly inflationary measures being put into action whilst real terms values continue to erode. This therefore increasingly points to a gradual decline in the rate of house price falls, and suggests a prolonged period of stagnation. However, it does make the Numis Securities forecast for a possible another 55% fall in UK house prices EXTREMELY unlikely, if anything the UK housing market is targeting a shallower rate of decline in the order of another 14%-16% over the next 2 years rather than the Telegraph’s scare mongering headline grabbing 55%, and if inflation is worse then expected then the pace of house price falls may still reduce further.

Recession Graph 5

I’ve managed to get a US GDP graph which quite graphically shows the car crash that was 2008 – and below it a UK GDP graph which shows the lag. One source I spoke to today reckoned that Feb was worse than Jan in terms of their business. I have to say that London was a ghost town today. The lag continues and 2009 will get much more gloomy before it gets glimmery:

Gross Domestic Product (GDP) Graph

United Kingdom GDP Growth Rate

Market views: Recovery or sucker’s rally?

The recent edition of The Week quotes various wise investors on the state of the market – and whether now is a buying time:

Edward Bonham Carter, Jupiter Asset Management: ‘This year is likely to remain schizophrenic. You will have periods of people thinking they can see the bottom… and then periods where people believe the economy will remain in difficulty for some time.’

Paul Kavanagh, Killick & Co: ‘The market was due a rally. I wouldn’t call it a sucker’s rally, but niether would I call the bottom… We’re looking at another year of working through this.’

Recession graph – shape: canoe – property still falling

I was talking to a North American this week. Some of the updates are all over my Twitter feed. While there’s generally optimism in my blog posts, I’m trying a persona of gloom on Twitter.

The average price of a house sale in Detroit in Jan/Feb? Well, according to her, $8000. That’s a pretty interesting number because it shows the depth of the sub-prime woes and just how much oversupply there is for housing in places that are dependent on industries that are in trouble. The motor manufacturing sector hasn’t yet died, but it’s getting a discounting from the local population!

While Sir Martin Sorrell famously suggested the dot.com bust recovery graph would track the shape of a bath, Canadians talk about a canoe shape. My friend reckons it’ll be a canoe!

Fire Canoe #2 by peter bowers

My previous discussions have pondered whether the graph shape will actually an ‘L’ with a long horizontal or a ‘W’ with a fake bounce in the middle or a ‘wonky W’ that bounces a bit but doesn’t end ahead or a ‘lightning strike’ with plateaux areas of comfort that are followed by slides.

The important thing to note, oh graph watchers, is the issue of microscope views. When you look through a microscope, even a straight line has jagged edges. So, as we ponder the recessionary descent, the graph is certainly not going to be a smooth freefall.

If there is general agreement that it’s still a fall… does it matter if there are plateaux? Yes, if you get fooled into thinking that a plateau is the bottom and you are in a hurry to buy back in to take the bounce – and it turns into a further slide.

My sense, with unemployment on the rise, with the banks still locked, with companies feeling further pinches, is that property prices are still on the slide. That they will continue to slide as the lag effect of unemployment euphoria makes way for reality to bite – that it’s a long old slog for many to get back into a job that will pay the same as a pre-crunch set-up.

Recalibration of the whole economy is still going on. The quantitative easing of the UK government may soften some of the effects, but we’re still coming back to earth on the slide. And, whether it’s a plateau or a floor… the bounce isn’t going to be strong or sustained or rapid.

The waiting game continues on a broad sweep of business activity. The vultures are not hungry enough to fly. And, the phoenix can sleep for a good few years in his egg that’s resting on the ashes… but the phoenix is taking strength from the heat to rise again.

Phoenix by BenGoode

Recession Graph 4 – Bathtub

Optimism required here. Previous posts have called the shape of this recession and economic activity as flat lines off an ‘L’ or wonky lightning. An analyst from UBS sees an uptick. In 2011 or 2012.

Meantime, we’re on the slope of a bath going down to the plug hole. We’re skirting the bumps of the plughole… flat, drop, swirl, clunk up, swirl, clunk up, crawl out, gradual ascent, Olympic climb up the back and out.

And, with reference to my previous post – amazing what you can find on Flickr… dead cat in the bath:

Ted Goes Nuts in the Bathtub by Geoff Penn

And, for those who want to start to explore Flickr’s photo library… this might tickle you… on a bathtub theme… here. (Which reminds me of a funny internet etiquette story, because some guys recently employed a German student as an intern and she thanked them, giving them a Flickr reference which put her demure nature in a whole new light. Do they ask her to return next summer? Where do they put their eyes)!

Recession? Property prices defy gravity/logic/market sentiment

I’m trying to be optimistic. But, through it all, I’m pretty convinced the recession graph will be L shaped at best with a long flat line… at worst, a wonky lightning strike down, flat, down, flat…

But, that bellwether, housing saw a bit of a spurt in January. Activity off a low base has been called ‘a recovery’. I like optimism. And, I’d point to those fundamentals we all believed in 2007… that demographics are changing, that the boomers all have parents bequeathing assets on top of their paid off mortgages… so perhaps the property market has permanently re-rated above trend. We need a bit of confidence (along with those other two C’s – customers and cash!)

But, look at the graph in today’s Sunday Times by clicking here

(It’s the Times’s first ever interactive map, they say… nice!)

House prices have rocketed for yonks, so if it’s really true that we’ve hit the worst brick wall in 100 years… I can’t see January sustaining its perk. No. There’s 10-20% further to go this year, they say… (I’d add ‘and some’ in many postcodes!!) because property is a lag indicator and some folks ain’t yet felt REAL SQUEEZE, even if they do need a roof over their heads.

Nonetheless, after bleak winter, there is always spring. The crocuses of the property postcodes are listed in a nice optimistic article here – 10 postcodes that will bounce back first

Scratch a bit? I can see everyone downshifting to Brighton, but Islington? I’ve lived there for yonks and hung out with lovely legal and city types… but, on the same TimesOnline website, there is talk of Allen&Overy laying off 400 and Simmons&Simmons releasing 70 staff. That Upper Street shuffle of lurvely bars, boutiques and cook shops? I can’t see it thronging when last Sunday felt like a bank holiday and the kings of value, LaPorchetta, had nobody in but us at lunchtime.

UK House prices – signal on recession graph rollercoaster?

10 Photography (aka Coroner)

The furore over banker bonuses doesn’t take one thing into account. UK house prices have been propped up by banker’s spending. The London market was super-charged by the bonus season as bankers cleared funds in the winter ready for a spring flutter on a 5-bedder in Islington or something a bit fancy in Epping Forest.

The shape of the recession graph may mirror house prices. If so, are we at the bottom yet? With sterling 30% off and property down 30% too, foreigners (with foreign currency) now have financial muscle that almost doubles their purchasing power. Get in, boys…

The FT reports that derivatives based on the Halifax index are pricing a further 32 per cent fall in property values – a 46.7 per cent peak-to-trough over the next two years.

What shape the recession graph? It’s still a nasty downward rollercoaster. So, while I’ve been calling an “L”… it looks like we are still on the down line if you’ve not already gone splat on the flat.


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