The trouble with markets
Like many people, I have been keeping an eager eye on developments in the economy and particularly on what is happening in the property market. This week we saw the third consecutive rise in average house prices, as reported by the building society Nationwide. Some analysts are now arguing that houses may actually rise in value by the end of 2009.
A couple of things worry me about this development. The first is about the society gap between those that ‘own’ property (I use inverted commas because most people don’t own their home, the bank does) and those trying to get onto the property ladder. It must be fairly unsustainable to have house price inflation in positive territory, while the wider economy is suffering from deflation, and while many people are losing their jobs, or having their pay frozen or even reduced – in other words salary deflation.
So let’s face reality. If you are not on the property ladder, it is going to become almost impossible to take that first step. And to add insult to injury, if you do still have your job and therefore pay tax, you are paying for other people’s homes because it was taxpayers’ money used to bail out the financial sector. Perhaps a better proposition would have been a sizeable and much needed round of sector consolidation, coupled with a realistic property price correction.
The second thing that springs to mind when pundits and ‘experts’ talk up property markets is that the numbers usually come from organisations with vested interests, the building societies, mortgage banks, estate agents etc. Also interesting is that they rarely, if ever, talk about sales volumes.
It is fairly disingenuous to say average property prices went up 1.3% in July, if only half a dozen houses were sold! An exaggeration perhaps, but we can all accept that a couple of years ago, a LOT of houses were selling, and producing vast price inflation. If you are looking to buy, maybe now is the time to wait and see what happens.
There is a phrase used by stock market investors called ‘the dead cat bounce’. This happens when a share price tumbles, usually on bad news such as a profit warning. The drop is very steep, perhaps a 25% drop on the day of the warning. Some investors might feel the sell-off is overdone and see it as an opportunity to buy in cheap. This causes the share price to rally somewhat, and this allows other holders to unload their shares at a slightly improved price. Of course, the second sell-off can be a big one with the shares losing another 10% or more.
Another piece of stock market wisdom is that profit warnings come in threes, so it is invariably an unwise idea to think about taking on a share after its first warning, thinking it’s a bargain. Stick it on your watchlist and monitor it for a year or so.
Given that property prices during the ‘good times’ were increasing at anything upto 50% per year and that the drop over the last year was a pitiful 15%, the current rosy-looking situation could easily be a trap – a dead cat bounce.
I fear that throwing in billions of pounds of taxpayers’ money to prop up a market that is aching for a correction is more a political exercise than an economic one. So a warning to all new property investors-to-be: be careful out there!
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