MoneyWeek Roundup: Britain’s stagnant housing market
James McKeigue highlights the week's best pieces from the MoneyWeek team, including: the return of the recession; the real reason behind Britain’s stagnant house prices; and is it time to sell gold?
"Britain is back in recession!" screamed the newspapers this week.
"Tell us something we don't know", shrugged the markets.
Neither the FTSE 100 nor even the pound seemed particularly perturbed by the news that Britain's economy had shrunk for a second quarter in a row.
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Are investors crazy to be ignoring the recession? No, says John Stepek in Thursday's Money Morning: Britain's in recession: here's why you don't need to worry.
Even if the figures are correct (they're preliminary estimates after all), the reaction of some sections of the press and politicians was over the top.
"You want to know why Britain is in recession?" asks John, "we had a boom. Now we have a bust. That's the way it works. It's as simple as that". In 2008, "we were in a serious mess. You can't then expect, less than four years on from that cliff-edge, for everything to be booming again".
In the US, things seemed to have picked up much more quickly, says John. But there is a reason for that. "If the US is indeed recovering now, it's because despite the best efforts of the Federal Reserve they had something closer to a proper crash."
The crucial difference was that, unlike the Bank of England, the Federal Reserve was unable to lower the cost of mortgages rapidly, points out John. "As a result, house prices collapsed and remain about a third lower than they were at the peak. Unemployment rocketed and remains extremely high. About a sixth of the population is on food stamps."
Don't be under any illusions the Americans have gone through a much more painful crash than us. But it means that their banks have been forced to write off debt.
"We chose the stagnation route out of the slump instead. Debts that should have been written off from mortgages to business loans - have instead been allowed to stagger on, by lowering the cost of servicing them." Given this misuse of resources, it's little wonder that we are still in a recession.
How do you protect your money in this environment? John has a few ideas if you missed it, you can read the rest of the piece here.
The real reason no-one is buying houses
The struggling economy is also having an impact on the housing market, says MoneyWeek editor-in-chief Merryn Somerset Webb on her blog. "There is much talk about the low level of volumes in the UK market and about how that is the thing that is keeping prices up.
"People, convinced their house is still worth a bubble number, won't sell at the new market price. So supply is crunched and prices have stayed higher than they should have. Soon, or so the story goes, sellers will blink and cut their prices properly, allowing volumes to rise and markets to clear."
But Merryn has a different theory. She draws attention to the fact that mortgage providers are raising their rates or making "sneaky" changes to contracts. Perhaps the problem isn't that people are greedily holding out for an unrealistic price for their home.
Instead, perhaps it's "all about the price they have to pay for a new mortgage on the next house they buy. The Financial Services Authority has pointed out that the UK is home to hundreds of thousands of mortgage prisoners people who can't move because they can't get a new mortgage at all. They have too little equity or too low an income for our newly prudent mortgage lenders to touch with a bargepole".
Even those people who aren't officially mortgage prisoners' might still be stuck, says Merryn. Falling house prices will have pushed up borrowers' loan to values (they owe more as a percentage of their house's value than they used to).
Combined with stricter terms from lenders, this means that even people who think they have portable mortgages' the type you can take with you when you move house will have to apply for a new loan. And that, in the current climate, means they will end up paying more.
So "the lack of volume in the market might not be about sellers not being able to cope with the price of houses, but something that lies behind that sellers not being able to cope with the price of new credit".
The blog led to a debate in the comments section below. Regular commenter Boris Macdonut felt that the increases by mortgage providers are not significant enough to affect the housing market. "The real reason is not a modest cost increase but fear and distrust."
But as Dr Ray pointed out, while the numbers may seem small, in percentage terms they are quite big. For example "an increase from 4.27 to 4.6 isn't a 0.33% increase. It is a 7.73% increase".
Meanwhile, Agabus25 put it down to various factors. "It's not one single thing but the combination: higher rates, fees that you can no longer capitalise, withdrawal of interest-only, no extended maturities (ie no longer than 25 year loans), no excessive salary multiples, no sky-high loan-to-value, plus the squeeze on middle class earnings. Combine just a couple of these and the total effect is substantial enough to become a deal breaker."
It's an interesting debate - if you haven't read the piece yet, get involved here: The real reason the housing market isn't moving.
The time value of money
If you have ever invested, or taken out a mortgage, or even chosen a fixed rate savings account, you have to watch deputy editor Tim Bennett's latest video. Because it's about one key judgement that we all have to make almost every time we make a financial decision: it's about the time value of money'.
We might not all use that phrase, but when we decide to make an investment in hope of a future pay off, this is a calculation we have to make.
In this week's video tutorial, Tim Bennett takes a closer look at the concept, and how it affects the financial system. Watch it here now.
The game is completely rigged
Another reason why it's worth watching the above video, is that it'll bring home to you just how damaged the current financial system is. Money printing by the Federal Reserve and other central banks, means that the idea of a risk-free' rate essential to calculating the value of anything in modern finance - is now obsolete.
Indeed, says Tim Price: "There's one thing I know about investing today - the game is completely rigged".
Tim, who writes The Price Report newsletter, isn't one to pull his punches. As far as he's concerned: "The world's governments and their central bank cronies are conspiring to distort almost every investment you can put your money in right now. But they can't do it forever".
He has a pretty bleak view of where things are heading. "The plain fact is that we are in the midst of a devastating sovereign crisis." Yet Tim thinks that investors if they're prepared can protect their money from the coming storm. And that'll leave them in a good position to take advantage of the opportunities that will arise from that.
Is the gold bull market over?
In the past few months the gold price has wobbled. Some have even said that the bull market for gold is over. Is it?
No, is the short answer, said Dominic Frisby in Tuesday's Money Morning: Good news for gold bulls - it could be time to start buying again.
In the current bull market, gold has regularly had sharp run-ups, just as happened last year. And each time it's happened, "a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases if the preceding move has been large the consolidation has lasted for over 18 months".
So don't worry. Gold is just having a breather. "I maintain we will eventually see new highs, just not any time soon."
In fact, now could be a good time to stock up if you haven't already. "If the patterns of previous moves continue to be our guide, we can expect gold to start creeping up from here perhaps to about $1,800 before a pullback. I would like to see gold get above its 252-day moving average and stay above it.
"If it doesn't and gold starts to creep down, I will be nervous. But continue to hold your gold. The fundamentals have not changed. And if you don't own any, I would say the odds favour now as a decent opportunity to accumulate."
Dominic has peppered the piece with lots of great graphs to highlight patterns in the movement of the gold price. I haven't got space for them here but if you haven't read it yet you should take a closer look.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds we've listed them below.
Have a great weekend!
John Stepek
Tim Bennett
James McKeigue
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James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ.
James has worked as a freelance journalist in various Latin American countries. He also had a spell at ITV, as well as writing for Television Business International and covering the European equity markets for the Forbes.com London bureau.
James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report.
He founded LatAm INVESTOR, the UK's only Latin American-focused investment magazine.
He is currently the Business Editor at Compass Media.