Thursday, 18 December 2014

House Prices Fall The Most On Record

According to Rightmove, asking prices for houses fell by the most ever on record last month. Nationally, they fell by 3.3%, which if they continued to fall at that rate would mean a fall of more than 40%, or about the same extent of fall that occurred in 1990. In London and East Anglia they fell by more than 5%, which over a year would be a fall of more than 60%, or equivalent to the falls seen after 2008 in the US, Ireland and Spain.

All this is despite the best possible conditions for house prices. Interest rates remain at low levels not seen for 300 years, and the government has been providing guarantees to lenders for loans, along with numerous other measures to keep the huge house price bubble inflated. Its now clear that interest rates are rising sharply on a global level. That is first affecting emerging market economies. Their bond yields have risen sharply, and official interest rates in Turkey, Russia, Brazil, India, South Africa and elsewhere have been ramped up to around 12%. In Russia, also affected by the fall in the price of oil, it has increased its interest rates from 12.5% to 17% overnight, as the Rouble fell.

Temporarily, this selling of emerging market bonds has caused a rush of hot money into the US, UK, and Eurozone bonds, but just like the warning of a tsunami is that the sea gets sucked up off the beach, before the wall of water arrives, so with these interest rates. When the currencies of the emerging markets have fallen sufficiently, and their interest rates risen sufficiently, that wall of hot money will fly out of the US, UK, and EU and into the emerging markets in search of these higher rates, and the potential of currency gains. Interest rates in the US, UK and EU will then rise sharply.

Already, the US Federal Reserve has given notice to markets that it will raise official interest rates in March or April of next year. The markets, and stock market cheerleaders do not want to hear that message, and continue to believe that the US will not raise rates until after June next year, if at all, but that is because they have become addicted to lax monetary policy to keep financial market bubbles inflated. But, the fall in the price of oil has already exposed the potential for a new sub-prime crisis, as the large scale borrowing by small and medium energy companies to finance fracking in the US and elsewhere via junk bonds, has already led to a freezing up of that market, and the start of a new credit crunch.

Its not just the new fracking companies. Recent analysis shows that North Sea oil production is now unprofitable at these prices. The likelihood is that many of these companies will go bust, and their debts will go into default. That is exactly the same kind of scenario that existed ahead of the financial crisis of 2008.

Moreover, as I have pointed out previously, the House Price Indices put out by the estate agents and building societies are a sham.  Asking prices are pretty meaningless, because a house can be put up for sale at any price. What it actually gets sold for is a completely different matter. The Asking price indices are based on the price that houses are initially listed at, and takes no account of any reductions of the asking price in subsequent months even, let alone, how much the house is actually sold for. All the evidence is that selling prices are around 30% below original asking prices, outside London, and even in London, it appears that the bubble is beginning to burst.

Moreover, the other metrics used such as the length of time properties are on estate agents books are also phoney. For one thing, houses that are on the books of one agent for 6 months or more, often get taken off not because they have been sold, but because the seller gets fed up and tries their luck with another agent. I know of many houses around me, where the seller has gone through three or more agents one after another, before they eventually sold their houses, again usually for around 30% what they originally listed for. Sellers would have saved themselves a lot of time and effort had they just set the asking price 30% lower in the first place.

The agents have other tricks up their sleeves too. At auctions, where bids are below the reserve price, the agents themselves put in bids to try to push the price up. Where sellers look to be becoming fed up with the agent for lack of progress, it is not unusual for the agent to suddenly announce a potential buyer, only for that buyer to subsequently disappear. At times of year like now, when agents know that demand slows, it is again not unknown for the amount of houses on their books to be suddenly reduced.

This seems to have increased considerably over recent months, as there has been a preponderance of houses that have been designated as sold subject to contract, only for the sale to fall through and the house be once more back on the market. Some of this is undoubtedly due also to the fact that the banks have tightened their lending criteria, and many people discover that their income is not sufficient to meet the monthly repayments, even before interest rates rise.

There has also been a notable increase in the number of repossessed houses being put up for sale. They are usually not listed as being a repossession, because such terms start to spook the market, and show up in the official figures. Instead, such sales are nowadays described as “corporate sales”, which simply means that the bank has foreclosed on the loan, but sold off the asset to a specialised property company for disposal.

All of this means that the conditions for a new more serious financial crash are being put in place. Interest rates are rising globally, credit in the high yield section of the market has already frozen up, financial asset prices are at astronomical levels, those levels are based on multiple levels of fictitious capital, which is hugely inflated, and unsound.

This is a huge Ponzi Scheme, the likes of which has not been seen before in history. It is a house of cards that must come tumbling down.   

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