THIS summer, the housing market has been so calm that people no longer care much what happened to prices in the past four weeks or feel that they must buy by the end of the month. Prices are rising at an annual rate that is somewhere between 6 per cent and 9 per cent. How refreshing. Wouldn’t it be wonderful if things could stay that way, except that prices at the bottom end of the market are still too high for first-time buyers without big risks.
Sadly, this normality, this blessed lack of extreme weather, is unlikely to last. An autumn rise in interest rates should not matter much. The first big storm cloud on the horizon is the scheduled introduction of compulsory seller home information packs (Hips) in June next year. This is a classic example of a good idea that went too far under the control of second-rate politicos trying to make a mark.
If ministers want to encourage good ideas to take off, the smart way is to offer tax advantages. Lead-free petrol quickly became the norm as soon as that was tried. Recycling is encouraged by a dumping tax. Stamp duty is charged on buying a home so it would have been simple to back Hips this way. Instead, it has been made virtually illegal to put property up for sale without an Hip.
The result is that a large bureaucracy of registered providers is being created, with regulation to follow. Because people have no choice, pet ideas such as energy ratings can be added to make the packs more hassle and more expensive. The likely result is that fewer people will put their homes on the market speculatively, so the market will be thinner, with unpredictable effects on prices.
Stable interest rates will also not last for ever. Economic cycles have not been abolished and we can therefore look ahead with certainty to future house prices spirals and “corrections” because house prices are so closely linked to short-term interest rates. Yet this need not happen if we act now.
Gordon Brown set up an inquiry into how we could avoid housing boom and bust by borrowing long instead of short. It got nowhere because short-term interest rates were lower than long-term, so the market would have to be turned upside down and a generation of home buyers infuriated to effect change.
Not today. Government 15-year bonds yield less than 4.7 per cent, which is about the level of the cheapest two year fixes (before the heavy arrangement charges). The best ten-year fix is 5 per cent and standard variable rates are between 5.9 per cent and 6.5 per cent.
To stop the next spiral, we just need a simple tax that no one would probably ever pay. Mortgage lenders who lent at rates below the yield on 15-year government bonds would be taxed as if they had lent at the higher rate. No one need be affected, though lenders would have to be more honest about low-start promotions. Prices would not spiral up when short-term rates were low, so there would be no crisis when rates go high. Simple really.
Pass the port
FUND managers have been continually surprised by the valuations that anyone but themselves is prepared to put on Britain’s transport infrastructure. Ratings paid for companies have become progressively higher. BAA made P&O look like a pretty cheap sale.
Allowing for the difference between a varied group of ports and a monopoly of the prime airports for one of the world’s leading cities, the auction for Associated British Ports is already making BAA look relatively cheap. Goldman Sachs, organiser of the winning consortium, and its Ontario pension fund backer have bid 16 times expected 2006 profits before interest, tax and depreciation, which is effectively 7 per cent more than the Dubai takeover of P&O.
Goldman was anxious to win after missing out on several private equity bid auctions. But it is not yet clear whether the prices reflect competition to do deals, the sheer weight of private equity money committed to funds seeking investments or the ever-widening difference between the cost of capital of an average listed company and the cost to a heavily geared private consortium vehicle. The answer will arrive with the returns in perhaps three years’ time. Meanwhile, the end of one auction sends share traders looking for the next.
Shares in Forth Ports have duly jumped each time that a new bid was made for its larger rival. Forth, which owns London’s Tilbury as well as Edinburgh’s Leith and Granton, is the last listed port operator, but is as much a property play as a transport company. Housebuilding can be a more profitable business around Scotland’s capital than moving freight.
But wait, maybe ports are old hat. Yesterday saw the first big private equity take-out of a bus operator, the London franchise of Stagecoach. The financiers must think they can rely on Ken Livingstone as much as on Britain’s air traffic controllers.
Painful cures
FINANCIAL markets steadied a bit this week, at least in the West. Like the break of 1997, however, this summer’s correction is hurting economies making the transition from developing to developed. Turkey has been a big loser as Western hot money flees from risk. Now it is South Africa’s turn. The rand has lost 6 per cent against the dollar in two days. In early May you could buy a dollar for six rands. Now it takes 7.4.
Standard Chartered, which follows African economies, argues that there is nothing badly wrong with South Africa. The economy is expanding at a sustainable 4 per cent, inflation is modest and finances under control. But for those seeking risks to be paranoid about, South Africa has a fatal flaw.
Imports topped exports by a whopping 6.4 per cent of national output in the first quarter of 2006. Financing that was not a problem. Foreign investors have been piling into gold shares as the price soars. But that left South Africa vulnerable to an outflow of hot money, which proved to be a self-fulfilling prophecy. When the highest deficit for two decades was revealed, hot money fled.
South Africa now faces imported inflation and more pressure on its balance of payments because gold has ebbed back from its May peak of $730 an ounce to $580. Tito Mboweni, the central bank governor, put interest rates up to 7.5 per cent two weeks ago but now seems certain to act further to curb growth and improve trade, which has been hit by Chinese competition in textiles.
This may be a correction for some. For others it is sure to be a real economic setback.
