1 Mervyn King’s bewilderment at house prices: the Governor of the Bank
of England has been perplexed about what has happened to the ratio between
house prices and average incomes. The ratio of London house prices to
first-time-buyer incomes has gone from 3 in the first quarter of 1997 to 6.8
in the first quarter of 2007. Ten years ago people were paying three times
what they earned in a year for their first home. Now it is nearly seven
times. It’s time to ask: is this the top of the market?
2 Stan Thomas’s hotel: Mr Thomas, from Atlanta, Georgia, has bought an
old insurance building for £1 million a room. Once it is refurbished, it
will have cost £2.5 million a room (give or take a few luxury apartments).
This is more than double Claridge’s or The Berkeley. And the Willis Building
is not in Mayfair – it’s in Tower Hill. It’s time to ask: is it the top
of the market?
3 Florian Leonhard’s violins: a London-based violin dealer is launching
the $50 million (£25 million) Fine Violins Fund, which will invest in old
violins. It’s not that the value of violins doesn’t appreciate, like wine.
It’s that the appetite for offbeat investments is at an unprecedented pitch.
And how this is a hedge fund – how it guards against a downturn in the
market – heaven knows. It’s time to ask: is it the top of the market?
4 The deal frenzy: so far this year deals have totalled $2.3 trillion,
up 71 per cent from a year ago and well on course to beat last year’s record
high of $3.6 trillion. Average deal premiums have also risen, with companies
making offers, on average, 49.5 per cent higher than the target’s stock
price compared with only 24.4 per cent for 2006. It’s time to ask: is it the
top of the market?
5 Edward Eisler’s white needle tea: a couple of restaurants in London
are serving tea at £10 a pot. It is flown in specially from China, and while
it may claim to have antiageing qualities, it can also boast that it’s more
expensive than any other pot of tea. It’s time to ask: is it the top of the
market?
6 Stefano Pessina’s buyout: the Italian has been able to double his
stake in Alliance Boots, buy out the company and still pocket half a billion
pounds, thanks to the help of KKR, the private equity firm, and seven banks
falling over one another to lend. The deal is a cracker for Mr Pessina, but
it seems to distort the link between risk and reward. He actually gets to
take money out of the business and increase his ownership of it. It’s time
to ask: is it the top of the market?
7 Mike Ashley’s stake in Newcastle United: a successful private
businessman has floated his focused retail business and used the money to
buy into the Magpies. Shifting assets from the high street to the Premier
League looks like a move from the rational business world to the irrational.
It’s time to ask: is it the top of the market?
8 Chelsea Barracks, a King’s ransom: Chelsea Barracks, a 13-acre site,
was sold on April 5, in a deal worth £900 million, to the Project Blue
Consortium backed by the State of Qatar and CPC, the offshore fund
controlled by Christian Candy. The buyers offered £800 million upfront and a
top-up when planning consent is granted. The MoD put the site up for sale in
October through Drivers Jonas, the agent, with a price guide of £250
million. It’s time to ask: is it the top of the market?
9 Loans and fundraising: in Europe, private equity firms borrowed
€115.8 billion (£79 billion) for acquisitions during 2006, compared with
only €15.2 billion in 1999, and they raised in excess of $263 billion in
funding, more than double the $113 billion raised in the boom of 2000. Given
that these funds typically take several years to spend, because private
equity firms rely mostly on debt for acquisitions, these cash-rich buyout
firms will be able to keep on going and going, even if overall market
conditions sour. It’s time to ask: is it the top of the market?
10 Ryan McLean’s tent: the 30-year-old pitched a tent in the middle of
an Exeter property development, camping there for eight days to have the
first pick of the flats, which start at £150,000. “It’s the only flat I can
afford,” he said. Again, it’s in Exeter. It’s time to ask: is it the top of
the market?
11 Tobias Meyer’s art auction: at the contemporary art sales in New
York a fortnight ago, Sotheby’s, Christie’s and Phillips de Pury &
Co realised their highest sales totals, $837 million, and more than 120
artists’ records were broken. It’s time to ask: is it the top of the market?
12 Daniel Gross’s bubble: you know it’s time to start worrying when
people are talking about paradigm shifts, supercycles and fundamental
changes to the economy. And you know the market’s getting toppy when people
start writing books titled Pop! Why Bubbles are Great for the Economy. Mr
Gross, the author, explains that America needs “periodic outbursts of
investor insanity”. It’s time to ask: is it the top of the market?
13 Steve Schwarzman’s IPO: private equity is booming. Across every
metric, it’s shaping up to be another record year for private equity firms.
The likes of KKR, Blackstone and TPG have gone on a rampage, notching up
$489 billion of deals, or 98 per cent more than this time last year. Private
equity accounts for about 21 per cent of all M&A, compared with only 3.5
per cent in 1999. The biggest advocate of private ownership –
Schwarzman’s Blackstone – is floating its businesses, going
public and abandoning its distrust of shareholder ownership to capture the
passion for private equity. It’s time to ask: is it top of the market?
14 Blackstone’s expensive pizzas: there has been a spate of
increasingly expensive restaurant deals, culminating in Blackstone paying
£2.5 million a site for the Strada chain. That’s a lot for a pizza joint,
but as Mitchells & Butlers, the pub and restaurant business, suggested
last week, interest rates/taxes were starting to have an impact on its
“mid-market consumers”. It’s time to ask: is it the top of the market?
15 Damien Hirst’s diamond skull: worth $100 million, it is being shown
at the White Cube Gallery today. That is as much as the $103 million
purchase of a 40-acre estate in East Hampton last month by Ron Baron, a
money manager. As the Romans demonstrated, such decadence is surely a sign
of the top of the market. Bring on the Visigoths. Or, if you want to be a
little more genteel about it, you could simply ask: is it the top of the
market?
16 Bridgepoint’s Fat Face: Fat Face, the clothing chain, was bought by
Bridgepoint for £360 million in March, valuing it at 11.4 times earnings. It
is normal for a retailer to go for about 8 times. It’s time to ask: is it
the top of the market?
17 Dominion’s endless appetite for luxury: Dominion, the
Switzerland-based fund manager, has launched a luxury-goods fund called Chic
to allow investors who are convinced that the appetite for high-end goods
can only rise to put their money into pertinent enterprises. Companies held
by the fund include Hermès International, Porsche, Tiffany, Bang &
Olufsen, Shiseido and Rémy Cointreau. Dominion expects to attract more than
£1 billion over the next 18 months. It’s time to ask: is it the top of the
market?
18 Canary Wharf’s soaring prices, slumping returns: last month HSBC
sold its 210-metre Canary Wharf headquarters building for £1.1 billion to
Metrovacesa, of Spain, the most expensive single office sale in the UK.
Under the terms of the deal, the Spanish company, a first-time buyer in
London’s commercial property market, will get a return of less than 4 per
cent on its money, a record low for City offices. It’s time to ask: is it
the top of the market?
19 Guy Hands’s love of music: it has to be near the top of the market
for private equity when Mr Hands, who runs Terra Firma, is buying EMI with
46 per cent equity. Interest payments on the debt will hoover up 80 per cent
of earnings in a falling market. It’s time to ask: is it the top of the
market?
20 Le Million: GoldVish, a Geneva-based luxury goods company, has
created the first €1 million mobile phone, made of gold and encrusted with
diamonds. A limited, not to say bizarre, edition. It’s time to ask: is it
the top of the market?
The very assembly of such a 20-reasons up and down column is a sign of the top of the market - when did we last see such a table? Time to get out while the going is still good - and wait for the bargains...which always return...
Peter, Dubai,
Whether or not to worry about a top in the market - note, a top, not the top - depends on where you bought in. In any market, the people who have the most to worry about are those who bought in only when they read about the market in the paper. If they bought a house after reading that other people were making money buying houses, they were very likely late to the market and therefore have a lot to worry about.
The people who have very little to worry about are those who told themselves a few years ago "Looks like oil, gold, houses..... could go up in a few years, so let's have a flutter". Those longer-term investors now have a cushion of profit and little to worry about. Even if the market corrects by thirty percent, they won't be forced to sell.
And the difference between these two groups is simply that one group reacts to what a morning newspaper says is hot today, while the other group did its own research, and is probably researching a future hot market right now.
jon livesey, Sunnyvale, CA/US
All of these points put me in mind of J.K. Galbraith's "The Great Crash 1929". He makes a great story out of the build-up of manic share-buying and an insane belief in the infallibility of the market until the crash in October of that year. It was all the exact same in the 1920s: a property boom in Florida (that crashed like all property booms do eventually - get real, Anthony in London: they used the supply-demand angle then too and it was a lie then and it's a lie now), 5% of the country owning 33% of the wealth (it's worse now), loans being issued to buy shares and pay off interest on other loans, overvalued investment trusts that were leveraged to the hilt, luxury goods everywhere and a mania to buy everything and anything you could get your hands on.
It all ended then and it will have to end now too. Hopefully political leaders and central bankers have learnt something from the post-1929 depression and will use economic tools to tide things over - until the next boom, of course
MB, Edinburgh,
why do we all think we will not have a house price crash and moreover why do so many BTL owners think they do not have to pay tax !!
At present current base rates are too low and 0.25% increases are too little too late we need back to back rate increases and a possible 0.5% to indicate the BOE know what they are doing ?
Any body with half a brain can see 6.8 times average pay and 35/40 year terms is madness.
Real inflation is circ 6% look at food,milk ,petrol and the BOE think oil prices will drop !!!!!
When we pull out of Iraq at christmas we will see oil prices rise again its the reaction to the unknown.
you can bet on base rates being 6.25% and svr being 8.25 % by jan 08 and recession in mid 08.
The BOE has to knock inflation this summer but many feel to little too late and repo house prices next year.
Any bubble bursts the dot com was going to happen and did and people still bought into it and more worring banks lent to continue the bubble.
wIll theFTSE be at 6700 next year !!!
jay, manchester, uk
The point is not that people are paying over the odds for assets but that the money with which they are buying it with is hugely overvalued.
The investors are suddenly realising that there is likely to be a serious devaluation of Stirling. This will be caused by the high levels of borrowing and the increasing interest payments as a result of the borrowing which is bringing about a failure of the Stirling monetary system. Where the Stirling monetary system fails, Stirling will lose its value and be devalued.
Money works as a system of exchange. Money will not work where it is completely loaned and borrowed. There is a point between no money being loaned and borrowed and being completely loaned and borrowed at which money will cease to work.
The current levels of Stirling being loaned and borrowed are taking it over the threshold where it will cease to work. An outcome of the failure is an exponential growth in the supply of Stirling which is being evidenced by the purchase.
Christopher G Miller, Bedford, England
Sell 20 reasons to panic!
All the above 20 accurate observations have one thing in common.
The bank of England has persistently and consitently sent out a clear free money for all message since 1997 that;
A: Under no circimstance must you keep your money in a saving account, because we will make it so that the perception of money values are antiquated and all other forms of spending is better than saving. This includes the current government.
B; We will look after your (the british public and government) exorbitant debt liabilities as if it really didnt exist at all.
So now that the time has come to call all these little I owe you papers in, you must not complain......after all .....nothing is more reliable than the inevitable change.
Arik Schickendantz, Newbury, Berkshire
Has the demand for supply really anything like matched the rise in the price to income ratio of 3 to 7? I know there are a lot more immigrants in the UK since 1997, but a doubling?!
Demand and supply is an issue but NOT the only one.
Try huge government stoked borrowing rates and a massive fashion for speculating in property (BTL).
Andrew, Cambs,
Mervyn King is possibly perplexed at how daft the sheep-like population are for blindly taking on massive debt they're unlikely to ever repay in the false assumption that property is a one-way bet.
Perhaps a quick glance at what is happening in the USA, Spain and many other countries, including that mysterious part of the UK outside London should clarify things a bit for those not understanding his disbelief.
Andrew, Brighton, Sussex
The number of new houses being built is less than the unprecedented growth in the UK population. Demand exceeds supply, so the price goes up (and up, and up, and up...). What part of this perplexes Mervyn King ?.
As for the other 19 "reasons to panic", BTL landlords are becoming richer than Croesus. They'll just buy everything.
Move over Bill Gates, here comes Peter Rachman !
Anthony, London, Great Britain
To paraphrase the words of Sir Isaac Newton....one can measure the motion of heavenly bodies but not the MADNESS of people!
R.TAILOR, London,
Some pertinent observations. I notice that David Smith is not among you - I've read elsewhere that he believes house prices will continue strongly well into next year at least, UK debt is not a real problem and oil will "very soon" drop to less than $40 per barrel.
Like the governor of the Bank of England, is David a wishful thinker?
J Hywell, London,
It might be the top of the market. It's the bottom of human stupidity. Or perhaps not. There doesn't ever seem to be a point so low that somebody won't go lower. If you've got a diamond encrusted mobile phone you can't, surely, sink any further down in self-regarding idiocy. Can you?
eric campbell, harrogate, uk