As the City lurches from one nightmare to the next, with banks bracing
themselves for further losses, and the global credit crunch starting to feel
its way into consumers’ pockets, there is one question on everyone’s lips —
how bad will it get? The Times surveyed a selection of business leaders and
luminaries, asking for their views on where the FTSE 100, the housing market
and the base rate of interest would be in two years’ time.
The panel were asked: two years from now:
1 Will the FTSE 100 be above the 6,000 mark?
2. What percentage change will there have been in the housing market
and in what direction?
3. What will the interest rate be?
Jon Moulton, managing partner, Alchemy Partners
1 Yes but one or two of the current FTSE 100 companies will not make it
that long. Tight credit and weak economic conditions will cause the demise
of some big names before the two years are up.
Perhaps 8 per cent to 10 per cent of the index's recovery will be from the
return of inflation. In two years' time people will be predicting better
times - but they will not have actually arrived.
2 Housing will drop 10 per cent and then slowly recover. Lower interest
rates will moderate the pain for mortgage payers.
3 In two years' time rates will be rising - inflationary fears will
have overtaken fears of recession and financial instability. Guess back at 5
per cent after dropping hard late this year. Finally - I am not very
confident of my predictions!
Conditions are unprecedented. The interconnected and complex financial system
may itself fail catastrophically - if so, all bets are off. Consider
accumulating a stock of barter goods. Rice is especially good - it stores
well.
Mark Dampier, head of research, Hargreaves Lansdown
1 Always impossible to predict markets over any period but given the
excessive pessimism that is around today, I think it will be above 6,000.
The market is trying to discount the present problems, so while in the short
term there is likely to be pain, unless we face Armageddon the market will
recover before the economy, something that investors often find hard to
understand.
2 I am a housing market bear. Prices have over ten years risen by
around 190 per cent but in popular areas by 300 per cent. This is
unsustainable. Factor in City lay-offs and redundancies and this must have
an effect on London and popular second home areas. Couple this with far
stricter lending and the multiplier effect must work in reverse - people
can't borrow so much, prices fall, the supply/demand factor is overcooked.
House price falls of 25 per cent would not be unreasonable.
3 The level of interest rates will depend on whether the current
problems turn out to be inflationary or deflationary. I'm not sure I'm
bright enough to give you an answer but falling assets, especially property,
are usually deflationary so rates could well be lower.
David Buik, partner, BGC Partners
1 If it's a straightforward contest between sentiment and value, it's a
no-brainer. Sentiment wins every time. Sentiment is currently negative. Even
though growth is likely to fall below 2 per cent in 2008, many constituent
stocks in the FTSE 100 look good value. The FTSE 100 will be nearer 6,500
than 6,000 by the end of 2009, despite the most visceral credit squeeze seen
since 1974.
2 The UK housing market is likely to be very patchy. Overall house
prices could dip by as much as 17 per cent by the beginning of 2009.
However, 2009 could well be a flat year, with prices increasing at the
beginning of 2010. What is clear is that there is a continued housing
shortage in this country and there is no quick remedy to this issue. London
house prices are unlikely to dip for long. The 1.5 million unaccounted for
Eastern Europeans will surely underpin the rental market.
3 The Bank of England and the Government are both obsessed with
inflation, which offers little scope for cuts according to their bible.
Interest rates in two years' time - 4 per cent. Unlikely, you might say but
a reality check may manifest itself. The economy is under the cosh and will
need stimulation for people to sustain the servicing of their debt while
enjoying themselves in the shopping malls.
Philippa Gee, investments director, Torquil Clark Holdings
1 Absolutely. We are going through a challenging time, where investors'
loyalty is being severely tested but this is an extreme part of the life of
a stock market cycle and it would be wrong to be so negative over such a
protracted period. There are always pockets of value, so investors should
stop trying to call the bottom of the market.
2 Zero per cent. It is likely that there will be a time of reductions
in value, although this will tend to be concentrated in certain
over-inflated areas within the country and then followed by a tentative
increase. However, this should remain minimal. Bricks and mortar will not
take a decade to turn around, as in times past, it will just mean that
buyers need to be ultra-careful about the property they buy, its location
and investment value.
3 While further cuts are likely, the economy should certainly have
worked through its negativity by that time and therefore I estimate rates
will sit in the 4 per cent to 4.5 per cent region. Clearly this will benefit
borrowers but investors will suffer as a result and this is another clear
reason why cash is unsuitable as a long-term holding.
Bob Rowthorn, professor of economics, University of Cambridge
The answers to these questions depend on the willingness and ability of
governments and central banks to shore up demand and prevent a serious and
prolonged recession. I think they have both the ability and the will to
achieve this objective. The main danger is that the authorities will listen
to the hair shirt brigade who think it is more important to punish bankers
for their reckless behaviour than to stabilise the financial system.
Fortunately, the hair shirt brigade seem to be losing the argument. I
predict that in two years time:
1 The FTSE will exceed 6,000; the price/earnings ratio is currently
quite low.
2 House prices will be 10 per cent less than now. Relative to income,
house prices are currently well above trend.
3 The interest rate will be 5 per cent. This would imply a real
interest rate of 2 per cent to 3 per cent, which is about average
historically.
Philip Shaw, chief economist, Investec
1 I certainly hope so. It is difficult to claim that stocks are
expensive at current levels and in two years' time we would expect the
financial system and the world economy to have put most of their problems
behind them and for the equity market to be trading above its current
levels. Failure to do so would imply that the global economy is in a serious
downturn, which we could all do without.
2 We would suggest that house prices will be lower as confidence
remains sapped from the market and households still have to contend with
high energy and food prices. Predicting house price inflation is not exactly
one of the economics profession's strong points but we have pencilled in a
fall of 5 per cent by the end of this year, followed by a period of
stability.
3 Interest rates will almost certainly fall again soon, but where they
are in two years' time will hinge on a wide range of factors. On the basis
that the UK avoids an economic slump, does not benefit subsequently from a
powerful rebound and that inflation is well contained, the bank rate is
likely to be around 5 per cent.
Ruth Lea, director, Global Vision and economic adviser, Arbuthnot Banking
Group
1 Forecasting the FTSE 100 two years hence is just about impossible, given
the number of imponderables in the markets and the economy, where recession
is a real possibility. But the FTSE 100 will probably be above the 6,000
mark, not least of all because there should be a recovery in banking shares,
which have plummeted in recent months.
2 House prices will decline modestly - say by 5 per cent to 10 per cent
(in nominal terms) although more in real terms. There should not be a
repetition of the 20 per cent fall experienced in the early 1990s, which was
exacerbated by double digit interest rates, a true recession in the economy
and rapidly rising unemployment.
3 Bank rate could be around 4.5 per cent, assuming no further
inflationary shocks and some modest growth in the economy. This also assumes
unchanged fiscal policy but this may alter, depending on the timing of the
next general election.
If the election is in 2010 there may be some pre-election sweeteners two years
hence; if it is in 2009, there may be some fiscal retrenchment.
Jonathan Loynes, chief European economist, Capital Economics
1 Yes. There is a risk that the FTSE falls further over the next year
as the economy and profits growth slows. But it should then start to
recover. Note that equities currently look cheap against some other assets
like bonds and property - they had their “bubble” in the late 1990s and
early 2000s.
2 Our forecasts are for a fall of 5 per cent this year and another 10
per cent or so next. But there is a clear risk of a bigger fall if house
prices were to move all the way back to “normal” levels compared with
income.
3 Our forecast is for interest rates to be at 4 per cent at the end of
2009. They could go even lower than that - perhaps to 3 per cent or even
lower. But they might be on the way back up in two years.
Sir Martin Sorrell, chief executive, WPP
1 I would say a resounding yes and that the market will fully
acknowledge the role that advertising and marketing services plays in
differentiating goods and services, geographically and technologically.
2 Up to 5-10 per cent higher. I would anticipate house prices would
have stabilised in two years but not shown very much growth from where they
are now. London may be the exception but the recent capital gains tax
changes and non-doms charge may shift the balance, even in London, although
the Olympics in 2012 should strengthen the market.
3 Up to one point higher. I would anticipate that interest rates remain
low to stimulate the economy. They may be around the same level as now or
may be a little higher given inflation worries.
David Cheyne, senior partner, Linklaters
1 We are in a current credit crunch, not an endless crash and it will
have worked its way through by then, so I would be very surprised if the
FTSE 100 wasn't above 6,000.
But how much above is another question.
2 Given the structural problems in the UK housing market - there still
aren't enough homes to meet demand - I would question how much of a real
decline in property prices we will see. Brits are stubborn about property
and many would rather hold on to their assets than sell for less than what
they think they are worth. So prices may fall by around 10 per cent but I
don't expect a crash.
3 They will rise but not by that much. Five per cent seems about right.
Richard Buxton, head of UK equities, Schroders
1 Yes, because irrespective of the economic environment companies will
perform and shares have a downturn priced in already.
2 Prices will fall by 5 per cent to 10 per cent per annum. Property is
expensive compared with other asset classes and prices will fall, partly
because of the higher cost of credit, and the City will shed jobs.
3 Rates will be lower. Unlike in the US, the Bank of England is
determined to cut the interest rate slowly. I think they'll fall gradually
through this year and through the first half of the next. It might be that
in about two years we will see the first rise but compared to now it will be
lower.
Depends on the direction of the wind!
Costas, Cyprus,
Q1 Will the FTSE 100 be above the 6,000 mark? Depends on the answer to 3.
Q2. What percentage change will there have been in the housing market and in what direction? Depends on the answer to 4.
Q3. What will the interest rate be? Depends on the answer to 2.
Q4. Will the media be upbeat or downbeat about the economy?
A. Confidence is everything
Pete, Chichester,
In short - no one knows. Might As well have asked an astrologer to read the stars. The only constants are death and taxes and I can confidently predict both will continue beyond any forthcoming crises. The other thing I can predict with confidence is that in two years time house prices - and share prices will be above or below where they are now. If I knew the outcome of either - for absolute definite - I would be placing the biggest spread bet I could possibly make. Only trouble is I wont be able to borrow the margin.
steve , Nottingham, UK
Andy G:
Suggest you check the supply/demand fundamentals in Japan during periods of property price falls. A property price crash is not certain, but it will be no surprise either it does happen or a sustained period of price falls sets in. Yes, there are supply issues, but these has been compounded by a huge speculative bubble on the back of cheap credit artificially boosting demand. Correcting this will involve some overshoot. Furthermore, only a year ago people were claiming that property was underpinned by a "fundamentally sound" economy, yet suddenly we find that perhaps it isn't so fundamentally sound after all. If the "real" economy declines, that that will undermine demand.
When it comes to human behaviour (which is all the economy and markets amount to) there is nothing new under the sun.
Paul Hopkins, Redhill,
How about this:
1. FTSE above 6,000 following a short crash, and company revenues increasing in trying to keep up with hyper inflation.
2. House prices 50% lower and falling as people lose their jobs and wealth due to the financial collapse.
3. Interest rate at 0% as the government tries to stimulate the economy, and hence allowing hyper inflation to wipe out its huge public sector debts.
In the process all people's savings will be wiped out, all Banks and utility and infrustructure companies nationalised, peoples assets seized, currency devalued and worthless, imported food unaffordable, .... and everything else results from this scenario.
All because socialist politicians tinkered with capitalism to allow lending at multiples of capital deposits, and to fund their public spending above tax revenue earnings.
George, London,
Andy G, London. So much self-delusion, the temple is crumbling around you yet you still worship the false god of ever rising property values. As far as I'm aware, no one is saying that property prices will fall to zero in the UK, so your supply and demand argument means nothing. Yes, property will remain in demand but there is absolutely no contradiction in combining this poposition with one which says that the appropriate price equilibrium point is about half where it is now. The simple fact is that prices have risen to their current levels because of a credit fuelled speculative boom, not under supply (the rented property next to me has been on the market for 3 months, rents haven't risen in proportion to property prices etc etc) so we're going to see major price falls as the market readjusts.
Clive, Chichester, UK
Like commenting on the after-life! We have no idea how much 'toxicity' is floating around, nor from which of the many sources trouble will arrive. All we know is that Bernanke is putting up a gallant fight, and that sooner or later it will all blow over. "A darkling plain, swept with confused alarms of struggle and flight, where ignorant armies clash by night."
Robert Sebag-Montefiore, Geneva, Switzerland
I concur only with the opening remarks by Prof. Lowthorn. The rest with respect is pure speculation. Only government and banking can overcome this: What of unemployment, new school leavers and graduates? What incentive to start a business and faith of stability when expert opinion varies so widely?
What we need is a boost to employment bought about by lower taxes, smaller government, less interference by government. Smaller banking with loans supported by real savings/deposits - not imaginary backed up by a gold standard.
david, London,
shame they did not ask whether the UK huge borrowing levels are sustainable?
Ian Dixon, East Horsley, Surrey
What would you experts in economics and finance to say. I imagine their jobs would be on the line if they said anything else but that things are really not so bad. Their main concern will be to hold on to their existing substantial assets and retire to their Tudor manor houses or Texas ranches (mortgages fully paid off) before they get found out. I don't like wearing a hair shirt, but if anyone would like to send me a cheque for $1 billion I promise to spend it as fast as possible to keep the economy afloat! Actually I have a vision of inflation rates 'returning' to 15%, but not within two years!
Brian Lewis, Manila, Philippines
Andy
That was what they said in Japan in the 80s (any "pillar" you can think of and they had "better" support). Go read up on there.
Do you think teh US thought this would happen a year ago? This is the first national fall since the Depression! In an election year!
Do you honestly believe that fundamentals are driving our housing market. Excess and cheap money given to fools helped silly bidding. Now funding is being cut off.
You then give a list of things that will be effected. Given these effect prices I am not sure how you are saying they are collapsing but house prices won't. Very odd.
Housing Review and ONS stats show we have more housing now per person than we did in 1990. Go do some maths. The shortage is made up. London will suffer most.
The "experts" above are part of the same crowd that knows enough about SIVs, conduits, CDOs to be dangerous. BUT they know more than the VIs and the idiots who believe them.
Lower prices = lower debt = lower interest costs = good.
Trevor, UK,
Mark Dampier does not even know that rice does NOT store well it gets weevils - easily.
Would you trust a man like this with your wallet?
Victor M., Cricklewood,
Regarding Sir Martin Sorrell's comment. The Olympics lasts two weeks, and as far as I can tell any rises in value in East London occured after it was announced they were won. These increases are now rolling back.
I believe the Olympics is bad for London. London tax payers are having to foot more and more of the bill and this will surely reduce economic growth. Yes there might be a minor boost in construction as the East London building programme is underway, but this is more than cancelled out by the property slump.
At the end of the day, East London will just be left with a white elephant of Olympic proportions,
mike livingston, Reigate, UK
Bob
I see you are another of the organised and cynical house price crash agitators. Sadly for you, house prices won't crash; they are driven by demand and supply not your propaganda. Demand is unlikely to drop much, supply is very stuck.
Price levels and rates of increase move with growth/real income/lending conditions and will be affected. But for you folks who missed out and want a crash to get back in, you missed the boat and the boat gets further away every day.
Deal with it.
Andy G, London, UK
It seems suprising that none of the experts even mention the U.K.'s £40+ billion annual balance of payments deficit as a factor in the future performance of the economy.
Furthermore about 50% of the world's wheat has effectively been removed from the market indefinitely because the US has given up subsidising farmers so that they can export cheap wheat when they can use it to reduce the cash flow to Chavez, Ahmadinejad and others fundamentally hostile to the West. This will be inflationary.
There could be room for more pessimism than that displayed by the experts.
Try house prices falling by 20+% and interest rates in double figures for size.
John, Woodbridge, Uk
House prices will fall because they are at unsustainable levels compared to fundamental values like average salary and disposable income. The current credit crisis is only the catalyst for such a needed market adjustment. Remember the dot-com bubble, we heard pundits say that companies should be valued at multiples of the "click traffic", and about rules of a "new economy".
There is no "new economy", the "old" economy is good enough to predict the future of house prices: back to 3.5x the average salary, which means an average house price of circa £130,000 or 35% lower than today. That is in "real" terms, but in "nominal" terms the price drop will be mitigated by the salary inflation (not very high, though).
Michelle, Richmond,
More hot air. Why waste it? Nobody has an inkling about where the economy and interest rates are heading.
But at least we now have reached a consensus that house prices are going to fall, so fall they will. It will be a self-fulfilling prophesy. Buyers are now going to wait on the sidelines until prices have dropped.
Bob Travels, Stevenage,