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House Price Crash Forum


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About Pete

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  1. Ultra long dated UK index linked gilts (eg 2055 issue) could return hugely (up to 1000%?) over the next few years. They are very volatile but will likely perform exceptionally as negative real rates become more pronounced. Negative real rates could hit -5 or -6%, a huge distortion which will propel these massively. Smart money in them now.
  2. So you are swapping assets trading at 1997 valuations i.e. well away from bubble territory (unlike the credit markets of 07) into cash which the authorities are detemined to dilute to nothing (Ben Bernanke is a determined clever man - you would be a fool to bet against him like Bob Prechter). Presumably, like many others, you think your market timing is good. Hope for your sake you are not gambling with your entire net worth.
  3. This bloke seems to think index linked is the way to go http://ruffer.co.uk/services/review.aspx
  4. Would only pay off my debts if I thought we were headed for deflation which seemed on the cards in 2003 but not now. Having diversified all my investments out of sterling, I actually sit quite comfortably with my big mortgage knowing that the currency is now weakening. I would have thought all savers/STRs would be quite sick of their pounds being eaten by inflation - the MPC seem pretty good at compromising the currency and I imagine this will continue. Watch out savers, probably more to come.
  5. I think you totally underestimate the value of a sea view to some people. Well paid job in London, 45 mins on train then home in time for a G&T on terrace with sea view. People DO pay a fortune for this
  6. I saw it - she was excellent. I love the way the elders refused to get drawn on the housing issue specifically - pompous arses. Single biggest wealth transfer from young to old ever - no comment.
  7. Couldn't agree more. I have had my own business for 10 years, taken a shed load of risk & employed others. I am now no better off than if I had bought a bigger house and sat there unemployed for 10 years. This economy is a farce - capitalism has been replaced by something else
  8. Here's a pretty gutsy investment review from Jonathan Ruffer of Ruffer LLP (who look after my investments - so far very well). Basically predicting the demise of the credt bubble. This sort of prediction is very unusual from a firm always trying to attract new money. The 2006 vintage of Chateau Ruffer was not one to relish. The stock markets put in another barnstormer, but we were more barn owl than barnstorm. We had a good showing in both 2004 and 2005 (each of them recovery years in the stock market) but we were not able to repeat it in 2006. Why was this? This last year has seen the second mania in ten years (the last was the dot-com boom). This is a most unusual phenomenon, since the disgust which follows the puncturing of a bubble usually lasts a generation and sometimes rather more. The reason, of course, is that the whole of the last ten years has been a period of an irrational exuberance of appreciating asset values, with various classes taking it in turns to bathe in the sun of investor euphoria. In early 2000 the top hundred NASDAQ stocks made, in aggregate, no profit and were valued at $6 trillion, the equivalent of the gross domestic product of the United States for eight months. (The last time that such madness had been seen in the investment community was in 1989 when Hirohito’s tennis court (and accompanying palace) was worth more than California: astonishing when one considers that Hirohito wasn’t even very good at tennis.) The present manifestation is every bit as extreme as the technology boom of 1999/2000, and is considerably more pernicious since it is not so easily identified for what it is. In that earlier period even the bulls of Colt Telecommunications and Yahoo could see that these companies were not without risk, however attractive their long-term outlook. As a result they were largely acquired with saved money, or with minimal debt – all the risks were in the investment vehicle. Today we see the reciprocal of this – all the risk is in the funding of the investment, which means that the investments themselves have, in abundance, all the qualities of safety. The investment opportunity comes about from the availability of massive borrowing at reasonable rates. A recent example has been the purchase of Thames Water for £8 billion, funded with £7.75 billion of debt, and only £250 million of equity. On this sort of financial structure, a fall of 3% in the value of the asset sees all your own money evaporate; from then on it eats away at someone else’s – the lender’s. The key is therefore to draw attention away from asset values, and onto cashflow considerations. If a target investment has a gross yield of , say, 6% and borrowings can be obtained at 5.5%, there is a 0.5% differential which, geared up thirty-fold, gives a return of 15%. Use it to pay down the debt, and the excess gearing recedes. After a few years, the debt has become manageable, so the key is to hope that the string bridge of positive cashflow holds steady over the initial period when the chasm of capital gearing makes the debt/asset value impossibly risky. Thus, the targets of this mania are built around stability and duration of the cashflow, not the capital value. The major beneficiaries of this phenomenon have been top quality property (Manhattan real estate selling on a yield of 3.5%, and in Piccadilly at 3.75%), utilities, infrastructure projects, good brand names of staple products (think Marmite) and long duration bonds of less than exceptional quality, whether corporate emerging market debt, or synthetic. Synthetic? Once a mania is underway, naughty children find new forms of misbehaviour. The ‘synthetic’ bonds (assets backed by an index representing underlying bonds often with a total value only a fraction of the synthetic itself) have value only on the assumption that the underlying asset movements continue to behave in an orderly and predictable fashion. This cannot be assumed. It is a repeat of the velveteen scam of the zero coupon preference share debacle coming back in a different garb: me no lycra. Another enormity is to borrow money in a foreign currency with a lower interest rate than the currency of the host investment. The benefit is a lower cost of debt, widening the differential on the net return in the investor’s favour, but with a substitution of currency risk. Jim Grant of Grant’s Interest Rate Observer cites how rampant and widespread this phenomenon now is: 92% of home equity loans in Hungary are Swiss Franc denominated, and 70% of housing related debt in Poland has such currency risk. Moreover, it transpires that the naughty child is not naughty at all, but a genius: the foreign currency risk has turned to be a currency reward as more and more ‘investors’ jump onto the bandwagon and drive these currencies downwards (see chart, overleaf). This chart is a thermometer of the heat of this mania. The relationship between the Swiss Franc and the Euro is a stable one, since they have so much in common. One thing alone differentiates the Swissie – its reputation as a safe haven and for this ‘insurance policy’ its holders pay a premium in the form of a lower interest rate and less liquidity. Its movement is, in broad terms, a gauge of markets’ fear and complacency; this most eloquent chart shows a decisive victory for complacency over fear. It is a single example of a most worrying characteristic. Investments in absolute safety are all weakening, and the more absolute the safety (such as index-linked stocks, short dated government bonds and bolthole currencies) the more they tell the same picture of a retreat in value. It is normally the preserve of risk assets to fluctuate in value, since the sort of safety which comes about through risklessness rarely loses value comprehensively. This phenomenon is not, however, unprecedented. It was the striking feature of 1999, when the rush into telecom madness sucked money out of safety to feed the frenzy. It is the dynamic of the tsunami, the first evidence of which is the retreat of the tide in the opposite direction from which the danger itself comes. Those who understood, knew that it was time to head for the hills. We believe that a similar move is warranted now. We have long predicted a financial tsunami, but we always make it clear that its timing is uncertain, and that there was little point, and some mischief, in trying to pick the moment of its arrival. The prediction of a financial dislocation is a big enough investment call, without adding an overlay as to its likely timing. But, for the first time, we are calling the top. To us it is simply incredible that the big majority of forecasters do not even consider this relentless rise in leverage as worthy of consideration. In our view, we take our cue from the Michelin rosette: stock markets are currently worth a detour. Jonathan Ruffer January 2007
  9. Here are the thoughts from Jonathan Ruffer (v successful fund manager over the years): Jonathan Ruffer's IR thoughts Most Significant Bit "Our strong belief is that IRs will be reduced very sharply" These are not empty words, these guys invest millions based on such macro calls
  10. 2.9% in one month is massive and concurs with what I've seen on the South Coast - looks like the soft landing was never possible after all.
  11. I read a comment by Marc Faber a few months back that he believes inflation will be good for Jap equities. He reckoned the reappearance of inflation risk will cause many Japanese savers to move from cash to stocks. Rememeber, the high for the Nikei was 40,000 - 16 years ago ! He also reckons Taiwan is undervalued. So far his calls have been damn good, although bond yields don't appear to be spiking as much as he predicted.
  12. The guy has been more successful at forecasting the market than Oswald, Bootle et al - maybe he deserves a bit of credit for that. But I have never properly heard him address the low wage inflation issue i.e. have buyers confused a drop in nominal rates for a drop in real rates. I read a comment by him on his website to the effect that "Buyers accept that their mortgages will last longer than before" (paraphrased). I'm not sure the market cares about people "accepting" things. Surely this is THE difference between the time of 3.5 x earnings and now. How can their not be a very significant lessening of demand at some future point due to low debt erosion (compared to our higher inflation past) ? Will it not be equal and opposite to the boost in demand resulting from the removal of the nominal cap ?
  13. So we have jittery stocks at PEs of 10 - 15, and we have property bullishness at PEs of 25 - 30. If this is not a demonstration of ridiculous sentiment swings in the markets I don't know what is. There are tech stocks out there valued at 10x earnings for gods sake. People were falling over themselves to buy at 30x earnings only 6 years ago !
  14. I emailed John Calverley, chief economist of American Express, for hist latest thoughts on house prices. Very decent of him to reply so extensively I thought - here it is: I continue to think that the UK housing market is in a bubble, that prices are very expensive and will eventually fall back significantly. Of course, as with anything else in the investment world I hold that view with less than 100% certainty, but I do put it at 80-90%. The current lift in house prices is due to the cut in interest rates last year, the slight pick-up in the British and world economy in recent months, and a feeling among many people in Britain that, since house prices did not crash, it is OK to buy again. This is called "anchoring" in the behavioural finance literature, as I discussed in my book. I seriously doubt whether prices will rise all that much because they are already too expensive for many people and also because the Bank of England will probably raise interest rates again. Much of the rise is in the top end in London at present, where prices fell in recent years. The timing of the eventual fall in prices is hard to know. It may not come for 3-4 years or more and, when it comes, it will likely take 3-5 years to unfold so the big opportunity to buy at a low price could be as much as 8 years away. It is most likely to come when the world goes through a serious economic downturn, which does not look imminent but will eventually come. As I argued in the book, being "short" housing is a risky position since we all need somewhere to live. I think the key is not to be "long" housing, i.e. overweight with buy-to-let property or with a house much bigger than you really need. But it also true that if you rent a house today you might pay around 5% of the value annually, while if you buy you will probably also pay about 5% so there is not much difference. If house prices do not rise paying interest is "throwing money away" just the same as paying rent. Bottom line -- you have risk either way. I hope these thoughts are helpful.
  15. Highly debatable figure that one, but probably achievable in shared houses etc. at a push. But then I'd want to offset the yield with higher management charges (my time) - so pushing the yield lower. Flat yields are lower than this. Fairer to compare P/E with BTL yield. You also need to consider whether or not the risk premium on each of these investments is fair. Current house prices have broadly the same risk premium as 15 years ago despite general wage disinflation over that time.
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