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How The Us Housing Slowdown Is Fuelling Inflation

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Investors have had a tough ride in recent weeks, and it doesn’t look like the jitters are going to end any time soon.

US consumer price inflation for May rose in line with expectations – but the core measure, which excludes food and energy prices, rose by a forecast-beating 0.3%. That means it’s a near-certainty that US interest rates will rise again at the end of this month.

We’ll return to that later. Back on this side of the Atlantic, we had our own bad news to contend with.

You know that times are hard when even the mighty Tesco comes out with disappointing results...

Supermarket giant Tesco saw like-for-like sales – that is, sales excluding new openings – rise 4.5% in the 13 weeks to May 27 (excluding petrol sales). You might think that’s pretty good, considering the amount of pressure the UK consumer is under.

But no. The results were at the bottom end of analysts’ forecasts. Sales growth was at its slowest for two and a half years – the fourth quarter of 2005 saw like-for-like sales rise 4.9%.

The group’s international units continue to do well, with sales up 15.3%, or 15.1% accounting for exchange rate changes. But as Tesco still makes almost 80% of its sales in the UK, the upbeat news from abroad did little to help its share price.

Meanwhile, prices in-store fell by 1.4%, despite rising costs. For all the complaints about Tesco’s dominant market position, the supermarket sector is still one of the most competitive around. And it’s tougher than ever just now, with Tesco facing a revived Sainsbury’s, and continued pressure from second-placed UK supermarket group Asda.

The supermarket giant wasn’t the only retailer reporting. While disappointment is a relatively rare experience for Tesco investors, it’s pretty much par for the course over at Woolworths.

The high street chain, which sells everything from sweets to electrical goods, saw like-for-like sales fall 6.7% in the 19 weeks to June 10th, compared to last year. The results were even worse than had been expected, with Seymour Pierce retail analysts Richard Ratner describing them as “awful.”

Woolworths also pointed out the downside of the World Cup. Amid all the excitement about beer and flat-screen TV sales, retail optimists seem to have forgotten that if people are glued to their big new TVs with cans in their hands, that means they’re not out shopping.

As Woolworths points out “in the short-term, we expect England’s participation in the World Cup to reduce overall high street footfall.”

Woolies’ pessimism is backed up by recent figures from market research company Experian. The group said that the number of people hitting the high street fell 8.2% last week compared to the same week in 2005. That’s the worst reading so far for 2006.

But don’t expect any big recovery once the football’s all over. Unemployment continues to grind steadily higher. The number of people out of work and claiming benefits rose 5,800 in May to 950,900, the highest level in four years.

Meanwhile, the unemployment rate rose to 5.3% in the three months to April, its highest level since October 2000, according to Bloomberg.

You might think that evidence of slowing growth in the UK would make it less likely that interest rates will rise here. But it’s not quite as simple as that.

As interest rates rise in other countries, the pressure is on the Bank of England to keep up or risk importing inflation as the currency becomes weaker. And, as we mentioned above, another rise in US interest rates now looks like a foregone conclusion.

US consumer price inflation rose 0.4% in May – but the real concern was the 0.3% rise in core inflation, compared to a forecast for 0.2%. The core measure is now up 2.4% on last year, well ahead of the Federal Reserve’s unofficial 1%-2% “comfort zone”.

But at the same time, US growth appears to be slowing. One of the main reasons for the rise in consumer price inflation is that the cost of renting a house has increased as more people look to rent rather than buy. Ironically, the main reason for the shift in favour of renting has been the rapid slowdown in the US housing market.

As consultancy Capital Economics points out, this trend is set to continue. Higher interest rates will make buying a home even less affordable, which in turn will drive up rental demand. That means rental prices will keep rising, which will in turn keep pushing up inflation.

Meanwhile, a separate report showed that wage growth is also faltering in the States. Real weekly earnings have actually fallen by 0.2% over the past year.

So is the global economy facing the worst of all possible worlds - stagflation? We’ll return to this in a future Money Morning - but if you can’t wait, you might want to read a piece from Morgan Stanley economist Stephen Roach, which we ran on the website earlier this week. We don’t always agree with his conclusions, but his work is always worth reading. See what you think, by clicking here: Is the world facing stagflation? (http://www.moneyweek.com/file/13857/is-the-world-facing-stagflation.html)

I hate to say it but there is some logic in there that will put a smile on the face of TTRTR. What do you call it when the value of your asset goes down but you charge someone more for using it?

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I hate to say it but there is some logic in there that will put a smile on the face of TTRTR. What do you call it when the value of your asset goes down but you charge someone more for using it?

Stagflation.

OR in TTRTR's position: Past time to sell high.

Edited by Realistbear

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As interest rates rise in other countries, the pressure is on the Bank of England to keep up or risk importing inflation as the currency becomes weaker. And, as we mentioned above, another rise in US interest rates now looks like a foregone conclusion.

The BoE really are a f*cking great big joke.

They were so quick to cut interest rates to 4.5%, even though inflation was at or above 2% at the time, now we have started importing inflation as they reported that imported goods prices increased, this is happening for the first time in ages.

The $ is currently 1.84 or something to the £ which is high and if the US keeps putting up it's rates which looks like a cert then the £ will get weaker, imported inflation will increase.

The BoE knows this, the people are starting to wake up to the fact that inflation is a fiddle, thanks in part to new Independent index

MESSAGE TO MERVYN - JUST GET ON AND PUT THE RATES UP! YOU MADE THIS MESS NOW FACE THE CONSEQUENCES.

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Stagflation.

OR in TTRTR's position: Past time to sell high.

anyone know what kind of net yields residential property in the prime U.S states is selling for?

just interested to know what kind of gearing people are lathering themselves up with.

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I hate to say it but there is some logic in there that will put a smile on the face of TTRTR. What do you call it when the value of your asset goes down but you charge someone more for using it?

Good luck to TTRTR if he wants to raise the rents in a stagflation environment. His tenants live on the economic margins already, and they will be hardest hit as the economy shrinks. I doubt they will be desperate to dig deeper into their shallow pockets when Steptoe comes round pleading poverty.

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anyone know what kind of net yields residential property in the prime U.S states is selling for?

just interested to know what kind of gearing people are lathering themselves up with.

I am familar with the San Diego , California market having lived there off an on since the early 70's.

I left last year when yields stank. Professional investors left the market in 2004. People were buying on the hope that house prices rise 20% a year, very year. The typical detached home reached $700k in my area (Carlsbad) and rents on such a home were around $2500 per month. The owners were also liable for property tax based on 1.25% of the purchase price which tranlates to almost $10k a year taxes. Most of the fools who bought after 2003 used IO mortgages--just like the sheeple here.

As San Diego stands it is almost the most overpriced housing market in the US given average household income of around $60k. It will crash very soon as inventories are at their highest level for a decade and no one is buying. In one zip code (Rancho Bernado) the median house price dropped 60.3% from a year ago! That may be an extreme example but it sets the pace.

The gearing is horrendous and I suspect the UK is an identical position with roughly the same HPI since the Great Crash which, incidentally the UK and San Diego shared at the same time and to about the same magnitude.

Bottom line, yields are extremely negative in California and, I suspect, in all the bubble markets (MA, FL, DC< VA).

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The difference is in the UK every man and his dog has got on the BTL bandwagon, there is a glut of properties for rent in my area.

There is far more supply than demand, if the landlord tries to put the rent up

I will move on. It is hard to believe that of all the things in the USA that could be causing inflation, it is rent!

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The difference is in the UK every man and his dog has got on the BTL bandwagon, there is a glut of properties for rent in my area.

There is far more supply than demand, if the landlord tries to put the rent up

I will move on. It is hard to believe that of all the things in the USA that could be causing inflation, it is rent!

BTL is quite big in the US also. The reason rent is causing inflation is that rents were once falling due to HPI. Now its HPC time the rents are rising as only fools buy. The government has not yet got around to removing rent from the basket to replace it with house prices!

Gordon may be planning to include house prices in the basket once HPC gets underway in earnest. Whatever suits his policy at the time.

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Good luck to TTRTR if he wants to raise the rents in a stagflation environment. His tenants live on the economic margins already, and they will be hardest hit as the economy shrinks. I doubt they will be desperate to dig deeper into their shallow pockets when Steptoe comes round pleading poverty.

There's always the street........ :D

The government has not yet got around to removing rent from the basket to replace it with house prices!

Gordon may be planning to include house prices in the basket once HPC gets underway in earnest. Whatever suits his policy at the time.

You took the words right outa my mouth.

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BTL is quite big in the US also. The reason rent is causing inflation is that rents were once falling due to HPI. Now its HPC time the rents are rising as only fools buy. The government has not yet got around to removing rent from the basket to replace it with house prices!

Gordon may be planning to include house prices in the basket once HPC gets underway in earnest. Whatever suits his policy at the time.

There is favorable taxation treatment, and a similar reponse to investors (with lower finanacing costs) in the US, which means many people cannot afford to purchase, and have to rent instead.

One group of people - landlords have a lower cost of financing. The other group, have a higher cost of financing from thier income and are forced to rent.

Dispite the US having far less restrictions on supply, rents are rising - with interest rate rises.

What do you think could happen here - with the added factor of unlimited immigration.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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