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House Price Outlook (27 September – 23 November 2008)

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This Month's House Price Crash Developments


> Nationwide: UK house prices fell 1.8% in October, down 14.6% (£27k) from their peak of £186k
> HBOS: UK house prices fell 2.2% in October, down 15.7% (£31,424) from their peak of £200k
> Rightmove: home asking prices down 7.7% (£19k) at £223k since last October's peak
> Home sales plummet to new low as Nationwide says lending has dropped 70%
> Hometrack: house prices fell 1.3% in October - largest falls seen in London & the South West
> Hometrack: buyers now only pay 89.2% of the asking price, time on market rose to 11.9 weeks
> Knight Frank: London house prices drop at record rate, down 3.9% in October, 13.4% from peak
> CML: Repossessions in third quarter jumped 12% - full year numbers expected to soar by 70%
> British Bankers' Association: Mortgage approvals down 57% in last year
> RICS: The number of transactions per surveyor has fallen to under one per week
> CML: August house purchase lending 63% lower than last year, first time buyers at all time low
> Barratt slashes 43% off price of some new homes as the global financial crisis takes its toll
> Buy-to-let product choice obliterated as 85% of buy-to-let mortgage products disappear
> Fall in land prices: Residential development land has dropped a third in value over the past year
> Brown to keep on borrowing, insisting the government will spend its way through the downturn
> The Bank of England slashed interest rates 0.5% and then another 1.5% to 3.0%, a 53 year low
> UK inflation soars to highest rate in 16 years at 5.2%
> UK government to use up to £50 billion of taxpayers' cash to bail out three major banks
> Bradford & Bingley nationalised after retail savers withdraw “tens of millions of pounds”


> S&P/Case Shiller reported US home prices down 1% in August, 20.3% off their peak
> Commerce Dept: price of new homes down 9.1% to $218k compared with September 2007
> Commerce Dept: Inventories fell 7.3% vs August, standing at a 10.4 months supply of homes
> RealtyTrac: Foreclosure filings in the third quarter of 2008 rose 71% from a year earlier
> RealtyTrac: October foreclosures up 25%  - 280,000 households received foreclosure notices
> NAR: Home prices down 9% in past year to $191,600 and are down 18.5% in the West
> $700 billion rescue plan for US economy agreed on Capitol Hill
> Washington Mutual was seized by US regulators on in the biggest bank failure in US history
> Concerned Fed cut 0.5% from its benchmark interest rate twice in October, now stands at 1%
> FDIC, regulators seize Houston-based Franklin Bank, the 18th to fail this year
> Percentage of US problem loans has tripled in the last year
> S&P500 dives to lowest level since 1997, erases decade of gains

Rest of World

> Hungary gets $25.1bn rescue package to avert a looming meltdown its financial system
> Ukraine gets $16.5 billion rescue loan to help to help overcome the effects of the financial crisis
> Argentina may expropriate property of its citizens by nationalising their private pension funds
> Iceland sought financial help in bid to rescue its economy - currency collapses, inflation soars
> Iceland secures £3.1bn rescue package from IMF, Finland, Sweden, Norway and Denmark

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Section Index

Overview: How am I Doing Against my 2008 Predictions? >
House Prices & Housing Market Review >
Oh Economy, What a Wicked Web You Weave! >
So What’s Happening? >
What’s Next For House Prices & the Markets? >
Outlook >

How am I Doing Against my 2008 Predictions?

Since we have already met or are getting close to some of my targets it seems like a good time to have a quick look at the WhichWayHome Market Outlook predictions.

> UK house prices currently down 15% (prediction for an eventual 50% fall from peak)
> US house prices currently down 20% (prediction for an eventual 30% fall from peak)
> FTSE Allshare Index currently down 46% (prediction 40%)
> S&P500 currently down 49% (prediction 40%)
> UK base interest rate currently 3% (prediction 1-2%)
> US base interest rate currently 1% (prediction 0%)

So the stock markets have fallen as expected and interest rates have been cut in response, again as expected. House prices will lag falls seen in other markets as it takes time for the impact of tight lending, rising foreclosures and job losses to feed into the property market. But house prices are sure to continue on their downward trend over the medium term.

Commodities – I was wrong in my assessment that all commodities would continue to rise in price as governments print massive sums of paper money. Most commodities have been sold off by hedge funds and other leveraged investors in a scramble to raise money, sending their prices down alongside stocks. My favourite commodity, gold, has performed extremely well throughout this crisis however, making new highs in October. I believe that this trend in the price of gold is set to continue as sophisticated investors scramble to protect their wealth.

Currencies – have been all over the place over the last few months. In fact, if you wanted to demonstrate the true fear and volatility present within the current financial markets you need look no further than the wild swings seen in the currency markets. Normally these markets are much, much more sedate. Certainly we have seen the pound suffer against most major currencies as the economic outlook here is deemed to be worse that in other developed countries. The dollar has risen despite massive US money creation, principally because of the relentless sell-off in stocks, bonds, commodities etc. If you sell one of these instruments you naturally get currency in return, and each new wave of selling leads to a scramble for dollars, pushing up the price of that currency. As I have stated in the past, I believe this is a temporary rally in the Dollar. Earlier in the month I spoke to James Turk, Founder & Chairman of and David Morgan of who very much shared this view.

Later in this outlook I shall examine my predictions in a little more detail and will set out my updated expectations for the future.

Back to Section Index >

House Price & Housing Market Overview

After the summer lull, activity usually picks up in the autumn. This season is usually characterised by busy estate agents and strong sales of property across the country but it is different story this year.

There is a distinct lack of buyers as people wait to see how the rest of the year plays out. Economic volatility, job security and mortgage lending restrictions are at the forefront of peoples' minds. The latest survey from the Royal Institution of Chartered Surveyors revealed that the volume of home sales plunged to a new low last month - estate agents in England and Wales had sold an average of only 10.9 properties per firm in the 12 weeks to the beginning of November, with agents in London struggling to sell one house a fortnight. That is the lowest level of sales since the data started being collected in 1978.

Low sales volumes resulted in a new wave of price cuts.

Nationwide reported price falls of 1.7% in September and 1.8% in October. It is now just over a year since house prices peaked in October 2007. The last 12 months of consecutive price falls bring the cumulative fall in house prices to 14.6% or £27,171.

Nationwide also reported that its net mortgage lending had fallen by 72% over the past six months, down from £3.6 billion to £1 billion in the six months to September 2008.

The price cuts were mirrored by Halifax, which reported that prices fell 1.2% in September and 2.2% in October. The peak in Halifax’s house price index was reached in August last year. Since then we have seen a decrease in house prices of 15.7% or £31,424, the single largest drop since the series began in 1983.

In both cases, the drop in house prices already exceeds the peak-to-trough fall seen in the last house price crash. Adjusted for the government’s published inflation rate the current situation appears even worse. Adjusted for the true rate of inflation (closer to 10-15% per annum) or gold, house prices have tanked.

The fall in house prices appears to be impacting all areas, all house types and all price levels.

The already bulging glut of properties stuck on the market swelled further as vendors returned from their summer holidays and rushed to list their properties in an attempt to capitalise on the non-existent autumn buying spree. I have read that in Surrey, a good proportion of homes coming on the market were bought within the last two years, suggesting that sales are being made out of necessity rather than choice. They were probably overpriced and as jobs are lost or debt burdens become too great, mortgages fall into arrears, forcing a sale.

Contrary to popular belief, London has not been immune to the property downturn. Knight Frank found that prime residential prices in central London fell by 3.9% in October, the fastest rate of decline on record. Such properties have fallen 13.4% in price since their March 2008 peak. Living in or around London was always put forward as a homebuyers best defence against a possible house price crash. If you think about this logically it makes absolutely no sense. Londoners still have jobs which could be at risk and mortgages which could be too large. The proportion of Londoners who are fabulously cash rich and financially independent is very small. Please guard against the belief that buying near London gives you immunity from a global asset price collapse.

As reported last month there has been a dramatic increase in the number of frustrated vendors deciding to put their homes on the rental market because they can’t achieve the sales prices they are looking for. Their aim is to ride out the current turmoil and to put their home back up for sale once prices recover, which won’t happen. Rental supply continues to exceed demand and rents are gradually heading lower. This month the Royal Institution of Chartered Surveyors confirmed that rents fell for the first time in five years between July and October as home-movers flooded the rental market with properties that they could not sell. The credit rating agency Standard & Poor’s now believes that more than one in three landlords will be plunged into negative equity by the middle of next year as house prices continue to fall.

The increasing weakness in the housing market means that house prices are highly negotiable. Hometrack has recently reported that buyers are paying around 89% of the asking price when agreeing a sale, but I have seen reductions of 20-25% or more.

Despite the reductions, many sales ultimately fall through and estate agents need to make a massive effort to keep the buying chains together. I’m not sure what percentage of chains fail, but I can imagine that the breakage rate is spiralling upwards as the economy and confidence splutters.

Even when buyers don’t get cold feet and persist with their plan to purchase property they are finding it difficult to raise the funding to needed to make their purchases. During the month we saw mortgage providers pull competitive deals from the market, despite appeals from the prime minister for lenders to pass on cuts in interest rates. And the selection of buy-to-let mortgages has been obliterated, with 85% of products being stripped from the market over the last year.

The credit squeeze is also percolating into the personal loan and credit card sector also. The number of lenders offering 0% offers has fallen 10% in the last year and millions of people who have applied for a credit card or personal loan during the past six months have been rejected. 13% of people who applied for a financial product in the six months to the middle of September had a credit card application turned down, while a further 6% were rejected for a loan, according to

The general tightness of credit is leading to increased numbers of repossessions. The Council of Mortgage Lenders recently revealed that repossessions in July, August and September jumped by 12%, taking the number of repossessions that took place over the summer to 11,300. The CML forecasts that total repossessions for the year will reach 45,000, marking a 70% increase on last year's total.

Desperate times call for desperate measures and big homebuilders have started slashing prices. Barratt lead the pack with the hope of offloading stock and generating sales by slashing 43% off the price of some new homes for buyers prepared to take five or more flats or houses off its hands in its Yorkshire East division.

The emerging financial crisis has caught many housebuilders unaware and unprepared. Residential development land has dropped in value by a third over the past year and by up to 15% in the past quarter alone. Developers have been revaluing their assets to reflect the lower value of the land on their balance sheets. About £2bn has already been written off by the big six nationwide housebuilders, £600m of it when Persimmon took a provision against the value of its land bank recently. Intangible assets, mainly goodwill, have also been cut by nearly £900m. By the time the market finally reaches a bottom and stabilises the fall in property and land prices could wipe out the equivalent of more than a decade of profits in the housebuilding sector.

Back to Section Index >

Oh Economy, What a Wicked Web You Weave!

OK. Take a deep breath. Ready? Here we go…

In the last two months alone we have seen house prices fall 3-4% (£5-6k), stock markets fall over 30%, pension pots must have fallen by a similar amount, CRB commodity index fall 30%, base interest rates fall 2% (cutting your savings income), the pound fall 19% against the dollar and 6% against the Euro.

The carnage brought forth a swathe of interest rate cuts…

Central banks have acted in unison, cutting interest rates in dramatic fashion in an attempt to unlock the credit markets and stimulate spending. October 8th saw coordinated rate cuts of 0.5% by the UK, US and ECB. Later in the month the US Fed cut rates by another 0.5%, taking its benchmark rate down to 1%. The UK followed on November 7th with a whopping 1.5% cut to 3%, the lowest level in 53 years. On that same day the ECB also cut rates, down another 0.5% to 3.25%.

Almost everywhere you looked, rates were being slashed. Here’s a list of just some of the countries following suit: Australia, Canada, China, Czech Republic, Denmark, Hong Kong, India, Japan, Norway, South Korea, Sweden, Switzerland, Taiwan and Vietnam. The markets expect further cuts to be made in the months ahead.

We also saw a flurry of coordinated bailouts, including the bailout of entire nations…

Hungary received one of the biggest rescue packages ever, £16 billion from the International Monetary Fund, World Bank and European Union in order to avert a meltdown its financial system.

The IMF together with Finland, Sweden, Norway and Denmark, put together a £3.1 billion deal to rescue Iceland following the collapse of the country's banking system which caused its currency to collapse and inflation to soar.

The IMF reached agreement in principle with Ukraine for a £10.5 billion loan to help to ease the effects of the financial crisis brought on by a 20% slump in the value of its currency to a record low and a fall in the price of steel, its main export.

Suspicions have arisen that Argentina could be on the verge of bankruptcy. The country has a track record of financial instability - In December 2001 it reneged on its $95bn of sovereign debt, which at the time was the biggest default in world history. The country’s government is making moves to take over $29bn of the country's privately managed pension funds – designed to give it fast access to much needed cash.

UK bank bailout...

The UK government announced that it is to pump £27bn of tax payers' money into three UK banks in one of the UK's biggest nationalisations. Royal Bank of Scotland will have £20bn injected into it and £17 billion will be injected into Lloyds TSB and HBOS. Separately Barclays intends to raise £6.5bn without government help. Following the move, taxpayers will own about 60% of RBS and 40% of the merged Lloyds TSB and HBOS.

US bank bailout...

The House passed an emergency plan to stabilise the financial system, paving the way for what could be the biggest government intervention since the Great Depression. The bill gave the Treasury Department the authority to buy up to $700 billion worth of distressed mortgage assets and take over banks’ bad debts. A proposal was put forward to use $250 billion to seize stakes in nine of America’s biggest banks, similar the approach taken in the UK. Since the bailout was approved Treasury Secretary Henry Paulson has changed his view on how the money should best be used, further spooking markets which are looking for signs of stability.

And not forgetting…

Austria’s Erste Group, one of the country’s top three banks, was the first to use a €100bn ($129bn) government recapitalisation scheme, taking €2.7bn to bolster its balance sheet.

Belgian, Dutch and Luxembourg governments combined to inject €11.2bn (£8.8bn) of capital into Fortis, the embattled banking and insurance group in an effort to shore up confidence among savers.

France threatened to seize control of the country's banks and fire top staff unless they do their part to stabilise the economy by stepping up lending to companies in need.

Germany: €500 billon bank bail-out
Germany’s financial sector reeled after Hypo Real Estate, one of the country’s biggest lenders, had to be rescued by other banks and the government in order to solve a £40bn liquidity crisis.

The European competition authorities later approved Germany’s bail-out plan. HSH Nordbank requested €30bn in guarantees following write downs of €2.3bn over the last year and heavy losses from the collapse of Lehman Brothers. Commerzbank said it would seek a combined guarantee and capital boost of €23bn and BayernLB will seek €5.4bn.

Ireland pledged to guarantee all bank deposits at its six major banks in order to improve bank access to international funds frozen by the global credit crunch. The guarantee covers up to €400bn of liabilities including retail, commercial and interbank deposits.

Italy is set to provide up to €30bn in capital for banks so they can keep lending.

Portugal’s government announced plans to nationalise a local bank that has run up accumulated losses of €700m and faced an “imminent breakdown” of its ability to meet payments. It also made up to €4bn available to Portuguese banks to strengthen their capital ratios.

Russia had the first run on one of its banks. Globex, a mid-sized retail bank, banned depositors from withdrawing their money as confidence in the Russian banking system began to show signs of evaporating. The Russian government committed to pump $37bn in long-term loans into its biggest state banks, amid signs that the turmoil was spreading to the real economy. The central bank has now spent $84bn of its reserves over the last month or so and mid-November it raised interest rates by 1% to 12% in an attempt to save the rouble from collapsing.

Spain’s Santander unsettled the markets with the surprise announcement of a deeply discounted £5.8bn rights issue to bolster its capital ratios.

Sweden’s largest savings bank, Swedbank, signed up for the government’s SKr1,500bn (£130bn) guarantee programme. Later Carnegie, the Nordic region’s oldest and largest investment bank, was taken over by the Swedish government after its licence was revoked for failures in its internal controls. Carnegie is the first Swedish bank to collapse in the current global financial crisis and the first to be taken over since the country’s banking crisis of the early 1990s. It is now likely to be broken up and sold.

In the United Kingdom, Bradford & Bingley was nationalised by the government following a deal agreed with the Spanish bank Santander, which will buy the UK mortgage lender’s £21bn deposit book and branch network for about £600m. The bank was taken into public ownership after savers withdrew “tens of millions of pounds” in just days.

HBOS revealed writedowns of £5.18bn, a more than doubling of the £2.46bn taken in the first half. The third-quarter impairments included a £457m loss on HBOS’s banking book relating to Lehman Brothers and Washington Mutual, the troubled US banks. HBOS warned that another £150m of impairments were likely to be taken against Icelandic banks, following the turmoil in that country’s financial sector. Losses attributed to “market dislocation” increased by £732m in the third quarter to total £1.83bn in the nine months.

In the United States, the Federal Reserve threw another financial lifeline to AIG, first agreeing to provide up to $37.8bn in additional liquidity to the stricken insurer and later increasing the package by another $27bn. The move, which now provides a total rescue loan of $150bn and gave the government control of the company, is designed to help AIG fund its troubled securities lending operations. The company said it would write down “substantially all” of a $20bn tax-related asset that has acted as a key component of its capital.

Washington Mutual was seized by US regulators in the biggest bank failure in US history. It was sold to JP Morgan Chase. At the point of takeover, WaMu shares had lost almost all of their value. To date, 18 US banks have failed this year, the most recent being Houston based Franklin Bank S.S.B.

American Express became the latest financial group to convert to a bank holding company in a surprise move that gives its credit card group access to Federal Reserve funds. The Fed approved the move more quickly than usual because of the “emergency conditions” and “the unusual and exigent circumstances” in financial markets.

Fannie Mae lost a record $29bn in the third quarter as the company wrote down a tax-related asset which had become a controversial addition to capital as losses mounted. Credit expenses soared to $9.2bn in the quarter due to deteriorating mortgage credit conditions and house price declines.

Freddie Mac said it will need a $13.8 billion cash infusion from the U.S. Treasury as losses stemming from home-mortgage defaults surge.

Wachovia revealed a $23.9 billion loss on a write-down of goodwill and mortgages. The bank has lost $33 billion over the last two quarters, roughly the gross domestic product of Guatemala.

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Back to Section Index >

So What’s Happening?

In the second chapter of Warren Buffett’s new biography, The Snowball, he says “In the short run, the market is a voting machine. In the long run it’s a weighing machine. Weight counts eventually. But votes count in the short term.”

At present the markets are falling because (a) people are looking into the future and are voting the prices of investments down, and (b) because some people have to sell.

(a) Future Prospects

Votes are being cast for lower asset prices in the future. A quick review of the bailouts above makes it clear that these are extremely difficult times. I think there is still a long way to go before the excesses of the recent past are unwound and the economy begins to return to health. It is a question often asked, but I do now think that the current crisis will prove more devastating than the conditions seen during the Great Depression.

(b) Forced Selling

There are a number of reasons for the massive selling we have seen:

Lack of short-term funding

Firstly, easy credit has disappeared. Many businesses use short-term funding to cover their working capital. Banks and many hedge funds do the same. They borrow in the short term and employ that capital to generate higher returns over the longer-term.

A bank’s business model, for example, is to borrow short term funding and to provide long term loans like mortgages. The interest it pays on the less risky short-term borrowings is lower than the interest it charges on longer-term, riskier loans. It therefore generates income due to the difference in the interest rates it pays and receives. This is one of the reasons that banks will not pass on the interest rate cuts made by the Bank of England – they will need to rebuild their balance sheets by borrowing at the cheap rates and lending our at much higher rates. The government also needs to let them do this in order to expedite the return of a healthy banking system.

Since many of the loans made by banks were to borrowers who could not pay them back, the loans started going bad and the rate of defaults increased. Gradually banks and mortgage companies started to lose huge sums of money and in order to protect themselves they curbed their lending activities causing the credit markets to seize up.

As the scale of the problem became apparent and lending institutions began to fail, trust between institutions disappeared. Inter-bank lending ground to a halt and it became impossible for many institutions to get hold of the short-term funding they needed to conduct business. This is where the central banks come in. If short term funding is not available, central banks step in as lender of last resort, pumping money into the system in order to boost liquidity and get the cogs of the lending machine moving again. This has worked in the past, but the scale of the current crisis is like nothing we have seen before. Below you will see an update of one of my favourite charts, which shows the amount of money banks have borrowed from the Federal Reserve from 1910 to the present. It is quite a spike from $0 to $600 billion in the blink of an eye!

Faced with the possibility of insolvency and bankruptcy, these banks, funds, insurance companies etc, began selling whatever they could lay their hands on in order to generate enough cash to keep their businesses going.

Unwinding of leveraged positions

The £1.1 trillion hedge fund industry is a particular contributor to falling prices. Most tend to invest with borrowed money, leveraging up their positions and therefore their returns. As prices fall their capital becomes very quickly eroded and they are forced to sell their positions in order to prevent bankruptcy.

For example, I start a hedge fund and I am going to trade houses. I have raised £10k of capital from various investors and I wish to deploy that capital in order to maximise my gain. If I buy a house worth £10k with the capital and house prices increase 50% in one year, I will make a profit of £5k (£10k x 50%). However, if I borrow £90k from the bank I can now buy a house worth £100k (£10k capital + £90k loan). Over the same year, that same 50% increase in house prices now gives me a much larger profit of £50k (£100k x 50%). I am happy because I have made much larger profits. My investors are happy because they too have made larger profits. And the bank is happy because it loaned me £90k but the value of the house is £150k after one year. Everyone is happy.

But what if I took the £10k of investors’ capital, the £90k loan from the bank and invested the £100k in a housing market which was about to fall in price? If the value of my £100k house fell 5% over the year I would lose £5k of my capital (5% x £100k), i.e. a 5% fall in house prices has resulted in a 50% fall in my capital base, down from £10k to £5k! And if house prices fall 10% or more, it wipes out the entire investors capital and I am out of business. So, to prevent the collapse of my hedge fund I would be sure to dump the house on the market as soon as prices started falling. Other hedge funds would most likely do exactly the same thing, leading to a collapse in house prices. This is what we are seeing across many markets at the moment.

Selling to meet redemption payments

This is linked to the hedge fund example above. Let’s say a canny investor noticed that property prices were falling and wanted his investment back. He calls the hedge fund, which has to sell some of the house in order to pay back the investor, pushing down house prices. As prices fall, more investors ask for their money back, meaning that the fund has to sell even more of the house into an already falling market, and so on….

Hedge funds which bought stocks and other investments with borrowed money and are now having to offload them at discount prices in order to meet redemption payments. Some 8000 hedge funds with $1.7 trillion (£1.1tr) in assets are being caught in this vicious cycle as worried investors pull out their money.

Unwinding of carry trades

A number of carry trades have been employed in recent years, the largest of which is the Yen carry trade. The interest rates in Japan have been held at or close to 0% for years. Investors looking to boost their returns would borrow Yen at low rates of interest and invest the money in securities which yield a higher return. So you might for example borrow Yen, convert it into US dollars and invest in the US stock market. Or instead you might borrow Yen at 1%, convert in to Australian dollars and invest in Australian government bonds paying 6%.

This trade works when the assets you invest in are rising, but once asset prices start falling, the trade loses its appeal. In addition, the recent volatility in the currency markets has lead to a rush for liquidation of such trades as the currencies in which investors have bought investments fall in value against the currencies they have borrowed, making the overall return for this strategy negative.

So there you have it, asset prices are falling around the world due to a combination of choice (voting that prices will fall) and necessity (selling to raise the cash needed for survival).

Back to Section Index >

What’s Next For House Prices & the Markets?

Have you spotted the big picture yet?

Often it is difficult to see the wood from the trees, especially at times like this when the markets move quickly. Headlines about bailouts, financial collapse, plunging asset values and the onslaught of recession fill the newspapers and TV shows daily. It’s certainly hard to keep up. It is also difficult to know what to focus on.

Have the bank bailouts worked? Will the cut in VAT stimulate spending? Should you buy houses yet? Should you buy stocks yet? Should you sell? Why haven’t the banks passed on cuts in the base interest rate? Will they? Will the Bank of England cut rates further? What if none of this works? Or is it working? Is my job safe? Should I be saving more? Where do I invest those savings? What about my pension?

The premise of this website is that big picture developments can be identified ahead of time, allowing readers to shape their financial strategy in the best possible way. Despite the bombardment of information brought about by global financial collapse, there is indeed a clear picture unfolding which has actually already been detailed at some length above. Lots of bailouts = massive money creation.

Anyone who has read The Essentials in this site will know that massive money creation is the problem in the first place. As we moved away from a currency system backed by gold, governments were able to create money out of thin air, decreasing the value of that money and making us work harder to maintain our standard of living. The paper money fed into the banking system and was used to create massive levels of easy credit, pushing up asset prices around the world and comforting us with paper wealth. The collapse of the financial markets over the last year has reclaimed most of that paper wealth, wealth that was never real in the first place. To obtain wealth you need to create or nurture tangible value. Buying a house at 9 times salary is not value. Buying a tech stock with a price to earnings ratio of 90 is not value. To quote Warren Buffett for the second time in this outlook “price is what you pay but value is what you get”. Warren has become one of the richest people in the world by shunning bubbles and focussing on value.

What does this mean?

Getting back to the likely outcome of current events… the policy response of almost every government to this crisis has been to inflate our way out of it – to print more money and to once again pump up the giant credit bubble. We have seen huge bailouts, funded by massive levels of government debt. Where will all of the money for these bailouts come from? Who is in a position to lend the £1-2 trillion next year, and Europe, including the UK, another £1 trillion or so? Unfortunately these actions lead us further and further down the road of ongoing massive paper money creation and the devaluation of our currencies.

The effects of the current money creation will not become apparent immediately, there is a lag between the creation of money and its impact on prices and markets. At present this lag is being prolonged by the banks' lack of willingness lend money. All the bailout money made available to them is being held tightly in order to provide them with a safety buffer. But gradually the banks will start to drip the massive supplies of money back into the economy and the governments will get their wish – to get the economy going again.

As the new paper money enters the economy it will again start to push up the price of tangible goods like food, oil, metals etc. It will also start feeding back into asset prices. I can foresee house prices and stock markets start to rise again as homes and shares are purchased with an overabundance of devalued pieces of paper money. The phenomenon of paper wealth will return to comfort many, while those with a true understanding of the situation will realise that such assets have created no real wealth in years.

I will be writing an article specifically about the coming inflation over the Christmas period. It will detail the causes and consequences of inflation. And, just a reminder, inflation is not the increase in price of a selection of consumer products, it is the fall in the value of money. Print lots of paper money and the value of each piece of paper decreases. The value of your savings will decrease. As will the value of your salary or pension. Inflation is the indiscriminate confiscation of wealth.

Back to Section Index >


House Prices

House prices will continue to fall, following other markets down. A lag will be observed between the price plunges we have seen for stocks and commodities and the fall in house prices, as it takes a while for the impact of job losses to be felt through forced sales and foreclosures. I still come across people who think that the house price crash is over and that we are in for a soft landing, but why would house prices stop falling here when some of the biggest names in finance have collapsed, the S&P 500 has fallen 50% to its lowest level for 11 ½ years, and thousands of job losses are announced every week. Even a realistically priced housing market would be have difficult time staying afloat right now, so you can imagine how shaky an overpriced housing market will become. I maintain my outlook for a 50% crash in the UK and a 30% crash in the US.

Interest Rates

I see interest rates continue to fall as governments attempt to reignite the economy. I still expect UK base rates to reach 1-2% and for rates in the US to reach 0%.

Stock Market

We have reached my target of 40% declines in the UK and US stock markets. Rather than restate my target at this time I will wait a couple of months to see how events develop. While I believe we may see a rally in the stock market from these levels, it will only be an upside correction within a primary downtrend. Given the current conditions I would not be surprised to see stock markets fall as far as 70% from their peak in a final capitulation of the stock markets. The risks are still very much to the downside – and it is time to sit back and reassess the situation.


As described above, most commodities have been hit hard by the forced selling from banks and investment firms. As with stocks, we could see lower prices if the market were to fall into a final capitulation in which everything is sold in a scramble for cash. The fundamental position for commodities is still significantly more compelling that that of houses or stocks however. At these low prices it is no longer feasible to expand oil production, mine metals or grow crops. Supplies will begin to dwindle and we will see commodities resume their upward price trajectory.

Gold has performed admirably throughout this financial crisis, acting as a store of value and a safe haven from corporate default and credit risk. The yellow metal has made new highs against a variety of currencies, including the pound. On October 10th gold hit a new high of £526/oz before falling back a little. As of Friday it stood close to its high at £520/oz. In the last year gold has outperformed house prices by 49% and by 55% since house prices peaked. In the last year gold has also outperformed the FTSE Allshare index by 75%.

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Market Outlook
Nationwide U.K. House Price Index
Gold Price in Pounds
Case Shiller U.S. House Price Index
S&P500 Index
FTSE Allshare Index
Dollar Index
Reuters CRB Commodity Index

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