115: Will 2007 see a crash like in 1990?
Abbey National in the UK recently commented that there were many similarities between the economy of 1990 and 2007 seven unbroken years of house price and economic growth, inflation rose to 7.5% in 1990 (interest rates to 15%) whilst in 2007 the RPI has increased to 4.4%. Margaret Thatcher lost power as seems the likely fait of Tony Blair. However, we believe there are some fundamental differences which should prevent a crash this time in the seven year cycle:
Globalization and the internet: have created great efficiency gains, cost reductions and reduced the pressure on inflation
Population and GDP Growth: The
Easier Money: Easier access to borrowing and competitive mortgage rates with many different deals means it is now easier for people to borrow larger amounts to fund property purchase how long this will last is debatable, but rather than three times earnings multiples we had in the 1980s, we now have 7 times earnings multiples in the UK.
High earnings: In most developed countries, earnings growth in running well ahead of core inflation in the
Not yet out of reach: Many people mention they cannot understand how young people can get into the housing market the answer is, they get help from their parents. Years ago, with large families and small asset values, parents did not give help for deposits on mortgages. Nowadays, if someone downsizes from a house in
High Net Worth Individuals: Wealthy buy-to-let investors, city bankers with big bonuses to invest and institutions re-balancing their portfolios with more property investment have fueled asset price growth this seems unlikely to stop in the short to medium term. The start of REITs plus certain property related SIPPs investments have also helped fuel asset growth.
Track Record: Property prices have risen on average 8% a year in the last 100 years anyone keeping gearing to 80% during this period would have seen a return on equity of some 40% a year. Property is about the only investment the average person understands most people make property purchases and hence one can consider all these people as property investors. Its tough to find a simpler way of achieving high returns than to invest in property given some good research to determine the right property, in the right place, bought at the right price at the right time.
Continuing Global Growth: Overall global growth is running at around 5% led by
Oil / Gas Price: Spot wholesale gas prices have dropped to 22p/therm (from levels of 50 80p a year ago) because of a flood if imports from
UK Inflation The shock interest rate rise in early January was likely caused by severe unease at the CPI inflation rising to 3% (RPI was 4.4%) - very close to when the Bank of England Governor is obliged to write a formal letter explaining himself to the Chancellor. There are significant downside risks to inflation rising though the minutes of the meeting gave some comfort to the more optimistic analysts that because the vote was 5:4 for an increase and all the normal internal banking hawks actually voted to hold rates, that there may not be a follow-up interest rate increase in early February. WE believe it most likely rates will rise to 5.5% by early March then most likely stay at that level until the second half of 2007 when they may drop slightly. Such movements are unlikely to knock the wind out of the property market to any great extent.
So in summary, no crash looks likely though it can never be ruled out completely.