Simple Pound

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Thanks to Rob @ Money Watch I didn’t miss this comprehensive overview of the credit crunch by the BBC. It is essentially a collection of key graphs to represent the economic changes in the last 12 months and I wanted to cherry-pick my favourites to share with you - but not necessarily because I agree with the message they are intending to bring across (hence the question mark in the title…)

Let’s start with a picture highlighting the key changes in our economy since the start of the credit crunch. The message is clear - petrol and food, two essential cost factors in nearly every household, have increased significantly in price over the last twelve months while the value of our homes has been eroded by approximately 4.4%.

With the rise in petrol prices come further cost increases in related fields such as energy or holidays (think airfares…). But did anyone ever stop to think that this has actually nothing to do with the credit crunch per se? Through an unfortunate coincidence we see a boom in commodities prices at the same time as our economy is already suffering from the aftermath of the subprime crisis - yet that doesn’t mean one caused the other.

Similarly, the food inflation we witnessed in the last couple of months originated in the commodities boom that saw prices in wheat and other agricultural produce reach heights of unprecedented nature. I agree that it has been rather extreme and that certain products seem to have been increasing at the rate of a penny a day, nevertheless that doesn’t automatically mean it’s a direct cause of the credit crisis.

More importantly I’m starting to wonder whether conditions like this couldn’t have been avoided if only people/businesses would have appropriately used hedging. Only today I read that South West Airlines still bought its fuel for $26 a barrel at a time when the market price had reached $80 (slightly old example, but it illustrates my point). How come the likes of Tesco’s, Sainsbury’s or Marks & Spencer’s didn’t come up with a clever idea like that? After all, hedging was introduced for companies to sell their risk in exchange for a small premium and stable input prices.

Before I rant even further, let’s move on to the last category in the summary picture: housing. If you have been reading this blog for longer than just a few days, you will know that I join forces with all the other people struggling to get their foot on the housing ladder and hence eagerly awaiting a double-digit drop in house prices. I totally emphasise with anyone who is worried about negative equity but if you are living in your house because it is your home then you have almost no reason to be overly worried. Hopefully nobody will be forcing you to sell any time soon, hence you can simply wait it out and I’m certain that we will see prices returning to their historic levels (with the only difference that hopefully a few more first-time buyers will have joined the ranks of home owners). And even if you are looking to sell and for whatever reason you cannot wait a few more months or a year until you do so, there are a one-hundred and one things you can do to enhance the value of your home.

In any case, my actual point was related to the graph below. After you got over the fact that house prices have officially been falling since April, have a closer look at the second graph with details of house prices over the last 10 years. Note that it charts the annual change in house prices - that means, as long as the graph runs above the 0 line, your home will have increased in value. Looking at your portfolio or pension account - how many investments can you quote that haven’t fallen in value once over the last 10 years? I doubt there will be many.

What I’m trying to say is that a house purchase has always been a good and solid investment with annual returns of anywhere up to nearly 30%. Now, for the first time in over 10 years we’ve seen a careful reversal of this trend and the world is in panic. As I said before, I totally emphasise with people worried about negative equity, especially as a house purchase is such a major investment, maybe the biggest one many of us will make in our life. However, that put aside, any investment bears the risk of losing as well as gaining in value. Why should property be different?

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I’ve come across a really good comment in the FT the other day and have kept the page on my desk at work every since - with the intention of sharing it with you guys. Due to copyright issues I won’t be able to recite the whole article here (nor would I want to), so I’m just going to quote you the best passages.

The original comment was written by Jonathan Guthrie and was published in the FT on Thursday, January 10th. The heading reads “Three cheers for falling property prices”.

“The assumption that rising house prices are good is deeply embedded in our culture. A belief in witches was too, years ago.”

“We pay a heavy price for the delusional comfort that comes from owning expensive homes, both in loan charges and distorted personal priorities.”

After discussing the amazing property returns we have seen in the UK over the last 12 years (160% on average, 193% in London), he observes the following

“Such inadvertent financial coups confer bragging rights at dinner parties from Barnet to Bromley. Yet the tiramisu-scoffing asset allocators could only realise their swollen capital if they relocated permanently to Barnsley.”

“The main beneficiaries of steep prices are therefore footloose retirers […] fly-by wrinklies too mean to sling younger relatives a few grand towards their own homes.”

He continues to wonder why people could possibly interpret rising house prices as something positive…

“[…] given that disposable income would, all things being equal, rise if mortgage costs fell. More Britons could then afford the ultimate contemporary status symbol, a full tank of petrol.”

…and examines the consequences of such an attitude…

“Television makeover mavens have shown soi-distant developers how to make a packet by tarting up a basement bedsit and advertising it as a garden studio.

Buy-to-let investors have piled into residential property in […] Balkan towns whose names they cannot pronounce.”

And he finally concludes

“My hostility to national property bingo reflects ambivalence at my own commonplace success in it. Like many Britons, my annual capital gains after costs have been equivalent to almost half my salary for no more effort than a little light decorating. But I am no richer as a result, unless I sell up and sleep in a ditch.”

His opinion is so different from the often-recited press view that you instinctively want to disagree with him. However, you come to realise quite quickly that he has an awful lot of perfectly valid points and the more thought you give his argument, the more you’ll see his point.

If you’re intrigued and want to read the whole article, you should still be able to access it here, but I’m not sure whether or not you might need a subscription? In any case, enjoy!

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