Property crunched
There is a rush for the exit from funds invested in commercial property, as fears grow that bricks-and-mortar for commercial use will be one of the more serious casualties of the credit crunch.
The managers of property funds have reacted in different ways.
, the investment arm of , the leading bank, has this week reduced the unit price of investments in its life and pension property funds by a staggering 19%.
That represents a fall in the value of the Β£2bn odd in its property funds of about Β£380m.
Some investors fear that Clerical Medical has reduced the unit price more than is strictly necessary, in order to stem redemptions by worried investors.
But the magnitude of the collapse of confidence in commercial property is hard to exaggerate.
Another manifestation of the sector's woes was a six month freeze in withdrawals from a Β£1.2bn fund by .
Friends felt it had no choice, because too many investors in the fund have been demanding their money back and cash balances in the fund have fallen to worryingly low levels.
The flight from property is a pronounced trend. Friends is the first fund to prevent retail investors cashing in, but other fund managers, including and , have put a block on withdrawals by institutional clients.
Their behaviour is rational, if alarming.
Unless investors' demands for redemptions are stemmed, there would be forced sales of substantial properties. And such forced sales would precipitate a vicious, self-reinforcing downward spiral in property prices.
Most at risk are the tycoons who have borrowed substantial sums to acquire properties on their own account as the property bubble inflated in the last few years - and second in the queue for pain are the lenders to such tycoons.
For banks and other financial institutions, the next wave of losses after sub-prime is likely to come from direct and indirect lending to commercial property.
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I love it... I always used to say that the best of getting the banks to support your manufacturing project was to con them into believing it was a hotel, an office block or a brothel.
Delighted to hear they might be getting their comeuppance.
As the owner of the Clerical Medical and Standard Life Property Funds as part of my pension, I'm affected by this.
Two financial adviser at the time recommended Commercial Property for it's stability. Doesn't seem so stable now!
I don't know how much of this is people withdrawing money out of the funds because they are falling, and creating a viscous circle.
On the other hand, do I want to be the last mug who is left with an even bigger loss on my hands. Get out now lose 20%, wait and lose even more?
Batten down the hatches!
You do not need to look far to see the problem of commercial property.
Everywhere I look in Glasgow I see empty commercial property. Shops, offices ,factory units etc.
Persons are telling us we have a vibrant economy I dont see it here.
regards
You do not need to look far to see the problem of commercial property.
Everywhere I look in Glasgow I see empty commercial property. Shops, offices ,factory units etc.
Persons are telling us we have a vibrant economy I dont see it here.
regards
Pop!
I enjoy reading your comments. You make them understandable for someone like me who is only just begining, as an interested spectator, to understand how national and global economics works. Seems to me, and forgive my naivity, that everything is very much built around presumption and promises in the financial world. It is an interesting, if fragile premis for such an important set of cogs in todays global village!
Yes there could be further falls in this sector, however it should be pointed out that this sector has massively outperformed Global Equities and UK All Companies over the last 10 years.Therefore , it could be discribed as profit-taking.
Market valuations may be overpriced, however the reasons for any investment is the return on capital employed. My understanding is that the Rental income is greater than BLT. Also the quality of the tennant is easier assertain as these are normally business owners.
From my knowledge it would be fair to suggest that any Pension or Charity Trustee prime objective is to own assets that produce income. Commercial property does provide this.
People should always view property as a long term investment and for the person who has this in their pension fund I would say if you don't need to money now keep hold of the property funds.
They will come back and in the long run will be a good investment.
Property prices have fluctuated over the last fifty years from boom to bust but over the long run it has worked well.
I'm not an estate agent or property fund manager by the way.
I'm a surveyor in the commercial property market.
The problem for the commercial property funds is that they entered the market late and/or overpaid for properties that had already been rejected by the professional investors. The buildings may be big, the tenants may be quality but much of what they bought is 'sub-prime' in the sense that it's not as prime as the funds would like to think; consequently since they were for the most part the only buyers, the only way they can resell is either to one another or at lower prices to bargain hunters.
Private investors would I think do better to cut their losses and invest in the quoted property companies that have clearly defined strategies, rather than simply buying anything that comes their way.
Mr Peston should have been aware that property funds (eg New Star, Norwich) have been steadily devaluing all year and by up to 20%. CM has done it in one large step.
But this is all on the back of steady double digit annual growth over the last few years so no medium/long term investor should have lost out overall. Surely that's the important message.
It is more fun being a drama queen though...
For these property funds... If the assets are so illiquid or are unrealistically valued then it is difficult to say where the true price actually is. The fact that FP are running out of cash in their fund and hence are now freezing any withdrawns (I bet that makes NR envious!) is just symptomatic of how artifical the values of such a fund really are.
Are there parallels with NR? Maybe... the underlying assets are going to be difficult to realise (and politically impossible to realise!) so the valuation is all a bit subjective.
Can we turn the clock back to March please? I liked it when the bubble was nicely inflated.
>>>Peston - Jan 2007... "Here and now is the best time to be broadcasting or writing about business"
Robert I think you might be busy in 2008 too. Happy New Year!
I'm having your sandwich board made up as we speak. Afterall, the end of the world is nigh isn't it Mr Peston! Consumer confidence is at a 12 year low... well it's not surprising with the emergence of 24/7 doom-mongering!
Robert, the link between all these disasters was the prolonged low interest rate environment boosting demand for credit with a limitless supply of it - without the restriction of either a reserve ratio (the ratio of deposits needed to be kept back by the banks to repay depositors) or a properly functioning capital ratio (the ratio of lending that needs to be kept back in the event of default).
How? Off balance sheet funding. It is a little known fact that money is created by private banks when a loan is made. The money supply hugely expanded in this credit bubble has fed house prices to the point where everyone is now saying the Emperor has no clothes.
Easy credit leads always to loose lending. Falling house prices are revealing the true extent of default. But the default now being experienced is unprecedented for the lack of capital reserves to cover it - the banks don't even have enough to put the damn stuff back on their balance sheets never mind write off bad loans!
As capital is destroyed this will be hugely deflationary. Far lower rates and Government spending will be inflationary. And we seem to be seeing a flight by investors from mortgage bonds into commodities (food, oil) - the next bubble before that too pops with the footsie with it. In the meantime this too will be inflationary.
# 11 - seems a bit silly to label an article reporting a 20% drop as being drama-queen-orientated.
What percentage drop would you say constituted a real drama?
I'm sure the bods who have bought in during the last 6 months or so will be feeling at least a little miffed!
We are now on the crumbling edge of a massive financial abyss with no visible bottom.
I am involved with several finance houses (some of which are household names) and over half have told me there will be no more money available after December. Which means unless I can find other sources to finance my clients purchases, down the tubes I go.
When will Brown and the Walter Mitty's in the City realise we are nationally and internationally in deep, deep trouble.
If I had any money in either commercial or residential property I would want out now at any price.
Robert, the link between all these disasters was the prolonged low interest rate environment boosting demand for credit with a limitless supply of it - without the restriction of either a reserve ratio (the ratio of deposits needed to be kept back by the banks to repay depositors) or a properly functioning capital ratio (the ratio of lending that needs to be kept back in the event of default).
How? Off balance sheet funding. It is a little known fact that money is created by private banks when a loan is made. The money supply hugely expanded in this credit bubble has fed house prices to the point where everyone is now saying the Emperor has no clothes.
Easy credit leads always to loose lending. Falling house prices are revealing the true extent of default. But the default now being experienced is unprecedented for the lack of capital reserves to cover it - the banks don't even have enough to put the damn stuff back on their balance sheets never mind write off bad loans!
As capital is destroyed this will be hugely deflationary. Far lower bank rates and increased Government spending will be inflationary. And we seem to be seeing a flight by investors from mortgage bonds into commodities (food, oil) - the next bubble before that too pops with the footsie with it. In the meantime this too will be inflationary.
Hi,
Good job an election wasn't called a few months back! Because whoever won would have been blamed for the forthcoming recession, believe me its coming. And the winner might have been my lot, being a "Thatchers child"....small blessings eh?
Today my Bank manager told me that they are under strict instructions not to let any business go above "protected" overdraft and not to loan against commercial property! Never, ever heard that one before.
Oops......so there goes our growth plans for the next two years...."computer says no".
Anyone else have the same issues? Because my Brother in law is seeing the same from a different bank.
Do I sell, do I stay....Mmmm
Keep up the good work Robert, and happy xmas.
CB
There are plenty of available offices around the City of London, I see cranes and builders everywhere. Who is going to move into these "investments" ? Certainly not investment banks as they will be too busy "downsizing" and adding to the problem, maybe bankruptcy lawyers and liquidators will be the new tenants.
I used to work as a Commodities Broker a while ago and we used to pitch Gold to private investors who would confidently and arrogantly state they were invested in property and nothing was as safe as houses. I'd really like to go back to these investors and show them the increase in gold and the decrease in global property. I am in no major way affected by the global credit crisis and have been waiting for this 'Credit Bubble' to burst for a long time now, as the general population has to wake up and realise their is no 'real' value in money that is created out of nothing. It is simply fools gold. Being a muslim I hold only non-interest based products and can sit back and be happy with my average, yet stable portfolio perform, whilst the rest of the world pulls its hair out for buying into something which was blindingly obvious.
In 1996 the value of derivative trades was $63 trillion, whereas the collective GDP of the world was $36 trillion... Now I'm not a wall st financial engineer but no amount of quantitative mathematics can explain that.
Wake up!
"13. harry e wrote:
Robert, the link between all these disasters was the prolonged low interest rate environment boosting demand for credit with a limitless supply of it"
Ehm... Can I just point out that money reacts to supply and demand, in exactly the same manner as all other commodities. Manipulating the money supply, as government and banks do, doesn't create wealth, it simply appropriates it from one set of people and hands it over to another set.
The usefulness of a monetary system which causes inflationary credit fuelled booms and subsequent deflationary debt fuelled busts is therefore highly questionable.
#15 Andrew..
Hmm.. Every now and then and if I thought they were worthy I used to try to help small energy tech companies raise VC type cash for their projects.
If you really want to depress yourself you should try that a few times. I've given it up now. You can only bang your head against a brick wall so many times before it begins to hurt.
US investment in energy/clean tech start ups/spin outs this year is expected to total over Β£2bn... UK equivalent investment will probably total out around four pounds, three shillings and sixpence. Well somewhere around Β£10m maybe..
We are a truly pathetic nation.
Robert - I really think you are bit behind the curve on this one. After a 7 year raging bull market a major and much needed market correction has been widely predicted since last Christmas. This really started to manifest itself in July and values are generally off 10 - 15%, not an awful lot compared to the total return in 2006 of 18.1%.
It is also important to determine the underlying strength of the market, this is ultimately a factor of tenant demand, which remains very positive, rather than short term capital flows and whipped up investor sentiment.
About time the Βι¶ΉΤΌΕΔ started reporting on business issues in a grown up fashion. You are now on my "I am reading blogs" list.
As for Commercial Real Estate, this is the first time since the 1970's that the property industry have experience such a rapid downturn in fortunes. Take a look at the hundreds of half finished buildings going up in the City of London and you wonder if they will ever be completed? And even if they are, they will be empty for years to come.
You have to wonder how many of the general public are aware of what's happening in the financial world.
Just been shopping for a few last Xmas presents (using my credit card - unsecured lending, HAHA!) and the local shopping centre is a hive of frenzied activity.
Also been stocking up on rice, pasta, tinned goods (especially fruit), coal, candles, bottled water and petrol in jerry cans over the last year.
Been to the bank 6 months ago and withdrawn all surplus cash. Not that it will be worth anything when hyperinflation kicks in. Might be useful for starting the open fire in my living room.
Having studied the history of war triggers in great detail (especially WW2), I conclude the best way out of this financial mess is a good old-fashioned, population-reducing war.
Kills many birds with one stone - increases the military-industrial spend, forces labour to work for peanuts for the 'greater good', gives people something far more serious to worry about than silly old money (i.e. being bombed/killed/maimed, loss of their kids etc) - all-in-all a good way to mask what a mess we're in, plus we're majorly overdue a proper war.
Can't happen here, you say?
P.S. at least so many of us are now overweight we won't starve for a couple of extra months when there's no food on the shelves. Britain imports 85% of it's foodstuff - when we can't pay for it, we'll just invade the producing countries!
2008/9 looks to be interesting times.
Are Friends Provident telling us that they have been valuing the cash and property in this fund at 1.2 billion but if they were to liquidate the assets they would get nowhere near this. begs the question as to what figure they have been calculating their fees at and under what prudence they have been valuing assets at. As a closing point are they also telling us that they expect the Commercial property market to pick up in 6 months time.
This article is unfortunately ill-judged, the key to any commercial property investment is whether the rent continues to be paid, if you are suggesting that commercial property is in meltdown ,this could only be true if rents were defaulting almost on a universal scale. Values go up and down, it is the rent receipts which determine whether commercial property is still a viable investment vehicle, whatever it`s deemed value
Your comment concerning the banks and what have they really been up to is very valid. The questions must be asked after 350 billion euros and the joint 50 billion pounds of extra cash injected into the banking system:
1) Why are they still not lending to each other? How big is this problem? 2) Why are central banks only now getting involved and not the policitians?
3) What were politicuans doing until know - please don't tell me they were all "prudent"
4) What value the Regulators who should have seen this coming and whose sole purpose is to protect the public from financial misdeeds.
Surely to heavens we need a major clearout of those who have allowed such a mess to occur. Are we really expecting these incompetants to really get matters sorted. It may be the season of goodwill but that really is pushing it.
Lets make 2008 the year of truth.
Can anyone explain why with all this doom and gloom talk the FT and Dow Jones indeces are not having big falls?
Also there is a lot of talk about people being over borrowed. Is there any evidence of a significant increase in the personal default rate in the UK? If not then who is to say we are over borrowed? While I remain in my job I'm able to continue to repay my loan. Have we all become skint overnight?
Surely it is only unemployment and increases in interest rates that will increase the default rate on any significant scale? Are either of these imminent?
Yes a few financial traders maybe out of work but they all have plenty of money to see them through anyway.
Are not posters here in danger of talking us into a much deeper slump than there needs be?
How long will it take these banks to reveal what their US sub-prime losses are likely to be? If they can do that quickly does there need to be a slump?
Lots of questions. No answers.
Merry Christmas.
A large part of "consumerism" depends
on making everybody edgy for as long as
possible. People go about freaking us
out about bits and bobs, saying the
world is about to end.
So forget all this negative stuff,
Robert, and relax. Christmas is coming
up, take a few days off and cease
warning us about how awful the future
will be. Please, be a good chap and
give us a break, eh?
The loans made by the Bank of England to Northern Rock have been recycled through the interbank market and into the liquidity that is so important in the current state of the market. No bank wishes to use the lender of 'last resort' and risk a run by its depositors.
In the 80's property collapse, the Bank of England created the lifeboat which placed the banks in the position to recycle surplus liquidity instead of holding onto it.
2008 is going to be difficult for the UK all round.
So what's next thing to collapse in this row of dominoes? First sub-prime mortgages, then commercial property, then what?
Cannot understand anyone wanting to invest money in a close end fund.
I last invested in one in 1980.
There are 17 property Investment Trusts
most of them are performing poorly but at least you can sell in the market.
Looking at Nigel's comment this is not profit taking and the performance of the last 10 years is irrelevant.
The market is in freefall,valuers are having to value realistically,there is no debt available and no deal-flow--so prices are collapsing.
It may change next year but this process started at the back-end of last year and is only now bieng recognised by the markets--it is a bloodbath to quote a valuer I know.
If you own commercial real estate and you have debt on it you may be in real trouble!!!
People are slowly remembering that property is by its very nature an illiquid sort of investment - unlike ordinary shares which can be bought and sold in milliseconds. The sale of an office block requires lawyers, agents, tenancy agreements to be vetted, surveys to be conducted so it takes ages to realise even when there are lots of buyers around.........so it is the ultimate long term investment and those holding funds invested in these assets would be well advised to wait two or three years for conditions to improve otherwise they risk selling at a distressed selling price, if they don't need the cash. Property should always have a higher yield than shares or cash because of the illiquidity - in recent years the yield has got too low because of poor lending/easy credit and the market has to correct itself. This can be painful.
"25. FR wrote:
Been to the bank 6 months ago and withdrawn all surplus cash. Not that it will be worth anything when hyperinflation kicks in. Might be useful for starting the open fire in my living room."
Okaaay. You know it's only money right?
Credit inflates, credit deflates but under it all the government have this thing called a printing press...
Debt and credit can be replaced by notes at the flick of a switch. Historically, gold, silver, shells, even cigarettes have been used as money. Money is simply a medium of exchange.
As the money supply is inflated, units of currency become worth less. As it deflates, the currency becomes worth more. If there's a big deflation of credit on the way, cash will be worth a bundle. If the central banks continue to chuck out mountains of credit (as they will), we'll see a continuing postponement of the deflation.
Another point. Zimbabwean inflation is hitting 8000% because the people in charge are idiots who have no idea what money is (either that or it's a deliberate attempt to destabilise the country). They have no idea what inflation is; They think it's a general increase in prices. Thankfully we are a little more enlightened here...
If you think the entire monetary system itself is about to hit the fan, then look to history to see what traditionally has been used as money. Gold and silver for example, they come in pretty bullion coins too.
I have to say you should probably invest according to what you think the likelihood of any such problem reaching this kind of stage is.
#22 Scamp:
"We are a truly pathetic nation."
You are right - but we have been driven there by 'well meaning' government sponsored schemes.
Competition, science and technology have been knocked out of success.
Check out exactly what
Has been spending your money on.
Instead of companies growing through competence they are supplanted by grant aided companies and bodies that survive by grant mining.
I have no doubt that all areas of the country have nstars that are messing up the marketplace.
The Government wants growth.
It is getting it by nurturing grant dependency.
Why don't investors use their own simple logic,instead of listening to 'financial' whizz kids.
I'll make it simple for you.
1.It is a global economy
2.Chinese and Indians etc will work for less than Β£1/hour,so even as their wages go up slowly our wages will go down to meet them somewhere in between.(the executives will be the last to suffer from this parity)
3.End result..see if you can work it out.
"25. FR wrote:
Been to the bank 6 months ago and withdrawn all surplus cash. Not that it will be worth anything when hyperinflation kicks in. Might be useful for starting the open fire in my living room."
Okaaay. You know it's only money right?
Credit inflates, credit deflates but under it all the government have this thing called a printing press...
Debt and credit can be replaced by notes at the flick of a switch. Historically, gold, silver, shells, even cigarettes have been used as money. Money is simply a medium of exchange.
As the money supply is inflated, units of currency become worth less. As it deflates, the currency becomes worth more. If there's a big deflation of credit on the way, cash will be worth a bundle. If the central banks continue to chuck out mountains of credit (as they will), we'll see a continuing postponement of the deflation.
Another point. Zimbabwean inflation is hitting 8000% because the people in charge are idiots who have no idea what money is (either that or it's a deliberate attempt to destabilise the country). They have no idea what inflation is; They think it's a general increase in prices. Thankfully we are a little more enlightened here...
If you think the entire monetary system itself is about to hit the fan, then look to history to see what traditionally has been used as money. Gold and silver for example, they come in pretty bullion coins too.
I have to say you should probably invest according to what you think the likelihood of any such problem reaching this kind of stage is.
We are a small solar supplier with a rather mixed but long term positive economic outlook.
On the one hand the high oil price and the news about Bali and global warming both mean that people who were previously undecided are now buying panels. On the other sales are lower in winter and we are vulnerable as a single product business selling what is still seen a to be a luxury good at about Β£3k a pop - and everyone demands a chunky discount before they will order these days.
From currently occupying one floor of a three storey building the whole lease has now become available. How would readers view this as a negotiating opportunity? We are seeking 5 years with a 2 year break...
I have studied stock market and related financial crises over the last fifty years and after each crises the financial press, and the public reaction from commentators and private investors
has always been the same that is to say predicting "Sodom and Gomorrah" and as a result private investors sold out at a great great loss and the more the sold the more the market makers had to lower values thus perpetuating the problem, but the sensible investors did not sell and remained in the market throughout the crisis and many even purchased selected bargains.
After each crises the markets not only recovered but went to new a high, those who left the market missed out on that all together, and reentering the market is expensive, and even that would not much help, since being out of the market for only a few days during market rises
can have a tremendous effect on one's portfolio.
Thus history tells investors to stay put let the storm pass and the result will be to one's benefit, unless one is a market gambler who borrows money to buy shares, they are of course forced to sell to meet any cash calls from their banks, but they are in the minority and have little impact on market valuations.
Colin Smith wrote:
"money reacts to supply and demand, in exactly the same manner as all other commodities".
Of course, in extremis you are right.
To expand on what I was saying, demand for credit when rates remain low is apparently limitless especially once a bubble mentality had formed. Restraining factors formerly concentrated on supply:
- borrower multiples which this time round had been stretched to unbelievable limits
- no functioing regulatory limits (reserve or capital ratios)due to the widespread use off balance sheet funding
Now higher rates have risen in the US (still to hit millions more borrowers) supply of credit has responded leading to default and lower house prices. They are about 18 months ahead of us - but it is said that the features of our very own market are more extreme.
And the same issues are faced by the commercial property market.
The European and North American banking system is in a liquidity trap similar to the siuation in the USA in 1929 and Japan in 1990. What we will witness is rapid deflation with a massive fire sale of assets. The comparison between the USA in 1929 and Japan in 1990 is interesting. In 1929 the banks in the USA had to write down debts on loans that borrowers had defaulted on from cheap credit. The banks refused to lend resulting in deflation. The Federal Reserve in the USA failed to help bail out the banks with an injection of liquidity or increase the money supply(M3), resulting in a run on all the banks and a crash on Wall Street. In 1990 the banks in Japan also had to write down large debts that borrowers had defaulted on from cheap credit. Again the banks refused to lend resulting in potential deflation. However, the Central Bank of Japan decided to inject liquidity or money supply (M3) into the banking system to save the banks. Deflation did occur but the Central Bank of Japan continued to inject liquidity or money supply (M3), and reduce the interest rates to 0% to allow the banks to continue lending cheap credit. This provided a soft landing resulting in stagflation. However, foreign investors fled with banks relying on exports, foreign investments, and the yen carry trade. However, the yen was devalued, taxes rose to pay for public expenditure and the population became a nation of savers reluctant to spend. And this is the way Japan carries on today. The danger signals for Europe and North America have always been in the smoke and mirrors of economic statistics, especially the money supply (M3). The truth is the central banks have been printing money happily for a long time creating a credit economy for us to have a party on cheap debt. Ask a politician, economist or media pundit about (M3)and they would rather hide behind the sofa. M3 has been increasing for the last decade at a rate of 12-15% YOY, and yet nobody, HM Treasury, Bank of England or ONS will publish M3 figures. The Federal Reserve in the USA gave up publishing M3 figures in 1996.
Merry Christmas and have a credit free New Year.
A question to all readers:
have you ever wondered why the Bank of England now adjusts interest rates by just 0.25% a time these days and how 5 such rises of just 1.25% can have such a marked impact?
Read about money, how it is created and its supply is controlled.
Will the Bank of England be adjusting interest rates by just 0.1% a time in 30 years?
You mention sub-prime and then commercial property as the next threat.
Could you take a little peep into the murky world of credit default swaps (CDS)for us.
CDS are simply insurance contracts in case of default of credit. It is an over the counter market i.e. with a winner and a loser.
The companies offering this 'insurance' aren't regulated as insurance companies though. Apparently their reserves are very thin and they are often highly leveraged.
The CDS market has risen exponentially since 2000 to reach $56 trillion now and has not been tested in a downturn.
The BoE has in their inimitable understated way started talking about 'counter party risk'.
I'm told it never makes sense to gamble with borrowed money...for anyone.
Over 40 and remember the good old 1970`s ??
In 1976 a Labour government was in power with Harold Wilson as prime minster with power about to be transferred to James Callaghan and the economy was in trouble. Nothing changes. Labour policy in 1976 was to follow the Keynsian model of tax and spend your way out of trouble. Unfortunately taxes were insufficient to meet public expenditure and so raised money from the Public Borrowing Borrowing Requirement (PSBR) ie. Gilts and Treasury bonds. Howver in January 1976 the annual rate of inflation measured by the Retail Price Index (RPI) was 23.4%. In Treasury bond terms this means the yield on 10 year notes would be low, very low. As all bond vigilantes know this would not be enough to attract sufficient domestic or foreign investors to maintain the level of public expenditure required by the Labour government. The other alternative, printing fiat money or increasing the money supply M3 was a no-no, as this would make inflation worse and lead to devaluation of the pound. The other alternative was (oh no!) was to borrow from the International Monetary Fund (IMF), and this is what the Labour government did. This was a horrendous deal as the interest payments on the loan crippled the economy and fiscal policy had to be revised. Remember VAT man, Dennis Healy, with his version of purchase tax. What a silly billy. James Callaghan had to introduce wage constraints on public servants to put a hold on public expenditure. The unions would have none of this with wages and savings becoming increasingly worthless as inflation increased. Despite having beer and sandwiches at Number 10 the unions balloted its members for strike action demanding higher wages. Strike action by Teachers, Nurses, Refuse Collectors, Rail Drivers, and other civil servants brought the UK to a standstill. In the 1979 general election the conservative party campaign used the plight of the UK as its rallying call - Is Britain Working ?
New Labour with its election victory in 1997 from the conservatives, vowed never to be constrained by public spending or strangled by the unions again. Tony Blair won New Labour`s reprieve from union domination with the removal of Clause 4. Gordon Brown, the then Chancellor of the Exchequer, meanwhile made the Bank of England independent and indulged with the City a game of smoke and mirrors to bring about an economic miracle. Changes were made to the way inflation is measured with the introduction of the Core Price Index (CPI), rather than the RPI, with a target of 2.0%. With hidden hedonics and weighting formulas it had kept inflation under control according to the government. However the Monetary Policy Commitee of the Bank of England decided to target asset prices to provide investors with a high rate of return. Banks for some reason (which is beyond me) found the rocketing asset prices irresistable to make some serious money. They created Special Investment Vehicles or SIV`s using government assets or treasury bonds (In the US, Henry Paulson of the Treasury planned this strategy with White House approval, unfortunately the UK banks adopted the US model under the auspices of Gordon Brown)to generate money from short term debt. This money was then used to purchase debt from mortgage issuers, auto loan issuers, credit card issuers, personal loan issuers, and house equity loan issuers. This practice increased the capital for credit issuers, spread risk, reduced banking costs and made credit cheaper. This debt bought from issuers was used to create a complex financial instrument called a Collaterised Debt Obligation or (CDO). Once the CDO was sold it would create more capital for the bank and the new money used as an ivestment vehicle or lent to create more credit. The CDO was packeged by a computer model that made it so complex nobody except the Masters of the Univers knew what was in them. The CDO was then rated by Moodys and Fitch with a credit rating according to the quality of debt the CDO contained. However, the ratings agencies were hoodwinked into believing they contained only high quality debt by their sheer complexity and gave them AAA ratings. This does exempt the ratings agencies from blame as they received generous fees from the banks. The CDO was also insured by mono-line insurers who are credit rated by the same credit rating agencies, Moodys and Fitch. The mono-line insurers guarantee their value and yields. The CDO was then sold to investors (where was the FSA and SCA ??) usually pension funds, (check your pension), fund managers (charities and trustees),foreign investors, and hedge funds, attracted by high yields and low risk. The CDO`s in fact were mixed with debt from high risk loans, highlighted by the media as sub-prime-debt from mortgage defaultors. As more sub-prime mortgage (a mortgage often provided to individuals with little or no income with a teaser interest rate that suddenly increased to a higher variable rate, called in the US an ARM) borrowers defaulted on their repayments the value of CDO`s sold to investors fell and thus reducing yield. The banks deliberately kept CDO`s off their balance sheets often sitting in tax havens and charitable trust accounts where they didn`t have to pay tax on the profits from shares on the CDO raised from the FTSE 100 or DJIA. This is where Northern Rock got caught out by keeping the CDO`s on their balance sheet as it had to be audited by Price Waterhouse Coopers. Once on their balance sheets the CDO`s became a hot potato and investors were no longer able to accept the risk and the capital market dried up. It could not rely on its retail deposits to keep lending or allow its assets to be liquidated to save itself from insolvency and put into administration. It had to go cap in hand to the Bank of England for a loan to allow it to buy time between finding a buyer or being nationalised. There is one question that should be asked about Northern Rock. Who owns this "solid" mortgage book, the taxpayer, the Bank of England who printed money and is independent from the treasury, or the investors who bought the CDO`s ? As the banks knew the risk and were not prepared to account for a write off if the CDO crashed they remained hidden. As investors fled from the CDO market the banks had to announce losses from the capital market. As the value of housing stock fell in the US there was no chance of sub-prime mortgage borrowers to re-finance their loans and so the value of sub-prime loans slumped. The credit rating on CDO`s were downgraded by Moodys and Fitch so theoretically all CDO`s were possibly tainted with toxic sub-prime sludge as nobody knew where it was hiding. The possibility that sub-prime-prime mortgage debt was held in any CDO all investor confidence in the bond markets drained away. In order to report their losses the banks had to move the CDO`s onto their books and liquidate the assets. However, after unwinding the CDO, the assets proved to be worthless even if a fire sale was called as there will be no buyers so multi-billion write downs are announced nearly everyday. Many banks will still not admit they have CDO`s and are playing a waiting game until investor confidence returns. With no capital from the debt markets and inter bank LIBOR rates above base rate the banks are not even trusting each other as to who has devalued bonds and paper with sub-prime debt. The banks are refusing to lend and in this liqudity trap the Central Banks arrempt to provide liqudity and reduce LIBOR rates is having little effect. There is little the central banks and positive government statistics can do to keep the banks lending and keep the stock markets in positive territory. Like an opium addict waiting for his next fix the only way out is to go cold turkey and allow private and commercial property prices to fall to a level where investors have confidence to buy again. In 1979 there was a change in government with new policies that were difficult to swallow. This time there is no credible political opposition that has policies to get us out this mess. There is no public industry to privatise. The unions are weak. We are a nation of shop keepers without a manufacturing base resulting in massive trade deficits. We import cheap goods from China with a massive balance of payments deficit. We have a Gross Domestic Product (GDP) that relies on consumers going shopping with cheap credit and financial engineering that is so fraudulent and debased that lawyers will be falling over themselves to buy a new penthouse suite vacated by the bankers. We cannot return to the Gold Standard as Gordon Brown has sold off the gold reserves. We are fighting two expensive wars in Iraq and Afghanistan that can`t be won. We import oil that is near $100 a barrell, fuelling inflation. Oil dominates our lives and we rely on it from transportation to dry cleaning fluid. We think oil is an infinite resource and take it for granted we will never run out. The UK has become a net importer of oil as the North Sea oil reserves become depleted. We can no loger rely on the tax revenue from North Sea oil. When oil is burnt it releases carbon dioxide into the atmosphere which causes climate change. We have no alternatives to oil that are practical and can be implemented quickly. Renewable sources of energy such as wind power or wave power cannot replace the existing gas, coal and nuclear power stations. The North Sea gas fields are depleted and we now rely on expensive gas imported from Europe, dominated by Gazprom, increasing the cost of electricity as the majority of new power stations built are gas fired, when gas was cheap.
DON`T WORRY THE ECONOMIC FUNDAMENTALS ARE SOUND.
I've just been reading about CDS as mentioned by a previous poster. It is truly frightening that such a product can be traded-in to such an extent - beyond reason actually. But that's markets - irrational. Up to a point. Then the rational side kicks in and people realise that what is being speculated on and what returns there are do not justify the price and that loans will not be paid back. Fractional Reserve banking actually makes it impossible NOT to have a Credit Crunch - it is always a matter of when.
It is impossible to know the true reality underlying what is happening in the economy, so there are really only general principles and key facts to work with. But it looks very bad. If the Credit Crunch continues to spread (it will) and it starts to damage derivatives and insurers (how can it not?) then it's difficult to see anything other than a radical re-structuring of life for this country. The consequences appear devastating. Many people cite Japan's 1990 experiences, but Japan was fortunate in that its bubble burst when it was one of the world's foremost exporters and second largest economy in a reasonably healthy global situation. I do not believe that the strategy that kept Japan in the game (15 years of little economic growth) can be used as successfully in the West at the present time.
Finally they are harvesting the fruits of their greed. The writing has been on the wall for the last few years, so if they get their fingers burnt - justice is done!
Ah why is property falling out of favour? Because the commercial property has to be filled by companies in Gordon Brown's miracle economy which doesn't like manufacturing things (best leave that to the Chinese and Indians) but provides services. Pity all those services can be out-sourced and thus remove the need for a UK office thus the need for commercial property in the UK.
The US sub-prime scandal is starting to move over the atlantic with the amazing rumour that the original sub-prime started in the UK with risky high leverage loans to unvuable UK applicants. Which fed a UK housing bubble that did not allow wages to keep pace. However check the following article to see how MP's keep their pay in line with CPI (currently 2.1%)
"46. Andrew Gray wrote:
However the Monetary Policy Commitee of the Bank of England decided to target asset prices to provide investors with a high rate of return. Banks for some reason (which is beyond me) found the rocketing asset prices irresistible to make some serious money."
Banks maximise inflation. It's What They Do. And they do it because inflation moves value from the working population to asset holders. The "independence" of the BoE must have seemed like a gift from heaven for them.
If wages are increasing at the CPI; 2% per annum and the money supply is increasing at 12% per annum as it has for the last few years, the subsequent inflation in property, stock and commodity prices moves
value from wages and cash savings to the people who own the assets. The CPI and RPI figures are basically works of complete fiction when it comes to reporting inflation. A more realistic estimate can be measured by subtracting the real growth in the economy (usually 2%-3%) from the money supply (12%).
With inflation, the wealthy become wealthier and the poor become poorer. Rather an ironic situation for a Labour government.
One of my bugbears with the existing banking system. The average person is targeted in two ways:
1: Inflation makes their wages and savings worthless. It's basically theft, sanctioned, encouraged even by a set of corrupt and/or inept politicians.
2: People are then required to acquire increasing levels of debt to pay for assets which they could have afforded before the inflation rippled through the economy.
We should celebrate.
The boom in alternative financial products and property prices is sucking the life out of innovation in other areas.
We need this correction to get a reallocation of resources into new companies, ideas etc.
To the guy whose lease is due, offer to pay the rates plus one pound per foot per year for rent, landloard will not like it. Tough.
#37 Rude Boy..
I agree but with one exception and that's the Scottish Enterprise run set of Co-Investment Funds which were set up to encourage private sector (VC, Angels etc) to take US style risks in investing in start-ups/spin-outs and early stage high tech type companies. To an extent this has worked in that its the private sector funders that make the decision as to whether to make the investment or not.
However, it hasn't worked as well as was hoped because of course there are very few private sector start up funders around.
#46 Andrew Gray..
Actually, most of our gas will soon be coming from Norway not Russia.
#51 TW
In April this year the Director General of the CBI Richard Lambert was quoted in the Scottish media as saying "In today's rapidly changing economic world order, we must create more global enterprises if we want the UK to remain in the top tier of world economies. Yet in the past 20 years the number we have built from scratch has been low."
Mr Lambert is completely correct but there is of course a direct correlation between this situation and the state of Britains financial system. Any economy that depends almost entirely on debt, consumerism and house price inflation to generate growth is simply never going to be able create more global enterprises
Interestingly, Robert, the downward trend in commercial property was flagged early in the year with the rapid falls in value of the EPRA (European Property Retail Index). By September it was down 14% on the year. Even though EPRA had exposures to Spain (a property basket case) it was solid in several other Euroland theatres. The historic problem has been that when commercial property falls (due to declining or stagnant leases) the rest of the property takes a big hit. I remember the late eighties and early nineties when Japanese corporations were buying up San Francisco and Los Angeles. Prices roared ahead before very abruptly tanked. The down-valuing of pension fund units is a very serious development,not unexpected but it will blow cold air through the economy from some time to come. The current mess will get worse larlgely becuase both politicans and centrel bankers pretend to have a handle on future trends. They don't and no one else has either despite the odd veridical glimpse into the future.
#53 Scamp
Just like bank robbers asked why they rob banks, spin outs and other start ups take grant funding because "That's where the money is".
Private investors will not get a look in until sanity returns to the technology marketplace.
Meanwhile government bodies shovel money into the pockets of so called technologists. Distorts just about everything...
Take my professional advice now .... if you have invested money in property funds GET OUT NOW please.
2008 is destined to be a disaster. Batten down the hatches get your cash out and invest in the many opportunities which will arise when people who ignore my advice have no cash or accesss to any cash.....
Hi
one problem with the property market is that newspapers and particularly local newspapers do not publish the truth when it is their own interests (due to the large reliance on property advertisements) to simply reprint press releases from the property industry.
What a fantastic time for our Government to introduce empty tax rates on Commercial property.
Once again thanks Labour
I HAVE HEARD TODAY THAT A SHARE I
HOLD HAS GONE INTO ADMINISTRATION.
I HAVE TO TAKE THIS LOSS ON THE CHIN!
IN LIFE WE SOMETIMES MAKE BAD DECISIONS WITH NOBODY TO `TAKE THE CAN` I MIGHT ASK GORDON TO PROP THIS FAILED COMPANY, BUT OF COURSE HE WOULD NOT!
IF ANY COMPANY `GOES` LET IT HAPPEN.
Evidence:
in my recent excursions I noticed that in Essex in an estate agent's window about 20% of properties were showing 'price reduction'
I am buying in Surrey - so I visited some estate agents - none are advertising 'price reduction' yet. some indicate that they are reducing prices on the internet or on noticeboards but without advertising that fact. I know this happens as last Autumn I spotted one house which was Β£1.1m one week then Β£1.2m then bakc at Β£1.1m. Furthermore there is one house at Β£1.4m which agents agree is over-values by c Β£500k. You just wonder in awe at the tricks the agents use to get dumb buyers from outside an area to decise on 'good value' for that area.
But more interestingly was the response when, as a cash buyer I enquired about 'price flexibility' suddenly eyes sparkle and potential reductions of up to 10% appear from no-where!
Basically agents work for sellers - and their fees are linked to prices achieved.
Currently we have house prices inflated by a combination of over-borrowing and high city bonuses - the source of both is drying up.
but more importantly we have full employment - and with the share price plunge of the last few months as well as the huge banking losses - jobs must go. As London is a major centre many will go in London.
If that does happen, as appears very likely, the current covert managed 'softness' will crystalise into an overt house price crash
Evidence:
in my recent excursions I noticed that in Essex in an estate agent's window about 20% of properties were showing 'price reduction'
I am buying in Surrey - so I visited some estate agents - none are advertising 'price reduction' yet. some indicate that they are reducing prices on the internet or on noticeboards but without advertising that fact. I know this happens as last Autumn I spotted one house which was Β£1.1m one week then Β£1.2m then back at Β£1.1m. Furthermore there is one house at Β£1.4m which agents agree is over-values by c Β£500k. You just wonder in awe at the tricks the agents use to get dumb buyers from outside an area to decide on 'good value' for that area.
But more interestingly was the response when, as a cash buyer I enquired about 'price flexibility' suddenly eyes sparkle and potential reductions of up to 10% appear from no-where!
Basically agents work for sellers - and their fees are linked to prices achieved.
Currently we have house prices inflated by a combination of over-borrowing and high city bonuses - the source of both is drying up.
but more importantly we have full employment - and with the share price plunge of the last few months as well as the huge banking losses - jobs must go. As London is a major centre many will go in London.
If that does happen, as appears very likely, the current covert managed 'softness' will crystalise into an overt house price crash