The extraordinary real estate agent bubble

This is one of those "sign of the times" charts.

The housing bubble also generated a bubble in real estate agents. The number of people working in real estate activities almost doubled between 1996 and 2009. As of September last year, there were around 370,000 people employed within the sector. That is about one estate agent for every 70 workers in the UK.

This staggering growth in the number of real esate agents was brought home to me about 18 months ago when I visited St Albans. It is a small but beautiful town just outside of London. However, the number of estate agents and mortgage brokers in the town centre was extraordinary. Perhaps, every fifth shop front was somehow related to real estate activities.

Over the last year, the numbers employed in the sector have declined by around six percent. However, housing transactions are down by around 50 percent. This would suggest that salaries and bonuses have also fallen by around a half.

This is not the time to be a real estate agent.

(The Data is from the ONS - the ONS employment series code is ALY2)

The Irish Prime Minister and Buy-to-Let

We should be grateful for small mercies. At least, our Prime Minister didn't dive into the Leeds buy-to-let market. From today's Times:

Brian Cowen, the Irish prime minister, is facing legal action in the English courts over his ownership of a buy-to-let flat which his landlords say he is illegally sub-letting to Leeds University.

Mr Cowen is part of a group of Irish investors who invested in a block of “student cluster apartments” designed and built as a hall of residence in the city. The Newcastle-based freeholder is seeking payment of ground rents and management fees from the Irish group believed to be more than £100,000.

The disclosure of the legal tangle over his British investment property will be highly embarrassing to the Taoiseach as he struggles to navigate the Irish economy and national banks through the worst financial crisis in decades.

Rent crash continues

Mayfair rents; the top of the market on the monopoly board. Now they are crashing.

For a decade it was the preferred location for hundreds of hedge fund managers as they deserted the City and set up shop nearer to their well-heeled clients. Making the move to Mayfair and St James’s, they would think nothing of paying more than £100 a square foot for a few floors inside a Georgian townhouse, driving rents ever higher as they bid against each other.

Property experts described the rents as “eye-popping”, but investors’ money was flooding in and fee structures were designed to capture 20 per cent of the profits, so managers believed that the bills could be shouldered easily.

(from today's Times)

Speed kills

Since this is the first post of the New Year, we should start with an old friend – the Halifax house price index. Since its peak in autumn 2007, house prices are down 21 percent. Prices are now back to a level previously recorded in the early summer of 2004.

Who would have imagined a 20 percent fall in little over a year? Actually, there were quite a few people who said that prices could fall that far. However, the speed of the decline was quite unforeseeable. While a decline of this magnitude was inevitable, the momentum of the housing crash has taken everyone by surprise.

Equity prices - the year in review

Here is a quick review of world equity markets in 2008:

FTSE All Share index fell 32 percent, the worst annual decline in 24 years.

Germany’s Xetra Dax fell 40.3 per cent, its worst annual performance in its 20-year history.

The CAC 40 in Paris was down 42.1 per cent.

FTSE Eurofirst 300 suffered an annual decline of 44.7 per cent, its worst year since the index was constituted in 1986.

The Nikkei 225 index fell 42.1 per cent.

Korea's Kospi index ended the year with a loss of 40.7 per cent.

The S&P 500 has fallen 41 per cent this year; the worst decline since the 47.1 per cent ifall recorded in 1931 during the Great Depression.

It all make the 16 percent fall in house prices (from their peak in October 2007) seem rather tame.

What a difference a year makes

In October, UK Banks approved just 32 thousand mortgages. 12 months earlier they approved 88 thousand. In one short year, approvals are down 63 percent.

No credit, no housing bubble.

More taxpayers money needed for NRK and the B&B

It seems like years ago when government ministers told us that the Northern Rock was a solvent institution and that our financial system was fundamentally sound.

Now, a source "close to the government" is telling the Daily Telegraph that more money is needed for our two state owned banks - NRK and the B&B. The story suggests that the government might need to inject a further "£2 billion pounds to £3 billion." This comes on top of the £3 billion the government has already injected into NRK as additional capital.

It is now painfully obvious that NRK was effectively bankrupt back in the summer of 2007. It had a rotten portfolio of mortgages that are now quickly deteriorating into a pile of bad loans.

Today's story in the Telegraph is a classic "bad news management" trick. The story starts out as a rumour, and then when all our rage has been dissipated on the rumour, the government quietly releases a confirmation.

Before this crisis is over, the government will make liberal use of this tactic. There is a lot more bad news to come for UK taxpayers.

Alice's bubble wrap

British banks face nationalisation if £400bn bailout fails

"Senior UK sources at the IMF in Washington gave strong hints tonight that if the British Government's £400 billion bailout fails, the only option left to stabilise the economy and financial system could be wholesale nationalisation of the UK banking system."

RBS, European Banks Slide on Concern About Economy

"More than $4 trillion has been erased from global equities this week".

Iceland: Britain's Credit Crunch Scapegoat

"There's nothing like an external enemy to make a country pull together, and Britain, until recently fractious and dissatisfied with its Labour government, has found a fresh foe: Iceland."

Brown Threatens to Freeze Icelandic Assets in U.K.

"The Icelandic banks are unable to finance about $61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg."

How could a country of just 300,000 people run up such a large debt stock?

Buy One Spanish Home, Get One Free

Still not interested.

U.K. Pound Has Biggest Weekly Drop Against Dollar in 8 Years

The U.K. currency was also down against the euro and the yen this week.

FTSE loses fifth of its value in a week

"London equities tumbled on Friday extending the FTSE 100’s decline to five-consecutive days during which the senior index lost a fifth of its value."

Initial Lehman CDS Auction: 90 Cents on the Dollar, Worse Than Forecast

"Those who wrote $400 billion plus of protection on Lehman's credit default swaps had been expected to make a substantial payout in the 80% to 85% of face value range, but the preliminary auction showed even worse results."

UK exports slip to create biggest goods trade deficit since 1697

"The Office for National Statistics said yesterday that July's deficit with the rest of the world had been revised upwards to £8.238bn - the biggest gap since records began in 1697. It blamed the revisions on a large number of late returns. The goods trade gap reached £8.198bn in August, well above City forecasts of £7.6bn."

Stock markets - its another day of deepest red

When will it end? How low can they go? Here are the latest scores.

FTSE 100
4011.16 down -302.64 (-7.02%)

Dax
4465.11 down -421.89 (-8.63%)

Cac
3167.75 down -274.95 (-7.99%)

Sydney
3939.50 down 351.80 (-8.20%)

Hong Kong Hang Seng
14796.87 down 1146.37 (-7.19%)

Nikkei
8276.43 down 881.06 (-9.62%)

Say hello to the inflators

There are people today screaming for inflation. They are desperate for higher prices. They are hiding their nefarious desires behind the ludicrous claim that the UK and US economies are deflating.

Here is a good example of an inflator - Jim Cramer. In this clip, he puts forward the claim that the US is deflating right now.

What is Cramer's argument? It seems to go something like this; if we take out commodity prices from the US CPI and replace it with house prices, then the CPI is actually falling. Therefore, the US is deflating and on the edge of a 1930s depression.

Is this true? Certainly house prices are falling. The non-commodity part of the CPI, which loosely corresponds to the PCE index, is not falling. In fact, it is rising. So are input prices, output prices, the GDP deflator and import prices. In fact, the only two prices that are falling right now are house and equity prices. So much for deflation.

The argument is obviously foolish. However, if we stretched the argument back to 2002-06, it must follow that the US was inflating. Back then, house prices were going up at double digit rates. So were equity prices. I don't recall Cramer raving about inflation back then.

He also launches a vicious and largely incoherent attack on the Fed. When it comes to practical policy advice, he substitutes his incoherence with silence. What should the Fed do? Jim has no idea.

The simple fact is that Cramer and his banker mates want inflation. They believe that higher prices will help out their insolvent customers, who took out loans that they can not now pay back. The losers will be savers. Since the bankers sit in the middle and make their money taking a margin, inflation will stabilise their balance sheets and allow them to keep on making money.

So, for people like Cramer, this deflation argument is really useful. However, it is a Trojan horse for inflation. It is a useful intellectual instrument in hands of self=serving self-interested bankers.

Make no mistake, inflation is the real problem. How do we know this? Because the money supply and inflation data tells us so.