I haven't seen such sulking since I lost at Monopoly when I was twelve years old (not that I ever lost). First we had the CML

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5308033.ece

now we have the Halifax and Nationwide refusing to give a prediction for house prices in 2009

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5372549.ece

There are a few predictions for total falls

Nationwide (prediction made in September)
House prices will fall 25 per cent between 2008 and 2010, according to Graham Beale, chief executive of the United Kingdom’s biggest building society

Barclays (December)
Fall of 15 per cent next year. John Varley, chief executive of Barclays, which owns the Woolwich mortgage brand, said that prices would fall by between 10 and 15 per cent before the end of the coming year

Lloyds TSB (December)
Fall of 10 per cent in 2009. Sir Victor Blank, the chairman of Lloyds TSB, which is taking over HBOS, said this week that house prices would fall by another 10 per cent in the next year

Halifax (December)
Fall of 20 per cent over 2008 and 2009. Martin Ellis, chief economist for Halifax, owned by HBOS, said at the start of this month that he thought house prices would fall about 20 per cent over 2008 and 2009

Capital Economics (October)
Fall of 35 per cent between 2007 and the end of 2009. The consultancy believes that prices will drop 35 per cent from the peak in 2007 and will not begin to show growth until 2011

Knight Frank, Savills (December)
Fall of 15 per cent in 2009. Both estate agents believe that prices are halfway through a fall of 30 per cent from peak to trough. Savills expects prices to begin to recover in 2010

Winkworth (December)
Fall of 10 per cent in 2009. Dominic Agace, of Winkworth, the estate agent, said that sales prices were down by 20 per cent this year and that prices would fall by a further 5 to 10 per cent in 2009

Rightmove (December)
Fall of 10 per cent in 2009. The property website has released a report predicting that house prices will decline by another 10 per cent next year

Kinleigh Folkard & Hayward (October)
Fall of 5 per cent in 2009. Lee Watts, the managing director of the estate agent, blamed irresponsible lending for a 20 per cent fall in prices this year and predicts that there will be a further 5 per cent decline next year

It seems that the consensus is that we are down around 15%, and are 10% from the bottom. I'm not sure why people pay any attention to vested interests. The market is off 19% already (>6% in the last two months alone)

http://www.hbosplc.com/economy/includes/04_12_08historicdata.xls   (AllMon(NSA))

and as I showed yesterday, it is still 25% over fair value.

http://www.noelwatson.com/blog/PermaLink,guid,a501304a-3b27-4712-a08a-c9e984ff9619.aspx

The betting exchanges are pricing in 22% falls next year - I reckon this is about right

http://www.noelwatson.com/blog/PermaLink,guid,87e050b0-fb3f-4e6d-b7ff-6b74ec0f2e0a.aspx

My original attempt

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

was flawed as Nationwide discounted the house prices backwards from the current price.  

I recently had a look at housing market, RPI and earnings,

and came to the conclusion that while Shiller thought that in the U.S., house prices tend to increase in link with inflation,

http://www.noelwatson.com/blog/PermaLink,guid,78724d63-2cd1-4484-a8f7-5c5b4a22596a.aspx

in the UK I believe that house prices increase in line with earnings growth (which for the period I chose was around 1.5% above RPI, and tended to be closely correlated).

For my final attempt (famous last words), I will download Nationwide data from 1953, adjust for RPI, and add an RPI-earnings adjustment. Note that I am using RPI as I don't have earnings data back to 1952.

The Nationwide data can be downloaded from here

http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

Note: I am using All Houses (UK)

RPI (quarterly is from here)

http://www.statistics.gov.uk/StatBase/tsdownload.asp?vlnk=7173

For the RPI-earnings adjustment, I've got data back to 1964

Note that the mean is 1.9 compared with 1.5 when using 1975 as the start date

http://www.noelwatson.com/blog/content/binary/RPIEarningsCombinedFrom1975.gif

Note that I am performing a very small extrapolation (highlighted red) to guess the values for Q4 2008.

RPI: Was 3% in November - I will guess 2.8% for December

Actual house prices: Were 158,442 in November.

http://www.nationwide.co.uk/hpi/historical/Nov_2008.pdf

The expectation is for a 1.5% fall in December, so I will guess £156k for December.

CONCLUSION:

Using the above data/assumptions, it would appear that house prices on the Nationwide index are still ~25% over fair value. We then have to take into account the inevitable undershoot. Furthermore, we have no idea how inflation, and corresponding pay rises will erode the debt.

What a surprise!

http://www.timesonline.co.uk/tol/money/pensions/article5355194.ece

As discussed here a couple of months ago

http://www.noelwatson.com/blog/PermaLink,guid,1e6654fa-c806-45b7-9aae-5cf7bd5376ac.aspx

there was an article in the FT yesterday (subscription required)

http://www.ft.com/cms/s/0/ea1c4920-cb12-11dd-87d7-000077b07658.html

RBS has the biggest exposure at £19.9bn

Main: 207

XOver: 1125

HiVol: 530

Main: 207

XOver: 1125

HiVol: 530

UK: 114

http://www.bloomberg.com/apps/news?pid=20601086&sid=a5PyWzGVCR7E&refer=latin_america

Main: 203

XOver: 1090

HiVol: 515

UK: 114

Main: 199

XOver: 1040

HiVol: 495

UK: 111

Main: 193

XOver: 1020

HiVol: 480

UK: 117

Main: 195

XOver: 1025

HiVol: 490

UK: 112

I posted last month about U.S. housing vs. inflation, and in particular Robert Shiller's belief that housing, in the U.S. at least, does not outperform inflation, and the recent outperformance is the exception.

Russ made a couple of comments

"I think an argument could be made that the long term increase should be in line with earnings, which you would expect to exceed RPI by the long-run productivity increase in the economy (perhaps 2%, but who knows?)"

so I decided to have a look at some of the data. Note that I am looking at U.K data rather than U.S. as I am more comfortable with the various indices.

Firstly, the Nationwide trend of 2.8% p.a. was baselined from Q1 1975

Average earnings growth (inclusing bonusus) in that period is 7.89%

while average RPI is 6.38%

shown here in another format

note that the mean figure of 1.5 is the same as in shown in the inflation adjusted house price trend in 2000

http://www.noelwatson.com/blog/content/binary/NationwideApril2000.JPG

which makes me believe that we still at least 30% still to go.

The second point

"The reason I'd say house prices would inflate with earnings is that they are not a static good, there are improvements in quality and so the average house of 50 years ago (outside bog, no central heating etc) would not resemble the average house of today. Also rents have tended to rise with earnings, and rents represent the replacement yield of housing."

I'm not sure I agree with the first part - I don't think we should make hedonistic adjustments.

Discussion here

http://forum.objectivismonline.net/index.php?showtopic=11943&mode=threaded&pid=171334

Compare a Fiesta from 1998 with one made today. A 2008 1.25 Fiesta costs £9,040

http://www.parkers.co.uk/cars/new-prices/summary.aspx?model=1721

whereas one from 1998 costs £9,315

http://www.parkers.co.uk/cars/used-prices/Valuation.aspx?deriv=15025&plate=58

so even without adjusting for inflation, the new Fiesta is cheaper,despite being more advanced in almost every way. The same is true for computers and white goods. Why should housing be any different?

As for rental levels increasing in line with earnings, I don't have the data, but it would seem logical.

Tribune defaulted the other day - the CDS has been distressed for a while so it wasn't news

http://www.reuters.com/article/americasDealsNews/idUSTRE4B76FJ20081208

but I remembered that I could check the net notional

which was around $1.6 bn last month - slightly above average for a top 1000 entity, but well below the $6bn of Lehman

Thought I would post a few screenshots to see what the markets think of Brown's claim that we are well placed to ride out the downturn.

• CDS: Gone from 7bps to 120bps in the space of a year. Admittedly, all sovereigns (and indeed all CDS markets) have suffered, but U.S. started the year at around 15bps, and is now only 66bps

• FX:

GBPEUR: Started the year at 1.36, now at record low of 1.14

http://www.telegraph.co.uk/finance/economics/3700755/Sterling-tumbles-to-record-low-against-the-euro-as-UK-economic-woes-mount.html

"The pound fell to a new record low against the euro today after a stark warning that the pace of economic decline in Britain is accelerating as the country moves into a deep recession."

GBPUSD: Similar picture - started year at approx 2:1, now at thirteen year low

http://www.telegraph.co.uk/finance/economics/interestrates/3548142/Interest-rates-cut-sterling-recovery-unlikely.html

"The pound has fallen against the dollar from a high of $2.0334 in March to below $1.45 yesterday, the lowest levels for 13 years. However, sterling launched a mini-rally after the interest rate announcement – rising from $1.4470 to $1.4677 shortly after noon."

• House prices: Fallen almost 20% in just over a year

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5284863.ece

"British house prices tumbled at a record 16.1 per cent in November, marking the sharpest drop in property values for a quarter of a century.

Figures released this morning by Halifax revealed that prices fell 2.6 per cent in November compared with October, and are 16.1 per cent lower than in November 2007.

The year-on-year decline is deeper than falls recorded during the last recession in the early 1990s, and is the biggest drop since 1983. "

Note: I think they meant to say since records began, as the market was rising in 1983

• Mortgage approvals: Record lows

http://www.telegraph.co.uk/finance/economics/houseprices/3538545/UK-mortgage-approvals-down-72pc-from-peak-Bank-of-England-figures-show.html

"The number of UK mortgage approvals dropped again in October, equalling their lowest low and 72pc down on their peak in 2007, according to the latest figures from the Bank of England."

• PMI (Purchasing Manager Index) - below 50 indicates outlook worsening

Services:

http://www.guardian.co.uk/business/2008/dec/03/recession-economics

"Britain's dominant services sector is shrinking at a record pace, a new survey showed this morning, suggesting the economy is heading into a deep recession."

 Manufacturing:

http://www.telegraph.co.uk/finance/economics/3538439/UK-manufacturing-shrank-to-record-low-in-November-PMI-report-shows.html

"The closely watched manufacturing Purchasing Managers' Index (PMI), which combines orders and output levels in British factories, was 34.4 - the lowest level since the series began in 1992 and the biggest ever one-month fall."

Construction:

http://www.guardian.co.uk/business/2008/dec/02/construction-recession-economy

"Further grim news on the economy emerged this morning as a survey showed the country's once-booming construction sector contracted for the ninth month running in November - and at the fastest pace on record"

No graph as Bloomberg only has a few months of data

• Unemployment: Highest level for 11 years

http://news.bbc.co.uk/1/hi/business/7724084.stm

• Manufacturing Production:

http://www.telegraph.co.uk/finance/financetopics/recession/3688680/Manufacturing-and-mining-drags-UK-industrial-production-down-more-than-expected.html

"Figures from the Office for National Statistics showed that manufacturing output fell by 1.4pc in October - the eighth monthly fall in a row and the longest run of falling output since 1980."

• Industrial Production:

http://www.guardian.co.uk/business/2008/dec/09/recession-interest-rates

"Britain's economy may be deeper in recession than previously thought after official data showed that industrial output plummeted at the fastest rate in nearly six years in October, with previous months also weaker than estimated."

 

Conclusion: It would appear that the pre budget report's claim that the economy will grow in the second half of 2009 may be a tad optimistic.

http://news.bbc.co.uk/1/hi/business/7775802.stm

Main: 195

XOver: 997

HiVol: 488

UK: 114 (close)

Main: 194

XOver: 1003

HiVol: 493

UK: 116

I wrote a few weeks back about how equity had lagged credit in the current downturn

http://www.noelwatson.com/blog/PermaLink,guid,6ff32223-b54c-4ac6-b1e3-6baf7d232c07.aspx

but for certain stocks, the trend has been reversed

Alcoa

Dow Chemical

and the Dow

all fell around the end of September, but the CDS spreads have blown out a lot more recently

Seeing mid of 998. Main 193, HiVol 498

Main: 196

XOver: 1015

HiVol: 515

UK: 120 (close)

Main: 196

XOver: 1013

HiVol: 522

UK: 118

Latest TFS survey - bottom is even further away

compared with last month

http://www.noelwatson.com/blog/PermaLink,guid,5685fb5a-c3fa-45b0-8e0e-18312f9804d0.aspx

UPDATE: Bottom is predicted to be £109,108 in November 2011

http://www.contractjournal.com/blogs/brickonomics/2008/12/half-price-houses-by-2011-says.html

Main: 202

XOver: 1035

HiVol: 530

*New addition*

UK CDS: 125 (Friday close)

(A lot less liquid than the indices, so it may be the case that last night's closing is used - I will state when I am using this)

Main: 219

XOver: 1099

HiVol: 552

Xover widened 50bps this morning with no reported trades - very illiquid market

Seeing average mid slightly over 1100bps. If we assume a recovery of 25%, over half the names are priced to default over the next five years.

It was only on Wednesday it passed 1000bps

http://www.noelwatson.com/blog/PermaLink,guid,0d31c672-bb52-4549-9187-0e115b030bf4.aspx

Main: 214

XOver: 1030

HiVol: 520

Main: 205

XOver: 1017

HiVol: 510

Currently seeing 200/202

Xover still hovering around 1000bps

Main: 192

XOver: 997

HiVol: 470

Main: 195

XOver: 1020

Today was the day the XOver breached 1000bps

http://www.noelwatson.com/blog/PermaLink,guid,0d31c672-bb52-4549-9187-0e115b030bf4.aspx

and I even heard suggestions that the index be quoted on an upfront basis (as single names tend to when they hit 1000bps). When single names are quoted upfront, a percentage of the notional is paid, then 500bps paid annually (125bps per quarter). The XOver currently trades on a coupon of 560bps. 1000bps spread on XOver equates to ~13bps upfront.

Main briefly skimmed 200bps (I saw 198/200).

This Scientific American article seems to think so

http://ftalphaville.ft.com/blog/2008/11/26/18734/quant-blame-me/

I put my comments on FT -  do the people writing these articles have any experience whatsoever about what goes on in an investment bank?

"These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities"

The quants don't invent anything - they get told what to do by the traders/structures.

An article in defence of the humble quant

http://tbm.thebigmoney.com/articles/judgments/2008/12/01/model-made-me-do-it?page=0,1

UPDATE: Wilmott talks quants

Seeing mid of around 1005. I recall this being predicted 18 months ago in the previous blowout

http://www.noelwatson.com/blog/PermaLink,guid,3a000888-e5df-4208-9515-01586f6332f2.aspx

My buy at 67bps is looking good (shame it is not real money!)

http://www.noelwatson.com/blog/PermaLink,guid,0c5c8ee2-cafe-4a5f-9f55-e0a0af90dc9e.aspx

EDIT: Cameron just mentioned UK CDS being worse than HSBC in the Commons

Main: 188

XOver: 954

I guess they weren't doing enough business to make it worthwhile. At least we still have TFS and I need to go and make friends with the chaps on the property derivatives desk.

http://www.spreadfair.com/

"Dear Cantor Spreadfair Customer

Cantor Index Limited has taken the decision to close Spreadfair, its online betting exchange, to focus on its financial spread betting and CFD business.

Effective from 4 pm, 1st December 2008, Cantor Spreadfair will cease to accept new customers and will take no further opening wagers.

Any funds that you have on deposit with us remain totally secure and any funds not required to support open bets will be refunded to you immediately.

If you have any questions, please contact our customer services team on 08000 111 441."

Main: 185

XOver: 940

Main: 197

XOver: 950

From yesterday's close

http://ftalphaville.ft.com/blog/2008/12/02/18924/debt-protection-costs-hit-new-highs/

http://us.ft.com/ftgateway/superpage.ft?news_id=fto113020081732485262

"One of the many heuristics that affect our investment decisions is representativeness, or simply stereotyping. Our tendency to chase performance is an example of the representativeness heuristic, as we misjudge past performance to be representative of future performance. Computers tell us past performance has little to do with future performance, yet most plan sponsors and fund of funds managers will only hire investment advisers whose past performance has been superb"

Main: 188

XOver: 936

Main: 171

XOver: 893