ASSET CLASS: Will The British Ever Learn?
17 Dec 09:06
By Alen Mattich
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--Britons seem to like taking a beating. Despite a third
year of market falls, households were buying shares during the second quarter.
And, as if that weren't bad enough, they're also leveraging themselves up to
the hilt by borrowing yet more against property in an already overheated
market.
As a nation, the British are in effect mortgaging themselves to get back into
the equity market.
Equity mortgage withdrawal has been growing at breakneck speed this year,
while official statistics show U.K. households bought some GBP4 billion of
shares during the second quarter.
That's a two-way risk. For one, it assumes that shares will rise, possibly
based on the belief that the bear market had ended in the second quarter. In
fact, U.K. equities have fallen 15% since the end of June. Meanwhile, anyone
remortgaging to buy shares would face a cost of capital - the mortgage interest
- of about 5%.
For another, a householder can only withdraw equity if the value of the home
exceeds their mortgage. Last year, house prices rose as much as 30%, which
meant big profits for some. But if house prices dive next year, as some
economists predict, falling values will reduce - or even remove - the equity
cushion.
This has happened before. Witness the housing market collapse and stock
market declines of the early 1990s which led to many householders suffering
negative equity - where the home was worth less than their mortgage. Stocks
didn't soar until the bull market began in earnest in 1995.
The highest profile example of someone swapping their home equity for shares
to their cost has been none other than U.K. Prime Minister Tony Blair.
Soon after he was elected in 1997, he sold his family house in London's
upmarket Islington district for around GBP725,000. Local estate agent Ian
Currie estimates it would be worth around GBP1.4 million now. That's a missed
93% capital gain.
The money was invested through a ministerial blind trust. If, as seems
likely, it went into shares, the Blairs would have lost around 20% of their
capital. In all, they'd now have 40% of what they would have had had they kept
their house.
But that's not where it ends. The trust recently sold shares to raise cash as
the Blairs returned to the property market through the now notorious purchase
of two apartments in Bristol. They unwittingly used the services of a convicted
con man, causing a scandal. An independent economics consultancy, Capital
Economics, figures house prices are in line for a 20% crash over the next
couple of years. If true, the Blairs will be burned twice as losses on falling
stocks turn into property losses.
And if property prices go down, leverage on houses becomes a big issue.
Mortgage equity withdrawal has soared to around 7% of a household's annual
income since it dropped to about zero in the last quarter of 1995, according to
Goldman Sachs estimates. The new level isn't far shy of that seen during the
boom of the late 1980s.
This worrying trend is mitigated by the fact that U.K. personal savings rates
as a percentage of income has stayed broadly constant during recent years at
above 5%. Unlike in the U.S., where equity withdrawal has been used to fuel
consumption, the British have been saving the money they've raised.
Those funds have gone into buying financial assets, which hit record levels
during the second quarter of this year. Cash and deposits made up a big part of
that increase - people are putting money in the bank.
But it didn't just go on deposit. Household purchases of shares and other
equity jumped smartly to just over GBP4 billion in the second quarter - the
most recent numbers available - from declines during the first quarter and most
of the previous year. About a quarter of that went into buying U.K. shares.
Given that U.K. equity market price toearnings ratios are still well above
average - and about twice the level at which they tend to trough in bear
markets - and that the housing market is as hot as roast chestnuts, it looks
like plenty of fingers will be burned.
Not that the individuals doing the borrowing are likely to be the ones doing
the investing, according to Goldman Sachs economist Ben Broadbent. He says that
the well-off have been doing more of the saving while younger, poorer Britons
have been borrowing.
A housing market collapse would fall more on the shoulders of the latter,
further drops in equity prices on the former. But the net result of both
happening over the near term would be a serious squeeze on the U.K. consumer.
Broadbent also questions the reliability of the government's numbers on
household share buying. They may be the best and most current statistics
available, but they're still very approximate results of survey evidence, he
said. And they're not particularly big figures.
But even if households haven't been buying heavily, institutions saving on
their behalf have. Only lately have pension funds and insurance companies have
started selling shares. During most of the bear market, they've been loading up
on equities, trying to maintain their weightings in equities against the
backdrop of falling prices.
-By Alen Mattich, Dow Jones Newswires; 44-20-7842-9286;
alen.mattich@dowjones.com
(END) Dow Jones Newswires
12-17-02 0906ET |
