Bull and bear: House prices: transactions rise again, but prices slump - The Share Centre Blog

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Michael Baxter

Bull and bear: House prices: transactions rise again, but prices slump

Written by: Michael Baxter on February 12th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: House prices: transactions rise again, but prices slump. YouTube coming to a television near you. Schmidt sells shares. Hester’s relatively modest salary depends on what you mean by relatively. Companies in the news. G4S, HICL Infrastructure Company, Essar Energy

House prices: transactions rise again, but prices slump

The latest survey from the Royal Institution of Chartered Surveyors (RICS) was supposed to provide compelling evidence that the UK housing market is in full recovery mode.  Instead, the compelling evidence is only really there if you view the survey through a rose tinted magnifying glass. Still, maybe it was down to snow.

As is pointed out here most months, the RICS survey does appear to provide just about the most reliable snapshot of the UK housing market. It is also just about the best guide to what is likely to happen over the next few months.

What is quite appealing about the index is that the headline reading – the one that tracks house prices over the past month – is not subject to the wild swings seen in other surveys. Only very rarely does this index flip from positive to negative, or the other way round. When it does, that normally marks a transition phase in the UK housing market, and indeed the UK economy.

So, for example, the index went negative in August 2007, a time when many were still talking about the UK economy having strong underlying fundamentals.  We can now look back and, with the benefit of hindsight, suggest that the moment at which the RICS survey for August 2007 was released may have marked the point when things started to go horribly wrong for the UK housing market, and for UK plc.

The RICS index stayed in negative territory for two years. In August 2009, however – to the surprise of many – it went positive. Many dismissed this as a one-off, but that was not how it turned out. The index stayed above zero for the next eleven months. Soon afterwards other housing market surveys pointed to rising house prices. It was not intuitive. How could house prices rise when the UK was in recession? But that is what happened, and the RICS index told us in advance.

The index then went negative again in July 2010. It has been less than zero every month since. During this period, growth in average wages was outstripped by inflation and the UK fell back into recession.

But during the last few months, the RICS index has been moving tantalisingly close to showing a plus reading again. And then in December the index scored zero, meaning the percentage number of surveys that said house prices were up in the month, was exactly the same as the percentage number that said down. Was the index set for another one of those breakthroughs? If it went positive in January, not only would that be a good sign for the UK housing market, but it would be good for the economy too.

Well, this morning, the data was out. What did it say?

Bear: Alas the index fell back to minus 4. And – as if to rub salt into the wound – the December Index was revised downwards from zero to minus 1. With those readings, the tantalising hint that the UK was set to rise from its plateau became a little less solid.

The index tracking new enquiries was down too, falling from plus 10 to minus 9. The index for new instructions fell from plus 1 to minus 5.

Bull:  But the snow may have been a factor at play. Maybe that white stuff falling from the sky merely delayed the recovery.

And now we come to the two bits of good news.

The index tracking 12 month price expectations rose from plus 5 to plus 18, so that was quite a hike.

Transactions were up too, with the index tracking newly agreed sales rising from plus 2 to plus 15.

So what can we conclude?

It is good that price expectations are up, but what does really tell us? Do surveyors really know anything more about the future than the rest of us? The headline index still points to mildly falling prices. It may only be a matter of time before it goes positive, but until it does, the bears remain in the ascendance.

YouTube coming to a television near you

Google has agreed a deal with Freesat – the satellite TV broadcaster owned by the BBC and ITV – to include a YouTube channel on Freesat service.

Once on YouTube Freesat, customers will be able to navigate their way through the various YouTube channels using their smart phone.

It may not have shown up on your radar, but a YouTube revolution has been occurring.

There are now 68 channels on YouTube. This means you can subscribe to content from various TV production companies, animation companies, or just sign-up to a particular TV show.

Ask yourself this question: do we need TV stations? Do we need a BBC, ITV, Channel Four or Sky? We did once, but in this Internet age, we have near infinite choice. Why do we have to access our content via a TV channel? Why can’t we go direct to the source?

That does not mean there won’t be a need for the BBC, or ITV. They are good at producing content. But don’t you think that in the Internet age, we will see a far more fragmented market?

If that is so, YouTube may yet become the key player in TV. The deal with Freesat may be a sign of things to come.

For Google, this is an outstanding opportunity.

Schmidt sells shares

So taking the story above into consideration, this was a reason to be bullish on Google. But here is a reason to be bearish. Eric Schmidt, the man who was CEO at Google for ten years before moving upstairs to take on the role of Chairman, is planning to sell 3.2 million of his shares in the company this year. With the current Google share price at $785, this should net Mr Schmidt quite a windfall. The shares he is planning to sell, by the way, amount to 42 per cent of Schmidt’s Google stake-holding.

So this begs the question: why? Is Schmidt planning to retire, buy himself a nice little bedsit in Eastbourne perhaps? And why does he want a few billion dollars to fund his retirement?

A more likely explanation is that Mr Schmidt is moving into politics. He was a major donor to Barack Obama’s re-election campaign. He is also a very big thorn in the side of China. He has clashed with Beijing over its censorship policy, and has accused it of being a ‘prolific hacker’ of foreign companies.

A statement from Google said Mr Schmidt was selling his shares to provide his portfolio with “individual asset diversification and liquidity.”

The diversification bit of that statement is fair enough. You may interpret Schmidt’s action as saying he is losing confidence in Google, but frankly you can’t blame him for wanting diversification. In these types of cases, markets have often taken an unreasonable view. If you want to see a business world run by irrationally optimistic entrepreneurs, then by all means panic every time they sell shares in the company they helped create or run. But if we want our entrepreneurs to be pragmatic, expect them to want to diversify their investments.

But the Google statement also referred to Schmidt wanting greater liquidly in his portfolio. Why does Schmidt want more liquidity?

Is he planning to make a big investment, buy a company perhaps?  Maybe he merely wants to be the next US President, and plans to partly fund his own campaign.

Hester’s relatively modest salary depends on what you mean by relatively

And so it turns out that RBS Chairman Philip Hampton thinks that Stephen Hester’s salary is relatively modest.

He was speaking before the Parliamentary Committee on Banking Standards. He admits that a salary of £1.2 million plus bonuses and shares potentially making the deal worth more than £6 million a year may seem like quite a lot of money to most people. Relative to what bosses at other major banks are paid, however, the Hester remuneration appears modest.

At face value it all seems rather scandalous. On the one hand, Hester and Hampton condemn other bankers, including former RBS employers. They said that the banking industry had been dominated by “hubris” and an “excessively self-centred culture.” On the other hand, some might say that if thinking a multi-million pound pay deal is justified is not hubris, then it is difficult to say what is.

Hampton pointed out that Hester’s job is devilishly difficult. And so it is. It is not easy for mere mortals like us to understand the sheer complexity of his job. Maybe a few million pounds is a just reward.

Maybe there are only a very few people out there who could do Hester’s job, and in a competitive labour market the bank has no choice but to offer its CEO a pay package that others may think is excessive.

To the average person any pay deal greater than theirs seems excessive. Does anyone deserve to be paid more than twice your salary or mine? The same logic says that MPs are grossly overpaid, when in fact democracy may be the winner if MPs were paid more, thus attracting fewer people who were born independently wealthy.

Maybe there are two questions relating to Hester’s pay. Question one: is it the case that very few people could do his job, in which case the laws of supply and demand suggest his pay package is justified? Question two: even if the market price is indeed justified, from an economic point of view, is it morally justifiable?

From an RBS shareholder’s point of view, what the bank needs is the best man (or woman) for the job. And providing that person gives more value to the bank that is taken in remuneration, shareholders benefit. But is that the logic that greed induced bubbles are made of?

Companies in the news

Tempus at the ‘Times’ came the closest of the tipsters to making a bullish comment this morning, when reviewing G4S. The p/e is modest, it says, but then again, the shares have risen sharply, and further advances may be limited.

As for HICL Infrastructure Company, Tempus said worth holding for the safe yield.

Bear: At the ‘Telegraph’, Questor reviewed Essar Energy. It said “avoid”, saying it was reticent about a company with so much short-term risk.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Eric Schmidt Google shares, Essar Energy, G4S, Google YouTube Freesat, HICL Infrastructure Company, RICS housing survey, Stephen Hester pay, UK house prices

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