New asking prices on Rightmove have jumped an astonishing 3.1% over the last month, the site reported this morning.
Rightmove said the “seemingly illogical” rise took “some explaining” and is unsupported by market fundamentals.
The 3.1% figure comes shortly after Halifax’s latest report, showing a 3.6% fall in the average prices of properties across the UK in September.
The average new asking price on Rightmove is now £236,849 – which is hugely disjointed from the Halifax’s figure of £162,096.
Whilst Nationwide reported a very slight (0.1%) rise in prices for September, its average national house price of £166,757 is not far adrift from Halifax.
The breath-taking rise in new asking prices on Rightmove comes after measuring the asking prices of 105,769 properties new to the market. In previous Octobers, asking prices have jumped 2%. The 3.1% rise equates to an average of over £7,000 in a month.
It appears to be the clearest sign yet of over-pricing.
In London, Rightmove said this morning that asking prices of properties new to the market have shot up by 5% in the last month.
But large numbers of houses in London are not selling, and prices are having to be cut. Ivor Dickinson, managing director of Douglas & Gordon, said his firm did 33% fewer transactions in September than a year ago and that asking prices are down by 10%. He said buyers should not be afraid to make “bold offers”.
Generally, market fundamentals, says Rightmove, “remain poor as property per branch rises from 69 in October last year to 78 now, and mortgage availability continues to deteriorate. However, 105,769 new October sellers asked a seemingly illogical £7,082 more for their homes than last month’s sellers. Why would new sellers test the market at asking prices 3.1% higher than a month ago?”
The site said that whilst bullish pricing is a normal autumn characteristic, vendors are struggling to react to new market conditions and, post-HIPs, are now testing the market at minimal cost.
Rightmove commercial director Miles Shipside said: “Given the challenges of the current market, the behaviour of sellers in raising their average asking prices by over £7,000 takes some explaining.”
He said one possible explanation was that sellers are not experiencing high levels of financial stress, but cannot afford to move unless they make their sums stack up.
But most sellers, said Rightmove, are doomed to disappointment, pointing to near-record stock levels and deteriorating mortgage availability.
Shipside said: “Some estate agents are showing a much stiffer resolve than others about the price they are recommending.
“For some agents and sellers there is the temptation to launch to the market at a speculative price, knowing one can always reduce it later.
“In these stock-rich, buyer-poor times, such a strategy stands minimal chance of success for the vendor. However, the agent that wins the instruction to sell in the first place is often able to keep the seller exclusively on their books while recommending a series of price reductions to try and get the price to a more saleable level.”
But he warned that the market can easily be “lost for good” if the launch pricing is wrong. Rightmove statistics show that interest in a property drops away sharply after the first week of marketing.
Monday, October 18, 2010
Thursday, October 14, 2010
The junk bond bubble is set to pop – here's how to profit
As the old adage goes, they don't ring a bell at the top. If you want to know – in any market – when prices are peaking out, you have to work it out for yourself. It's not easy. If it were, everyone would be doing it. But there are often signals you shouldn't ignore.
Worrying signs are appearing in several markets right now. Some of the most concerning, though, are showing up in 'junk' bonds.
Yes, they've done very nicely of late. But this is one market that could be heading for a pile-up.
Why are junk bonds so popular?
Junk bonds are officially known as 'speculative grade credit'. In essence, they're lower-grade IOUs issued by companies to raise cash.
Junk bonds yield more than top-notch issues, reflecting the higher risk you take when you buy them. But junk bond investors still rank higher in the pecking order than ordinary shareholders. So junk bonds could still get repaid even if a company's equity capital goes up in smoke.
When the overall market mood was ultra-grim, junk bonds' extra security compared with shares was a big draw. Investors could snap up very tasty yields without the risk of buying high dividend-paying stocks. Even if the ordinary share dividend was cut and the share price fell, bondholders often still got their income payments in full.
Then the world's central banks started pumping lots of money into the system. The aim was to boost economic growth. But it hasn't worked out that way. Instead, much of this money has ended up in the financial markets. And as investors wanted higher yields than government bonds were paying, a fair chunk has gone into the junk bond market.
In fact, ever more cash is being ploughed in worldwide. Almost $100bn-worth of junk bonds has been sold by corporate borrowers in the last three months, says Bloomberg. That's a new record level of issuance – but clearly, plenty of people are still buying.
What's more, there's lots of hype. "A tremendous yield hunger that isn't satisfied is pushing up prices in all the bottom-tier names," says Margaret Patel at Wells Fargo. "If you want capital appreciation, there's only an ever-shrinking universe to get that sort of yield."
Three reasons why junk bonds have reached their top
So why do I suspect that if the 'market top' bell existed, it'd be ringing around now for junk bonds? Here are three reasons.
First, as we should all know by now, when everyone piles into a market, it's time to start getting very wary. This junk bond mania is now developing all the signs of a fast-inflating bubble.
In the two years to the end of June, investors poured a staggering $480bn into debt mutual funds – the US equivalent of unit trusts – according to the Washington-based Investment Company Institute. That's more than went into equity funds during the dotcom bubble.
Add in all the extra money that's gone into those mutual funds since the start of July, and there's yet more riding on the junk bond market.
Second, all the value has gone from the junk bond market. What do I mean? Junk bond investors have done well in 2010. Including reinvested interest, European junk bonds have returned 16% this year, says Bank of America Merrill Lynch index data.
But don't be fooled. Although the junk bond market's cheerleaders pretend otherwise, investors and borrowers aren't on the same side. What's good for investors – e.g. a higher yield – means more cost for borrowers and vice versa.
When companies churn out extra IOUs in record amounts as fast as they can, like now, they reckon they're onto a good thing. And they are – the average yield for junk-rated European debt has now fallen to 7.62%. That's the lowest since July 2007, i.e. before the financial crisis kicked off. So investors are getting a much worse deal now than before.
"This is a case of too much money chasing too few good bonds," says Don Ross at Titanium Asset Management. "It's just money changing hands and corporations being gainers by being able to issue cheaper [bonds]".
Neither of these concerns would matter quite so much, though, without the third reason – the amount of future supply. It's massive.
In Europe, $316bn of junk-rated corporate debt needs refinancing before the end of 2014, says Moody's Investors Service. It's a "wall of maturities" that's much bigger than the historic ability of the market to find the cash. In the States, despite recent junk bond sales, the amounts needing refinancing over that timeframe are even bigger.
"The wall of maturities raises questions," says Moody's Chetan Modi. "How's the market going to get this increased capacity and what does that mean for pricing and for other conditions?"
To put that another way, companies will only be able to raise sums as big as these by paying much more for the cash. So yields will be forced higher – and junk bond prices will drop.
A daring play on falling junk bond prices
Of course, calling the precise top isn't easy. But avoiding junk bonds seems a sensible course of action. And if you're really feeling adventurous, there's a way to play potential falls in junk bond prices.
The iTraxx Crossover Five-year Total Return Index gauges the default risk of 50 of the most liquid European high-yield corporate bonds. As investors' fear of default falls, junk bond prices rise. So the index climbs – it's at its highest since Bloomberg data began in 2006.
Now there's an exchange-traded fund (ETF) that's the inverse of the index. It's the db x-trackers iTraxx Crossover Five-year Short Total Return Index ETF (GY: XTC5). If junk bond prices drop, the underlying index falls. As a result, this ETF rises because it's effectively selling the crossover index 'short'.
It isn't without risk. You lose money if the index increases. Nor is it a straightforward structure – you can read about it here. And it's listed in Frankfurt and quoted in euros, so there's currency risk if the pound moves up. But if the junk bond boom is ending, this could be one of the easiest ways for you to profit.
Our recommended article for today
Is commercial property making a comeback?
Commercial property prices in Britain have recovered somewhat since last September. So is it time to buy back in or are there better prospects elsewhere? David Stevenson investigates, and tips the best bet in a bombed-out sector.
Worrying signs are appearing in several markets right now. Some of the most concerning, though, are showing up in 'junk' bonds.
Yes, they've done very nicely of late. But this is one market that could be heading for a pile-up.
Why are junk bonds so popular?
Junk bonds are officially known as 'speculative grade credit'. In essence, they're lower-grade IOUs issued by companies to raise cash.
Junk bonds yield more than top-notch issues, reflecting the higher risk you take when you buy them. But junk bond investors still rank higher in the pecking order than ordinary shareholders. So junk bonds could still get repaid even if a company's equity capital goes up in smoke.
When the overall market mood was ultra-grim, junk bonds' extra security compared with shares was a big draw. Investors could snap up very tasty yields without the risk of buying high dividend-paying stocks. Even if the ordinary share dividend was cut and the share price fell, bondholders often still got their income payments in full.
Then the world's central banks started pumping lots of money into the system. The aim was to boost economic growth. But it hasn't worked out that way. Instead, much of this money has ended up in the financial markets. And as investors wanted higher yields than government bonds were paying, a fair chunk has gone into the junk bond market.
In fact, ever more cash is being ploughed in worldwide. Almost $100bn-worth of junk bonds has been sold by corporate borrowers in the last three months, says Bloomberg. That's a new record level of issuance – but clearly, plenty of people are still buying.
What's more, there's lots of hype. "A tremendous yield hunger that isn't satisfied is pushing up prices in all the bottom-tier names," says Margaret Patel at Wells Fargo. "If you want capital appreciation, there's only an ever-shrinking universe to get that sort of yield."
Three reasons why junk bonds have reached their top
So why do I suspect that if the 'market top' bell existed, it'd be ringing around now for junk bonds? Here are three reasons.
First, as we should all know by now, when everyone piles into a market, it's time to start getting very wary. This junk bond mania is now developing all the signs of a fast-inflating bubble.
In the two years to the end of June, investors poured a staggering $480bn into debt mutual funds – the US equivalent of unit trusts – according to the Washington-based Investment Company Institute. That's more than went into equity funds during the dotcom bubble.
Add in all the extra money that's gone into those mutual funds since the start of July, and there's yet more riding on the junk bond market.
Second, all the value has gone from the junk bond market. What do I mean? Junk bond investors have done well in 2010. Including reinvested interest, European junk bonds have returned 16% this year, says Bank of America Merrill Lynch index data.
But don't be fooled. Although the junk bond market's cheerleaders pretend otherwise, investors and borrowers aren't on the same side. What's good for investors – e.g. a higher yield – means more cost for borrowers and vice versa.
When companies churn out extra IOUs in record amounts as fast as they can, like now, they reckon they're onto a good thing. And they are – the average yield for junk-rated European debt has now fallen to 7.62%. That's the lowest since July 2007, i.e. before the financial crisis kicked off. So investors are getting a much worse deal now than before.
"This is a case of too much money chasing too few good bonds," says Don Ross at Titanium Asset Management. "It's just money changing hands and corporations being gainers by being able to issue cheaper [bonds]".
Neither of these concerns would matter quite so much, though, without the third reason – the amount of future supply. It's massive.
In Europe, $316bn of junk-rated corporate debt needs refinancing before the end of 2014, says Moody's Investors Service. It's a "wall of maturities" that's much bigger than the historic ability of the market to find the cash. In the States, despite recent junk bond sales, the amounts needing refinancing over that timeframe are even bigger.
"The wall of maturities raises questions," says Moody's Chetan Modi. "How's the market going to get this increased capacity and what does that mean for pricing and for other conditions?"
To put that another way, companies will only be able to raise sums as big as these by paying much more for the cash. So yields will be forced higher – and junk bond prices will drop.
A daring play on falling junk bond prices
Of course, calling the precise top isn't easy. But avoiding junk bonds seems a sensible course of action. And if you're really feeling adventurous, there's a way to play potential falls in junk bond prices.
The iTraxx Crossover Five-year Total Return Index gauges the default risk of 50 of the most liquid European high-yield corporate bonds. As investors' fear of default falls, junk bond prices rise. So the index climbs – it's at its highest since Bloomberg data began in 2006.
Now there's an exchange-traded fund (ETF) that's the inverse of the index. It's the db x-trackers iTraxx Crossover Five-year Short Total Return Index ETF (GY: XTC5). If junk bond prices drop, the underlying index falls. As a result, this ETF rises because it's effectively selling the crossover index 'short'.
It isn't without risk. You lose money if the index increases. Nor is it a straightforward structure – you can read about it here. And it's listed in Frankfurt and quoted in euros, so there's currency risk if the pound moves up. But if the junk bond boom is ending, this could be one of the easiest ways for you to profit.
Our recommended article for today
Is commercial property making a comeback?
Commercial property prices in Britain have recovered somewhat since last September. So is it time to buy back in or are there better prospects elsewhere? David Stevenson investigates, and tips the best bet in a bombed-out sector.
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