Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

House prices on the UK – on the slide?

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Confession

This piece is one of my occasional rants.  My ambition is to show readers that what gets quoted in the media (print or electronic) as ‘expert’ opinion is often out of context or plain stupid!  My ex-colleagues told me I was prone to ranting – my response is a rant is a proportional non-violent reaction to utter tosh being promoted as rational expertise.  It happens a lot in finance and economics!

Background

You may have read that the Halifax House Price Index reported a sharp fall in prices this month.  I used to work with the economist who created the original index, but no doubt is has developed since the 1980s.  Some suggest this was a ‘freak’ data item but I doubt that.   The on-line article then quoted the chief economist of an economic research business as saying something to the effect that ‘as long as interest rates don’t rise sharply and people don’t need to sell their houses because they can’t afford their mortgages, prices are not likely to fall’.  My hands were then moving to my head looking for a few remaining hairs to pull out!

Analysis and a bit more realism

Of course, repossessed houses coming on to the market in quantity would probably cause prices to fall very sharply, as they did in past recessions.  That is because of an increase in supply combining with a decrease in demand for owner occupation (partly mitigated by an increase in the demand for houses to rent).  That is just basic beginner’s economics.

However, what our chief economist friend seemed not to want to say (I am sure he thought about this) is that a more general reduction in demand alone, which we are actually seeing in London already, will also cause a fall in prices and a sharp reduction in demand will in time cause a sharp fall in prices.

For example, there are Brexit effects that are not much discussed.  Significant blocks of housing in the East Midlands especially are owned by or occupied on multi-tenant lets by Eastern Europeans.  I know this first hand – I live in Eastern Europe and have friends who have been to the UK to work, some returning home, some not yet, and my parents and sister live in the East Midlands.   That source of demand is already reducing as is evidenced by the shortage of labourers in some industries.

As Britain now appears to outsiders to be a more hostile place for foreigners (it is  – I was recently personally racially abused on a bus in Yorkshire on the apparent assumption that I was an Albanian), people with lots of money (eg Russian, Chinese and  Indian nationals) will not buy in London, which will turn off the main source of liquidity that has been driving prices in the South East too .  If net immigration falls as well, it is certain that demand side of the UK housing market equation will ease off.  That combined effect and possibly rising interest rates as well could mean a long down slope for house prices in those areas that have seen the biggest gains.  Maybe not a bad thing in economic terms, being just the turn of the cycle but falling house prices and recessions often come along together.

 

May Watching Brief now published

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This is the regular market commentary that I have always intended to publish.  I have altered the format completely, so it now feels much like the presentation I would have made verbally to clients if I had been reviewing their portfolios as part of their service contract when I was their IFA.  That would have fed through to any necessary fund switches, sales or additions.

This change is the result of feedback received, so I hope it useful.  I have not restricted it to Member Only this month, so non-members can see if it might be helpful and justify signing up!  Here is a link.

Of course, this cannot be the same as a full review with an IFA, because that would conclude with personal recommendations, which I do not offer.  But if you have an IFA, this will give you something to take to the review meeting, or even to prompt an extra phone call.   If you are making all your own decisions and you are a subscriber, feel free to contact me if you want to disagree, or want to see any more evidence!

 

What is diversity and how can you get it?

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I have been asked to write on this subject by a site reader and it is indeed a ‘hot topic’ in the trade press for investment advisers.  That is because the ways in which investment advisers and managers diversified portfolios traditionally are not likely to work in the current financial market climate.  I started with a blog post, but the subject deserves more than that, so I have added a “How to” article.  Here is a link.

Mary, Mary quite contrary

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Readers may have heard the phrase ‘contrarian’  with reference to a certain fund manager or investment style.  Generally this implies taking decisions that are at odds with the perceived thinking of the majority.

NotHarry has a T shirt with a quote from Mark Twain that goes something like this: ‘if you find you are one of the majority, it is time to stop and think again’.  That would suggest merit in challenging the accepted wisdom.  On the other hand the gurus of behavioural psychology point out that the ‘non thinking’ or at least not conscious thinking part of the human brain drives far more of what we do than the analytical, logical part, which makes a case for investing on what is usually called a ‘momentum’ basis, or following the herd.

The question then arises: is it good to be a contrarian in the long run?  Absolutely! But….

The way a contrarian is able to increase the odds of success in investing is to keep the analytic part of their thinking process switched on at all times.  Investing with the momentum makes sense if you get in at or near the start, like a surfer spotting the next big roller some way off the beach.  But you need to know how long to stay on the peak and when to safely get off.  Better to exit gracefully than crash out and get caught in the undertow.

A good contrarian investor is not someone who just buys cheap out of fashion assets, although that can be part of the process.  The contrarian assumes the majority view is wrong until they have proved to themselves that it is not, or even that it is wrong but will push share prices up for a while!  Above all the contrarian (maybe without actually knowing as much) understands that behavioural biases influence investment markets and clichés and simplistic rules of thumb are not an intelligent way of building a portfolio.

I will finish with an example.  It is widely believed that electric vehicles are the future and indeed there is concrete evidence of reduced sales of diesel cars.  A simple view might be to invest in Tesla or another car manufacturer with a stated specific total commitment to electric cars,  and so sell or even ‘short’ holdings in businesses like Volkswagen, Nissan or BMW. A contrarian would perhaps argue that with the most advanced production facilities in the world, these latter companies could switch to making electric cars much faster and at lower unit cost than a new player who will have to purchase vast amounts of capital equipment and learn the process.  So the contrarian would take advantage of bad news about diesel car sales resulting in lower share prices for a well run ‘traditional’ car company to build a stock position, especially if they can see from thorough research that plans for a major switch of production are already well under way.

In my view being ‘contrarian’ is simply a matter of fighting the human tendency to be one of the pack and keep your intelligence turned on all the time.  If you can do that, you will have a lovely show of investment blue bells and cockle shells.