Housing

The January chintz-fest in asset prices is starting to look a little frothy given news that previously do-not-touch-with-barge-pole assets such as triple-C rated credit are now back in vogue. Yields more broadly continue to plunge as FOMO takes hold and bankers are back strutting the coop. Stung by the paucity of the 2022 bonus pool, they are out pushing new deals in speculative credit. And despite the messy macro-outlook, they are finding buyers. Exuberance is rife, too, across equity land; look no further than the 20%, super-sized, January rally in the shiny ARK Innovation ETF. Albeit a rally that leaves it 75% lower than its 2021 peak, such was the bush fire of capital in profitless tech last year. Mike Roman, CEO of the sprawling, fingers-in-pies conglomerate, 3M sounded a note of caution though. In lowering guidance and firing 2,500 colleagues he talked of “rapid declines” in many consumer facing markets; a decline that “accelerated” into December. Ho hum. The cold data, meanwhile, continues to give those whose loiter by the water cooler, invading personal space with white-lipped warnings of an imminent recession, something to coo over. Flash PMIs continue to reflect economic contraction and the Conference Board’s index of leading indicators has just printed a six-month decline so fast, it has never not been followed by a period of soup, board games and drizzle-flavoured staycations. The FED though, continues to vex over a labour market – despite many tech companies cutting fat put on during the pandemic boom – that is as tight as a father-of-four in a mountain restaurant. Quite why all the hand wringing over a recession remains a moot point; in the long run, they tend to clear decks and usher forth periods of sustainable economic expansion. That said, whilst there are many things to watch, there may be nothing more important than housing; a magnificent global bubble that is starting to hiss air. US equities remain somewhat expensive, but that is not the case for Europe and emerging markets. Housing though, is a different story. With the blow-off in house prices last year the multiple of household income to buy a home in the US sits at around 6x, a level that may be above the record of the 2006 bubble, but a level that is a long way from the gaudy multiples found in places like Vancouver, London, Sydney, and Shanghai; multiples which range anything from a unpalatable 10x, to a knee-knocking 20x family income. The problem for the wider economy then, is that housing busts take much longer to play out than the trouser dropping moves in assets such as equities. We’re talking years, not months. Six years in fact – peak to trough – in the case of the most recent GFC debacle. Housing is also much more of a middle-class thing, and a middle-class thing financed by mountains of debt; debt that is fast being repriced as rates race higher. Perceptions of wealth, and retirement plans, are also tied up in the sticker price on Rightmove. Out in Canada and Australia, prices have started to crack. Canaries in the mine, perhaps, on the ballyhoo of an asset that has been fuelled by a decade long ZIRP bonanza. Or the trashing of housing stocks last year, means it’s all ‘in the price’? Time will tell. Those hoping for a pivot from the Fed, meanwhile, may pause to consider the recent moves off the lows of a variety of ‘stuff’: Iron ore +45%, copper +35%, aluminium +35%. Corn +20%, the list goes on. Moves that, when it comes to the data, are all incoming. Thud thud thud. Maybe best to turn the screens off, and go walk the dog.