Thursday, 17 January 2008

Housing Stock: Up And Sharply Down

"U.K. real estate stocks may surge at least 20 percent in the first half as the Bank of England cuts interest rates in order to avert a recession, Morgan Stanley said."

" 'We expect a short, sharp counter-trend rally in U.K. property shares,' said Martin Allen, a London-based analyst at the bank, in a note to investors today. 'But we remain very bearish on a two-year view.' "

"Property-related shares could halve by the end of 2009 following the rally as a recession forces rents down and pushes highly leveraged investors into insolvency, Allen said. He expects the Bank of England to cut interest rates by 1 percentage point."

I think they call that a "Sucker Rally" , it's a rally that has no leg. So at some point Property stocks (we are not talking about property price) will rally up to a point when people realize that it doesn't make sense. The rally will start to lose steam and reverse gears... The same happened in the Technology stocks in 2000-2001 before being hammered.

If the US goes into a recession and is followed by UK and Europe, then indeed rents will go in one and only one direction on the way down... pushing housing price on the way down too.

The problem with that again is timing. The central bankers have a history of bailing out the reckless lenders and speculators as they did in 1987 and 1997 by cutting rate and witnessing 2-3 years after, a collapse of the system they helped inflate.

Would this time be the same?, central bankers cutting rate in 2008, injecting more air to the current asset bubble and make it collpase few year after (2009-2010) in a more tragique way? I guess the ECB knows that it should not cut rate but might be forced as they are unable to forecast an ever increasing complex economie with global ramifications.

But at the end, they will cut rate, and most probably before end of the year as history taught us. If they cut let's just hope that they are right in doing so and is putting a cushion to create a soft landing instead of throwing oil to the "inflation" fire...

Source: Bloomberg

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