Tag Archives: bubble
Property: Is This Just Another Bubble?
Is it time to ditch property just five months after one of the biggest boosts to the sector in decades? By Nick Reeve | Published Sep 02, 2013 The introduction of the government’s Help to Buy scheme in April triggered huge gains for housebuilders and other property-related stocks, which in turn has helped UK small and mid-cap managers – who have the widest selection of such stocks – to record strong 2013 performances. The average performance of the 10 biggest mid-cap focused funds so far this year has easily outstripped the wider IMA UK All Companies sector, according to FE Analytics – 23.4 per cent from mid-cap portfolios compared with 16.6 per cent from the sector. A big part of this outperformance has been exposure to the housing sector, whether through housebuilders or other companies indirectly linked to this area. Star mid-cap managers such as Franklin Templeton’s Paul Spencer and Old Mutual’s Richard Watts have been particularly vocal in their support for the housing sector. It’s easy to see why. Investment Adviser’s research into the top holdings of 10 UK mid-cap funds found that between them they invest in 22 property-related firms. Of these firms, 20 have posted share-price gains of more than 25 per cent in 2013 alone. Examples held by several managers, including both Mr Watts and Mr Spencer, include Ashtead Group, a provider of heavy-duty construction equipment, which has gained 42 per cent so far this year; and kitchen-maker Howden Joinery, which is up 51 per cent. But there are increasing signs that the property recovery may have run its course already, and it may be time for the likes of Mr Spencer and Mr Watts to cash in on their profits. Last month property fund managers from Aberdeen and Henderson told Investment Adviser that the easy money may already have been made from property, with Aberdeen’s Sanjeet Mangat warning investors in her £176.2m Property Share fund not to expect its strong performance track record to be repeated. Ms Mangat’s fund is a member of the Investment Adviser 100 Club of outperforming funds and providers (see page 29). John McClure, manager of the top-performing Unicorn UK Income fund, said in June that he was steering clear of most housebuilders and developers as they were “structurally flawed” and did not have any substance. Miton’s Martin Gray, manager of the £883m CF Miton Special Situations fund, believes the “run has happened” and, while acknowledging some upside may remain, says he “wouldn’t buy in now”. City Financial’s David Crawford – who runs the firm’s top-performing long/short UK Equity fund – points out that strong performance based almost exclusively on government stimulus is bound to be short-lived. Investors only need look at the reaction of the equity and bond markets to the potential slowing of another form of stimulus, quantitative easing, to see that such catalysts cannot last forever. The UK government is desperate to prove it can help more people onto the housing ladder, and with Help to Buy it is helping first-time buyers to secure mortgages with deposits of as little as 5 per cent. Many of the same companies held by UK managers have specific ‘Help to Buy’ pages on their websites, detailing what aid there is available for first-time buyers – and giving a strong hint that this scheme has directly benefited them. “In a properly free market the value of houses would drop,” Mr Crawford says, adding that banks are still not lending prudently to borrowers trying to get on the housing ladder. He highlights banks that are granting mortgages equivalent to eight or nine times an individual’s salary, as opposed to two or three times. Martin Gray adds that the Help to Buy scheme “sounds to me like electioneering, which is a little worrying”. But for those still surfing the wave of housing-related stocks, the end is not yet in sight. Patrick Newens, small-cap fund manager at F&C, argues that the “electioneering” by the government through Help to Buy is likely to mean the scheme will last until at least the next election in 2015. He adds that house price-inflation has only just started feeding into companies’ figures and analysts’ forecasts. “Housebuilders are all seeing earnings upgrades and their margins are going up,” he says, leaving room for “decent upgrades” still to come. In addition, Aviva Investors’ Toby Belsom says it is not all about property prices and first-time buyers. He points to St Modwen Properties, LSL Property Services and Paragon Group – all top holdings in his UK Smaller Companies fund – as examples of property-focused companies that are not dependent on house prices. Instead the companies operate in longer-term projects, renting, and the secondary market. For these reasons Mr Belsom says he is “comfortable” with the stocks’ valuations, in spite of some very strong numbers so far this year. Opinion is split between those that did back housebuilders and have benefited from the move, and those who by their own admission have not, including Mr Gray and Mr Crawford. The debate is likely to continue for as long as the stocks themselves keep pushing higher, but with specialist property managers already having to hunt ever harder for attractive valuations, investors should be at least wary of increasing their exposure. Continue reading
ANALYST: We Are Seeing A Farm Bubble In The Corn Belt
MAMTA BADKAR JUN. 10, 2013 AP/Nati Harnik National farm values appear to be overpriced but not in a bubble, according to Paul Ashworth at Capital Economics. Prices are up 10% in the last year, and have been up 25% over the past three years. But he does see a “localized bubble in farmland values in the corn belt,” considering the biggest gains in farmland values have been among the largest corn and wheat producers: “Near-zero interest rates have undoubtedly played some role in this, but the bigger factor has been the surge in corn and wheat prices over the past decade. “We do not believe that a bursting of this bubble would have any systemic risks for the wider financial system. Nevertheless, a slump in farmland prices in the corn belt could hit some small community banks very hard and it would be devastating for the farmers involved.” Prices have risen by over 50% in prices in the northern plains (Kansas, Nebraska, North and South Dakota) and the corn belt (Illinois, Indiana, Iowa, Missouri and Ohio). In Nebraska prices have nearly doubled over the past three years and Iowa prices are up over 80%. The rising price of corn and wheat explain the rise in prime crop land values. But ranch prices haven’t moved along with livestock prices, and this is because livestock prices were pushed up by rising feed costs. Ashworth also points out that farmland values could be driven by the shale revolution. Capital Economics A closer look at Iowa Iowa’s farmland is overvalued relative to national value of farm production, writes Ashworth. That ratio is almost double the long-run average suggesting that farmland is overvalued by as much as 100%. But this isn’t an apples to apples comparison. From Aswhorth: “Comparing Iowa farmland with the national value of farm production is, however, unfair. Unfortunately, we don’t have figures for Iowa State farm production values. But since Iowa farmland is predominantly used to grow corn, we can compare it to corn prices, although we need to adjust for rising yields. (We used a 10-year average of corn yields to smooth out temporary drought-related slumps.) This ratio suggests that Iowa farmland is a more modest 40% overvalued. “Even then, however, we have used the 2012 end-year price of around $6.50 per bushel. Corn is now fetching around $5.50 per bushel, which would suggest that Iowa farmland is nearer to 70% overvalued. The bottom line is that Iowa farmland is markedly overvalued, unless you believe that corn prices will rebound back to recent highs. “Compared with cash rents for farmland, however, Iowa farmland values don’t look nearly as overvalued. Data from Iowa State University show that cash rents for Iowa farmland surged to $252 per acre in 2012, up from $183 in 2009. Using those cash rent rates and farmland values, we can calculate a yield for Iowa farmland. As Chart 12 shows, that yield has fallen from about 6% a decade ago to 3% in 2012. Given the even bigger decline in long-term Treasury yields over that time period, the decline in Iowa farmland yields seems reasonable.” The good news is that the demand for farmland loans is decreasing, and only 0.7% of farmland loans are seriously delinquent. And though a collapse in farmland value would hurt small community banks, these loans don’t make up a huge part of banks’ balance sheets and therefore don’t post a systemic risk to the financial system.” Read more: http://www.businessi…6#ixzz2W1hLcv8z Continue reading
The Market ‘Bubble’ You’ve Never Heard Of
By Nin-Hai Tseng, Writer May 10, 2013 Some economists are worried that farmland prices are nearing bubble territory. How bad can it be if no one’s heard of it? FORTUNE – Following the collapse of U.S. home prices in 2007, analysts and economists have been eager to spot the next big bubble. There’s been talk of a bond bubble . And as U.S. stocks hover near a five-year high , many have wondered if a bubble is in the works. There have also been worries over the market for student loans in which defaults have recently risen. Then there’s apparently a new bubble that few have ever heard about: America’s farmlands. Thanks to higher crop prices, the costs for farmland nationwide have risen rapidly, particularly across the Midwest’s Corn Belt. Demand for corn soared as the use of ethanol in the U.S. and abroad has risen. Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on — they’re buying too. The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week — a group of bankers advising the Federal Reserve warned prices aren’t justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they’ve opted for farmland. They blame the central bank’s super-low interest rate policies . “Agricultural land prices are veering further from what makes sense,” according to minutes of the Feb. 8 gathering of the Federal Advisory Council. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.” True there’s some bubbly behavior going on, but that doesn’t mean the market for farmlands has entered bubble territory, at least according to Yale University economist Robert Shiller , who first warned of a housing bubble back in 2003. The most obvious sign: Nobody has ever really heard about it. Even if prices went belly up, it likely won’t cause nearly the kind of financial havoc that sub-prime loans did onto the housing market and the nation’s financial system. As Shiller wrote in 2011 in Project Syndicate , an online opinion forum featuring leading economists., the market for farmlands isn’t nearly as big as the housing market or stock market, for that matter. Whereas farmland had a total value of $1.8 trillion in 2010, the U.S. stock market’s value was $16.5 trillion, and the housing market was $16.6 trillion. Plus farmland bubbles are rare, he adds. While prices in the Midwest declined dramatically in the 1980s, Shiller notes that there has only been one farmland bubble in the U.S. during the 20 th century, when there was a fear of overpopulation in the 1970s. True, farmland prices could fall if interest rates rise and if crop prices decline in big ways, making it difficult for farmers to repay loans. But unlike America’s latest housing market bubble, which saw the supply of new homes rise rapidly as investors banked on new mortgages, there is no increase in the supply of farmland. Admittedly it’s hard to say if there is indeed a bubble, and if so, when might it pop. Corn futures have been on a steady decline for the past nine months. Nonetheless, there are plenty of reasons why farmland is still the “bubble” many have never heard of. Continue reading
