US property woes are a warning to us all
Some weeks back when China’s stock markets fell 9% investors panicked and the New York Stock Exchange could not cope with the level of sell orders coming though the system.
The panic triggered by China shook the global markets and suddenly analysts began asking fundamental questions about the worth of shares.
In the end it boils down to the fact that something is worth what people are prepared to pay for it on any given day. It is a profound viewpoint which makes it plain that markets, in the final analysis, are fickle.
During the share price panic, prices were impacted in all markets and as investors recovered their nerve, markets recovered.
But the point was well made. Increasingly we live in a global economy and what affects one sphere of the globe tends to carry through to the rest of the world and at a pretty fast pace.
Technology and the speed of information transfer has a lot to do with it, but at the end of the day we are talking here about investor sentiment and how that ultimately affects value.
Somebody remarked recently that while house prices have risen dramatically, the value of our properties hasn’t gone up by anything like the same amount.
For some that’s patently not the case and lucky investors have made massive gains on second and third properties. For the vast majority, the value of our homes may offer some comfort, but in reality it is worth a lot more to those who will inherit it than it is to the owner.
House prices too are starting to take on an international dimension, certainly as far as market sentiment is concerned.
Take the case of US bank M&T, in which AIB has a significant share.
It has been hit by the effects of the US sub-prime lending market.
Profit in its current quarter will be well below expectations because of the bank’s exposure to the Alt-A residential mortgage market.
In the US these are dubbed “liar loans” by the market, on the basis that acquiring them requires little or no documentation.
And this is the really frightening bit.
It is thought that 40% of all new lending to buy homes last year was in the Alt-A category, some of which are now starting to default.
Up to 30 lenders have exited the market and some are going or have already gone to the wall.
That may well explain why AIB’s shares have been hammered in the past few weeks although their exposure in the US is not that great.
As we all gloat smugly over the value of our properties, we need to wake up to the fact that the cracks are starting to emerge in the US.
That effect is already starting to trickle across the Atlantic, affecting sentiment around the banking sector in Britain as well as Ireland where all financial stocks have lost value in recent weeks.
Close to €3bn was wiped off AIB’s shares since February when the shares peaked.
All banks have serious exposure to the housing market and the prognosis on Ireland is getting depressingly worse.
In the Irish context sub-prime lending is believed to be pretty modest and the drop in bank values reflects the belief that mortgage lending is about to slow significantly.
One leading economist reckons that last year investors may have accounted for up to 40% of new borrowing for properties.
If they exit the market the shake out here could be pretty dramatic.
Add to that fears of US firms becoming less enamoured with Ireland and the cause for worry about the economy starts to take on a decided edge.
