Outlook: Battle of the indexes fails to address key issue about housing

Trade failure; Telewest pact
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The Independent Online

Another day, another house price index to feed the British public's obsession with the value of their homes. This one comes from the Office for the Deputy Prime Minister, and on the face of it, there's not much to commend it over any of the others. For a start, it is two months out of date in reporting annual house price inflation of 14.6 per cent for July. It also fails to include cash purchases, which astonishingly account for as much as a quarter of all house purchases in Britain.

Another day, another house price index to feed the British public's obsession with the value of their homes. This one comes from the Office for the Deputy Prime Minister, and on the face of it, there's not much to commend it over any of the others. For a start, it is two months out of date in reporting annual house price inflation of 14.6 per cent for July. It also fails to include cash purchases, which astonishingly account for as much as a quarter of all house purchases in Britain.

The object of most fascination is, in any case, what will happen to house prices rather than what has, and here the debate is as highly charged as ever. Over the past month there has been a pronounced pick up in the market, which broadly corresponds with the equally marked "Baghdad bounce" in the wider economy. Can this last, or is it just momentary remission? We all know the arguments. Supply is limited and demand is growing, therefore prices must rise. Furthermore, housing is more affordable because interest rates are so low, enabling people to borrow more for the same cost.

There may be something in the first argument but the second is largely illusion. In the past, high inflation and strongly rising incomes to match have had the effect of inflating away the value and cost of any mortgage. A big mortgage would have seemed expensive at the beginning, but by the end it would have been eating up a comparatively small amount of income.

That's not the case today. The cost of a mortgage as a proportion of income might seem low right now, but with low earnings growth to match low inflation, the proportion will remain much the same throughout the lifetime of the mortgage. The effect of high inflation and high interest rates is to front end load the costs of buying a house. Low inflation and interest rates spreads the cost, yet the total proportion of real income absorbed might be much the same.

In these circumstances there is nothing to justify the steadily rising cost of houses relative to income. At present, the ratio of prices to income is even higher than it was at the height of the last housing boom in the late 1980s. The ratio of prices to rents is similarly stretched. Perhaps there has been what Americans sometimes refer to as a paradigm shift. Unwise to count on it, though.

Trade failure

When world trade stalls, growth in the world economy tends to stall soon after, so we have to take the failure of the World Trade Organisation talks in Cancun very seriously indeed. In the short term, of course, nothing very much changes. The delegates return to their respective countries to lick their wounds, but trade carries on much as before. Indeed, there is quite a lot of trade liberalisation still in the pipeline from earlier agreements - for instance, the full opening up of textile markets, due to take place next year.

The public display of histrionics that we saw over the weekend by developing and third world countries will soon be no more than yesterday's chip paper, and in any case, we've had serious setbacks before without long term damage.

None the less, there is no disguising the import of what's just happened. This is a terrible outcome to talks that were supposed to kick-start the world economy after a period of negligible growth. Without further liberalisation, there's no room for trade to expand. In extremis, the process might go into reverse, culminating in widescale protectionism.

It is too easy to blame European and US intransigence on agricultural subsidies for the collapse of these talks. In fact the immediate cause of the walkout was not directly related to agriculture at all, but European and Japanese refusal to drop the four so-called Singapore issues, which deal with how countries treat foreign investors, and transparency in government purchasing and the like.

The developing world used these issues to strike a blow at the prosperous west, yet it was an entirely pyrrhic victory. The poorer nations need multinationalism a good deal more than the US and Europe, with their largely self-reliant economies. This may seem like a politically incorrect point, given the strength of anti-American feeling, but the reality is that it is the US, with its yawning trade gap, which is keeping the rest of the world economy going right now.

You only have to look at the astonishing development story of China, and compare it with India's rather less impressive rates of growth, to see that equal investment rights are not something the developing world needs to fear. To the contrary, they are a boon, encouraging potentially vast inflows of foreign capital. Resistance to change is not confined to the agricultural policies of Europe and the US. Equal investment rights are a threat to the cronyism and corruption of many third world countries. Many of these regimes prefer the impoverished status quo to the alternatives, however much general prosperity they are capable of delivering.

That's not to say the West isn't blameless. Both the US and Europe can and should dismantle the system that links agricultural subsidy with levels of production much more swiftly than they are. The consequent overproduction of agricultural goods, often dumped on poorer nations, is the root cause of complaint. There is nothing wrong with paying farmers to stay in business if that's what society wants. What is wrong is to pay them to overproduce.

The recriminations from these trade talks will echo for months to come. The important thing is that the blame game should not be allowed to do lasting damage. Trade liberalisation is ultimately in everyone's interests, not just the big bad western nations.

Telewest pact

Telewest Communications, the beleaguered cable TV company, claims to have reached agreement with its main bondholders on a refinancing that, in a debt for equity swap, would leave shareholders with just 1.5 per cent of the company. What yesterday's statement fails to mention is that the terms of this agreement appear to be wholly unacceptable to the company's primary creditors. These are the banks, with roughly £2bn of loans outstanding. Without their agreement, there can be no refinancing.

Nor does yesterday's statement mention that the refinancing proposals include shifting the company's domicile and listing to the US. So what's really going on here? The answer is that the company is being hijacked by a US-based financier called Bill Huff. Mr Huff has acquired a reasonably substantial holding of Telewest bonds at distress prices which he is now using to call the shots in the refinancing. Under his proposals, the bonds will convert into a roughly equal proportion of equity. He would also gain strong boardroom representation. Once in the driving seat, Mr Huff would merge Telewest with its main UK rival, NTL, where he has a similar position, and hey presto, he'll be rich beyond the dreams of avarice.

The board's apparent willingness to be dictated to by a self interested vulture capital fund looks odd, to put it at its kindest. The deal as proposed looks extraordinarily beneficial to bondholders, but it is hard to see anything but downside for other stakeholders. Shareholders are to all intents and purposes history, bankers might lose their preferred creditor status and employees would face the axe in the cost cutting merger to come. Charles Burdick, the managing director, would say the plans are preferable to an administration, yet even that's debatable.

A company can be put in and out of administration very quickly these days without damage to employees or primary lenders. Bondholders, on the other hand, would be left high and dry. Several of the bankers cannot understand why the deed has not already been done. If Mr Huff wants this company, he will have to cough up. Bankers won't allow the switch of domicile without a payback.

jeremy.warner@independent.co.uk

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