Housing market in danger of bouncing too high
Tuesday 03 December 1996
The evidence is now accumulating that we have at last reached the turning point and that prices are now rising with a momentum that risks getting out of control. One of the best ways to see this is to look at real house prices, after adjusting for inflation.
It is true that, for most homebuyers, real prices are a rather pointless theoretical notion. What matters, especially to those with negative equity, is how much bigger their house price is than the mortgage. But in fact real prices have proved a rather better guide to the market than nominal prices. Over the last quarter-century, real house prices have shown several periods of sustained decline. In the 1970s these were bigger than any in the latest recession, though they did not persist for as long.
The interesting point is how quickly after previous price collapses the market recovered its momentum. All it took were a few quarters of steady real increases and housing market turnover took off again.
Data from building societies has been showing small and faltering annual rises for three years, in nominal terms, which has led to much confusion about trends. But with the exception of one quarter at the end of 1994, the more significant measure of real house price inflation has been consistently negative since 1989 - until the last few months that is, when suddenly it became sharply and convincingly positive.
With house prices rising at an annual 7-8 per cent this autumn and inflation under 3 per cent, it is at last possible to point to a genuine change in the market. Unfortunately, the house price take-off is not a phenomenon that can be dealt with by the odd quarter-point rise in mortgage rates. It takes a lot to change human nature; the last recession was nowhere near enough.
Who is running the Racal hotch-potch?
Racal has demerged so much of its vital innards over the years (Vodafone, Chubb), delivering huge amounts of value to shareholders in the process, that it really shouldn't come as much of surprise that what remains is, well, a bit of a hotch-potch of unwanted left-overs. Final confirmation of this uncomfortable truth came yesterday with a quite disastrous profits warning from the Racal rump. Profits for the full year are not going to be just a few mil below what the stock market was expecting. In fact, they are going to be pounds 20m less and the interims are being rushed forward to clarify the position.
The main problem appears to be in the military radio division, where expected orders have been slow to come through. However, it is hard to see how this can explain the full extent of the damage, since such orders are generally very long term and the profits that flow from them therefore easy to predict.
Tough rules exist these days to prevent companies massaging down stock market expectations in the way they once did by drip-feeding the bad news over a period of time. These days, all the bad news has to be released in one humiliating go by way of a publicly announced trading statement. But this doesn't really explain the problem either. The extent of the shortfall seems to have been as much of a shock to directors as it was the stock market.
It is hard to resist the impression of a company not properly in control of its affairs or reporting structures. That may be unfair, but directors still have a lot of explaining to do whatever the truth. There are still lots of "good bits" within Racal, as well as some good stories to tell about them, but there doesn't seem to be much of a strategy to connect and unify them.
Perhaps, in the end, this doesn't much matter in a company like Racal. Its investment appeal was always as one of that lucky breed of companies which every now and again, seemingly by chance, stumbles across a gold mine - Vodafone being the most spectacular example.
But just how many times is it possible to win the National Lottery, investors will be asking themselves.
Emap kicks itself in the teeth
In the end it was inevitable that the Emap Two would have to go. But in parting company with its dissident non-executive directors, Professor Ken Simmonds and Joe Cooke, Emap has neither enhanced its own reputation nor struck a blow for better corporate governance.
What began as a spat over proposed changes in the company's articles of association quickly degenerated into a full-blown and very public row over the way Sir John Hoskyns chairs the Emap board from which no one emerges with much credit.
The dissidents were made to look small-minded and obsessive - witness their belligerent and personalised attacks on the Emap top brass during yesterday's extraordinary meeting .
On the other hand, Sir John and his fellow directors come over as a rather smug bunch who pay lip service to shareholder democracy only when it suits them. The fact that they actually bothered to hold an egm yesterday to dispense with Mr Cooke and Professor Simmonds when the changes in the company's articles which originally sparked the row rendered such a meeting unnecessary is neither here nor there.
The power of the proxy has crushed many a small shareholder revolt and it was on display again yesterday at the Connaught Rooms in London, scene to Emap's meeting. It is a safe bet that Emap would not have held an egm if there was any danger of losing the vote.
It is important to remember why the changes in the articles (they were passed at last July's agm) were so objectionable to the two dissidents. Emap has removed the requirement for there to be no fewer than five non- executives and given its board the power to remove a fellow director by a 75 per cent vote.
Notwithstanding what Emap says, this is not in line with current practice. In fact, Emap is distinctly in the minority. Nor, as has been suggested, is it a means of preventing shareholder interests from being abused by a domineering chairman. Such creatures tend to fill boardrooms with placemen. In fact, the effect of the changes is to make it easier to stifle dissent and harder to keep rogue executives in check.
Between now and his retirement in 1998 Sir John has a duty to set up adequate safeguards to prevent this from ever happening.
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