The US housing market vs Rollercoaster Tycoon

We’ve been a bit lazy about posting lately. Sorry. It’s been an interesting time in the bond markets however, with gilt yields rising to 2 1/2 year highs (5.07% for 10 year gilts as I type) and risky assets performing well again after the wobbles of February and March. Rising oil prices aside, the other inflation indicators appear reasonably well behaved, and the Q1 wage round looks like it’s delivered sub-inflation rises (meaning a squeeze on incomes). Recent UK data showed that not only was 2006 the weakest year for over two decades for income growth, but also that the UK saving ratio has slipped below zero. In other words times are becoming increasingly hard for consumers, with 3 mortgage rate hikes since the middle of last year, and higher utility and council tax bills all meaning that people are having to borrow to make ends meet. Given the importance of consumption to our economy (it’s about 2/3rds of our GDP) this is all very bad news. There’s still a good chance that the Bank of England hikes rates again, but I think there’s also a possibility that rates might have to fall back again by the end of 2007 – and that’s not expected by the market. Gilt yields over 5% might look like a very good buy. You’ll also be aware at how closely we’ve been watching the US housing market, and that there are signs that it’s starting to roll over. This short video shows the housing market in the States depicted as a rollercoaster ride. You’ll be bored for the first 2 1/2 minutes, but it’s worth hanging in there for the finale. White knuckle times ahead?