Many look like they’ll have to find more capital to shore up their balance sheets, and there was much speculation in the weekend papers about investment banks ganging up behind the scenes to prop the sector up.

With housing sales in freefall, builders aren’t building anymore. It now looks as though just 100,000 homes will be built this year compared to a Government target of 240,000. That would be the lowest number built since 1945.

David Sutherland, chairman of housebuilder Tulloch, tells The Telegraph: “The UK housing target does not have a cat in hell’s chance of being met this year or next. Somebody at central government needs to do something.”

Two questions immediately arise in response to this plea. “What can the Government do?” and “Why should anything be done?”

Housebuilders are calling for government aid now that the housing market has gone into self-destruct mode. The Home Builders Federation is calling for stamp duty to be suspended and interest rates to be cut.

Sales are down 60% on this time last year, says Roger Humber of the House Builders Association. “No business or industry can survive that.”

The housebuilders are indeed facing terrible times ahead. They’ve had their boom – a boom never seen before, the likes of which they could never have dreamed of. Now they’re having the bust that was always certain to follow that boom. Just as the boom was better than they could have hoped, so the bust will be worse than they’d ever imagined.

This is why housebuilders usually trade on low price to earnings ratios, by the way. It’s because they are so brutally cyclical. Once the market turns, it turns badly, and the ‘e’ part of the p/e ratio drops off a cliff.

When activity drops off, the builders find they are left with assets plunging in value (their land banks) and they have to rapidly lay off workers to slash costs as sales dry up.

So – no surprise that they now want someone to save them.

But this is capitalism, remember? This is the way it works. Throughout the boom, no one in the property industry was particularly keen to have the state intervening in the market any more than it already does. Home Information Packs (HIPs) for example, which started out as a broadly sensible idea, were ripped apart by the property industry until they were introduced in their current, worse than useless, state.

More to the point, there’s nothing the Government can do. Stamp duty cuts? House prices are falling by about 2% a month at the moment. That’s your stamp duty right there. Interest rate cuts? In case the builders hadn’t noticed, rates have already fallen by three quarters of a point, and it hasn’t made a bit of difference.

That’s because banks still aren’t keen to lend. There’s been a curious reaction to this in the press recently. One leading property writer seems to be blaming Halifax among others for the seizure in the housing market, complaining that they are causing the house price crash by refusing to lend to creditworthy borrowers. Meanwhile, in The Telegraph, a reader’s letter cites amazement at banks greedily ignoring the BoE’s interest rate cuts.

It’s important to understand that the banks aren’t doing this out of spite or greed. This is not a matter of simply persuading them to start dishing out the readies again. The banks – for anyone who didn’t notice Northern Rock or Bradford & Bingley’s travails – are undergoing a bit of a crisis themselves. Halifax parent HBoS is right now crossing its fingers for its £4bn rights issue, while Royal Bank of Scotland has just raised £12bn.

To put it bluntly, the banks are skint. They gave too much money to people who couldn’t pay it back, and now they’re paying for it. They need all the money they can get. They don’t care how good a credit risk you are – they simply aren’t in a position to be as profligate as they were before.

Sure, it’s their own fault they got into this mess. But if you want to blame the banks for their reluctance to lend now, you also have to acknowledge that they were wrong to have been so free and easy with the credit in the first place. And that’s something I suspect most property pundits would be reluctant to admit.

Anyway – back to the point in hand. There’s nothing the Government can do – short of actually giving the housebuilders money (don’t rule it out) – to save the construction companies.

The good news is that with the free and easy access to credit that created the boom in the first place now gone, house prices will settle back to a level that genuinely reflects supply and demand. And with builders unable to build more houses (bye-bye to Gordon Brown’s eco-towns, thank goodness), and foreign workers heading off back home in their droves, we’ll soon see just how much of a housing shortage Britain really has.

I think we’ll find it’s less of a problem than the bulls have been making out.

Turning to the wider markets…

The FTSE 100 recovered on Friday to rise 12 points to 5,802. HBoS was the biggest riser along with other banks as investors closed out short positions.

Meanwhile, in Europe, the German Xetra Dax climbed 50 to 6,765, while in Paris the French CAC 40 rose 10 points to close at 4,682.

In the US on Friday, stocks made strong gains as inflation data was in line with expectations and the dollar continued to rally. The Dow Jones rose 165 points to 12,307. The S&P 500 climbed 20 points to 1,360. And the Nasdaq rose 50 points to end at 2,454.

In the forex markets today, sterling was trading at 1.953 against the dollar and 1.2677 against the euro. The dollar stood at 0.6493 against the euro and 108.31 against the Japanese yen.

In Japan, stocks were higher as the weaker yen boosted earnings at car and electronics manufacturers. The Nikkei 225 climbed 380 points to close at 14,354.

Brent spot was trading this morning at $133.70, while in New York crude was trading at around $134.10. Spot gold was at $867 an ounce. Silver was trading at $16.49, while platinum was at $2,019.

This morning, Barclays’ share price has risen after it said that it is actively considering selling shares to prop up its balance sheet. Profit for May was “well ahead” of last year’s figure. Reports at the weekend suggest that any money raised would come both from sales to sovereign wealth funds and to existing investors.

Source: The Good News About the Housing Crash

Play money? She had barely enough money to buy groceries with. But that’s Annie for you. She has her own approach to investing and she’s certainly entitled to her feelings about risk.

Risk is highly personal. And emotional. If you like an investment and you can sleep at night knowing you may wake up out of money and out of luck, well, that’s the bed you knowingly made.

But I suspect with the markets inflating and deflating like a balloon on ‘roids, some of you may be getting a little frightened. Maybe you’re thinking this isn’t what you signed up for. If you want out … if you want safer and smoother sailing … that’s also your right, captain.

Far be it for me to tell you that whatever you do, don’t jump into bonds. Oh my. Too late.

Last week I told you to avoid U.S. bonds like the plague. But at least I gave you an alternative. To refresh your memory, I suggested that Australian bonds are a far better alternative than U.S. bonds.

But if you don’t like the ups and downs of the equity markets, it’s quite possible that you also harbor a dislike for the ups and downs of the Forex markets.

This is what the Australian dollar looks like compared with the U.S. dollar over the last couple of years:

Some of you who see a clear trend of the Australian dollar strengthening against the U.S. dollar will be quite comfortable with the ups and downs within the uptrend.

The uptrend is still intact – the highs are still getting higher as are the lows. Yet, some of you may focus on the fact that the Australian dollar has lost some ground to the U.S. since the beginning of March.

Of course, in figuring out the currency risk, you should not only look at charts. You have to compare the strength and direction of the two economies … the latest moves in interest rates … their trade and budget balances … and to what degree inflation is affecting economic growth and long-term interest rates.

And after weighing all that, there’s a chance you could still be wrong. If you are, what would the damage be?

Well, from August 13th to the end of February, the Australian dollar gained 20 percent against the U.S. dollar. That was by far the biggest bounce in the two-year period covered in the above chart.

If you were earning 6 percent on every $100 you invested into Australian bonds, your payments would increase from $6 to $7.20. With a $10,000 investment you’d be making $120 more per year. And your interest rate would have risen to 7.2 percent.

But if that 20-percent move was a move against you, you’d be making $120 less. And instead of earning 6 percent, you’d be earning 4.8 percent on your Australian bond once your payment is converted into U.S. dollars. That’s still way above the 3.5 percent you’d be earning on an equivalent (10-year) U.S. Government Bond.

That’s the kind of drop that could spook cautious investors from considering Australian or other attractive overseas bonds – like the ones from Iceland, Switzerland, Norway, Turkey and Brazil.

And for those of you who are more averse to risk than others, that would be a shame. Overseas bonds from these countries and some others are a much better deal these days than U.S. bonds.

But here’s something that even the most conservative of you can get behind.

A few of the firms specializing in helping American investors buy overseas bonds are now offering “custodian” services. These firms will keep these payments in the local currency until it once again strengthens against the dollar. And they’ll hold it in a local money market account (or something similar) where it can earn interest!
This new capability will do much to dilute the risk of foreign exchange volatility. Even the most risk-averse among you should now be able to stomach the ups and downs of the Forex markets.

International Assets Advisory (the same outfit I mentioned last week) is just one of several firms which have or soon will have this capability.

Please don’t confuse me with my colleague, Rusty McDougal. But I should mention that next week you’ll get Part III of my series on bond investing. I don’t believe there’ll be a Part IV, unless Mr. McDougal convinces me otherwise.

Good Investing,

Andrew Gordon

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

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