Property Shares...watch this space
18th July 2008
Reader Writes:
Do you believe we are at the bottom of the property investment market?
For the sake of clarity, there are three sectors we are referring to: Residential and commercial property and property shares. The answer to all three is no, but the one closest to an upturn ...
18th July 2008
Reader Writes:
Do you believe we are at the bottom of the property investment market?
For the sake of clarity, there are three sectors we are referring to: Residential and commercial property and property shares. The answer to all three is no, but the one closest to an upturn is property shares.
It’s been some time since the first two have represented any value over cash and as such we have had them as a sell for over two years.
Enough has been said about residential property and I won't go over old ground, but all my previous comments remain intact and you can expect continued downturn for a few years before we hit bottom.
Commercial property also has a potential for double dip falls. We have had considerable falls in any event, and with valuers valuing property on the basis of the quality of the tenant rather than capital value, added to the tightening of the credit market, the price can only go one way.
If we move further into the recessionary world that we already have, offices and retails are going to become more and more available. Demand will fall, and as a consequence, with an increase in supply (empty properties), rents will be under pressure to decrease which in turn creates the double dip in the capital values.
It seems the government are happier to focus externally on inflation than locally on the worsening domestic situation, so you can probably expect the above to occur as companies are choked to death by rising costs, high borrowing and plummeting consumer confidence.
Property shares are normally the first to bounce back and as an asset they are easy to get in and out of. They key will be a return to confidence and a view that the bad news is all on the table. I don’t believe we are there yet, but when it happens the bounce is significant and we can expect the large vulture funds to play their part.
There are large amounts of cash waiting, and given the lack of buying in many good key property companies, one can only assume they see what I see and what the media talking the sector back up again don’t see.
In June, the IPD derivatives market (a future value of property using future expected pricing) priced in another fall of 10%. Somewhere around here, there could be real value in property shares and at this point we may expect the herd to return. Lets see.
One of the strong indicators will be the actions of the government as they close in on an election. Clearly now is a sure fire loss if they went for it, but most expect the next election to be in May 2010. If this is the case, much of what is being talked about today will have its full impact in approximately 18 months time as this is how long financial decisions typically take to make their way through the economy.
If that’s true, November this year is when we will begin to see changes to fiscal policies.
Lets not forget that many of the large property shares are currently trading at large discounts to their net asset value with Hammerson at 42%, BL at 43%, Brixton estates at 51%, Segro at 42%, and all have with well covered dividend yields of 5-6%.(1)
Property shares are generally considered to be interest rate sensitive. Five year SWAP rates are currently extending outwards to 5.75% and with that in mind you can see why the general investor is ignoring why these property shares may well be good value today.(1)
If our greedy commodity investors get burned and that bubble bursts, the inflationary pressure from oil and food will disappear, followed by pressure easing off interest rates and in turn property shares looking much more attractive. The signs are there so keep a close eye.
If you have an investment query please call Peter on 0845 230 9876 or e-mail info@wwfp.net, please also see our section on Investment.
Source
1 Premier
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
Do you believe we are at the bottom of the property investment market?
For the sake of clarity, there are three sectors we are referring to: Residential and commercial property and property shares. The answer to all three is no, but the one closest to an upturn is property shares.
It’s been some time since the first two have represented any value over cash and as such we have had them as a sell for over two years.
Enough has been said about residential property and I won't go over old ground, but all my previous comments remain intact and you can expect continued downturn for a few years before we hit bottom.
Commercial property also has a potential for double dip falls. We have had considerable falls in any event, and with valuers valuing property on the basis of the quality of the tenant rather than capital value, added to the tightening of the credit market, the price can only go one way.
If we move further into the recessionary world that we already have, offices and retails are going to become more and more available. Demand will fall, and as a consequence, with an increase in supply (empty properties), rents will be under pressure to decrease which in turn creates the double dip in the capital values.
It seems the government are happier to focus externally on inflation than locally on the worsening domestic situation, so you can probably expect the above to occur as companies are choked to death by rising costs, high borrowing and plummeting consumer confidence.
Property shares are normally the first to bounce back and as an asset they are easy to get in and out of. They key will be a return to confidence and a view that the bad news is all on the table. I don’t believe we are there yet, but when it happens the bounce is significant and we can expect the large vulture funds to play their part.
There are large amounts of cash waiting, and given the lack of buying in many good key property companies, one can only assume they see what I see and what the media talking the sector back up again don’t see.
In June, the IPD derivatives market (a future value of property using future expected pricing) priced in another fall of 10%. Somewhere around here, there could be real value in property shares and at this point we may expect the herd to return. Lets see.
One of the strong indicators will be the actions of the government as they close in on an election. Clearly now is a sure fire loss if they went for it, but most expect the next election to be in May 2010. If this is the case, much of what is being talked about today will have its full impact in approximately 18 months time as this is how long financial decisions typically take to make their way through the economy.
If that’s true, November this year is when we will begin to see changes to fiscal policies.
Lets not forget that many of the large property shares are currently trading at large discounts to their net asset value with Hammerson at 42%, BL at 43%, Brixton estates at 51%, Segro at 42%, and all have with well covered dividend yields of 5-6%.(1)
Property shares are generally considered to be interest rate sensitive. Five year SWAP rates are currently extending outwards to 5.75% and with that in mind you can see why the general investor is ignoring why these property shares may well be good value today.(1)
If our greedy commodity investors get burned and that bubble bursts, the inflationary pressure from oil and food will disappear, followed by pressure easing off interest rates and in turn property shares looking much more attractive. The signs are there so keep a close eye.
If you have an investment query please call Peter on 0845 230 9876 or e-mail info@wwfp.net, please also see our section on Investment.
Source
1 Premier
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Remortgage Silver Lining
3rd July 2008
Managing Director, Worldwide Financial Planning, Writes:
The quite brilliant excuse of the credit crunch has offered an opportunity to dump every bit of bad news into the market. As a consequence bad news is all around us. Amazingly, it’s blamed on the United States which confuses me more.
The UK’s ...
3rd July 2008
Managing Director, Worldwide Financial Planning, Writes:
The quite brilliant excuse of the credit crunch has offered an opportunity to dump every bit of bad news into the market. As a consequence bad news is all around us. Amazingly, it’s blamed on the United States which confuses me more.
The UK’s debt situation is actually worse than the U.S. with consumer debt totalling over 159% of income – It was 106% of income in 1995 before the current government came to power. (1)
To blame the U.S. and an inanimate ‘credit crunch would be irresponsible. The fact is the economy was allowed to overheat and debt was created on a belief that your house was a never ending upward graph that could be used as an ATM.
Remember it was a matter of months ago that property was still being talked up by so called experts. The result is such that many are now finding it difficult to remortgage but despair not there are options out there.
Credit from the Far East has dried up and banks have stopped lending to each other. There is a distinct lack of trust between banks and that has meant they are now looking to lend commercially and residentially only to the right projects and people. If you are looking to remortgage, make sure your case is packaged properly before you approach a lender.
The chancellor (said quickly it sounds like chancer) has told us we can expect a years toughing it out. Great!
This has come at a time where we have record debt, coupled with a colossal rise in the cost of living through oil and food.
In the meantime momentum has turned against property and few if anyone, believes we are in for a short downturn in house prices.
This downturn bears a number of similarities to that of the early 1990’s. It must be remembered that a straightforward investment into the building society over the ten years from 1990 would have outperformed property by over 100%. There is no real reason I can see that this will be any different.
With negative momentum, properties are now being down valued and this, coupled with lenders not wanting to lend as much, has really tightened the market to unprecedented levels.
Perhaps the biggest issue is for the person coming off a fixed rate from two years ago. If they are forced onto a standard variable rate, they may see payments rocket by up to 64%. Even if they are offered the best two year fixed rate, they will face a deal 35% more expensive than the one they are currently on.
Those who took out a mortgage with a loan to value over 90% may also find it tricky to remortgage, along with those who have a high multiple of income as the criteria has tightened so much.
Remember you are not alone. There are plenty of people who took out mortgages with a loan to value of 125% via northern rock who will be less than pleased. In a falling market they are already in negative equity by 25%.
There are solutions however and you should seek advice of a mortgage Independent Financial adviser to assist you with your planning.
Until six months ago, anyone could arrange a mortgage, but today it’s the job of a seasoned professional who specialises in mortgages. Nationwide announced recently that they are now moving to quality rather than quantity in deciding which mortgage advisers they work with.
A specialist Independent financial adviser (IFA) will know exactly how to position your case with a lender and will invariably have clout because of their buying power. A fee charging IFA is a better option as some lenders don’t pay commission, and a financial adviser not charging a fee may be less likely to use them as they will not get paid.
For a list of tips to assist you in remortgaging call Peter on 0845 230 9876, e-mail info@wwfp.net or take a look at our section on Mortgage
Source:
(1)OECD
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Think carefully before securing other debts against your home.
Managing Director, Worldwide Financial Planning, Writes:
The quite brilliant excuse of the credit crunch has offered an opportunity to dump every bit of bad news into the market. As a consequence bad news is all around us. Amazingly, it’s blamed on the United States which confuses me more.
The UK’s debt situation is actually worse than the U.S. with consumer debt totalling over 159% of income – It was 106% of income in 1995 before the current government came to power. (1)
To blame the U.S. and an inanimate ‘credit crunch would be irresponsible. The fact is the economy was allowed to overheat and debt was created on a belief that your house was a never ending upward graph that could be used as an ATM.
Remember it was a matter of months ago that property was still being talked up by so called experts. The result is such that many are now finding it difficult to remortgage but despair not there are options out there.
Credit from the Far East has dried up and banks have stopped lending to each other. There is a distinct lack of trust between banks and that has meant they are now looking to lend commercially and residentially only to the right projects and people. If you are looking to remortgage, make sure your case is packaged properly before you approach a lender.
The chancellor (said quickly it sounds like chancer) has told us we can expect a years toughing it out. Great!
This has come at a time where we have record debt, coupled with a colossal rise in the cost of living through oil and food.
In the meantime momentum has turned against property and few if anyone, believes we are in for a short downturn in house prices.
This downturn bears a number of similarities to that of the early 1990’s. It must be remembered that a straightforward investment into the building society over the ten years from 1990 would have outperformed property by over 100%. There is no real reason I can see that this will be any different.
With negative momentum, properties are now being down valued and this, coupled with lenders not wanting to lend as much, has really tightened the market to unprecedented levels.
Perhaps the biggest issue is for the person coming off a fixed rate from two years ago. If they are forced onto a standard variable rate, they may see payments rocket by up to 64%. Even if they are offered the best two year fixed rate, they will face a deal 35% more expensive than the one they are currently on.
Those who took out a mortgage with a loan to value over 90% may also find it tricky to remortgage, along with those who have a high multiple of income as the criteria has tightened so much.
Remember you are not alone. There are plenty of people who took out mortgages with a loan to value of 125% via northern rock who will be less than pleased. In a falling market they are already in negative equity by 25%.
There are solutions however and you should seek advice of a mortgage Independent Financial adviser to assist you with your planning.
Until six months ago, anyone could arrange a mortgage, but today it’s the job of a seasoned professional who specialises in mortgages. Nationwide announced recently that they are now moving to quality rather than quantity in deciding which mortgage advisers they work with.
A specialist Independent financial adviser (IFA) will know exactly how to position your case with a lender and will invariably have clout because of their buying power. A fee charging IFA is a better option as some lenders don’t pay commission, and a financial adviser not charging a fee may be less likely to use them as they will not get paid.
For a list of tips to assist you in remortgaging call Peter on 0845 230 9876, e-mail info@wwfp.net or take a look at our section on Mortgage
Source:
(1)OECD
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Think carefully before securing other debts against your home.
What are cyclical assets?
9th June 2008
Managing Director, Worldwide Financial Planning, Writes:
It is worth remembering that Residential and commercial property are cyclical assets. ‘Cyclical’means they have their day, then they don’t, and so on. Take a comparison between the FTSE all share, money market cash and property since the last downturn in the market ...
9th June 2008
Managing Director, Worldwide Financial Planning, Writes:
It is worth remembering that Residential and commercial property are cyclical assets. ‘Cyclical’means they have their day, then they don’t, and so on. Take a comparison between the FTSE all share, money market cash and property since the last downturn in the market from 1990-2000. Who would have thought the cash account would have outperformed property by over 257%. The FTSE all share over the same period outperformed by 1309%.1 The next five years were very different with the FTSE taking a battering and property soaring.
I am hearing lots of noise relating to property taking ‘a year off’ and back with a vengeance next year. Apologies, but I cannot see that will happen. The reasons markets have spikes and lulls are the basics of fear and greed. Whatever the reason used to say they have ‘corrected’ themselves is little more than an excuse for dumping bad news. If any asset becomes attractive with enough noise and momentum, it surges beyond the point the elastic band is comfortable, and pings back…without exception.
Many people become trapped at the top end. I listened to some politician on question time last night blaming what has happened on the USA without any ridicule from the floor. It is almost like they believe it! Thankfully I found the remote control.
I wont repeat a previous article but a number of key issues exist: According to the Organisation for Economic Co-operation and Development, UK mortgage debt was 126 per cent of gross domestic product at the end of 2006, against 104 per cent in the US; total UK household debt was 164 per cent of GDP, against 140 per cent in the US; and, not least, the UK’s ratio of household debt to GDP jumped by 50 percentage points between 2000 and 2006, while the US ratio rose by just 37 points over the same period.2
This was before the numbers bit into the economy and the pain in the US is widespread. The UK is always at the end of the US tail and the issues are hitting us here bang on time.
With every crisis, there follows a straight forward logical solution that doesn’t scare me in the slightest.
Crisis hits (whatever excuse is needed after an inappropriate surge in prices), followed by denial, marketing talk to keep it up, media noise to cover their bad reporting and use the excuse to dump the blame, acceptance by the public and in turn negative momentum and the view that the asset is now ‘bad’. The market turns to another asset and in a few years, after another bubble goes, it comes back again with slow acceptance as journalists don’t want to be that wrong again, followed by the inevitable surge. Simple.
The commercial property market will do the same but the pain comes with any double dip as prices fall, followed by an increase in supply (people sell, businesses go out of business). In turn, rents fall which means the asset price falls further.
I sat with the ex manager from the highly successful Aberdeen Property share and we were in agreement when he also pointed out that the derivatives market (where you can buy a future price on an asset) has priced in a further 13% fall in commercial property.
As with every pain there is also the potential for gain but it won’t be in the purchase of the actual fixed assets, it will be in the companies that own property. Shares in such companies fall further than the assets they hold until there is a natural bottom in the market until its realised, and there is typically a surge back into the market. That’s a nice surge to be in. We are a little way off what I would call a natural bottom but 10-15% from now would be perfect.
For a fact sheet on the better property share funds call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment.
Sources:
1Lipper
2OECD
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
It is worth remembering that Residential and commercial property are cyclical assets. ‘Cyclical’means they have their day, then they don’t, and so on. Take a comparison between the FTSE all share, money market cash and property since the last downturn in the market from 1990-2000. Who would have thought the cash account would have outperformed property by over 257%. The FTSE all share over the same period outperformed by 1309%.1 The next five years were very different with the FTSE taking a battering and property soaring.
I am hearing lots of noise relating to property taking ‘a year off’ and back with a vengeance next year. Apologies, but I cannot see that will happen. The reasons markets have spikes and lulls are the basics of fear and greed. Whatever the reason used to say they have ‘corrected’ themselves is little more than an excuse for dumping bad news. If any asset becomes attractive with enough noise and momentum, it surges beyond the point the elastic band is comfortable, and pings back…without exception.
Many people become trapped at the top end. I listened to some politician on question time last night blaming what has happened on the USA without any ridicule from the floor. It is almost like they believe it! Thankfully I found the remote control.
I wont repeat a previous article but a number of key issues exist: According to the Organisation for Economic Co-operation and Development, UK mortgage debt was 126 per cent of gross domestic product at the end of 2006, against 104 per cent in the US; total UK household debt was 164 per cent of GDP, against 140 per cent in the US; and, not least, the UK’s ratio of household debt to GDP jumped by 50 percentage points between 2000 and 2006, while the US ratio rose by just 37 points over the same period.2
This was before the numbers bit into the economy and the pain in the US is widespread. The UK is always at the end of the US tail and the issues are hitting us here bang on time.
With every crisis, there follows a straight forward logical solution that doesn’t scare me in the slightest.
Crisis hits (whatever excuse is needed after an inappropriate surge in prices), followed by denial, marketing talk to keep it up, media noise to cover their bad reporting and use the excuse to dump the blame, acceptance by the public and in turn negative momentum and the view that the asset is now ‘bad’. The market turns to another asset and in a few years, after another bubble goes, it comes back again with slow acceptance as journalists don’t want to be that wrong again, followed by the inevitable surge. Simple.
The commercial property market will do the same but the pain comes with any double dip as prices fall, followed by an increase in supply (people sell, businesses go out of business). In turn, rents fall which means the asset price falls further.
I sat with the ex manager from the highly successful Aberdeen Property share and we were in agreement when he also pointed out that the derivatives market (where you can buy a future price on an asset) has priced in a further 13% fall in commercial property.
As with every pain there is also the potential for gain but it won’t be in the purchase of the actual fixed assets, it will be in the companies that own property. Shares in such companies fall further than the assets they hold until there is a natural bottom in the market until its realised, and there is typically a surge back into the market. That’s a nice surge to be in. We are a little way off what I would call a natural bottom but 10-15% from now would be perfect.
For a fact sheet on the better property share funds call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment.
Sources:
1Lipper
2OECD
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Will house prices stabilise?
12 May 2008
Reader Writes:
Do you think the credit crunch will lighten up and house prices will stabilise?
It’s no surprise that the vast majority of calls and emails are about this subject and it’s difficult to ignore, given its consequences. The UK has, for a long time, dined out on ...
12 May 2008
Reader Writes:
Do you think the credit crunch will lighten up and house prices will stabilise?
It’s no surprise that the vast majority of calls and emails are about this subject and it’s difficult to ignore, given its consequences. The UK has, for a long time, dined out on the fantasised wealth of the ‘equity’ in property.
After September 11th, interest rates were allowed to remain low in order to stabilise the economy. We will pay the price for that.
Whilst Mervyn King1 (Bank of England chief) is attacking the city bonus culture in commercial banks, criticising their excessive pay packages, Mr King will be reminded that he controls interest rates, and in turn people’s buying and selling habits.
The rich and greedy are an easy target but most educated people won't fall for that.
Banks are in difficulty, and they will continue to want to protect themselves by creating extra margins. It is unlikely therefore that we will see lending return to normal for some time to come.
Alliance and Leicester increased its mortgage book by 82% over the last eight years. The net income for all that risk is a mere £1m. 2 Expect things to remain tight.
This will have a dramatic effect on demand. At the end of the day however we are all a bit like friar tuck trying to be like Robin Hood. After firing an arrow into the forest, he asks what Robin thinks of his shot. Robin responds by asking which tree Friar was aiming at, as there are thousands. He walks into the woods and draws a circle round the arrow in the tree and says ’this one’. Easy after the event.
Just like the canary in the mineshaft, this column for months has been pointing out that house prices would plummet as we could see what demand was doing.
As those with their hands in your pockets referred to the ‘housing shortage’ and the need for new properties, we pointed to the fact that property completions were down each month on the year before, and the numbers deteriorating. We told you in October that completions (the only true measure of demand which drives house prices) were down 11.9% on the year before. Well brace yourself; the most recent numbers for house prices is a massive 39.2% down on the year before and 57.16% of the 24 month high. 3
Perhaps this crash will be the biggest learning point not to ever use a house price index as a measure of what to do. If history was that relevant, librarians would be the richest people in the world.
House price indices are naturally flawed in any event as they measure an ‘average’. What’s an average? In times like this when properties are not selling, the larger properties (unaffected by the economy as they are bought by the wealthy) keep the index propped artificially.
The key is to look at the future market. Plummeting demand and increasing supply will prove themselves over the next few years.
Remember also that a number of lenders are tightening up in numerous areas. They are pulling out of apartments completely (try selling these on again with a flood of properties on the market and few banks to fund them) but more importantly they are also down-valuing properties and lowering the amount they are prepared to lend (loan to value). Once again this will drive down demand.
Remember however, this isn’t really bad news. It is only bad news for those with more than one property or indeed those who have borrowed excessively. If property drops back it means less stamp duty and less potential Inheritance tax. For most that will be good news.
As far as lending is concerned you just need to use a good broker now. Up to now anyone could get a reasonably good price but now that things have tightened, a broker will come into their own, as they will know how to package the deal.
For advice on your mortgage, a list of the best terms or if you have a general query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgage.
Sources:
1Guardian
2Jupiter
3Land registry
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. \\\'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.\\\'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Think carefully before securing other debts against your home
Your home may be repossessed if you do not keep up repayments on your mortgage
Reader Writes:
Do you think the credit crunch will lighten up and house prices will stabilise?
It’s no surprise that the vast majority of calls and emails are about this subject and it’s difficult to ignore, given its consequences. The UK has, for a long time, dined out on the fantasised wealth of the ‘equity’ in property.
After September 11th, interest rates were allowed to remain low in order to stabilise the economy. We will pay the price for that.
Whilst Mervyn King1 (Bank of England chief) is attacking the city bonus culture in commercial banks, criticising their excessive pay packages, Mr King will be reminded that he controls interest rates, and in turn people’s buying and selling habits.
The rich and greedy are an easy target but most educated people won't fall for that.
Banks are in difficulty, and they will continue to want to protect themselves by creating extra margins. It is unlikely therefore that we will see lending return to normal for some time to come.
Alliance and Leicester increased its mortgage book by 82% over the last eight years. The net income for all that risk is a mere £1m. 2 Expect things to remain tight.
This will have a dramatic effect on demand. At the end of the day however we are all a bit like friar tuck trying to be like Robin Hood. After firing an arrow into the forest, he asks what Robin thinks of his shot. Robin responds by asking which tree Friar was aiming at, as there are thousands. He walks into the woods and draws a circle round the arrow in the tree and says ’this one’. Easy after the event.
Just like the canary in the mineshaft, this column for months has been pointing out that house prices would plummet as we could see what demand was doing.
As those with their hands in your pockets referred to the ‘housing shortage’ and the need for new properties, we pointed to the fact that property completions were down each month on the year before, and the numbers deteriorating. We told you in October that completions (the only true measure of demand which drives house prices) were down 11.9% on the year before. Well brace yourself; the most recent numbers for house prices is a massive 39.2% down on the year before and 57.16% of the 24 month high. 3
Perhaps this crash will be the biggest learning point not to ever use a house price index as a measure of what to do. If history was that relevant, librarians would be the richest people in the world.
House price indices are naturally flawed in any event as they measure an ‘average’. What’s an average? In times like this when properties are not selling, the larger properties (unaffected by the economy as they are bought by the wealthy) keep the index propped artificially.
The key is to look at the future market. Plummeting demand and increasing supply will prove themselves over the next few years.
Remember also that a number of lenders are tightening up in numerous areas. They are pulling out of apartments completely (try selling these on again with a flood of properties on the market and few banks to fund them) but more importantly they are also down-valuing properties and lowering the amount they are prepared to lend (loan to value). Once again this will drive down demand.
Remember however, this isn’t really bad news. It is only bad news for those with more than one property or indeed those who have borrowed excessively. If property drops back it means less stamp duty and less potential Inheritance tax. For most that will be good news.
As far as lending is concerned you just need to use a good broker now. Up to now anyone could get a reasonably good price but now that things have tightened, a broker will come into their own, as they will know how to package the deal.
For advice on your mortgage, a list of the best terms or if you have a general query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgage.
Sources:
1Guardian
2Jupiter
3Land registry
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. \\\'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.\\\'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Think carefully before securing other debts against your home
Your home may be repossessed if you do not keep up repayments on your mortgage
How far could property prices fall?
21 April 2008
Reader Writes:
Do you think the property downturn will be a long one and what % drop do you think is possible?
On the 23rd March 2005 I wrote my first article on the impending property bubble for this column. My last two were in June and August last ...
21 April 2008
Reader Writes:
Do you think the property downturn will be a long one and what % drop do you think is possible?
On the 23rd March 2005 I wrote my first article on the impending property bubble for this column. My last two were in June and August last year. As you will know we have been advising you to sell for over eighteen months. The same applied to commercial property funds. It seemed however that the momentum, as it always does, had carried everyone away, and I slowly thought that at forty, perhaps I wasn’t moving with the ‘new economy’ - whatever on earth that was.
Common sense always prevails however. Back in Mid June I agreed that sensible valuations on property would be more like 30% less than they were. I don’t believe that has changed. Whether or not it gets there will largely depend on the aggressiveness of the banks in lowering rates and calming nerves. If they do (they are already five months too late), you can expect a flat market with little or no activity i.e. you try and sell your house but end up in a chain that never completes because of the weakest link continuously breaking.
Robert Schiller wrote in his US Housing book of 2003 about ‘learned truths’. If you experience something enough you believe it is true. What has been most interesting is the comments from friends to me which highlight their learned truths:
‘Doesn’t matter if my business fails, I have so much equity in my house, I will just downsize’,
‘The market is different this time’, ‘you never, lose on property’ and the one which came from a leading accountant I know as we discussed advice to a very famous person, ‘there is no risk in property’.
All of these are learned truths until they change. But what will change them. In 1989 everyone thought property was great. From 1990 to 2000 cash outperformed property by over 100%. (1) What has been most interesting is the response of the public and lenders. Lenders with huge lending targets offered 125% mortgages. They relaxed their lending proposition considerably and will pay for it. Friends of mine used to say about property mania, ‘it’s mad isn’t it, great’. Mad and great area should be used together with the same enthusiasm as actuary and interesting are used.
Whilst consumers used their houses like an ATM, newspapers continued to talk about house price rises, and so the sentiment carried on. One reader thought I was a bit negative in my article about house prices and so they would given that everyone else was talking them up.
I knew they wouldn’t turn until the balloon party ventured into the cactus greenhouse and some excuse somewhere would be used to pop it. Who wants to be first off a great train?
I also commented that it was only when the media began to talk about the downsides that sentiment would change, the learned truths would slow, and then they will change. Learned truths unfortunately have the turning speed of the Titanic and most people will have lost considerably by then.
Now the tabloids that were talking up the market are battering it. Unfortunately this, along with the others who created the spiral upwards, will drive it down.
Consider the new factors. It’s impossible to get a 100% mortgage now. It’s very difficult to get any competitive buy to let mortgages. Apartments are extremely difficult to borrow against. Momentum has changed. It was believed that a house was an investment rather than a utility, a place you lived. That momentum spiralled prices, and the banks willingness to lend against an inflated asset rather than ‘character’ will cost dear.
Momentum is just as powerful the other way and gravity is no friend. All of this is on a backdrop of excessive supply of new properties that are not selling. Whilst there are regional differences, they are only short term.
For advice on the best mortgage terms call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Reader Writes:
Do you think the property downturn will be a long one and what % drop do you think is possible?
On the 23rd March 2005 I wrote my first article on the impending property bubble for this column. My last two were in June and August last year. As you will know we have been advising you to sell for over eighteen months. The same applied to commercial property funds. It seemed however that the momentum, as it always does, had carried everyone away, and I slowly thought that at forty, perhaps I wasn’t moving with the ‘new economy’ - whatever on earth that was.
Common sense always prevails however. Back in Mid June I agreed that sensible valuations on property would be more like 30% less than they were. I don’t believe that has changed. Whether or not it gets there will largely depend on the aggressiveness of the banks in lowering rates and calming nerves. If they do (they are already five months too late), you can expect a flat market with little or no activity i.e. you try and sell your house but end up in a chain that never completes because of the weakest link continuously breaking.
Robert Schiller wrote in his US Housing book of 2003 about ‘learned truths’. If you experience something enough you believe it is true. What has been most interesting is the comments from friends to me which highlight their learned truths:
‘Doesn’t matter if my business fails, I have so much equity in my house, I will just downsize’,
‘The market is different this time’, ‘you never, lose on property’ and the one which came from a leading accountant I know as we discussed advice to a very famous person, ‘there is no risk in property’.
All of these are learned truths until they change. But what will change them. In 1989 everyone thought property was great. From 1990 to 2000 cash outperformed property by over 100%. (1) What has been most interesting is the response of the public and lenders. Lenders with huge lending targets offered 125% mortgages. They relaxed their lending proposition considerably and will pay for it. Friends of mine used to say about property mania, ‘it’s mad isn’t it, great’. Mad and great area should be used together with the same enthusiasm as actuary and interesting are used.
Whilst consumers used their houses like an ATM, newspapers continued to talk about house price rises, and so the sentiment carried on. One reader thought I was a bit negative in my article about house prices and so they would given that everyone else was talking them up.
I knew they wouldn’t turn until the balloon party ventured into the cactus greenhouse and some excuse somewhere would be used to pop it. Who wants to be first off a great train?
I also commented that it was only when the media began to talk about the downsides that sentiment would change, the learned truths would slow, and then they will change. Learned truths unfortunately have the turning speed of the Titanic and most people will have lost considerably by then.
Now the tabloids that were talking up the market are battering it. Unfortunately this, along with the others who created the spiral upwards, will drive it down.
Consider the new factors. It’s impossible to get a 100% mortgage now. It’s very difficult to get any competitive buy to let mortgages. Apartments are extremely difficult to borrow against. Momentum has changed. It was believed that a house was an investment rather than a utility, a place you lived. That momentum spiralled prices, and the banks willingness to lend against an inflated asset rather than ‘character’ will cost dear.
Momentum is just as powerful the other way and gravity is no friend. All of this is on a backdrop of excessive supply of new properties that are not selling. Whilst there are regional differences, they are only short term.
For advice on the best mortgage terms call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
What now for the property bubble?
14 February 2008
Reader Writes:
What are your views on both commercial property, now that the values have taken a battering and also residential property?
Readers of this column will no doubt recall we have been warning of a bubble and a potential house price crash for nearly two years. Instead ...
14 February 2008
Reader Writes:
What are your views on both commercial property, now that the values have taken a battering and also residential property?
Readers of this column will no doubt recall we have been warning of a bubble and a potential house price crash for nearly two years. Instead the bubble got bigger. Whilst millions poured into property via commercial property funds lured by their perceived security, we told you to sell.
The simple reason is the numbers didn’t stack up. Now that sentiment has turned negative they wont stack up for a few years, despite the fact that property funds have been hammered, with Aberdeen property share for example down over 35% for the year 1.
We forecasted it on the basis that the yield on property (rental income after expenses) was less than cash. In basic 'A' level maths they will explain Sharpe ratio, which is the potential for return over a risk free asset for the risk you are taking.
Why would you buy an asset that returned less than cash as a yield? Most were sold on the basis of the potential for the capital value to rise which of course is nonsense. If the capital value gets higher the yield is falling thereby providing a yield even lower than cash.
So people were poured from their melting with profit bonds into fermenting property funds and the inevitable has occurred. We also told everyone to take their cash and run, as it wouldn’t be long before the market went pear shaped and the companies providing such bonds put a six month block on the exiting asset. Guess what? They are in full flow and most companies have halted the exit by applying that six month block.
The biggest threat however is the forced redemptions. What do I mean by that? These funds are required to keep a certain amount of cash for liquidity. If everyone starts to sell their funds the fund provider will need cash to pay them out.
The only way they can do that is to liquidate (sell) assets (property).If they are all trying to sell, they will need buyers. If there are no buyers and the managers need cash quickly, this massive increase in supply will force the market price down. If customers carry on with the current stampede of selling their property funds back, we are not far away from such a collapse, which is why the managers apply the six month block to calm things down.
We know that residential property is also taking a battering despite the spicy talk ups from those with a vested interest.
Consider the most recent figures from the land registry: We know that house completions are down month against month on the last year. June this year was down 5.75%, July 6.1%, August a staggering 10%, September down 22.34% and October (most recent figures) down 20.8%. Detached houses are faring worst with a price fall in each of the last three months of the year 2
This is a potential crisis as the real issues with housing have not bitten yet. How many people have a mortgage that was on a fixed rate? How many will now come off it and onto a variable rate with a near 60% increase in payments? These numbers will only serve to batter consumer confidence as capital values are wiped off.
The natural action would be to stimulate the economy via a rate reduction but the Bank of England have inflationary pressures which are very real and very threatening. It is unlikely they will be as generous as the US have been with their rate decreases and further to Mervyn king's comments that we should 'tough it out' we can expect small decreases until the inflationary pressures abate.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our sections on Mortgage or Business Finance.
Source
1 Trustnet.
2 Land registry
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
To fix or not to fix - Which mortgage type is best for me?
23 January 2008
Reader Writes:
I was thinking of fixing my mortgage or just going for a flexible variable mortgage and wondered what your views were?
The advantage of a fixed rate is that you know what you will pay all through the fixed term of your mortgage. Unlike a variable rate, where you ...
23 January 2008
Reader Writes:
I was thinking of fixing my mortgage or just going for a flexible variable mortgage and wondered what your views were?
The advantage of a fixed rate is that you know what you will pay all through the fixed term of your mortgage. Unlike a variable rate, where you won’t know one month from the next what you are paying, the ability to control and budget is one of the driving reasons behind choosing a fixed term. Its difficulty is that you may find variable rates dropping, and you would be stuck on a higher rate. At the end of the fixed term of course there is also the potential shock of coming out of a fixed rate and into a variable rate which has shot up, meaning a massive hike in payments.
A variable rate mortgage tends to suit the person who is searching for the lowest terms and is happy to take the risk of the rate rising in the meantime.
So what is likely to influence interest rates? In simple terms the decision falls down to Mervyn King at the Bank of England. The key drivers will be the control of inflation and the general well being of the economy.
Mr King has made it clear he will not reduce rates to stimulate the economy at the expense of the threat of inflation. We therefore have a rock and hard stone.
The economy, and in particular the retail sector took a battering over Christmas. In short, people have less money than they used to, and that lack of disposable income has made its way through to confidence. Once confidence alters sentiment, everything can become self fulfilling i.e. we talk ourselves into recession. Mr King will be under pressure to lower rates which effectively gives people more money to spend and off we go again. Simple!
The housing market also looks firmly under control with completions down over 10% on the same month in the previous year and new properties struggling to sell.1
With everything under control or indeed threatening to go too far the other way, a rate drop should be imminent. That is until you bring in the hard stone – inflation. Inflationary threats are considerable. An economy out of control with driving inflation is not pretty. It only leads to the less than exciting outcomes of higher pay demands which of course cripple commerce and the spiral is only one way.
Threats have come by way of oil and food, and there are bigger threats to come. Until now, we relied on the economic and currency gaps between here and China (for example) to dampen inflation. As a driving economy, China now has its own inflationary pressures and the goods we purchased so cheaply before are no longer going to be so cheap.
Oil has maintained its pressure but the news that the new President of OPEC is happy to increase supply if he thinks its needed is welcomed as this will inevitable lead to falling prices.
The other threat is food prices. China for example is reporting 17.9% food inflation and the German media have also made their points about 40%butter inflation.2 The next worrying aspect is that food is still priced relatively low in comparison to other fuels and is now being harvested to provide energy, further enhancing the inflationary risk via a food supply shortage. Years of price subsidy under the common agricultural policy has served to make farming for export, a less than attractive option for EU farmers, and this, along with the dire position in the US will mean supply will remain under threat, keeping this inflationary pressure a real hard stone for the potential for lower rates. That said, I expect the February monetary policy meeting to bring good news for borrowers.
For advice on a mortgage or if you have a general query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our mortgage section
Source
1 Land Registry
2 Communiqué
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I was thinking of fixing my mortgage or just going for a flexible variable mortgage and wondered what your views were?
The advantage of a fixed rate is that you know what you will pay all through the fixed term of your mortgage. Unlike a variable rate, where you won’t know one month from the next what you are paying, the ability to control and budget is one of the driving reasons behind choosing a fixed term. Its difficulty is that you may find variable rates dropping, and you would be stuck on a higher rate. At the end of the fixed term of course there is also the potential shock of coming out of a fixed rate and into a variable rate which has shot up, meaning a massive hike in payments.
A variable rate mortgage tends to suit the person who is searching for the lowest terms and is happy to take the risk of the rate rising in the meantime.
So what is likely to influence interest rates? In simple terms the decision falls down to Mervyn King at the Bank of England. The key drivers will be the control of inflation and the general well being of the economy.
Mr King has made it clear he will not reduce rates to stimulate the economy at the expense of the threat of inflation. We therefore have a rock and hard stone.
The economy, and in particular the retail sector took a battering over Christmas. In short, people have less money than they used to, and that lack of disposable income has made its way through to confidence. Once confidence alters sentiment, everything can become self fulfilling i.e. we talk ourselves into recession. Mr King will be under pressure to lower rates which effectively gives people more money to spend and off we go again. Simple!
The housing market also looks firmly under control with completions down over 10% on the same month in the previous year and new properties struggling to sell.1
With everything under control or indeed threatening to go too far the other way, a rate drop should be imminent. That is until you bring in the hard stone – inflation. Inflationary threats are considerable. An economy out of control with driving inflation is not pretty. It only leads to the less than exciting outcomes of higher pay demands which of course cripple commerce and the spiral is only one way.
Threats have come by way of oil and food, and there are bigger threats to come. Until now, we relied on the economic and currency gaps between here and China (for example) to dampen inflation. As a driving economy, China now has its own inflationary pressures and the goods we purchased so cheaply before are no longer going to be so cheap.
Oil has maintained its pressure but the news that the new President of OPEC is happy to increase supply if he thinks its needed is welcomed as this will inevitable lead to falling prices.
The other threat is food prices. China for example is reporting 17.9% food inflation and the German media have also made their points about 40%butter inflation.2 The next worrying aspect is that food is still priced relatively low in comparison to other fuels and is now being harvested to provide energy, further enhancing the inflationary risk via a food supply shortage. Years of price subsidy under the common agricultural policy has served to make farming for export, a less than attractive option for EU farmers, and this, along with the dire position in the US will mean supply will remain under threat, keeping this inflationary pressure a real hard stone for the potential for lower rates. That said, I expect the February monetary policy meeting to bring good news for borrowers.
For advice on a mortgage or if you have a general query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our mortgage section
Source
1 Land Registry
2 Communiqué
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
What next for House Prices?
22nd December 2007
Managing Director, Worldwide Financial Planning, Writes:
It’s very easy for me to remain unemotional about house prices as I have neither an axe to grind nor anything to lose. Remaining detached allows you to look purely at the numbers. That’s what we have been commenting on it for eighteen ...
22nd December 2007
Managing Director, Worldwide Financial Planning, Writes:
It’s very easy for me to remain unemotional about house prices as I have neither an axe to grind nor anything to lose. Remaining detached allows you to look purely at the numbers. That’s what we have been commenting on it for eighteen months now. The truth is the bubble has just got bigger and bigger and the Bank of England (BOE) may well rue the chances they had to slow house price inflation and take a harsher stance before they have.
All the signs were there and with highly educated people continuing to tell me that this wasn’t a bubble like the last one, it was a matter of time before it popped. November had the biggest drop in house prices in twelve years. (1) So what? That headline, like those which drove people to continue to buy houses they couldn’t afford, is frankly unhelpful.
The message is clear however. The cost of debt has bitten hard and has taken a mouthful out of confidence. Once that’s damaged, it can turn to negative sentiment. At that point, it’s not pretty.
I agree with Neil Woodford’s comment a year or so ago that a house price fall of 30% would not be inconceivable.
Why do I say that? It was a bit similar to the stock market in 2002. I was asked on a radio station and this column if I believed the stock market had reached the bottom. I said it was impossible to forecast any of these issues but that a stock market would definitely turn at, or around, a point that it was considered to be cheap, i.e. priced lower than the real value it contained.
Sure enough, eighteen months later it turned at exactly that point. Whether the UK housing market turns before the ‘cheap’ value will be down to how aggressive the BOE is with interest rates, and how much they can maintain confidence and sentiment. It’s a sign of things to come that we are indeed hanging by that thread rather than true value.
I wonder how many of you will have kept the headlines cut out for all those banks with a vested interest who have been forecasting x% increase in a housing market over the last twelve months.
Whilst a number of institutions have commented to me that I am anti competitive with my comments about the housing market, I don’t see it like they do and don’t have the vested interest. I see a tree as a tree and report it as such. The sting however is in the tail.
Let’s consider three real problems the BOE has now: Oil and food costs are still driving inflation, forcing the BOE between a rock and a hard stone. Inflationary pressures mean they cannot ease interest rates as they should to support the housing market and domestic spending;
Two million customers will come out of a fixed rate in the next eighteen months.(2) That will be expensive. If you are coming out of a fixed rate of 4.5% and onto a standard variable of 7.25% that would mean a monthly payment increase of 58% from £475 to £725, a point we made eight months ago. This will not have gone amiss which may well account for the lack of through put in estate agents at the moment. Whilst some talk of house prices, I have never walked past a house with a sticker on the side of it saying what its worth. In any event what it’s now worth is of no relevance as, what it’s about to do is the key;
So why have none of our so-called experts pointed out the most damaging issue to the housing market. Supply and demand is the biggest driver. Let’s look at that trend. In June this year there were 5.75% less completions than the year before. In July it was 6.1% less than the year before, and August (the last published figures) was a staggering 10% less. (3) Interest rates are on their way down and expect one before March!
For advice on the best mortgage rates call or if you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our mortgage section.
1 Nationwide
2 Standard Life
3 Land Registry
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
It’s very easy for me to remain unemotional about house prices as I have neither an axe to grind nor anything to lose. Remaining detached allows you to look purely at the numbers. That’s what we have been commenting on it for eighteen months now. The truth is the bubble has just got bigger and bigger and the Bank of England (BOE) may well rue the chances they had to slow house price inflation and take a harsher stance before they have.
All the signs were there and with highly educated people continuing to tell me that this wasn’t a bubble like the last one, it was a matter of time before it popped. November had the biggest drop in house prices in twelve years. (1) So what? That headline, like those which drove people to continue to buy houses they couldn’t afford, is frankly unhelpful.
The message is clear however. The cost of debt has bitten hard and has taken a mouthful out of confidence. Once that’s damaged, it can turn to negative sentiment. At that point, it’s not pretty.
I agree with Neil Woodford’s comment a year or so ago that a house price fall of 30% would not be inconceivable.
Why do I say that? It was a bit similar to the stock market in 2002. I was asked on a radio station and this column if I believed the stock market had reached the bottom. I said it was impossible to forecast any of these issues but that a stock market would definitely turn at, or around, a point that it was considered to be cheap, i.e. priced lower than the real value it contained.
Sure enough, eighteen months later it turned at exactly that point. Whether the UK housing market turns before the ‘cheap’ value will be down to how aggressive the BOE is with interest rates, and how much they can maintain confidence and sentiment. It’s a sign of things to come that we are indeed hanging by that thread rather than true value.
I wonder how many of you will have kept the headlines cut out for all those banks with a vested interest who have been forecasting x% increase in a housing market over the last twelve months.
Whilst a number of institutions have commented to me that I am anti competitive with my comments about the housing market, I don’t see it like they do and don’t have the vested interest. I see a tree as a tree and report it as such. The sting however is in the tail.
Let’s consider three real problems the BOE has now: Oil and food costs are still driving inflation, forcing the BOE between a rock and a hard stone. Inflationary pressures mean they cannot ease interest rates as they should to support the housing market and domestic spending;
Two million customers will come out of a fixed rate in the next eighteen months.(2) That will be expensive. If you are coming out of a fixed rate of 4.5% and onto a standard variable of 7.25% that would mean a monthly payment increase of 58% from £475 to £725, a point we made eight months ago. This will not have gone amiss which may well account for the lack of through put in estate agents at the moment. Whilst some talk of house prices, I have never walked past a house with a sticker on the side of it saying what its worth. In any event what it’s now worth is of no relevance as, what it’s about to do is the key;
So why have none of our so-called experts pointed out the most damaging issue to the housing market. Supply and demand is the biggest driver. Let’s look at that trend. In June this year there were 5.75% less completions than the year before. In July it was 6.1% less than the year before, and August (the last published figures) was a staggering 10% less. (3) Interest rates are on their way down and expect one before March!
For advice on the best mortgage rates call or if you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our mortgage section.
1 Nationwide
2 Standard Life
3 Land Registry
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Am I protected if my lender gets into trouble?
6th December 2007
Reader Writes:
I was wondering what protection I have as a consumer both in terms of my savings and also my mortgage should the society I am using fall into trouble. I was also wondering what I should consider as I am re-mortgaging and want the best terms and ...
6th December 2007
Reader Writes:
I was wondering what protection I have as a consumer both in terms of my savings and also my mortgage should the society I am using fall into trouble. I was also wondering what I should consider as I am re-mortgaging and want the best terms and fees.
On the 1st of October 2007 the FSA increased the protection for customers to 100% of the first £35,000 they had invested. This is a mild increase from the previous cover which was £33,000. Be careful to spread your money on deposit with as many societies as you can to keep the risk down, as you can claim the protection for each £35,000 you have with any society. Be careful also to ensure you don’t have your capital with a subsidiary of a society as this will only afford you the protection once.
As for your mortgage lender, it would be nice to think that if they had ran into difficulties they would simply forget your loan, and tell you not to bother paying it back. Unfortunately not. Basically you would be unaffected as your loan would be sold off to another lender on the same terms as you had contractually agreed. Most importantly you wouldn’t be forced to settle the debt earlier.
Now clearly there could also be a situation where the lender wasn’t the original source of funds. Take Northern Rock for example. It was, and still is a perfectly good business which unfortunately had a hole in its business structure – it borrowed from elsewhere to lend to customers. What happens if they had gone under but your borrowing was with another lender? Once again, both you and the lender would be bound to your contract. It’s very likely in any event that the loans would have been securitised and sold on, so your debt still applies.
Customers with an equity release plan, or lifetime mortgage as they are now called, may feel particularly worried. After all, they have borrowed a large lump sum from a lender thinking its for life who then goes under. The last thing you want at that stage in life is to have to go through the hassle of refinancing your equity release scheme. Good news however, as once again the same applies, as the debt would be sold as an asset to the purchaser of the failed lender. Northern Rock was a market leader in the equity release/lifetime mortgage arena, but has now virtually priced itself out of the market in terms of new business. Existing customers should be fine, and new customers will probably see a more competitive pricing post any takeover.
As for your re-mortgaging question, consider this very carefully. We are probably at the peak of the interest rate cycle now and it’s likely that the next rate change will be southwards. Consider very carefully before fixing your rate as you may well find yourself fixing above a falling rate. Interestingly banks have already begun to drop their savings rates in preparation for the inevitable rate drop in the New Year. This, of course is frowned upon, as they have simply increased their margins because they are still lending at the higher rate, but providing the savers with a lower comparative rate.
Consider any fees you have to pay carefully. We are finding lenders are becoming protective of their customer base and offering better terms to keep them. Go to an Independent Financial Adviser and see what they can put together for you. They should look at your existing mortgage and see if it can be beaten by also taking into account any extra fees that need paying. Don’t allow the overall cost of the fees to be hidden inside the loan. That is often a way of disguising the true cost of a mortgage and may mean you moving when you don’t need to. Be careful also of putting unsecured loans onto a mortgage. Whilst payments may be lower defaulting on an unsecured debt would not mean losing your property.
For advice on re-mortgaging call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
For lifetime mortgages to understand the features and risks ask for a personal illustration.Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I was wondering what protection I have as a consumer both in terms of my savings and also my mortgage should the society I am using fall into trouble. I was also wondering what I should consider as I am re-mortgaging and want the best terms and fees.
On the 1st of October 2007 the FSA increased the protection for customers to 100% of the first £35,000 they had invested. This is a mild increase from the previous cover which was £33,000. Be careful to spread your money on deposit with as many societies as you can to keep the risk down, as you can claim the protection for each £35,000 you have with any society. Be careful also to ensure you don’t have your capital with a subsidiary of a society as this will only afford you the protection once.
As for your mortgage lender, it would be nice to think that if they had ran into difficulties they would simply forget your loan, and tell you not to bother paying it back. Unfortunately not. Basically you would be unaffected as your loan would be sold off to another lender on the same terms as you had contractually agreed. Most importantly you wouldn’t be forced to settle the debt earlier.
Now clearly there could also be a situation where the lender wasn’t the original source of funds. Take Northern Rock for example. It was, and still is a perfectly good business which unfortunately had a hole in its business structure – it borrowed from elsewhere to lend to customers. What happens if they had gone under but your borrowing was with another lender? Once again, both you and the lender would be bound to your contract. It’s very likely in any event that the loans would have been securitised and sold on, so your debt still applies.
Customers with an equity release plan, or lifetime mortgage as they are now called, may feel particularly worried. After all, they have borrowed a large lump sum from a lender thinking its for life who then goes under. The last thing you want at that stage in life is to have to go through the hassle of refinancing your equity release scheme. Good news however, as once again the same applies, as the debt would be sold as an asset to the purchaser of the failed lender. Northern Rock was a market leader in the equity release/lifetime mortgage arena, but has now virtually priced itself out of the market in terms of new business. Existing customers should be fine, and new customers will probably see a more competitive pricing post any takeover.
As for your re-mortgaging question, consider this very carefully. We are probably at the peak of the interest rate cycle now and it’s likely that the next rate change will be southwards. Consider very carefully before fixing your rate as you may well find yourself fixing above a falling rate. Interestingly banks have already begun to drop their savings rates in preparation for the inevitable rate drop in the New Year. This, of course is frowned upon, as they have simply increased their margins because they are still lending at the higher rate, but providing the savers with a lower comparative rate.
Consider any fees you have to pay carefully. We are finding lenders are becoming protective of their customer base and offering better terms to keep them. Go to an Independent Financial Adviser and see what they can put together for you. They should look at your existing mortgage and see if it can be beaten by also taking into account any extra fees that need paying. Don’t allow the overall cost of the fees to be hidden inside the loan. That is often a way of disguising the true cost of a mortgage and may mean you moving when you don’t need to. Be careful also of putting unsecured loans onto a mortgage. Whilst payments may be lower defaulting on an unsecured debt would not mean losing your property.
For advice on re-mortgaging call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
For lifetime mortgages to understand the features and risks ask for a personal illustration.Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
How will the US housing market impact on the UK?
6 November 2007
Managing director, Worldwide Financial Planning, Writes:
In response to my column about house prices, many of you asked about the US housing market and what impact that may have here…
The US housing market has no real impact on the UK housing market. The issues there are well documented ...
6 November 2007
Managing director, Worldwide Financial Planning, Writes:
In response to my column about house prices, many of you asked about the US housing market and what impact that may have here…
The US housing market has no real impact on the UK housing market. The issues there are well documented in terms of plummeting house prices and a stagnant market.
Sometimes the bubble has to be really big before sense is seen. The US market is way ahead of the UK in that their fiscal policy of rising interest rates began some time before the UK. Whilst the US rates rose to slow the economy, the lower rates here continued to fuel an already obvious bubble.
Northern rock’s situation was blamed on the credit crisis in the US and politicians nodded their head in agreement. Why?
Let’s take a look at the horrible situation in the US versus the UK:
I listen to news flow coming from the UK and wonder where they get the information from. House prices rose x% in October. Whilst I mentioned it before, one house sold for £2,000,000 doesn’t represent an average, and we need to look closer at the amount of completions. Most agents I speak to, complain of poor flows through the door. They aren’t getting the viewings. We are in a buyer’s market. In June the land registry notes a 15% drop in completions in comparison to the same date last year. (1) The writing is clear.
I now read about repossessions soaring and then I read about over 1 million people in the UK who are using their credit cards to pay their mortgages! (2)
The bubble is growing.
The potential problems in the UK are uncannily similar to the US, only much worse:
House prices in the UK are high by any standards. Household saving stands at just 3.1% of disposable income! Overall financial deficit for the UK is at a staggering 7% of disposable income. These figures are not nice reading. (3)
Further weaknesses are obvious: From 1996 until its peak ten years later, the index of US house prices rose by 127% in real terms but the FT’s index for property was up 144% until the third quarter this year. (3)
According to the organisation for economic co-operation and development, the US price to rent ratio for housing was 36% above its average, whilst the UK is 66% higher. (3)
US mortgage debt was 104% of gross domestic product whilst the UK is 126%. Total US household debt was 140% of GDP at 2006 whilst the UK was 164%. (3)
Lastly the ratio of household debt to GDP soared by 37 points between 2000 and 2006 but the UK’s was a staggering 50%. If you think the US is struggling to breath, the Uk is choking in debt. (3)
I attended a seminar recently where someone said: ‘but we have housing shortage’. Do we? How many people do you see queuing up with cash?
What we have is a shortage of quality homes and also affordable homes. Goldman Sachs also commented that if supply and demand was driving prices, the rise in rents and house prices should be similar. The same scarcity of prices should increase rents and house prices equally. They commented that in fact net rental yields had halved in the last decade. They also concluded that house prices must fall by 20% for there to be an appropriate historic relationship between the two. (3)
But what difference does it make anyway?
None really, since the value of your house should not contribute to an estimate of your net wealth. It shouldn’t affect spending but undoubtedly it will, as any feelings that you could have a net debt (negative equity) would sure send panic into the spending system.
The pre budget report has pointed to there being a much closer relationship between house prices and the increase in the nil rate band for Inheritance tax – that’s a bit late, just as we move into a falling market. Another interesting stealth tax.
In between times consider your exposure to the housing market via multiple properties. It may be time to lower that, particularly in light of the new capital gains proposals.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
(1) Land Registry
(2) Shelter
(3) Financial Times
Managing director, Worldwide Financial Planning, Writes:
In response to my column about house prices, many of you asked about the US housing market and what impact that may have here…
The US housing market has no real impact on the UK housing market. The issues there are well documented in terms of plummeting house prices and a stagnant market.
Sometimes the bubble has to be really big before sense is seen. The US market is way ahead of the UK in that their fiscal policy of rising interest rates began some time before the UK. Whilst the US rates rose to slow the economy, the lower rates here continued to fuel an already obvious bubble.
Northern rock’s situation was blamed on the credit crisis in the US and politicians nodded their head in agreement. Why?
Let’s take a look at the horrible situation in the US versus the UK:
I listen to news flow coming from the UK and wonder where they get the information from. House prices rose x% in October. Whilst I mentioned it before, one house sold for £2,000,000 doesn’t represent an average, and we need to look closer at the amount of completions. Most agents I speak to, complain of poor flows through the door. They aren’t getting the viewings. We are in a buyer’s market. In June the land registry notes a 15% drop in completions in comparison to the same date last year. (1) The writing is clear.
I now read about repossessions soaring and then I read about over 1 million people in the UK who are using their credit cards to pay their mortgages! (2)
The bubble is growing.
The potential problems in the UK are uncannily similar to the US, only much worse:
House prices in the UK are high by any standards. Household saving stands at just 3.1% of disposable income! Overall financial deficit for the UK is at a staggering 7% of disposable income. These figures are not nice reading. (3)
Further weaknesses are obvious: From 1996 until its peak ten years later, the index of US house prices rose by 127% in real terms but the FT’s index for property was up 144% until the third quarter this year. (3)
According to the organisation for economic co-operation and development, the US price to rent ratio for housing was 36% above its average, whilst the UK is 66% higher. (3)
US mortgage debt was 104% of gross domestic product whilst the UK is 126%. Total US household debt was 140% of GDP at 2006 whilst the UK was 164%. (3)
Lastly the ratio of household debt to GDP soared by 37 points between 2000 and 2006 but the UK’s was a staggering 50%. If you think the US is struggling to breath, the Uk is choking in debt. (3)
I attended a seminar recently where someone said: ‘but we have housing shortage’. Do we? How many people do you see queuing up with cash?
What we have is a shortage of quality homes and also affordable homes. Goldman Sachs also commented that if supply and demand was driving prices, the rise in rents and house prices should be similar. The same scarcity of prices should increase rents and house prices equally. They commented that in fact net rental yields had halved in the last decade. They also concluded that house prices must fall by 20% for there to be an appropriate historic relationship between the two. (3)
But what difference does it make anyway?
None really, since the value of your house should not contribute to an estimate of your net wealth. It shouldn’t affect spending but undoubtedly it will, as any feelings that you could have a net debt (negative equity) would sure send panic into the spending system.
The pre budget report has pointed to there being a much closer relationship between house prices and the increase in the nil rate band for Inheritance tax – that’s a bit late, just as we move into a falling market. Another interesting stealth tax.
In between times consider your exposure to the housing market via multiple properties. It may be time to lower that, particularly in light of the new capital gains proposals.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on mortgages.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
(1) Land Registry
(2) Shelter
(3) Financial Times
Crunchy Housing Market?
5th October 2007
Reader Writes:
I noticed your article last week mentioned the current credit crunch and the issues with Northern Rock, I am not sure I understand the current credit crunch its impact on the housing market. Can you explain it please?
The credit crunch referred to is simply a lack ...
5th October 2007
Reader Writes:
I noticed your article last week mentioned the current credit crunch and the issues with Northern Rock, I am not sure I understand the current credit crunch its impact on the housing market. Can you explain it please?
The credit crunch referred to is simply a lack of trust in the system. US banks loaned capital to people with poor credit ratings and decided to reduce their risk by packaging the debt and selling it on. Pension funds and Hedge funds around the world bought the debt.
That’s all very well. The difficulty is no one really knows the extent of the bad debt and also where it is now. Moreover there is also the concern of bad debt in the UK.
Borrowers have been borrowing against property at levels way above where they should, and the concern is that this could unwind itself in a less than funny fashion.
Whilst I might have highlighted this two years ago, the market has carried on its merry way and unfortunately the bigger the bubble the bigger the pop.
The Bank of England were slow to increase interest rates and borrowers approached banks on the basis of what they could afford and not on what they may afford in difficult times.
Whilst we could borrow at a base rate of 3.5% in July ‘03, the same debt today is 65% more expensive at 5.75% - and it could become more expensive. 1
The consequence of this is that banks tighten up policies and tar up the system by not lending to each other as they have a fear over the strength of the bank they are lending to. That’s fair enough. The difficulty is with this mistrust, banks tighten up on their risk, begin to charge more for their rates between each other and this inevitably has to be passed onto the borrower.
All this adds to extra expense to a borrower already faced with a 65% increase in debt expense over the last four years. Finally, throw into the pot the fact the UK is in record debt and you have bubbles brewing which are less than perfumed.
In the United States, where they have introduced higher interest rates earlier than the UK, there is a glut of repossessions, and with borrowers finding it difficult to borrow money, the squeeze has been painful as there are fewer buyers, and of course extra properties. It’s generally believed that interest rate increases take eighteen months to make their way through to the economy properly.
If the UK market goes the same way, there is no doubt demand will decrease and supply will increase. If that’s the case, and you need to sell your house and there is no market, there is only one way the house price can go.
The evidence is already there, with new builds struggling to sell against aggressive targets. Northern Rock and other sub prime (lower credit customers) organisations are also struggling to borrow money to lend to customers due to the tightening of these controls.
What will really help the credit crunch go away is lenders all agreeing to show each other their books, and come clean with the bad debt they have. Once this happens lenders will feel safe about lending to each other and liquidity moves back into the market and lenders can again lend with confidence.
What is most concerning is the fact lenders have not openly moved to do this. On that basis, I can only assume a number have information they do not wish to share and that’s not good news.
As I said last week, the key information is coming through to show a slower interest in new property and also fewer completions. Whilst an average house price might show as still level, an average can be distorted by extremes. The key point to look at is completions and they are falling.
If you have a financial query or want to speak to Peter McGahan, call 0845 230 9876 or e-mail peter@wwfp.net
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Source
1 Bank of England
Reader Writes:
I noticed your article last week mentioned the current credit crunch and the issues with Northern Rock, I am not sure I understand the current credit crunch its impact on the housing market. Can you explain it please?
The credit crunch referred to is simply a lack of trust in the system. US banks loaned capital to people with poor credit ratings and decided to reduce their risk by packaging the debt and selling it on. Pension funds and Hedge funds around the world bought the debt.
That’s all very well. The difficulty is no one really knows the extent of the bad debt and also where it is now. Moreover there is also the concern of bad debt in the UK.
Borrowers have been borrowing against property at levels way above where they should, and the concern is that this could unwind itself in a less than funny fashion.
Whilst I might have highlighted this two years ago, the market has carried on its merry way and unfortunately the bigger the bubble the bigger the pop.
The Bank of England were slow to increase interest rates and borrowers approached banks on the basis of what they could afford and not on what they may afford in difficult times.
Whilst we could borrow at a base rate of 3.5% in July ‘03, the same debt today is 65% more expensive at 5.75% - and it could become more expensive. 1
The consequence of this is that banks tighten up policies and tar up the system by not lending to each other as they have a fear over the strength of the bank they are lending to. That’s fair enough. The difficulty is with this mistrust, banks tighten up on their risk, begin to charge more for their rates between each other and this inevitably has to be passed onto the borrower.
All this adds to extra expense to a borrower already faced with a 65% increase in debt expense over the last four years. Finally, throw into the pot the fact the UK is in record debt and you have bubbles brewing which are less than perfumed.
In the United States, where they have introduced higher interest rates earlier than the UK, there is a glut of repossessions, and with borrowers finding it difficult to borrow money, the squeeze has been painful as there are fewer buyers, and of course extra properties. It’s generally believed that interest rate increases take eighteen months to make their way through to the economy properly.
If the UK market goes the same way, there is no doubt demand will decrease and supply will increase. If that’s the case, and you need to sell your house and there is no market, there is only one way the house price can go.
The evidence is already there, with new builds struggling to sell against aggressive targets. Northern Rock and other sub prime (lower credit customers) organisations are also struggling to borrow money to lend to customers due to the tightening of these controls.
What will really help the credit crunch go away is lenders all agreeing to show each other their books, and come clean with the bad debt they have. Once this happens lenders will feel safe about lending to each other and liquidity moves back into the market and lenders can again lend with confidence.
What is most concerning is the fact lenders have not openly moved to do this. On that basis, I can only assume a number have information they do not wish to share and that’s not good news.
As I said last week, the key information is coming through to show a slower interest in new property and also fewer completions. Whilst an average house price might show as still level, an average can be distorted by extremes. The key point to look at is completions and they are falling.
If you have a financial query or want to speak to Peter McGahan, call 0845 230 9876 or e-mail peter@wwfp.net
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Source
1 Bank of England
Is selling my house and renting it back from a landlord a good idea?
18 September 2007
Reader Writes:
I have seen an advertisement for a scheme that lets me sell my house and rent it back from a landlord. Is this a good scheme?
The sale and rent back scheme you are referring to has some advantages – a bit like when a bad flu ...
18 September 2007
Reader Writes:
I have seen an advertisement for a scheme that lets me sell my house and rent it back from a landlord. Is this a good scheme?
The sale and rent back scheme you are referring to has some advantages – a bit like when a bad flu at least gets you a day off work.
The scheme simply works with a firm (of landlords) buying your property and then renting it back to you. You receive cash and live in your property. Normally the bad news is in the small print, but there is so much bad news here, it takes up most of the large print.
It would typically appeal to those who are struggling with payments, and need to realise some assets to pay off debt, but unfortunately cannot borrow, and also cannot sell their house. In desperate times, emotions can take over and unscrupulous organisations can take advantage of that.
Repossession figures reached over 8,000 for the first half of this year alone and 35% of people are struggling with their day to day finances. (1) It’s easy to see why firms like the above creep out from the woodwork.
The typical scheme says it will offer you an average of 80-85% of your home! (1) You pay them an average market rent and get to live in your home.
With an average house price in the UK at £181,460, that’s an immediate charge of £36,292 to £27,219. (2) The truth in practise is somewhat different, with quite horrible stories already in evidence.
One lady, Victoria Taylor was offered £50,000 for her £100,000 house. She described the fair rent (what they were offering her) as extortionate. (3)
Another example of an elderly man living in Wolverhampton had his house valued at £165,000 but was offered £40,000 by one of these organisations. (3)
Setting aside the pain this would cause, we can now turn to the guarantee of staying in your property. There isn’t one. The agreement given to you as a tenant is either a six or twelve month assured shorthold tenancy. At the end of the tenancy you can be asked to leave and you have no rights. (3)
In some situations the tenant is offered a reasonable rent at the outset. At the rent review they are offered a greatly increased rent and are then forced to leave. The new landlord now sells his house (which he got at a great discount) for a hefty profit leaving the tenant homeless. (4)
Other horrifying examples cited are those of the landlord defaulting on their mortgage and the bank repossesses the home. This leaves the tenant homeless. (3)
Worryingly, some of the companies encourage you to use their solicitor and surveyor. Where would the independence be there? Are you really going to be fully informed and receive a fair market price? (5)
I took a quick look at a number of the websites that are in existence offering such schemes. One ‘guardian angel’ laid out what other options were available but simply used the space to say that these other options were not a good idea!
Many of these schemes offer their services in local papers with full page adverts (it’s no wonder they can afford them). Other approaches include leaflets being dropped door to door.
Before you consider responding to any of them consider very carefully what else you can do. If you are falling behind on loans don’t stick your head in the sand. Whilst it’s a common reaction and temporarily avoids the pain, it’s the same as trying to solve algebra with spaghetti.
Approach your lender. They don’t want your property for many reasons. If that’s failing approach an independent Financial Adviser and also the citizen’s advice bureau.
Consider also approaching a local estate agent to see if he has any buy to let landlords in the area. If they do, get a valuation from three of them and try and do business that way.
Sell to rent should be the final resort – the very last resort!
If you are in financial difficulty or if you have a financial query call Peter McGahan in confidence on 0845 230 9876 or e-mail info@wwfp.net
Source:
(1) http://www.clickpress.com/releases/Detailed/38000005cp.shtml
(2) http://www.landregistry.gov.uk/houseprices/
(3) http://news.bbc.co.uk/1/hi/business/6972967.stm
(4) http://www.thisismoney.co.uk/mortgages/article.html?in_article_id=423920&in_page_id=8
(5) http://news.bbc.co.uk/1/hi/business/6266268.stm
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I have seen an advertisement for a scheme that lets me sell my house and rent it back from a landlord. Is this a good scheme?
The sale and rent back scheme you are referring to has some advantages – a bit like when a bad flu at least gets you a day off work.
The scheme simply works with a firm (of landlords) buying your property and then renting it back to you. You receive cash and live in your property. Normally the bad news is in the small print, but there is so much bad news here, it takes up most of the large print.
It would typically appeal to those who are struggling with payments, and need to realise some assets to pay off debt, but unfortunately cannot borrow, and also cannot sell their house. In desperate times, emotions can take over and unscrupulous organisations can take advantage of that.
Repossession figures reached over 8,000 for the first half of this year alone and 35% of people are struggling with their day to day finances. (1) It’s easy to see why firms like the above creep out from the woodwork.
The typical scheme says it will offer you an average of 80-85% of your home! (1) You pay them an average market rent and get to live in your home.
With an average house price in the UK at £181,460, that’s an immediate charge of £36,292 to £27,219. (2) The truth in practise is somewhat different, with quite horrible stories already in evidence.
One lady, Victoria Taylor was offered £50,000 for her £100,000 house. She described the fair rent (what they were offering her) as extortionate. (3)
Another example of an elderly man living in Wolverhampton had his house valued at £165,000 but was offered £40,000 by one of these organisations. (3)
Setting aside the pain this would cause, we can now turn to the guarantee of staying in your property. There isn’t one. The agreement given to you as a tenant is either a six or twelve month assured shorthold tenancy. At the end of the tenancy you can be asked to leave and you have no rights. (3)
In some situations the tenant is offered a reasonable rent at the outset. At the rent review they are offered a greatly increased rent and are then forced to leave. The new landlord now sells his house (which he got at a great discount) for a hefty profit leaving the tenant homeless. (4)
Other horrifying examples cited are those of the landlord defaulting on their mortgage and the bank repossesses the home. This leaves the tenant homeless. (3)
Worryingly, some of the companies encourage you to use their solicitor and surveyor. Where would the independence be there? Are you really going to be fully informed and receive a fair market price? (5)
I took a quick look at a number of the websites that are in existence offering such schemes. One ‘guardian angel’ laid out what other options were available but simply used the space to say that these other options were not a good idea!
Many of these schemes offer their services in local papers with full page adverts (it’s no wonder they can afford them). Other approaches include leaflets being dropped door to door.
Before you consider responding to any of them consider very carefully what else you can do. If you are falling behind on loans don’t stick your head in the sand. Whilst it’s a common reaction and temporarily avoids the pain, it’s the same as trying to solve algebra with spaghetti.
Approach your lender. They don’t want your property for many reasons. If that’s failing approach an independent Financial Adviser and also the citizen’s advice bureau.
Consider also approaching a local estate agent to see if he has any buy to let landlords in the area. If they do, get a valuation from three of them and try and do business that way.
Sell to rent should be the final resort – the very last resort!
If you are in financial difficulty or if you have a financial query call Peter McGahan in confidence on 0845 230 9876 or e-mail info@wwfp.net
Source:
(1) http://www.clickpress.com/releases/Detailed/38000005cp.shtml
(2) http://www.landregistry.gov.uk/houseprices/
(3) http://news.bbc.co.uk/1/hi/business/6972967.stm
(4) http://www.thisismoney.co.uk/mortgages/article.html?in_article_id=423920&in_page_id=8
(5) http://news.bbc.co.uk/1/hi/business/6266268.stm
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Consider rural vs urban house prices & commercial property funds
11 September 2007
Reader Writes
I read your article on house prices last week with interest and wondered if you had a view on regional and rural areas as opposed to the overall market as a whole. Could you also give me your view on commercial property funds post their announcement to impose ...
11 September 2007
Reader Writes
I read your article on house prices last week with interest and wondered if you had a view on regional and rural areas as opposed to the overall market as a whole. Could you also give me your view on commercial property funds post their announcement to impose an exit penalty?
There are clearly differences in the market depending on whether you are dealing with a major city or a rural area. The impact will naturally have an effect depending on how the drivers of supply and demand are dealt with.
One of the major issues with rural housing however, is the fact that house prices tend to increase more than wages to a much greater extent than the urban counterpart.
Whilst the average UK house is valued at near seven times earnings (1), Carrick in Cornwall is over ten times earnings and is deemed the least affordable rural area in the UK.
In any market downturn this will have a greater impact as affordability will naturally affect demand. For those who have overstretched there is the sad fact they may lose their property and add to the supply. Excessive supply and low demand leads to only one thing.
Urban areas are less affected in that employees need to live close to the city to work so demand is maintained to a higher level.
A rural area that is a high retirement destination is also less affected due to an ongoing consistent demand.
A common (and misleading) point that is made is that there is a shortage of housing and that demand will always be there. It is not that there is a shortage of housing; it’s a shortage of affordable housing that’s the real issue. How else can you explain the fact that a number of new builds are struggling to offload whilst we apparently have numerous people who still need property.
Another factor to consider however, is the monetary policy committee’s stance on inflation. Whilst the target is clearly a 1% variance on 2% inflation, it seems they have forgotten this and are solely focused on a 2% target. Their view is that consumers will become used to inflation over 2% and are taking a strong stance to drag it below this figure. It’s well documented that inflation is cooling and it seems peculiar that they don’t wait to see the rate rises having their true effect but their aggressive stance is sure to have an effect on spending and the economy. Those with a job that is under pressure due to cost cutting may consider ensuring themselves now before they become under pressure.
As for the commercial property funds… It was over a year ago I advised they shouldn’t be purchased given the fact the potential for return over and above cash was non existent. It didn’t stop the launch of real estate investment trusts or the abundance of new property funds however.
As is well documented the slide began over a month ago with the canny institutional investor believing they have had their best returns, selling out, and moving to a different investment sector.
The fund managers saw this and moved to protect themselves in whatever way they could, most notably by hitting those exiting with a hefty penalty.
Some of the largest penalties were nearly 7% with Axa in their life and pension funds with standard life slapping a 6.7% exit charge. (2) This follows suit with Prudential, Norwich union and New star who have all applied a penalty varying from 2 - 4.2%.
As they are having a net outflow of cash, the funds simply change the pricing of their units to a minimum valuation basis. It is standard practise amongst managers but rarely have I met an investor who understood it and its potential. The simple reason is to stem outflows and to avoid the inevitable where they have to begin selling properties which would be disastrous. Already many of the funds have a net outflow of cash rather than inflow. If this continues the potential for loss increases further.
For advice on a property fund you own call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
(1) bbc website http://news.bbc.co.uk/1/hi/uk/6963270.stm
(2) Sesame research bulletin R07-052
Reader Writes
I read your article on house prices last week with interest and wondered if you had a view on regional and rural areas as opposed to the overall market as a whole. Could you also give me your view on commercial property funds post their announcement to impose an exit penalty?
There are clearly differences in the market depending on whether you are dealing with a major city or a rural area. The impact will naturally have an effect depending on how the drivers of supply and demand are dealt with.
One of the major issues with rural housing however, is the fact that house prices tend to increase more than wages to a much greater extent than the urban counterpart.
Whilst the average UK house is valued at near seven times earnings (1), Carrick in Cornwall is over ten times earnings and is deemed the least affordable rural area in the UK.
In any market downturn this will have a greater impact as affordability will naturally affect demand. For those who have overstretched there is the sad fact they may lose their property and add to the supply. Excessive supply and low demand leads to only one thing.
Urban areas are less affected in that employees need to live close to the city to work so demand is maintained to a higher level.
A rural area that is a high retirement destination is also less affected due to an ongoing consistent demand.
A common (and misleading) point that is made is that there is a shortage of housing and that demand will always be there. It is not that there is a shortage of housing; it’s a shortage of affordable housing that’s the real issue. How else can you explain the fact that a number of new builds are struggling to offload whilst we apparently have numerous people who still need property.
Another factor to consider however, is the monetary policy committee’s stance on inflation. Whilst the target is clearly a 1% variance on 2% inflation, it seems they have forgotten this and are solely focused on a 2% target. Their view is that consumers will become used to inflation over 2% and are taking a strong stance to drag it below this figure. It’s well documented that inflation is cooling and it seems peculiar that they don’t wait to see the rate rises having their true effect but their aggressive stance is sure to have an effect on spending and the economy. Those with a job that is under pressure due to cost cutting may consider ensuring themselves now before they become under pressure.
As for the commercial property funds… It was over a year ago I advised they shouldn’t be purchased given the fact the potential for return over and above cash was non existent. It didn’t stop the launch of real estate investment trusts or the abundance of new property funds however.
As is well documented the slide began over a month ago with the canny institutional investor believing they have had their best returns, selling out, and moving to a different investment sector.
The fund managers saw this and moved to protect themselves in whatever way they could, most notably by hitting those exiting with a hefty penalty.
Some of the largest penalties were nearly 7% with Axa in their life and pension funds with standard life slapping a 6.7% exit charge. (2) This follows suit with Prudential, Norwich union and New star who have all applied a penalty varying from 2 - 4.2%.
As they are having a net outflow of cash, the funds simply change the pricing of their units to a minimum valuation basis. It is standard practise amongst managers but rarely have I met an investor who understood it and its potential. The simple reason is to stem outflows and to avoid the inevitable where they have to begin selling properties which would be disastrous. Already many of the funds have a net outflow of cash rather than inflow. If this continues the potential for loss increases further.
For advice on a property fund you own call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
(1) bbc website http://news.bbc.co.uk/1/hi/uk/6963270.stm
(2) Sesame research bulletin R07-052
Is house price growth slowing down?
3rd September 2007
Reader Writes:
Over the last year a number of readers have asked you about house prices but it appears that momentum is gathering for a slow up. Do you believe this is true?
Undoubtedly. It’s all about how we look at something. Back in 1990 I learned there was ...
3rd September 2007
Reader Writes:
Over the last year a number of readers have asked you about house prices but it appears that momentum is gathering for a slow up. Do you believe this is true?
Undoubtedly. It’s all about how we look at something. Back in 1990 I learned there was no such thing as house prices, just the price that houses or an average of had sold at in the past. The fact much less houses are selling and top end prices are still holding for the time being can easily maintain the average at a level that is perhaps misleading.
Thinking about what house prices are doing will not help you when trying to make a decision on whether or not to keep invested. It’s more preferable to consider what the factors are that will drive the price. Those factors are not magical – supply and demand. Supply and demand are driven by sentiment and the greatest drivers to that are fear and greed.
The U.S. is an example and the current shake up in the stock market is testament to that. I spent nearly five weeks in five states in the U.S. this year, and it was obvious that the interest rate cycle (which has an 18 month head start on the UK) had bitten, and fear had now set in. Palm Springs for example, is one of the destinations for the retired and wealthy from Los Angeles. House prices had collapsed and younger people who lived there, but couldn’t own a home, were pleased that prices were falling but weren’t taking the opportunity to buy. They believed they would fall further still and also were worried about higher interest rates so fear had set in. A stagnant market ensues where chains appear that never complete as they are only as good as the weakest link which normally collapses at completion.
Whilst the U.S. took a more deliberate and forward plan to slow house price inflation, the U.K. trotted along near 18 months later with their interest rate policy.
Let’s look at a number of factors that point to where we look to be going with U.K. house prices.
The office of national statistics has confirmed that over the last decade, house prices have risen by 204% whilst wages have only risen by 94%. (1) This points to a lack of affordability. Whilst in buoyant markets sentiment (the greed element) ignores what this will really mean, in a flat market, it can have a devastating effect on prices.
Repossessions are also an example. Currently repossessions are up 30% on last year and also at their highest level for seven years. (2) This is alarming. Although we have had a number of interest rate rises, for a large proportion of the market the rates have not really had any impact. Many borrowers are on fixed rates, so there have been no pressures on them with their payments.
When they eventually come out of their fixed rate the concerns will come home to roost.
This factor has a direct impact on supply, i.e. there are more houses for sale. Naturally when fear sets in of a falling market, this will curb demand and quite quickly you reach a point where you have a flat or falling market.
Other factors that are impacting now include U.K. banks keenness to achieve market share and the levels they are currently lending at. Because they are so aggressive, borrowers have been able to access money they shouldn't really be able to in my opinion. This has created that final spin at the top of the market which could prove expensive. When they tighten their policy, borrowers will struggle to consolidate.
I noticed a number of houses that are selling well below what they are priced for sale. I also noticed a number of new build properties advertising free solicitor and legal fees, no valuation fees as well as cash back and a considerable discount on what the house was for sale at - another sign that demand has reduced and the crunch has begun.
If you have a query on house prices call
Reader Writes:
Over the last year a number of readers have asked you about house prices but it appears that momentum is gathering for a slow up. Do you believe this is true?
Undoubtedly. It’s all about how we look at something. Back in 1990 I learned there was no such thing as house prices, just the price that houses or an average of had sold at in the past. The fact much less houses are selling and top end prices are still holding for the time being can easily maintain the average at a level that is perhaps misleading.
Thinking about what house prices are doing will not help you when trying to make a decision on whether or not to keep invested. It’s more preferable to consider what the factors are that will drive the price. Those factors are not magical – supply and demand. Supply and demand are driven by sentiment and the greatest drivers to that are fear and greed.
The U.S. is an example and the current shake up in the stock market is testament to that. I spent nearly five weeks in five states in the U.S. this year, and it was obvious that the interest rate cycle (which has an 18 month head start on the UK) had bitten, and fear had now set in. Palm Springs for example, is one of the destinations for the retired and wealthy from Los Angeles. House prices had collapsed and younger people who lived there, but couldn’t own a home, were pleased that prices were falling but weren’t taking the opportunity to buy. They believed they would fall further still and also were worried about higher interest rates so fear had set in. A stagnant market ensues where chains appear that never complete as they are only as good as the weakest link which normally collapses at completion.
Whilst the U.S. took a more deliberate and forward plan to slow house price inflation, the U.K. trotted along near 18 months later with their interest rate policy.
Let’s look at a number of factors that point to where we look to be going with U.K. house prices.
The office of national statistics has confirmed that over the last decade, house prices have risen by 204% whilst wages have only risen by 94%. (1) This points to a lack of affordability. Whilst in buoyant markets sentiment (the greed element) ignores what this will really mean, in a flat market, it can have a devastating effect on prices.
Repossessions are also an example. Currently repossessions are up 30% on last year and also at their highest level for seven years. (2) This is alarming. Although we have had a number of interest rate rises, for a large proportion of the market the rates have not really had any impact. Many borrowers are on fixed rates, so there have been no pressures on them with their payments.
When they eventually come out of their fixed rate the concerns will come home to roost.
This factor has a direct impact on supply, i.e. there are more houses for sale. Naturally when fear sets in of a falling market, this will curb demand and quite quickly you reach a point where you have a flat or falling market.
Other factors that are impacting now include U.K. banks keenness to achieve market share and the levels they are currently lending at. Because they are so aggressive, borrowers have been able to access money they shouldn't really be able to in my opinion. This has created that final spin at the top of the market which could prove expensive. When they tighten their policy, borrowers will struggle to consolidate.
I noticed a number of houses that are selling well below what they are priced for sale. I also noticed a number of new build properties advertising free solicitor and legal fees, no valuation fees as well as cash back and a considerable discount on what the house was for sale at - another sign that demand has reduced and the crunch has begun.
If you have a query on house prices call