Archive for November, 2009

Buy to let gold rush, or road to ruin?

November 26th, 2009

In many Northern cities of UK developers have been offloading new build units at discounts of up to 15% or more.  The discounted properties have resulted in much interest from new landlords and existing landlords, but are these properties good investments?

Firstly it seems the developers are only giving the big discounts to those with cash to invest, so one view could be that if you have a large amount of cash sitting in a bank account earning 3% or so then maybe the rental yield is more profitable.

But there are some real risks.  Some city areas have been “over developed” and thus creating excess supply over demand.  The upshot is that it may take a considerable time for some areas to see a recovery in property prices.  Combined with this is a potential over supply on the buy to let market, thus depressing rental yields and increasing rental voids. 

The advice for anyone considering investing in new build units being offloaded by developers is:

1 – Research the local rental market, be realistic about rental yields and rental voids when calculating your likely rental income.

2 – Take account of ongoing service charges that will apply to some new builds, these can sometimes be a significant proportion on rental income.

3 – Do not take the developer’s word on valuation, use an independent RICS valuation surveyor to understand what the “true” open market valuation is.

4 – Don’t expect short term capital gains, focus on cash flow and net rental income as the motivation for investing.

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Self Certified Mortgages – a thing of the past?

November 19th, 2009

According to government statistics the number of self employed people is approaching 4 million, and there is an increasing trend of self employed.  But now we have a situation where around 4 million self employed people are struggling to get a mortgage, so why is this?

Put simply the new FSA regulations place more stringent tests on lenders to assess the affordability of a mortgage by new applicants.  For self employed this involves such checks that make it almost impossible to obtain a mortgage, for example:

  • Self employed accounts going back several years – but what if you have only been self employed for 1 year?
  • Those working in partnerships or directorships need to show evidence of turnover and profits for the last 3 years.

All of this is really quite absurd.  For example, as a business owner I may choose to live off a lower income and “invest” what would have been my income in new employees to grow the business.  Those employees can apply for mortgages after a few months evidence of salary, but as the owner you cannot, for some reason you are a higher risk than the people you are employing.  The logic does not add up.

To coin a phrase often used by financial firms as mandated by the FSA [past financial performance is not and indicator of future financial performance] it is also true to say that “past employment is not an indicator of future employment”.  The PAYE employee could apply for a mortgage today and be made redundant tomorrow. 

The reality, it appears, is that the FSA are “over regulating” mortgage lending, the result will mean unnecessary hardships for some and an adverse impact on the property market as some homeowners simply cannot afford to move as they are unable to get a new mortgage.

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Posted in Mortgages

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Property fraud, Part 1, how it started

November 16th, 2009

Details removed awating outcome of final investigations, updates to follow later

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Avoiding property fraud

November 13th, 2009

Advice on how to avoid becoming a victim based on a real case study to be published later.

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The UK’s credit rating could fall as debt concerns grow

November 11th, 2009

A leading agency, Fitch, has suggested that the record levels of UK Government debt could soon affect the UK’s credit rating.  Should this happen it will impact everyone, a lower credit rating means higher interest charges on UK debt.

Let’s put some figures on this.  Assuming a total debt of £800bn then a 0.1% increase in interest rates would cost the UK economy £800m per year, a 0.5% increase would cost the economy £4bn per year.  Due to the size of public sector debt just a small increase in rates could have a very significant impact on the cost of borrowing.

Another impact of a reduction in the UK’s credit rating could be to further devalue the pound, as a large importer this would increase costs to the economy.  For example the still a net importer of goods (the trade deficit was reported to be £7.2bn), any further devaluation could increase this deficit and create future inflationary pressures.

But all is not lost, the UK’s credit rating has not yet been affected, according to the leading agency reports (Fitch, Standard & Poor) much will depend on how the UK manages its debt, and in particular the disciplines that will be put in place to reduce the overall debt burden.

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Posted in UK Economy

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Mortgages available at 6 times your salary?

November 10th, 2009

Despite then difficulty many property buyers face in obtaining a mortgage there are some lenders who have been easing their criteria for borrowers.

At Aliance & Leicester they are currently (November 2009) offering up to SIX TIMES you annual salary based on the borrower earning £60,000 and having no other financial commitments.  This is a huge multiple considering the current difficulties in the financial markets.

Whilst Aliance & Leicester are the leading lender in terms of lending the most on multiples of salary there are some other banks who are offering fairly high multiples for the current climate.  One is Woolwich who are offering 5 times salary, and even the tax-payer owned Northern Rock is offering 4.5 times salary.

It seems that these higher multiples for mortgages currently being offered are based on new lending criteria where banks are placing more emphasis on affordability, e.g. understanding a borrower’s disposable income and the maximum lending that is safe to support. 

It also seems that LTVs are improving with 90% and even 100% LTV products currently available.  The only issue tends to be that the higher LTV mortgages carry a higher rate of interest, if you want the best deals you still need a sizable deposit.

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Is the UK addicted to Quantitative Easing?

November 6th, 2009

Some analysts have suggested that the ongoing programme of quantitative (QE) easing has potentially creating an addiction for the UK economy such that if we were to stop QE it could have a negative recessionary impact.

So far the BoE has implemented £175 billion of QE with a further £25 billion announced yesterday. There is no doubt that QE has prevent a more severe recession, many analysts have reported this. But, the concern is what happens when QE stops, which it will at some point.

The current view by some is that the way QE has been implemented, effectively buying back Government bonds, has simply freed up “cash” for the previous holders of those bonds to invest elsewhere. According to some this “elsewhere” investment is actually the stock market which has seen a strong rally in the past 12 months. So one theory is, if QE stops, will this cause a fall in share prices and potentially trigger a contraction in growth and even possibly push the economy backward into negative growth?

No one knows for certain how markets will react, but clearly the action of halting QE will need to be managed in a way that minimises any negative impact on the economy. Perhaps more importantly is when will we start to withdraw the (current) £200 billion from the economy. When this happens it will have further effects possibly restricting growth and inflation. This last point could be relatively positive, unwinding the QE in the economy could help to prevent excessive inflation – which some have said may follow in the coming years.

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Posted in UK Economy

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Property prices rise 1.2% in October – according to Halifax

November 4th, 2009

The latest figures form Halifax report a fourth consecutive monthly increase in property prices of 1.2% in October, this compares with a 0.4%increase for October reported by Nationwide.

But it is the comments behind these headlines that are interesting….

Halifax’s housing economist, Mark Ellis, also raised caution that much of the recent increases are because there are too few homes on the market to meet demand.   Mr Ellis also commented that there are some indications that more people were deciding to put their homes on the market which would curb the rate at which property prices are increasing.

The Chief Economist of HIS Global, Howard Archer, commented that you can’t place too much store on one survey and that you need to look at the whole picture.  In particular Mr Archer commented that “I just don’t think the economy is strong enough to sustain these increases”.

Overall the message here seems to be that caution should be applied to the reported increases in property prices and that we are still in a fragile economy.

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Posted in UK House Prices

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Stamp Duty changes 31 December – Should you rush to buy a property?

November 3rd, 2009

On 31 December 2009 the threshold of 1% stamp duty will be reduced from £175,000 back to the previous £125,000 threshold.  Does this signal that property buyers should rush to complete purchases before the end of 2009?

If you are looking to buy and have made an offer then it makes sense to push the completion through before 31 December.  But what if you are only thinking about buying?  Our view is that if you have not found a property you want to buy then do not rush just to make a “potential” 1% saving on Stamp Duty, and here is why.

  1. In the current market it is much easier to negotiate a discount, just a 1% discount will offset the savings in Stamp Duty, so maybe the emphasis should be on negotiating the best possible price.  It is likely that a vendor may hold out for a higher price and use the 31 December to help negotiate this … e.g. if you pay their price they will do everything possible to support completion before 31 December.
  2. Property prices are still volatile, some analysts are suggesting prices might fall back over the winter, thus more than compensating for the 1% saving in Stamp Duty.  Clearly however property prices changes vary throughout the UK, you need to understand your local market.
  3. Purchasing a property is a huge financial commitment, rushing to purchase in order to save 1% Stamp Duty could actually result in a purchase you were not 100% committed to.

Overall our view is that if you have found the property you want and agreed the price then do everything possible to complete and save on Stamp Duty.  If you have not yet found a property then it is unlikely that you can complete in time (solicitors offices often close for 1 to 2 weeks over Christmas), you are better off taking your time to find the right property at the right price.

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Posted in Property Buyers

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Why banks are not passing on cheap financing for property buyers

November 2nd, 2009

Apart from the cost of wholesale finance which we have blogged about earlier there is another factor coming into play.  The UK Government appears to be placing restrictions on state owned banks and influencing lending criteria at other banks in which the tax payer has a large stake.

One clear example is Northern Rock who last week were instructed not to appear in the top 3 for “best buy mortgages” until the end of 2011. Further Northern Rock was told it must also keep its savings balances below £20billion.  This move appears to be to “ease competition” in the market and avoid other banks complaining that Northern Rock is benefiting from being “state owned”.

Another example is Lloyds TSB who have been making deals less attractive in what appears to be an effort to “lose customers”. 

Royal Bank of Scotland is yet another example, last week it was reported that they were scaling back on mortgage lending.  RBoS have also increased some of the rates on their mortgage products, one example being the 5 year fixed mortgage which at the time of writing had increased from 5.99% to 6.39%.

A comment attributed one senior MP was “… pressure from Europe means they should not have competitive advantage” and that banks should not provide financing at rates which are “out of line with the rest of the market”.

Overall, whilst it is clear that the health of the banking system needs to be improved, it also raises some questions…..

  • If Europe is concerned about competition affecting banks and asking state owned banks to be less competitive, then why are many banks already reporting higher levels of profits and bonus payments?  
  • Do the non state supported banks really need more help to reduce competition?

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Posted in Mortgages

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