Home Economics: Buy-to-let breathes again

By David Smith

In the darkest days of the credit crunch, one claim was made so regularly, you might have believed it.  This was that buy-to-let was dead, a victim of a housing boom that had turned to bust.  “Bye-bye, buy-to-let” was an irresistible headline.  We now know reports of its death were exaggerated.  Cluttons estate agency reports a 40% increase in demand for property – concentrated around the £500,000 mark – from professionals such as solicitors, accountants and doctors investing for the first time.

This will displease the moaners, but a functioning private rental sector is necessary for a healthy housing market.  Private landlords took a battering and faced funding difficulties as severe as anybody.  They appear to have weathered the storm.

Figures from the Council of Mortgage Lenders (CML) showed gross buy-to-let lending grew in the third quarter, its first rise for two years, with a rise from 21,600 to 23,700 in the number of loans and an increase to just over 1.2m in the number of outstanding mortgages.

Admittedly, the rise was from a low base, but this was a clear sign of life.  “The figures show buy-to-let is here to stay,” says Michael Coogan, director-general of the CML.  “Future demand for housing in all tenures supported by lenders will remain strong, despite mortgage funding constraints and low construction rates.  With funding for social housing under pressure, the private rented sector has a strong future.”

The other buy-to-let story – the expectation of a flood of arrears and repossessions as landlords faced grim reality – is not going according to plan either.  The number of buy-to-let mortgages with arrears of more than 1.5% of the balance has fallen for the third quarter in a row and stands at just 20,500.

As with other parts of the housing market, this is a slow climb back after the huge shock of an abrupt withdrawal of mortgage availability.  Moneyfacts.co.uk says the number of buy-to-let mortgage products has risen by more than a third from its September low, which sounds impressive – except that this is still 93% lower than its August 2007 peak.  Sensibly, deposits of at least 20% are required, which was not the case in the past.  Like it or not, buy-to-let is still alive.

Housing markets in the world’s leading economies are continuing to recover, although the majority are still lower than this time last year, says the Global Property Guide (globalpropertyguide.com).  Israel has been the strongest performer, with prices up by 13.7% in the year to the end of September.  The sharpest fall was in Latvia, down 59.1%. (David Smith, The Sunday Times).


Dubai – gets that sinking feeling

By Martin Skinner

Building expensive villas on man-made islands with little protection from erosion always seemed pretty bonkers to me.  Brilliantly bonkers.  Was Dubai’s economic miracle nothing more than a mirage?  Or is an unfortunate victim of an unprecedented global financial crisis.

Dubai’s brash and ‘blinging’ approach has been pretty uncoordinated and in the past when I visited it I found it soulless.  I wouldn’t want to live there.

Having said that it has certainly been a beacon for both Western and Eastern capitalism in the region and while its mineral-rich neighbours initially saw it as an upstart, they then copied many of its innovations  – free trade zones, massive transport infrastructure upgrades, freehold property ownership, moderation towards other religious & cultural beliefs etc.

And it has a brighter future.  Dubai may be overleveraged but it has plenty of assets still and some significant competitive advantages in the region.  It also has friends in high places.  Including some incredibly wealthy friends  and family in the area (particularly in Abu Dhabi & Saudi Arabia) that will invariably support it.  Its ‘friends’ will probably loot a few gems in the process, its Emirates airline for example, but they will stand by their neighbour and defend their own pride and western lenders will be able to breathe another cautious sigh of relief.

Currently it looks to me like the reverse leverage brinkmanship game that’s been played out between banks and borrowers throughout the West for 18months or so now.  It’s just being played out middle-eastern style.  Dubai has presided over an economic miracle and doesn’t want to give up control of its trophy asset (Emirates).  Abu Dhabi has all the cards at present and is almost certain to get its way – in picking assets.  However It will provide the necessary guarantees.

I’m sticking to my prediction that we won’t suffer a double-dip or a “W-shaped recession” however it’s clear the global recovery isn’t going to be a smooth one – Alan Greenspan’s forecast for a much more turbulent economic period continues to look very prescient.

From an entirely biased perspective (please excuse me) I hope it will encourage get-rich-quick speculators to focus on fundamentals like supply and demand and we’ll attract a bit more money back to relative safety in London.

For some great reading on the ‘Dubai Debacle’ check out these links:

Mortgage lending rates increased – are they taking the …. ?

By Martin Skinner

Yesterday’s Sunday Times money section details a number of margin increases on mortgages by UK banks; mostly the government backed ones.  Cheltenham & Gloucester (Lloyds owned) has increased its tracker rate for its 90% LTV product to 5.49% over base – 5.99% at present.

I’m an interest rate ‘dove’ meaning I believe interest rates will remain low for at least a couple of years.  This is despite a substantial increase in inflation that’s due around the time the VAT rate returns to 17.5% in January.  And despite my belief that a drop in house prices (a ‘double-dip’) is unlikely next year and my expectation that economic growth is likely to surprise on the upside. 

5.49% over base for a mortgage though?!  That should really come with a public safety warning notice.  When base interest rates do finally return to their ‘normal’ position after this crisis has passed of around 5% that would leave borrowers paying 10.49%.  More if rates have to be increased further in order to slow the economy again.

With such limited competition out there for lending still borrowers need to take extra care when arranging their loans.  With such huge margins the banks will inevitably be declaring big profits soon and competitors will enter the market – in turn improving the offering for borrowers again.

Surely sticking with much lower margin mortgages has to be the way forward for now even if it means putting down larger deposits?  Then negotiate bigger mortgages on fixed rates in a few years time when competition returns and future interest rate rises are more likely.

Additionally here’s my roundup of the best of the recent news:

Mind the housing gap

By David Smith

The Queen’s speech, published last Wednesday, sets out the areas the government considers important in the year ahead.  Britain’s impending serious housing shortage, one must conclude, is not a priority.

True, this was a speech designed to extract maximum political advantage for the government in the months left before the election.  And true, not all changes require legislation.  But the need to build many more homes in Britain, and thus improve affordability, which was once such a priority for Gordon Brown, has slipped off the agenda.

When he was chancellor, this was a big issue.  Britain needed 240,000 new homes annually to meet demand and hold down house-price inflation.  Though the housing market has changed since that target was set, the underlying picture has not.  The UK has 61.4m people, and official projections are for this to rise to 63.5m by 2013, 67.8m by 2023 and 71.6m by 2033.

How far are we running behind the target?  The National House-Building Council reports that it received applications to build just under 25,000 new homes in the three months from August to October: 27% up on the same period last year, but still barely more than a third of the target.  While the builders are increasing their output, it is from a very low base.  Government initiatives, meanwhile, most of them launched in a blaze of glory, have either been forgotten or scaled back to the point of irrelevance.  Remember the £60,000 home?  How about eco-towns?

The slump in new housing supply has, of course, helped to prop up prices, thought not as much as the “sellers’ strike” by existing homeowners.  But it is storing up serious problems for the future.

Stuart Law, chief executive of Assetz a property investment company, says: “The current undersupply of property is likely to worsen, as house builders struggle to deliver any substantial increase in new properties in 2010.  Developers are only going to be building about 100,000 units next year, whereas at the peak this was around 180,000 units a year.”  The market will stay thin, which will support prices, but it is a long way from normal.  Judging from the Queen’s speech, the government has run out of ideas about what to do about it.

Gross mortgage lending last month was an estimated £13.5 billion, up 5% from September, but down 27% from £18.5 billion 12 months earlier, the Council of Mortgage Lenders says.  It reports that the number of loans to buy new homes has picked up significantly in recent months, but remortgaging has dropped to levels last seen a decade ago. (David Smith, The Sunday Times).

UK Property – Residential vs Commercial

By Martin Skinner

My last two blogs discussed what I believe to be understandable but over-stated concerns of a double-dip in the UK economy in 2010.

This week I’m going to dig into the reasons behind the recent outperformance of residential property as compared with commercial property and would love get some feedback from readers.

In broad terms commercial property values in the UK fell approximately 40-50% from the peak of the market in 2007 to their trough in early 2009 whereas residential property in the UK fell approximately 15-25% from peak to trough.  Both have rebounded somewhat as the fears of complete financial and economic collapse have faded.

Why has commercial property fallen so much more than residential and how are they likely to compare in the years ahead?

Private vs Institutional Investment
The residential property market is a lot more granular than the commercial proeprty market.  Most residential properties are owned by their occupants – far more so in the UK than in Europe for example.  Commercial properties tend to be owned by large (typically institutional) investors.  The two markets though linked in many ways therefore operate differently.

Purchases are typically larger and long lease terms are the norm (usually 5/10 years minimum).  Each tenant also tends to take more space and be responsible for the repairs, insurance and general upkeep of the building.  By comparison lease terms for residential properties are generally very short (6/12 month AST’s) and the landlord is typically responsible for the buildings insurance and maintenance.  It’s therefore a lot easier to invest a large sum of money in commercial property. 

The ease to which money raised could be deployed & managed innevitably played a significant role in the type of property it was invested in. 

Occupier Markets
When the economy took a big hit tenants had to cut their overheads and of course the space they occupy makes up a large proportion of the overheads for both businesses and households. 

It’s here the supply and demand dynamics diverge significantly for commercial and residential property.  Just before the credit crunch even as housebuilders were merging, leveraging and generally overstretching themselves there was a great deal of discussion around the undersupply of homes for people to live in.  The same was not the case for commercial property.

Future Trends
I believe developments in technology and working practices are going to have a profound impact on the way we live and work. 

Most notably employers can’t offer the ‘job for life’ anymore and flexible working has both been encouraged and demanded in response.  In economic terms this is a good thing – flexibility and de-centralisation of planning encourages personal responsibility and greater productivity.  This will lead to more people working from home and part-time from serviced offices.  Social media is also going to accelerate this trend and lower growth in demand for large floorplate formal office space is therefore likely.

The growing pensions crisis combined with the shock many households have experienced recently is also likely to have at least some effect on peoples saving patterns.  People are likely to save more and spend less.  Combined with the trend towards shopping online growth in demand for space shopping centres is likely to reduce.

By comparison we are likely to continue to attract high levels of immigration from abroad (particularly Eastern Europe) and therefore growth in demand for residential accommodation is likely to persist.

Summing Up
Institutions will continue to struggle to deploy large sums of capital into residential and will maintain their focus on commercial despite consistent historical outperformance by residential.

Both commercial & residential production capacity (supply) has been significantly impaired for at least 5 years. 

Residential property has the most compelling argument for future demand growth and in my opinion rents are therefore set to rise fastest for residential property – in the best areas (most notably in London) examples of significant rental increases are already becoming commonplace.

Do you agree?  Either way, what trends do you believe will significantly influence these markets in the coming years? 

Additionally here’s my round up of the best of the recent news:

Rose tinted spectacles or optimism returning?

By Martin Skinner

I’d been building up to my blog last week on the assumption that more Quantitative Easing would be implemented and support for the banks would be effectively unlimited.  With these now in place it seems to me unlikely that we will suffer the severe double-dip that many are worrying about.  As last weeks’ comments show this isn’t a view shared by all – and it shouldn’t be expected to be; it is just my opinion based on information currently available and forecasting can be a mugs game these days.

Regardless, the news in the financial press is undeniably better now than it was 9 months ago and either my finding out I’m going to be a dad has given me rose tinted spectacles or optimism is returning to the City.

Looking back
Anatole Kaletsky used the example of the irresistible force and the immoveable object at the height of the crisis and argued that the willingness of governments and central bankers to use unlimited guarantees and in theory at least inject unlimited capital (£200bn so far) into the economy was the only way to reverse a classic run on the banks.  This was necessary because banks will rarely have enough money to pay all of their depositors out if confidence goes completely and they all want their money at the same time.

My argument now is that this tactic has succeeded – however it takes a while for markets to shift from ‘batten down the hatches’ to risking capital reserves on growth.  Understandable when you consider just how close we came to utter economic collapse.

Bosses optimism
In the Sunday Times last week John Waples reported on three top chief execs calling an end to the recession in the last week or so – Sir Stuart Rose at Marks & Spencer, Stephen Hester at RBS and Eric Daniels of Lloyds.

Tonight I went to a presentation by St James’s Place Wealth Management and the theme was very much that the returns offered by ‘riskier’ assets like equities, corporate bonds and property greatly outweighed the minimal returns offered by cash at 0.5% – and the expectation was that economic growth was likely to outperform expectations.  I agree.

What do you think is going to happen next year? And what do you think will be the 2010’s top performing asset classes?

In Other News
Some other great articles from the weekend press included:

The Blogfather – Lesson Number 1

By Martin Skinner

On request & dedicated to our new godson Archie Campbell.

Lesson Number 1 – Just add FUN

Firstly what I don’t mean:

  • I don’t mean just do exactly what you want when you want – other people are important and you should always try to be considerate.
  • I don’t mean just do the easy fun things (consume) before you do the hard things (contribute) – you should do the quite the reverse, contribute first then reap the rewards.  It tastes better that way.

Now what I do mean:

  • Don’t take yourself too seriously – the sooner you learn to laugh at yourself the less life’s critics can get you down.
  • Savour the funnier moments (“always look on the light side of life”), particularly at tough times, and people will greatly appreciate you for it.  Life can be boring and worse at times – but only if you allow it to be.
  • Dare to be different.  It’s easy to want to fit in, particularly when you’re young.  But if you want to be special you need to think about how to stand out.
  • Take risks – consider your options then get out there and test them out.   “You have to be in it to win it.”
  • Get a shark hat !  You’ll just have to trust me on this one.