November 14, 2008
Bank Of England Accepts That House Prices Are Important
Charlie Bean, the Bank of England's deputy Governor said six months ago that there was little link between house prices and consumer spending. This has been retracted this week with the confirmation that they believe stability in house prices is far more important than they previously thought.
Reductions in house prices damage the balance sheets of banks and reduce their willingness to lend said a report issued on Wednesday. Obviously it also reduces people's wealth, at least on paper and house price falls impede people's ability to withdraw equity.
I think the most important factor is the damage to banks balance sheets that significant house price falls will bring and, as I commented on in a blog entry earlier this year, it is quite reasonable to expect the Bank of England to consider defending house prices in order to defend bank's balance sheets and the financial system.
The falls in base rates that we are seeing are, I suspect very strongly, in part targeted at the defence of this nation's house prices and its housing wealth as part of the concerted strategy to stabilise the financial system. Good news for buy to let property investors and property investment generally.
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November 13, 2008
Oil Prices Drop 40% Year on Year
Oil prices continue to drop and there is now a 40% year-on-year price fall with oil prices in the $53 to $59 price range.
Pump prices also seem to be falling dramatically with several examples of filling stations showing a 25% fall from their highest prices a few months ago and still falling fast.
The effect of this upon CPI inflation will be significant and with all of the other factors contributing to the inflation calculation we still expect to see negative inflation in 2009 at some point which will go some way towards compensating for wages not going up very much for the next year. The retail price inflation figure is certain to go below zero by the spring in our opinion.
All of this justifies historically low interest rates for a period of time and we expect to see UK base rates at under 3% until the end of 2009.
It will be important for property investors and homeowners alike to switch into fixed rates at the point at which sentiment on inflation is at its worst. By this I mean when press comment is at its peak in terms of talking about deflation as this will be when expectations of future interest rates being low are at their maximum. This will feed through into interest rate swap pricing and will give you the lowest fixed rates. Expect this to be sometime around the middle of next year.
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November 12, 2008
The Green Shoots of Spring in the Housing Market Are Coming Rather Early
Okay, I'm not saying that the housing market is recovering all of a sudden but the first signs of a firming up in the market are beginning. We see a record increase in the number of first-time buyer enquiries, a slashing of mortgage rates, RICS surveyor sentiment suddenly surging forwards and a continuously reducing LIBOR rate indicating that the banks are beginning to trust each other more that will surely lead to increased lending.
Many banks are done with their lending for 2008 and we expect a significant pause until January, particularly in the commercial lending sector. What we do expect however is LIBOR to drop to around 0.5% to 0.75% above base rate in the near future, for lending to increase into the spring and for some of the best mortgage rates ever seen. Sure, banks will make a good margin on their lending but with interest rates heading down in the general direction of zero they can make a fat margin and their customers can still get historically low rates.
Change of sentiment is a very difficult thing to judge. I remember trying to judge it through the 90s as lower and lower interest rates failed to revitalise a stagnant housing market year after year. It became amazing that no matter how obvious low house prices and low interest rates made the forthcoming boom it took an age to actually get started.
I suspect this time it will be a lot faster. Long-term dire performance in pensions and the stock market combined with a far more financially savvy property investor community, and indeed financially savvy homeowner community in many ways, will lead to a far sharper bounce this time around.
I've said it before and I will say it again that people will be shocked by the sudden surge in the housing market to come in the not too distant future. It will be driven by the implosion of the housebuilding sector and their loss of capacity to build in reasonable numbers, the overall demand for housing (currently focussed on the rental sector), the gradual recovery in lending capacity from the banks as they begin to trust each other again and historically low interest rates.
Nationwide today said the peak to trough fall from about last September will be 25%. Perhaps so for their own mortgaged clients (and their sellers) having to contend with surveyor's depressed valuations but on the land registry data represented in the financial times house price index I wouldn't expect a peak to trough of much different to around 15% to 17%.
So how come we are being offered so much property by developers at 30% or greater discount to the current RICS valuation? Just take Taylor Wimpey for example about to breach its banking covenants by January. They are desperate for cash to minimise the loss of shares to their bankers in exchange for this breach. These developers won't deal with individual buyers but our groups of buyers are having a field day when we gather them together for a joint bid.
We are seeing finished houses that were £200,000 currently available in modest numbers for £100,000 but you won't see that in a press advert. We're seeing two-bedroom apartments priced at £140,000 a year ago available again in small numbers at £65,000. We expect all housebuilders stock to have gone by the spring and the sudden stock overhang that creates an impression oversupply will be flip in an instant to undersupply.
These heavily discounted prices won't have much effect on house price indices as they are a small proportion of total transactions but as I said to the FT a few days ago these are the best prices you will ever see ever again. ( http://www.ft.com/cms/s/0/12aea790-af91-11dd-a4bf-000077b07658.html )
If you're a serious investor and you have a little cash to put into these properties you should take advantage right now. Don't believe the hype that the only serious volume distressed sellers in the market, the housebuilders, are going to be here for a long time. Once this stock is gone it will be gone for good and housebuilders will build much more cautiously again in the future and ensure that they are well behind levels of demand in order to hold up prices and profits. Don't wait until it's obvious with hindsight.
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November 8, 2008
Mervyn King, King Canute, Has Finally Given In As the Tide of Economic Slowdown Washes Over Him
We gave Mervyn King, the Governor of the Bank of England, the title of King Canute around a year ago in return for his blatant disregard for the clear and present danger of economic slowdown as a result of his excessive interest rate rises and his failure to reverse them in it knowledge meant of the wider effects of the credit crunch on the real economy.
King Canute attempted to command the tide to turn back, such was his vanity and self belief and disregard for the laws of nature. Mervyn King and the monetary policy committee (MPC) did the very same thing in attempting to claim that inflation was the real threat and that the financial meltdown as a result of the credit crunch would be contained within the city of London and the banking sector and would not leak into the real economy. Even if they thought it would leak they clearly thought it was of a minor consequence.
What a stunning U-turn this week we now see as the tide of recession washes over Mervyn King and the MPC forcing them to admit that they have been foolishly reckless through their disregard for the effects of the credit crunch on the real economy. We've now seen a huge fall in bank interest base rates as they attempt now, far too late, to stop the economy going into recession. Huge cuts in base rates will assist the economic slowdown being shallow but it is a damning indictment of the central bank's lack of ability to anticipate the near future. Isn't that why they have this job?
Peter Dixon of Commerzbank is quoted today as saying "All other forecasters were suffering from myopia to the same degree" in reference to Mervyn King and Spencer Dale, the Bank of England's chief economist, being likely to face intense questioning over whether the Bank of England was too slow in assessing the economy's health. Sorry Peter but I would like you to correct that erroneous statement as for the last year I have been shouting from the rooftops that early signs of economic slowdown, as a result of the credit crunch, have been blatant across the whole country and has been the most compelling "clear and present danger" compared to the risk of inflation and that base rates should have been cut more aggressively a long time ago - a fact that King now accepts.
The bank is probably going to change its economic forecast for next year to be a 1% - 1.5% fall in GDP. If base rates go down another 1% next month, the government continues its pressure on banks to pass through savings to borrowers (whilst still permitting them to make substantially greater profits than in the past) and banks continue to lend to each other to greater levels then perhaps we will get away with this lightly. We won't know for sure until the spring when we will be looking for signs that quarterly GDP growth is stabilising rather than falling too much further. This will not get us away from the fourth quarter GDP growth this year being rather substantially worse than the -0.5% growth of the third quarter. When this figure gets announced in the New Year it will be enough to push base rates from the 2% we forecast before Christmas down to 1% or so we expect.
Property investors with cash are going to see great opportunities continue over the next year or so as lending rates come down and property deals abound. High yielding property in particular is likely to be highly attractive as interest from bank accounts is going to become close to zero for instant access savings accounts.
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Banks Forced to Lose Money by the Chancellor
A completely unreported effect of the Chancellor's demands that banks pass on the full 1.5% base rate drop on their standard variable rate mortgages is that banks will be losing money.
50% of all mortgages are fixed rate, 40% are trackers linked to the bank base rate by a margin but 10% of mortgages are on standard variable rate and many of these have now dropped on Friday to around 5% which is a great rate. Unfortunately, as banks fund significantly from interbank lending (LIBOR) and interbank lending rates only dropped around 1% last week banks have just lost 0.5% margin on standard variable rate mortgages until such time as LIBOR drops the full 1.5%. Banks will need to lend more to each other in order to achieve this. Does this mean banks will be effectively pushed once more in the direction of lending more freely to each other, hence bringing down LIBOR rates. Quite possibly.
What's the result? If LIBOR rates don't come down as a result of banks trusting each other more and lending each other money this base rate drop will end up costing them dear. I wonder if that was the intended outcome as if so it was quite clever thinking by the government or their advisers at least. I was the Prime Minister right now I'd be thinking about an election as people longer term memories of the government's incompetence are probably outweighed right now by their short term reaction to some big, and quite correct, vote winning decisions.
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Bank Savings / Deposit Interest Rates to Fall Sharply
Instant access savings accounts at banks are paying interest rates that are close to zero - not something that is going to be helped by the base rate cut last week.
Even savings bonds where you lock up your money for two or three years or more and that currently pay around five or 6% are going to fall over the next week or so sharply.
Where do people go for good income ? It's no coincidence that our investment division is seeing a substantial increase in demand for hotel room investments yielding typically 8% or more.
There is even a UK budget sector hotel, behind the booming profits at Whitbread/Premier Inn and Travelodge, and located in Preston, that pays 8% interest on the deposit during the construction period.
People are more and more considering that part of their assets should be in this high yielding property sector and we've certainly seen a huge number of enquiries and people through the doors of our hotel room investment training courses - not just investors but IFAs as well.
Take a look at the properties currently available around the world at http://hotels.assetz.co.uk and in particular the budget hotel sector that is already booming as a result of the economic slowdown. The new budget hotel in Preston city centre is a good example - http://hotels.assetz.co.uk/property-detail.htm?propID=2937
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November 6, 2008
Finally Mervyn and the MPC woke up - The Base Rate cut was savage as we said
No surprise there then - at least not to regular blog readers ( http://investors.assetz.co.uk/blog/archives.php ) - base rates down 1.5% to 3%, the lowest for 53 years.
Mervyn King and the MPC have finally woken up to the economy slowing down being a higher risk than a temporary surge in inflation. We have been saying this for a year and for the last few weeks have been giving advance warning on imminent 'savage' base rate cuts. Do you know what is sad, and rather worrying ? 60 out of 60 Bloomberg economists failed to predict the large cut - in fact all but 8 said a 0.5% cut was a certainty and those 8 said the cut would be 1%. The MPC would have to have been mad not to react the latest economic data after a year of dithering so why did these 60 economists get it wrong - are they not paying attention ? Are they asleep to to what is going on in the real economy and the effect that bank interest rates have on the man in the street and the small business? I think so.
Some of our clients' mortgages, and mine, are now two point something percent, many if not most others are three point something percent - you guessed it, I and many clients are on trackers at present and most of them lifetime trackers until such time as fixed rates bottom and we exercise the free switch most of them come with. I practised what I preached and since September last year trackers have been the only place to be.
Are there further drops in base rates to come ? Yes, we think that rates will keep falling to between 2% and 2.5% before Christmas and could hit 0% by the middle of next year - not very likely but certainly possible.
Does this help everyone on trackers? Probably not as many BTL rates have a 2.75% floor below which rate cuts will not be passed on. Didn't know that ? No, many didn't and they certainly were not told so watch for a class action against the banks for misselling next year if they don't do the right thing and strike out the small print in many tracker mortgage terms.
What about SVR, Standard Variable Rates? If you have not been able to move to a new lender because you don't have the equity or rental level then you may well be stuck on a SVR mortgage after the expiry of your tracker or fixed rate. Will base rate cuts be passed on to you ? Not all have been so far and not all will be going forwards but such savage cuts will cut your rate a lot even if the full amount isn't passed on.
The Government £50bn bank investment had a condition that banks help borrowers - Alistair Darling has repeatedly stated that banks must pass on all rate cuts but their new part owned banks are not playing ball and really don't want to do it. Banks are profiteering regardless of the CML saying otherwise in their rather silly statement today. Banks have been raising margins on their mortgages for many months and they are still doing it this week. They need to make bigger profits to repair their balance sheets but charging their customers instead of their shareholders will not be forgotten.
What does this mortgage drop mean to the prospects for the economy ? There are many factors in play and there are many problems to address, not least the trust in banks by fellow banks and credit starting to grow again but the real economy and consumer sentiment will be dramatically buoyed by this cut and the further ones to come.
There is now a good chance of a V shaped bounce rather than a long U shaped slump in the economy but many more things need to be done to get there. Times are good though for property investors - rents are surprisingly stable in the face of developers dumping unsold stock on the rental market and mortgage rates dropping for many will be making Buy to Let quite profitable for most.
And yes, Mervyn should still resign for leaving it a whole year before he remembered there was a real economy out there that is more important than the square mile.
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October 30, 2008
Mervyn King must resign - Base rates must be cut by 2% now
Since last September Assetz has been calling attention to the "clear and present danger" of an economic slowdown being far more significant than short-term inflation concerns. ( http://www.google.co.uk/search?sourceid=navclient&ie=UTF-8&rlz=1T4GGLR_en___GB227&q=clear+and+present+danger+assetz ). Month after month we have been calling for base rate cuts to preempt the slowdown that was coming.
Initially the Bank of England did nothing at all, and then, as the credit crunch intensified over recent months, it began to adjust base rates only slightly, by quarter of a point at a time. Only at the height of the market turmoil did it drop one half of one point and even now UK bank base rates are still very high at 4.5%. The Fed, however, has shown true leadership and acted extremely quickly to cut rates in the United States and they are now down to 1% as part of a coordinated series of measures to combat the credit crunch, the financial turmoil and its leakage into the real economy. Initial data shows that their economy and housing market is beginning to stabilise - but we have not yet seen a great weight of evidence here yet other than interbank lending rates beginning to creep down.
Where are we exactly here in the UK? Well, we have a monetary policy committee that until just a few weeks ago thought the biggest risk to the economy was inflation rather than recession. Inflation will have its day but certainly not for the next two or three years and if anything the biggest threat is deflation during 2009.
David Blanchflower has clearly been ignored by the rest of the members of the MPC as he was the sole voice warning of the threat to the real economy from the credit crunch after effects. We have heard Mervyn King say he travels the country and sees what is happening at the coalface, that he knows what's going on in the real economy - we can clearly now see that if he has travelled the country, he spent his time talking to the wrong people and eating in elevated dining rooms far from the real world. I have seen real businesses close-up all over the country for the last year tightening up on recruitment, tightening up on expenditure and seeing it becoming more and more difficult for these businesses to raise finance. Where was the MPC when all this was so clearly going on ? Or perhaps they don't think these indicators are the beginnings of a possible recession and to be acted upon?
Now David Blanchflower has admitted yesterday ( http://www.telegraph.co.uk/finance/economics/3280664/Bank-of-England-member-David-Blanchflower-admits-bank-was-slow-to-act-on-rates.html ) that the MPC has been mismanaging inflation through an incorrect interest rate policy, exactly what we have been saying for the last year. He has admitted that the MPC was mostly concerned over the monthly inflation reports and reacting to these rather than doing its job and planning interest rates to manage inflation 1 to 2 years ahead. Economists know, and even the Bank of England has admitted, that this is the timescale necessary for rate adjustments to feed through to the economy. To read his words is enough to make a grown man weep ;
"With hindsight, monetary policy has not been sufficiently forward looking. Changes in monetary policy only affect the real economy with a substantial lag... It is not sufficient to consider the data month by month until it emerges that the UK is in recession. I believe the trend has been apparent for some time. The synchronized downturn in so many business surveys should have led us to realise sooner that the UK economy was entering a recession."
As recently as three weeks ago we warned about this exact mismanagement taking place during the MPC meetings - http://investors.assetz.co.uk/blog/?postid=104
Mervyn King has been Deputy Governor or Governor of the Bank of England since 1998. People have given him credit for the stable, NICE (non inflationary, consistently expansionary) period of the last 10 years but I would contest that he has been akin to being a driver of a car down a straight road without any challenges ahead. Now that a sharp bend has come up, the Bank has not reacted correctly and has ploughed on into the central reservation. Where we are right now is with that car spinning down the motorway out of control and it will be very hard to regain control quickly. Keeping interest rates high in such unprecedented times is the equivalent of not turning the steering wheel when a bend presents itself and the Bank will now need to to drop rates dramatically in order to get the real economy stabilised. That brings with it inflationary risk in the future and this time the Bank will need to be awake at the wheel to ensure rates are brought back up at an appropriate time to deflect inflationary risk in the future.
The Bank of England has not listened to the people on the front line who have seen this coming for over 12 months and who have been getting more and more concerned that the end result will be worse and worse due to rates not being cut earlier. Now very large base rate cuts will be needed to head off deflation and drive growth again - but it will take quite a while to have its full effect but 2009 and 2010 will be all the better for it.
We need a lion and not a mouse to lead us through these turbulent times. Next Thursday's MPC meeting should end with an announcement of a 2% base rate cut and the end of the Mervyn King era. Mervyn King should resign.
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October 12, 2008
Expect savage base rate cuts - interest rates to fall at an unprecedented speed
It will be no surprise this week to see another huge cut in interest rates - it is quite conceivable that we could see a whole 1% taken off by the majority of central banks well before the next meeting in order to put a floor underneath the economic slowdown and bring GDP reduction to a halt. Rates are going to go so low that in normal times it would create a massive inflationary boom but this time round will merely stabilise the real economy provided they raise rates again in due course as growth begins once more. This could be a couple of years out from where we are today, however.
This is great news if you're on a tracker mortgage but unfortunately several base rate trackers are either being withdrawn by lenders or new trackers are being introduced with higher margins so that new borrowers would not be benefiting from the full cuts to be seen in the near future. With the savage cuts in base rates that I expect this won't be too bad as the banks will make great profits and your mortgage costs will go down as well- this is what's needed to stabilise the economy and it is one of the reasons why base rates will drop so much and so fast. Another very good reason is that according to my sources every single Bank in the UK was effectively going to go bust if property prices fell to anywhere near the level that some commentators have suggested due to the resulting losses to their balance sheets. With the banks effectively being part nationalised tomorrow morning the Government has now got a degree of control and if things go to plan we should see the mortgage taps turned on significantly hand-in-hand with the base rate cuts (that honestly aren't anything to do with government intervention or so they keep saying!) making mortgages cheaper. The combination of these two factors need to stabilise the housing market as it underpins the entire economy and the banking system capitalisation itself. House prices absolutely and fundamentally need to steady for the government plan to succeed and they know it.
Trackers are very likely going to be the best mortgage product to be in over the next two or three years and a lifetime tracker takes away the need to refinance until an appropriate time and has been my product of choice for the majority of properties in my portfolio. Switch to long-term fixed rates at the bottom of this interest rate cycle if you can - with interest swap rates being so low in the long-term the longest fixed rate you can get is probably also going to be the cheapest. See this very useful site for swap rates - http://www.swap-rates.com/UKSwap_extended.html - swap rates are effectively the rate at which you can swap today's base rate against the long-term fixed rate and are utilised by many property investors on a variable rate to lock in against a fixed rate of interest by way of an additional financial contract.
Note that the thirty-year swap rate indicates average base rates of around 4% for this period and this is likely to fall further. I really don't believe that is where we are going to be if you were looking back in 30 years time, especially with very long-term inflationary pressures still very much real even though they have been neutralised for the next couple of years or so at least. Please take advantage of long-term fixed rate mortgages this time and remember mortgage interest rate risk is the property investor's greatest threat - don't gamble with interest rates and lock in a great fixed rate over the next couple of years on as many of your properties as you can.
Our prediction of base rates dropping to 3% to 3.5% by early next year stands - but if they don't do it soon enough it could go at lower than that. Let us hope this week brings good news and a degree of stabilisation in the financial markets.
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October 8, 2008
Oil price inflation is now zero - CPI to fall
The oil price has fallen so far to the mid $80s today that oil price inflation is now zero over the last twelve months. Nice to see and there are few things that can hold inflation up now so expect CPI to fall fast over the next few months giving the MPC all the data it needs to drop rates a lot further - more on this below.
So super low base rates will be coming soon to stoke up the economy again with little risk of inflationary effects, especially with wage rises going to get reported over coming months and record lows - the Spring wage bargaining season next year will see poor rental growth for a period after a great rental growth spurt. Landlords will need to watch their tenants carefully as they run out of money in the near term - landlord rent insurance is now a very much recommended option.
The Bank of England MPC committee has been very foolish over the last six months - living off a false reputation for good economic management during the very stable, low inflation and good growth period for the last decade. Since they were handed the sole control of base rates (until this week when they were told what to do, but that is an official secret) they have not had to do much to maintain stability but since late last year events required leadership and that has just not been forthcoming - the known facts, and published by the BOE themselves, is that interest rates affect inflation around 2 years ahead - so why are they waiting for monthly inflation figures to make decisions (other than this weeks overdue, obvious and yet panic measure) - because they have no idea of what the future holds, and if they do know then they are scared of acting in advance in case they get called to account for themselves. The BOE is clearly trying to manage inflation on a month to month basis, not two years ahead and this will be costly and unstable going forwards if it continues.
Mervyn King should resign once the current fuss is over as he is not the leader we need in this new economic period - the country needs a lion, not a mouse, as the Governor of the Bank of England.
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