June 28, 2008
More Trouble with Buy to Let Rents - Landlords Will Win in the End
More interesting news reported in the Financial Times today with "Landlords Told to Lower Unrealistic Rents" :
http://www.ft.com/cms/s/0/986ff854-4473-11dd-b151-0000779fd2ac.html
Yet at the same time we see in the same article an example tenant complaining about having to increase their rent from £1600 a month to £1800 a month and saying they would move to Hamburg to avoid this. Very realistic. It reminds me a little of the student who complained to the BBC ( http://news.bbc.co.uk/1/hi/england/west_midlands/4711528.stm )a while ago over Unite raising his rent significantly by charging for more weeks of the year. He complained a lot and ended up on the BBC but he wanted to live where he was living and did not move out and paid the increased rent.
I expect we will see a lot more complaining tenants over the next couple of years as rents go stratospheric. Unfortunately rents rather than mortgage payments are in the CPI inflation figure and will be taken into consideration over interest rates - I guess you can't have everything.
What the article was pointing out is that London rents have already had their first surge of around 15% to 25% over the last two years and are pausing for breath. Other parts of the country seemed to be doing much better. Other than London, it is just the the regional city centres that have had (temporarily) too many new build flats built over the last year or two that are still hanging back on rental growth but with all city centre property development now ceased it won't be long before these start to increase at very significant levels as we have previously predicted. It's interesting to see comments in the article that tenants are being forced into outlying areas because premium locations are beyond their budget. Again this is exactly what we would expect to see if rents in a location are starting to reach realistic levels again. There are too many poor quality tenants (partying at night against terms of the landlords lease, causing damage and leaving with a month or two's unpaid rent at the end) living in high quality property in city centres and this situation needs to sort itself out over the next year or two if the laws of supply and demand and fair pricing are to come into play.
This type of news-noise is exactly what we need to see if tenants are going through the pain barrier and if rents are starting to rise well above previous expectations in order to compensate for increased mortgage margins by banks who have raised rates whilst the Bank of England has dropped the base rate. In just the same way as people complain to the banks over unreasonable mortgage rate increases, tenants will now pay with unreasonable, and above inflation, rental increases. For regular Assetz blog readers this is a pretty old story and I said tenants would pay for bank mortgage rate increases back in early July 2007 ( http://investors.assetz.co.uk/blog/?postid=39 ).
If the banks continue to profiteer in order to rebuild their balance sheets then both tenants and bank shareholders will pay dearly in the medium term. It is only in the short term that landlords and the banks themselves will suffer from the consequences of a credit crunch. Property investment is a medium to long-term activity and for most landlords it is just time to sit back and wait for their just rewards.
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June 21, 2008
Congestion Charges - City Centre Buy to Let Is A Winner
Congestion charges are on the agenda for many councils around the UK with Manchester planning on following up London in short order.
The newly announced congestion charges for Manchester certainly favour city-centre living with no charge at all for travelling out from the centre in the morning and back in at night. This is important for city centre buy to let investors as there is a huge trend towards living in the bustling centre whilst commuting to work in nearby towns such as Stockport - our own Northern office base in Stockport, South Manchester has around 50% of our staff doing just that. These congestion charges will certainly affect business decisions to set up in the city centre rather than in the business hubs around the city without at all negatively affecting whether people want to live there.
It looks like these types of congestion charges are going to make the centre of the city more and more of a residential zone and less of a business zone in years to come.
(Courtesy of Channel M)
Combined with an almost entire standstill in new residential property development in city centres following banks pulling funding for this type of scheme on the whole and the imminent overtaking of supply of property in the centre by demand to live there, it is only a matter of time before further effects such as congestion zone charging help push rents and indeed prices further forwards.
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June 14, 2008
Collapse In New Housing Starts Is Now Official - As We Predicted Last Year
Not exactly rocket science but developers mothballing sites is going to mean lower supply - it is has taken until today for the trade to admit it fully and the BBC have really picked up on it today finally : http://news.bbc.co.uk/1/hi/uk/7454376.stm
Many of our research based forecasts come through in some form or another but these forecasts are as low or lower than even our guesstimates at 110,000 (we thought the tail off would be slower from the prior years 160,000 and only down to 80,000) and in 2009 just 80,000 new front doors built (we thought as 95,000 in January this year) which is extremely low - bear in mind the official government target of 240,000 (which is thought to be short by 40,000 at least by lobbyists).
House prices will rise again through raw supply and demand imbalance with rents rising too extremely strongly in the short term and firmly for many years to come. How soon will prices rise strongly versus rents through overall excess housing demand ? That depends upon availability of credit through mortgages and until that is clear it is existing landlords who will benefit from huge income rises.
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June 4, 2008
Surprise, Surprise - a Land Speculation Company Wound up by the FSA
If it sounds too good to be true...
http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=166207
I can't believe that 4500 people paid an average of £15,000 each for a piece of a field with no planning permission and probably no realistic chance of planning permission. I've been saying this for many years but the problem is because of its speculative nature the relatively low entry point and the huge value if planning permission is achieved meant that many investors I spoke to just viewed it as a bit of a side bet and effectively wrote the money off unless it turned out to work. This strategy earned the company £69 million of fees.
Buying land without planning permission without any specific genuine inside knowledge is an out and out speculation, not an investment. A genuine investment should have income and a relatively forecastable outcome over the years. Land with no planning permission should be viewed as something for the children or grandchildren at best and be very careful of these managed schemes where plots of land from a carved up field are sold as individual prices similar to the price for the entire field to the company that bought it.
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UK House Prices - Current Data, Not What You Would Expect
From all the news stories on house prices recently you would expect UK houses were in freefall, but they are not, far from it, just look at the chart below of average house prices in the UK:
The above chart shows the 3 month average house price from the FT, Nationwide, Halifax, DCLG and RightMove - it uses the most up to date data available from all of these sources. We ahve used 3 month moving averages to take all the volatility that we have seen recently out of the data and show real quarterly trends. The chart below shows the individual data and shows how transactions dependent on mortgages with Nationwide and Halifax are diverging from the broader market of both mortgaged and non-mortgaged purchases indicated by land registry/ FT/ DCLG. It also shows how Rightmove asking prices are clearly still robust and at the highest level ever recorded this month !
This is not exactly unexpected as it is those people who are typical borrowers from Nationwide and Halifax and dependent on a mortgage (obviously) that are using the bank's profiteering margin on their mortgage rates (high rates) as an excuse to haggle down property prices by a few percent in compensation. Hence these two indices show a more exaggerated change in pricing. For another interesting point, take the two figures announced last week, Nationwide reported a 2.5% drop for the month and Land Registry 0.2% (although still slightly lagged behind Nationwide data). What is interesting however is Rightmove asking price data recorded the highest house price it had ever seen two weeks ago.
What does all of this mean? Certainly vendors are bullish, perhaps they are raising prices slightly to take into account that the buyers may haggle. If this is the case then buyers can now get 5% off a house asking price (a greater reduction than historic averages) without affecting the resulting net house price a vendor was going to accept compared to normal.
What all of these charts hide is what's going on on the margins of the market. In the super prime sector (houses bought for cash typically above £7 million) prices are up 4% in the first quarter alone. In the distressed market sector buyers can achieve 25 to 30% off current valuations. Both of these however are low-volume transactions compared to the mass market. In addition data for specific streets, towns and regions all have their own story to tell.
Now for an interesting chart - does this look like house prices have got carried away compared with the late 80's ?
I have used Financial Times HPI data as it is long term and all of market, not just mortgaged property, and a log scale to make sure the power of compound growth does not distort the data (why ? because logarithmic rather than linear charts show long term continuous steady growth as a straight but sloping line, whilst escalating growth rates show up as a rising curve - it is easier to spot if growth is getting carried away in an investment - clearly not above.)
OK, I admit it, I am a chartist - I look at technical analysis charts as a window into peoples current psychology - a mass distillation of all the information in the market and people's current interpretation of that data. I also spend a lot of time talking with people at the sharp end in order not to get information second or third hand or worse - this type of data helps confirm chart indications. Estate agents and developers are reporting huge pent-up demand from first-time buyers to me, caused by more difficult mortgage availability and higher deposit requirements - the demand hasn't gone away, buyers are still desperate for an opportunity to buy. First-time buyers are just waiting for slightly better deposit requirements from lenders and are getting more and more upset about rapidly escalating rents - or so they tell me. Our property investors survey last week shows 99.3% of you are planning to buy more property over the next 12 months. Hardly surprising given the bargains available, if a little limited, if you look hard enough.
And now for something that some people disagree with but haven't thought through properly :
We have much greater demand for housing in the UK than supply. Some misinformed commentators have suggested that house builders having unsold stock and a general slowdown in transaction levels indicates that demand for housing never was greater than the supply and that the supply demand imbalance argument is incorrect. This is completely missing the point and is disingenuous. The housing market, where people live, is not just the purchase market but also the rental market - both are means to the same end - of having somewhere to live. If anybody doubts demand is greater than supply in the housing market as a whole just look at the effect upon rents (shooting up at 3 to 5 times the rate of inflation) as all of the excess housing demand moves temporarily away from purchasing onto renting.
In the end demand is clearly greater than supply here in the UK and house prices will continue onwards and upwards over the years to come. Later this year we expect to see strength in house price indices as a whole that will surprise most. This will be helped by developers cancelling the majority of their schemes going forwards for the time being and making the supply problem even worse hence helping drive up prices. In addition First Time Buyers will re-enter the market as mortgages improve slightly.
Conclusion:
We are in a period of weakness, not a crash, and vendors are more easily negotiated with, provided they are a forced seller. Continue to add to your portfolio by buying from motivated sellers, whilst there is weakness, would be my recommendation. To register interest in buying distressed property of all types please review this web page and enquire using the link on that page.
Stuart Law
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May 21, 2008
Monetary Policy Committee Members Have Got Their Heads in the Sand
So the MPC committee voted eight to one to keep base rates the same at 5%. Not very sensible.
David Blanchflower appears to get the seriousness of the situation but the rest seem disconnected from reality in an ivory tower. We need to drop base rates fast to keep the economy on even keel. This will not induce inflation. Banks will maintain their high margins on top of base rate, or indeed on top of LIBOR in order to further improve their balance sheets following the nearly insolvent situation many of them encountered recently in the UK (and the US). These high payable rates will keep inflation at bay even though the bank has dropped base rates. This will drop the payable rates ideally back to around 5.75% for most home owners on a secured loan basis and higher slightly for commercial borrowers and unsecured personal borrowers.
General confidence will remain reasonable, inflation under control and wage claims will not be too aggressive due to the current wobbly situation over employment. All in all a soft landing.
Will they do this? If they don't act before the summer and lower base rates eventually to around 4% by the year end they will have to act faster and sharper and we expect base rates to be 3.5% in the early part of 2009 as a necessary over reaction.
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May 13, 2008
Bank Of England Is Now Able to Act
The Bank of England must not use the spike in inflation (to 3%) announced today as an excuse to hold back interest rate cuts again next month. Today’s hike is largely due to rising food prices and energy costs and the significant recent increases are now in the figures and we expect inflation to retreat later in the year. The bank also appears to expect this to happen according to its recent report last week where it stated it was likely to have to write a letter to the Chancellor and that inflation is likely to remain above target for much of the remainder of the year.
There are however much bigger issues at stake. With mortgage lending down 48% since the same time last year the property market is in serious danger of continuing to stagnate or even falling to some modest degree and the knock of confidence for consumers is already having dramatic effects on spending and upon the economy as a whole. The risks to the economy as a whole are much greater.
We strongly suggest the Bank of England now lowers base rates very quickly to 3.5% given that the increased profit margins for the banks mean that payable interest rates for the property owner, consumer and business will still be higher than before last summer. This should significantly protect against inflationary effects whilst producing windfall profits for the banks and not putting the country under economic pressure from such a sudden change upwards in payable interest costs.
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May 2, 2008
Slump In New Houses Being Built Is Worse Than We Thought
There's pretty good news for buy to let investors in this rather terrible set of statistics.
We predicted in September last year that housebuilders would get in a terrible mess as high-volume presales to investors began to slow down due to the credit crunch and as discounts required by purchasers increased. We thought that it would be a pretty big slowdown in the new homes being built in 2008 and 2009 but it is beginning to look worse than we thought.
http://www.ft.com/cms/s/0/ddac21b0-17e4-11dd-b98a-0000779fd2ac.html
Housebuilders new home reservations are down around 65 per cent from this time last year. In a previous blog entry in January there was data showing that new housing starts were down forty percent but now most housebuilders are putting new sites completely on hold for the foreseeable future. With reservations collapsing so far it's not hard to see why.
So why is this bad news for housebuilders and their shareholders so good for buy to let investors and homeowners ?
Firstly the (soon-to-be-outgoing it would appear) government target of 240,000 net new homes a year was already being undershot at around 160,000 net new homes being built in 2006 and a little lower than this in 2007 with builders mothballing vast numbers of their sites. We will see a period of a few months where there are superb discounts to be had from developers before their overhang of stock is sold. After that there will be little new supply. The numbers of these properties being sold at these high discounts will not be statistically significant and therefore will not pull down house price indices particularly and the shortage afetr this will lead to significant support in house prices going forwards as we are going to be well over 100,000 new homes per annum short of the government target for at least the next two years.
Some people question whether there really is any excess demand for housing, questioning the supply versus demand argument for why house prices have risen so strongly in recent years. I would suggest these people open their eyes and look at the rental statistics. House price growth has taken a breather whilst many people are forced into rented property now. Huge demand for housing is now directed at the rental sector and is driving rents up and this wouldn't be happening if there was a significant oversupply of property rather than undersupply.
That's right, buy to let property is undersupplied right now hence rents are rising at historically very high levels - QED there is excess demand over supply and it just happens to be currently focused on the rental sector more than the purchase sector but it will be back in due course and not only support house prices but drive them forwards again.
We sometimes feel like we are the lone voice saying house prices are robust but also it would appear the only people looking at the data. Average house prices according to the Assetz House Price Watch (average data taken across all the main indices) were only down £211 in the first quarter of 2008, hardly a crash, just flatlining for now.
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So Capital Gains Tax Changes Were the End of Buy to Let ?
Or maybe not. Yet another silly theory debunked.
The theory of buy to let investors selling up en masse just because their tax reduces room between 24% and 40% down to 18% has been shown to be wishful thinking from the house price crash protagonists. It was pretty obvious this was never going to happen for several reasons ; firstly by to let investors generally invest for the long-term, secondly the market is a little weak at the moment if you are a seller, thirdly if anybody was going to sell they would have already brought the property to the market before the April tax change as all they had to do was delay exchange until the 6th of April in order to capitalise upon the new tax rate. There never was a rush of sellers coming to the market before April and any estate agent would have told you that if they had been asked.
Unfortunately the popular press don't sell papers just by telling the truth and looking at the data, it's a little dry. Right now bad news sells newspapers. Of course all my good friends in the press community are above all that and whilst they might agree with many of comments are keeping their powder dry until the market turns to the positive again in the near future. Then the truth will out.
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Rents Carry On Their Upward Trajectory
Rents are still rising strongly according to Paragon's latest survey. With a rise of 4% in the first three months of 2008 and 12% just over the last six months it is clear that tenants will continue to pay part of the cost of the credit crunch. We have long said that rents will rise strongly for years to come after a long period of minimal growth, even when people said this was wishful thinking but we've never been one to follow the mass-market opinion.
We have previously forecast 10% growth per annum for 2008 and 2009 but it is more likely now that we will see 15% growth both this year and next year on average across the whole nation. This will make renting very expensive and easily comparable with the cost of a mortgage however the huge swing towards renting recently is unlikely to abate due to it being unlikely that hundred percent mortgages will be introduced to gain any time soon.
First-time buyers may wish they could purchase to reduce their monthly outgoings on a mortgage versus rent but they're going to have to save up a big deposit and that isn't going to happen any time soon. Rents will continue to rise strongly for several years.
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