The crisis in the US sub-prime mortgage market has been a topic in broadsheet City and Business Diaries for over a year now with the question being asked “Will there be a property market correction or crash here?” The concensus seems to be No (probably) although some sort of correction is expected as the combination of higher interest rates on the one hand and Gordon Brown’s stealth taxes on the other hand squeeze living standards and real income. Other indications that a house price boom is over, is when prices in the provinces start to catch up London and the South East and demand for rental properties increases as buying becomes increasingly unaffordable, both of which are happening now.
In property, bond and stock markets markets, whenever there is a shake-out, correction or whatever some pundit calls it, there is usually a “flight to quality” meaning that good stuff will sell easily and generally hold or even increase its value whereas more marginal properties will take ages to sell and probably only at a reduced price. If this means “negative equity” again, then people tend to stay put themselves and put off having children.
Against this, interest rates would have to rise by about two per cent before mortgage costs equal the same proportion of earnings as in the late 1980s and there is a shortage of properties in some areas, hence the (probably). I hope that this Government’s lunatic obsession with Home Information Packs or HIPs is not the last straw that breaks the camel’s back here. Their £600 + cost is the last thing a couple needs saving up to get on the housing ladder or move home with a growing family http://www.georgeemsden.co.uk/?p=42
In all this cheerful speculation, I find a new word or acronym – NINJA lending in The Daily Telegraph City Diary. Everyone knows YUPPIES (Young Upwardly-mobile Professionals) and there are also DINKYs (Double Income No Kids Yet) but lending to NINJAs (No Income, No Job or Assets) seems positively bizarre to an old banker turned IFA like yours truly. Researching this acronym on Google, I discover a most amusing blog by Barbara Ehrenreich http://www.huffingtonpost.com/barbara-ehrenreich/smashing-capitalismb61144.html With its eye-catching title of Smashing Capitalism, it is almost like being a student again. Her latest blog is similarly amusing http://www.huffingtonpost.com/_63455.html Freshpersons, Welcome to Debt. And if you want to know what on earth an Upanishad is, well you will have to Google that for yourself.
Staying with the theme of sub-prime lending, Lehman Brothers, the American investment bank anounced that they were shutting down South Pacific Mortgage Lending (SPML) a leading UK sub-prime mortgage lender only weeks after having had motivational meetings with staff. These acquired the soubriquet “town hall” meetings for senior staff and “brown paper bag” meetings for junior staff. Staff departures probably accounted for part of the reason to shut SPML down but whether they just panicked, we will not know – at least for while – as the staff haven’t got their “severence bonuses”(?) yet. Eighteen months ago they were doing £100 million business a month but this had fallen off drastically recently.
The net margins on prime lending are not huge, being about 0.2 per cent p.a. on average while the same figure for sub-prime lending is over 1 per cent. Whereas prime variable rates have increased by about one per cent recently, some sub-prime lenders have increased their margins by over 2 per cent. In theory, the interest rate or rather the margin over the cost of funds is meant to reflect the lending risk. But when prime borrowers with good jobs and clean credit records are struggling with a one per cent increase, how on earth are people who are not such a good risk going to manage with more than double the increase? The huge increase in sub-prime rates will only create the problem it was supposed to cover and seems a case of lenders running for cover. It is a classic example of the cure being worse than the disease but according to Barbara above, this type of lending was meant to end in tears anyway.
Within a few days, a stampede seems to develop with Rooftop, Advantage, Future Mortgages and The Mortgage Works anouncing that the higher LTV products are being withdrawn all within in a couple of days. Sometimes this is with immediate effect and sometimes with two weeks left to get “fully packaged” application in. Fully packaged here means the properly completed and signed application, every single bit of information that the lender might require e.g. bank statement, Money Laundering information. In response to complaints about service standards sometime ago when the market was booming, the Woolwich pointed out that 10 per cent of their applications needed to be returned because a signature was missing. A mistake here by the borrowers could mean that their application will be done under new stricter and more expensive criteria – if at all.
Victoria Mortgages a leading sub-prime packager puts itself into Adminstration but to cheer me up, I get an e-mail telling me that “prices in Bucharest are rising by the day”. The only sensible news seems to be from TMB owned by HBOS (Bank of Scotland Group) who announce that they will step in to help Victoria with their application packaging. TMB are a leading lender in the self-certification market and shows that the Scots don’t carry the epiphet “canny” without reason.
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By way of a change, let me say a little about investments. It is easy to overlook some rather basic lessons when thinking about putting your money into the Stock Market which is where the best returns usually are:
the safest way to invest in equity funds or stock markets is to invest regularly say, every month. This means you can forget about choosing a good time to invest. The ups and downs in the market (what pundits call the volatility) actually work in your favour through something called pound cost averaging.
if you are going to invest a lump-sum in something like an ISA, do it at the start of the tax year rather than at the end as the longer you are invested, the more likely you are to beat investing in cash or fixed interest securities. The Barclays Capital Gilt Equity study reinforces this every year.
Couples that do not use their income and capital allowances, are basically throwing money away. My heart sinks when I come across couples where the income, dividends and interest is in all the earner’s name and the partner’s allowances are not being used. This is especially silly when the earner is a Higher Rate Income Tax payer and the other partner has no income because they are bringing up their children.
the easiest way to spread investment risk is to have your portfolio in different asset classes and geographical areas. Starting with a decent managed fund is the simplest way here, diversfying into different areas over time. Quite a lot of people seem to make a step in this direction by picking up a leaflet from their bank or building society (the so-called bancassurers) while standing in a queue at their branch. On average though, bancassurers’ funds and products tend to have above-average charges and below-average performance.
if you thinking of investing for income now, it might be a good idea to choose a fixed-interest or fixed return investment as inflation looks set to fall as the steep energy price inceases work their way out of the annual inflation figures. If you invest in a fixed return investment now, you are basically locking in when inflation and the returns offered are high. The Governor of the Bank of England MPC has also said this week that interest rates may be at their peak. If you choose an index-liked investment, the return will fall as inflation falls. Check the exit terms though as getting out of fixed investments early, can be very costly.
To finish on a youthful, light and musical note, Joe Boyd the author of one of my holiday reads White Bicycles will be on a BBC Radio 3 programme 40 years on 1st and 8th October at 10:15pm. If your memories of the pop music in the 1960s are a bit hazy, this should bring some of them back, especially if you went to The Roundhouse in Chalk Farm in North London. Names he was involved with include: Pink Floyd, Bob Dylan, The Move, Fairport Convention and Incredible String Band. The broadcast will also be available via the internet and the BBC http://www.bbc.co.uk/ has a very useful facility of letting you listen on-line to radio programmes you may have missed, up to one month later.
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