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As regular readers will know, MoneyWeek has been worried about the UK housing market for some time.
So far, our fears have been unfounded. House prices – after a brief hiatus in 2005 – have continued to soar beyond even the most optimistic commentator’s predictions.
But despite all that, we can’t just relax and join the party. And this year – for a change – it seems we’re not the only ones who are starting to believe that this can’t go on forever…
Life is being made more difficult for potential homebuyers by the banks and building societies. The latest surprise interest rate rise has seen them somewhat unsportingly yank their fixed-rate deals off the shelves.
This may seem like good business sense – but the banks really are profiteering out of the Bank of England’s hike. You see, when they launch these fixed rates, they’ve already borrowed the money to fund them – so they’ve already locked in their own rate. Now, unless the rush to remortgage has exhausted the funds for all of these fixes (and we doubt that – rates only rose a few days ago, and most people we know are pretty slow – unsurprisingly – when it comes to things like remortgaging) then what they are planning to do is relaunch the offers, but at a higher rate – which means much more profit for them.
The other option has been to push up arrangement fees. For example, Abbey has kept its two-year fix at 4.99%, but the arrangement fee has jumped to £999 from an already very hefty £799.
(We could happily go on for hours about how lenders are ripping us all off with soaring arrangement fees, and of course, exit fees – but personal finance isn’t really the main focus of this email. However, MoneyWeek editor Merryn Somerset Webb is launching her own weekly personal finance email which will deal with mortgages, credit cards, savings, and many other subjects – it’s something that anyone who wants to make the most of their money will want to read. To sign up, click here: https://www.electricmessage.co.uk/mailer/signup.php?sid=217)
Anyway – so home loans are getting more expensive, making life tougher for both people who feel overstretched and want to remortgage, and of course, for first time buyers. After all, once upon a time, £799 could have formed a useful chunk of deposit – now it’s just the price of buying a loan.
But there’s always the buy-to-let market, isn’t there? We’ve been arguing for a while that buy-to-let as an investment (or a pension, as most people like to call it these days) makes very little sense. Rentals have not risen anywhere near as rapidly as prices, and so yields have fallen. In fact, it’s really not hard to find landlords who will readily admit that the rent they are being paid does not fully cover their interest-only mortgage payments – and that’s before repairs are factored in. And this situation is by no means unusual – according to a recent survey, a third of buy-to-let landlords bought their properties in the past year.
Most probably reckon that house prices will only go up – who can blame them? They’ve been rising since 1996, they’ve seen lots of people make a lot of money in that time, and despite all the good arguments made by housing bears like ourselves, prices have kept rising.
And of course, when it looked like prices would actually start falling, back in mid-2005, the Bank of England cut rates. No wonder many people believe that ‘the Government will never allow house prices to fall’.
But buy-to-let investors should go into the market with their eyes open – and this clearly isn’t the case. Buy-to-let is a highly leveraged investment – it’s like spread betting in a way. You put down a small amount of money to get exposure to a large amount. If the underlying asset price rises, your returns soar correspondingly. But if it falls, you could be wiped out.
As Tom Stevenson points out in today’s Telegraph, we all happily take this bet on the property market. But ‘I would, for example, never consider taking a £100,000 bet on the gold price with a £5,000 down payment. Why? Because that sort of gearing is a great way to lose your shirt.
‘Gearing is a two-edged sword – and the one in three buy-to-let investors who have been in the market for a year or less are in grave danger of finding out that it works both ways.’
As he points out, rental yields are at five-year lows, with a real return of likely near 4% – a lot less than you could get in a decent savings account. Also, the BoE is clearly worried about inflation. It’ll be interesting to see what today’s consumer price index figure comes out at – if only to find out whether Mervyn King has to write a letter to Gordon Brown or not.
But the point is that now ‘interest rates of 6% or so are not fanciful. That will mean that even the most assiduous buy-to-let switcher will see an outflow of cash every month unless they have owned the property for a while or put down a significant deposit.’
That will make property much less attractive as an investment, and also put a lot of pressure on those who have recently bought to sell. It becomes much harder to think of an asset as a ‘long-term investment’ when it’s costing you shedloads of cash to hold on to it in the short term.
Turning to the stock markets…
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The FTSE 100 closed 24 points higher in London yesterday, ending the day at 6,263. Shares in Smiths Group soared over 11% after the company announced the disposal of its aerospace business. Other aerospace stocks, including Rolls Royce and BAE, gained in sympathy. For a full market report, see: London market close
Elsewhere in Europe, the Frankfurt DAX-30 hit its best level since February 2001, ending the day 26 points higher at 6,731. In Paris, the CAC-40 closed 13 points higher, at 5,631.
Across the Atlantic, US equity markets were closed for a holiday yesterday.
In Asia, the Nikkei closed 7 points lower, at 17,202, after a day of investor unease ahead of the Bank of Japan’s decision on interest rates.
Crude oil was heading back towards the $52 mark this morning, last trading at $52.61. In London, Brent spot was at $52.23.
Spot gold was trading at $625.10 today, whilst silver had slipped down to $12.81.
And in London this morning, retail behemoth Tesco announced a forecast-beating rise of 5.9% in underlying Christmas sales, driven by its organic and premium product ranges. Fellow supermarkets Asda, Sainsbury and Wm Morrison have also reported strong sales over the Christmas period. However, Tesco Finance Director Andrwe Higginson urged the Bank of England not to respond with rate rises, arguing that consumers were by-and-large still cautious, despite having wanted to treat themselves at Christmas. Tesco shares had fallen by as much as 2.5p today.
And our two recommended articles for today…
Gold reaches a major turning-point
– 2007 has so far been a rollercoaster ride for gold investors. The metal fell nearly $20 in the first week of January only to make its biggest gains in two months a week later. So where next for gold? To find out why James Turk of Goldmoney.com thinks recent lows could mark the start of an exciting new uptrend, read: Gold reaches a major turning-point
When the oil runs out, go nuclear
– Whilst we all debate whether or not oil will fall below $50 this year, we risk losing sight of another important issue: what we’re going to do when the oil starts to run out. And, as far as Merryn Somerset Webb is concerned, there is only one viable substitute. For Merryn’s top stocks in the nuclear sector, see: When the oil runs out, go nuclear