Where’s the Zopa?

Zopa is one of those terms from negotiation theory that you come across from time to time.

It means “Zone Of Possible Agreement” – basically, it’s the area between the lowest offer they’ll accept, and the highest price you’re prepared to pay. As a property investor, you end up making lots of offers, and hope that some of them end up in the ZOPA (though most don’t.)

For the last six months or so, however, I’ve been investing with a company called zopa.com They have nothing to do with property negotiation, but use the term in a different area.

They are basically a forum where you can either register as a borrower (for loans up to a few thousand quid.) However, rather than lending their own money they match you up with lots of small lenders.

• As a borrower, you give some information about yourself, and basically say what interest you’re prepared to pay.

• As a lender, you transfer them some money, and basically say what interest rate you’re prepared to lend that money out at.

It’s a bit more complex than that – based on a borrower’s loan application, zopa allocate them into a risk group, and as a lender you can choose which risk group, or groups, you’re prepared to lend to, and set different interest rates for each. Zopa sort things out so that, rather than lending the whole amount to a single borrower, they break it up into small chunks, so you end up lending a tenner each to lots of borrowers (there are ways that you might lend more to one borrower, but the default is a tenner a pop.)

A little while ago, I thought I’d try my toe in the water, and just transferred in £250 to see how it worked. Since then, I’ve been earning 8-10% on the loans that have paid… which has been all of them!

I was expecting a few defaults -but  so far I’ve made 30 loans, each of a tenner (as the interest has come in, and capital’s been partially repaid, I’ve set up my account so Zopa will re-lend it automatically.)… and none have defaulted. Clearly, if you become a lender, you might get different results, but to my mind limiting my exposure to only £10 per loan, rather than making a single bigger loan fits my investment goals better.

Oh, and I chose mainly to lend to the youth market…. so it’s win/win. I get to lend to people who pay a better rate than I could earn with other short-term sources, young people get to borrow at a lower rate than a bank would charge them, zopa.com get their fees… and the only “losers” are, I guess, the banks who otherwise might have sold a loan at 15-20% interest… I can live with them lending.

If you’re interested, as either a borrower or a lender, then zopa.com

I’ll be updating my own experiences with them 3-4 times a year, but so far, it’s been excellent.

 

 

DECLARATION OF INTEREST: They run a “recommend a friend” scheme, so that if you take out a loan, or invest a reasonable sum, I will get a commission. This does not affect the interest rate you pay as a borrower, or that you receive as a lender.

HIPs – some updates to the law

In about three weeks time, some minor changes will apply to the way that Housing Information Packs (HIPs) work. If you are thinking of selling any property next month, then you should be aware of these changes now, since you may need to take action before the 6th April!

As I reported at the time, HIPs were introduced about 16 months ago, supposedly to make the process of selling a house easier. I think that the jury is still out on whether it has worked, but it has led to a nice little hidden extra tax, and it’s certainly been good for the association of housing pack providers
Anyway, the rules changed as of last week – the changes were announced back in December, and come into force on the 6th April.

Up till now, you could market a property, provided you had applied for a HIP. You then had a grace period of 28 days to get the HIP together (and with the exception of water companies, things pretty much worked.)

As of next month, however, the grace period disappears. You have to have a complete HIP before you start marketing the property. That means you have to apply for the HIP and get all the information back, before you can even put a ‘for sale’ piece of card in a window, or place a free ad in a newspaper… let alone instruct an estate agent.

There are some other changes, which to quote from the government press release, mean that extra information about the following is required:

[...] include flood risk information, gas and electricity safety, service charges, structural damage and parking arrangements [...]

I’m broadly in favour of the “extra info” changes, but enforcing a wait for HIP providers to get all the information they need back? About the only possible reason to be pleased with that is if you want to see house prices decline further!

Of course, from a purely selfish perspective, because I intend to be a net buyer, I do want to see house prices carry on going down (and my reading of the economics tells me they will)… but extra legislation to suppress a market further in the middle of what is looking like the biggest recession since the 1929 one??? Please?

Property Networking – Leeds – 10th February

I received the following information from Michael Entwhistle.

If you run a property networking event, and publish times and places, then let me know, and I’ll add your notes to this blog. What I don’t promote are the so-called networking sites that have a single “enter your email to receive details” pages
If you go along on the 10th, say “Hi” to Mike from me!

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Are you in the north or close to Leeds on Tuesday 10th February? Would you like to learn from one of the UK’s foremost experts on HMOs? If so, then you are in luck – LPN have persuaded Jim Haliburton, “the HMO Daddy”, to come to Leeds and tell you about his experiences at next Tuesday’s Leeds Property Networking event.

Jim will be sharing his extensive HMO knowledge and experience and showing you how you too can become better equipped with cash-generating properties to see us through the challenging times ahead. Mike and the team are looking forward to seeing you there!

As usual, the guys at LPN will bring a variety of property experts to you, sharing their own strategies to help you plan the year ahead – you may just unlock that key fact or meet the person to help you succeed in 2009.

Date: Tuesday 10th February 2009

Location: The Study, top floor at The Living Room, Greek Street, Leeds LS1 5BD

Time: From 18:30; round-table discussion with Jim Haliburton at around 20:00

Cover Charge: £5.00

Website (coming soon): www.LeedsPropertyNetworking.com

UK Base rates cut (again) – another record

In sport, it’s common for records to fall at each Olympics.

In banking UK history, it appears that no-one is willing to wait four years to smash a record, but that the Bank of England want to set a new “lowest ever” on a monthly basis.

In a move that was, frankly, anticipated by just about everyone, the MPC again reduced the UK base rate, from 1.5% to 1.0%.

Customers on tracker mortgages will see the benefits, as will (according to the FT) customers of the standard rates of Nationwide, Halifax, Lloyds TSB, Woolwich and Skipton Building Society. This is, on the face of it, good news for borrowers… sort of…

Specifically, it’s good news for borrowers who have already got mortgages, but not altogether great for those looking for mortgages.

The problem is that, as a result of the rate cuts, over 14% of UK savings accounts are now paying 0.1% interest a year – that’s to say 10p interest for every hundred pounds in savings. Under these circumstances, people are saving less (despite the offset in savings growth caused by “I might lose my job” fear.)

When people save less, banks have less money to lend. It’s nothing like as simple as “one pound in savings means an extra pound to lend”, but there is a relationship – in that regulators only allow banks to lend a certain multiple of the cash they have.

However, banks are caught in a double-whammy: One the one hand, people are saving less (because they can only get tiny interest on their savings)… but on the other hand the regulators are requiring banks to hold MORE cash per million of lending than they were a couple of years ago… so even if savings returned, the money available to lend wouldn’t come back to the same level.

So, harder to get a mortgage – in that you probably need a much bigger deposit. Truth be told, finance was much too easy to come by in the past – some made a killing by borrowing to buy in a booming market and got out in time before the crash… others, however, borrowed too much because the banks were falling over themselves to lend money… and then got stuck with property encumbered with massive mortgages in a falling market. Those who concentrated on positive cash-flow over the last few years (as I’ve been banging on about since 2004) seem to be OK, but those who bought anything in the belief that “properties go up in value” or with the intention to “flip” them have been left holding the bag when the music stops.

My own position is that I’m waiting, but not yet buying again. I see the potential for bargains getting better each month, as credit (slowly, very slowly) improves, prices continue to fall, but rents (round here, at least) are holding up.

Property Crashes compared to Stock-Market Crashes – long term

This week’s Economist has an interesting article based on research done by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard. (The original paper, The Aftermath of Financial Crises is available to download – click on the title in this blog.)

The paper investigates “severe financial crises”, including “headline names” like the US (1929), Argentina (2001), Hong Kong (1997) and Japan (1997), as well as more minor crises.

Some interesting statistics, though:

• In major financial crises, House Price falls have averaged 36% from peak to trough, and the slump has lasted 5.0 years on average
• In major financial crises, Share Price falls have averaged 56% from peak to trough, and the slump has lasted 3.4 years on average

So, we can see that house prices do fall less than shares, but that house price slumps can last a very, very long time.

Of course, a lot hinges on whether we really are in a “severe financial crisis” – if we are, then we could see another 3-4 years of property price falls in the UK. But if we aren’t, well things might turn around. That having been said, the most hopeful forecasts I’m seeing from serious ecomists talking about how things might reach the bottom by the end of 2009, rather than carry on falling.

Buying rental property? Not me, not this quarter.

The financial crisis – flowchart

US Firm, mint.com have put together a lovely graphic that explains how we got where we are.

Of course, back in December 2006, I started predicting a US housing crash, and as long ago as May 2005, I started writing about the risks of being a landlord. I massively underestimated how bad it would be, and missed the knock-on effects on the wider economy, but at least I wasn’t saying “House prices never fall” – quite the opposite!

The failure of capitalism vs. the failure of communism

I heard a phone-in on the radio this week, in which the punter was basically saying that Capitalism had failed in the same way that Communism failed.

I was, to put it mildly, shocked by this claim.

In the current “failure of capitalism”, in the last twelve months, approximately 1 in 1,000 home-owners has defaulted on their mortgage, and in some cases had their homes repossed. In the vast majority of cases, the former home-owner has either found private rental accomodation, or been housed by the social sector.

In the “failure of communism” in the 1970s and 1980s, communist governments provided living conditions so poor that they had to erect machine gun towers and minefields to stop people fleeing.

Moving into a rented house vs. risking your life being machine-gunned in a minefield. Fair comparison????

Top Gadgets 2008

It’s odd, but despite becoming Europe’s number 1 real estate blog, the post that attracted the most comment off-line have been the occasional “technology in the real world” ones.

I realise that it’s been two years since I wrote a Top Gadgets post – so while we had Top Gadgets 2006, there was no similar thing last year. Later on in this post, I’m going to go back and see which of the 2006 list I’m still using…

However, firstly, my top gadgets 2008.

I only really have 5 to make it onto the list this year (since some of the most useful things are still from the 2006 list.)

1: The Mac Mini. You know how irritating those Mac users get, forever banging on about how much better their computers are compared to Windows PCs. Well, I spent about ten years arguing with them that, while I was willing to believe this was true, their PCs cost so much more than ones with the Microsoft O/S that the point was moot. Then Nik Butler made the simple observation that I didn’t base my car choice on specs and price, but on a whole bunch of intangibles, and that I should consider the Mac Mini as a sort of Jaguar. I tried a Mac Mini, and I’m hooked. We’re now a 2-Mac family, since Mary has a Mini also. In the words of Tom Peters, it’s about design! (It’s also about productivity, and, less tangibly, how I feel when using it.)

2: The Drobo. I wrote a long review of the Drobo back in September. Basically, it’s an external enclosure that takes up to 4 hard drives, and applies a RAID-like algorithm to them, so that even if one drive completely fails, your data is safe. High-end servers have done this (expensively) for years, but this takes cheap, standard, SATA drives, and just works.

3: The ASUS EEE Pc. At the opposite end of the computing spectrum to Apple lies ASUS. The EEE Pc is a small laptop, with a tiny screen, and a fiddly keyboard… that is nonetheless the size of a hardback novel, runs on battery for “sufficiently longer than I need that I really can’t tell you how long it lasts”, and has built in wifi. It also creates far less of a psychological barrier than a big laptop when I’m in a meeting, and I can use it on a plane or a departure lounge. OK, it runs Xandros Linux, but it comes with Firefox (qv), and OpenOffice, so does pretty much 90% of what I need. As a result, I don’t really have a “real laptop” any more.

4: The DVD Duplicator. Bought from the ever-reliable APR Media, this beast has saved me a whole bunch of time, since I can just stick in a DVD or CD in the top tray, up to 5 blanks in the lower trays, and press the “duplicate” button. It meant that, this Christmas, we were able to get the playgroup nativity DVDs out to all parents who pre-ordered before Christmas… wheras last year we had to write them from my laptop, and they didn’t come out until the new year. (The playgroup is a charity of which I’m a trustee, and the Christmas nativity DVDs are a big fundraiser for us.) Plus, work-wise, it’s made a huge difference to our ability to run off 50-60 CDs for corporate orders.

5: A normal, non-smart Nokia handset that is just wonderfully designed and optimised for talking to people. I do not have a smartphone. I do not want a smartphone… for the same reason that I don’t have voicemail. My clients know that I’m busy, that when I’m working for them, I’m focussed on their needs, not on checking my email in case other clients want my time… but that cuts both ways. If it’s important enough to interrupt me, phone me! If it’s for general info, and can wait a few days, email me! The last thing I want, however, is for clients to believe that I’m just sitting around waiting for their crucial message to come in – hence, no smartphone, no voicemail.

Now, what happened to the 2006 list:

1: The iPod. Hardly use it any more – I tend to read on the train, and use the car stereo.

2: The Dell laptop is still in use, but the battery has long since failed, and the replacement cost of batteries is, well, ludicrous. Hence, it’s now in use as if it were a desktop PC.

3: The Domia Lite system. Still working well, still in everyday use. However, I ought to point out that the system is now known as “Bye Bye Standy”, and the energy-saving features are what are promoted.

4: The “Skype headset”. Honestly, I’ve lost it. From time to time, I wish I could find it, not least because my brother has a Skype-enabled mobile. I, however, use it for IM rather than voice!

5: Software choices… Firefox, now on version 3 is still what I’m using (even on the Mac) – I used Flock for a while, which was great, but not optimised for what I do. I’m also running NeoOffice, a Mac version of OpenOffice. (I’m told that OpenOffice 3 for the Mac is probably better, and still free, but what I have works, and I’m loathe to change it.)

6: The aircon unit now has a friend, so we have aircon upstairs and down. Truth be told, we only ran it for a couple of weeks in 2008, but who knows what 2009 will bring.

7: Another year with paper diaries

8: Really Useful Company 35 litre crates. These have moved out to the garage. We had someone build some shelving that takes about 20 of them. Works very, very, well.

9: The Satnav. How did I live without one? We now have his and hers.

10:  The cars. Both of the 2006 cars have gone – the Morgan 4-seater was, alas, written off when someone drove into the back of it in September 2007. The Bentley just got too expensive to justify – it was costing over a grand a month to keep running, so we now have a Volvo Estate that runs on LPG (49.9p/litre.)

The Dr. Who Theory of Recessions

Depending on your age, you may believe that Dr. Who is either a trendy young man, who appeared on our screens a couple of years ago… or you may believe that he wears a long flamboyant scarf. (I’m firmly in the latter camp, by the way.)

What you may have missed is that the only person who can say we’re entering a recession in the UK is the good Doctor, because doing so requires the ability to time travel.

This is because, here in the UK, we have a precise definition of what a recession is, and it’s different to the definition they use in the USA. Over in the States, there’s a body called the National Bureau of Economic Research, and part of their job is to say when the US economy enters a recession. They use a broad range of factors, and basically announce what they’ve decided.

Here, however, a recession has a specific meaning – it’s two consecutive quarters of “negative growth” (which sounds like a politician’s way of saying “shrinkage” to me).

Now, back in October, it was announced that Q3-2008 was negative… no surprises to anyone who’d actually lived in the UK during the months of July, August and September.

The question now is whether anyone even vaguely believes that Q4 will turn out positive? I’ve not found anyone making such predictions, by the way.

So, here’s the way the logic works.

In late January, the Office of National Statistics will formally announce the Q4 figures. At that point, it will be announced that we are in a recession…

… but this is where the Doctor comes in. What will actually be announced is that we’ve been in a recession since July.

OK, maybe you don’t have to be a Time Lord to have worked that out by now, but it is one of those odd little quirks of UK life that we won’t “officially know” for another month or so. This is why investors spend so much time trying to work out “forward looking” measures, rather than only looking at out-of-date statistics.

For the record, the first time I used the r-word was on the 22nd January 2008, but that was talking about the US economy, not the UK… but still a good YEAR before the UK Civil Service

Inflation bad, deflation bad, high interest rates bad, 0% interest rates bad

It’s hard to know what to make of the global economy, and the UK economy in particular, at the moment.

A few months ago, all the papers were worrying about inflation, how the cost of everything apart from DVD players was going through the roof, and how this spelt poverty for millions of Britons. We in the property world were worried about high effective interest rates, and mortgages being hard to get.

Suddenly, the headlines are things like “Mervyn predicts inflation-free zone” and “Bank rates head for zero per cent“.

Now, you might have thought that if inflation was bad, then deflation would be good… and that if high rates were bad, then low rates would be good… but the truth is more complex than that.

Inflation tends to be frowned upon because it hits those who have assets… the money they currently have will be worth less this time next year. The obvious people are, say, pensioners with savings, who have seen that their savings didn’t go as far as they’d hoped. Less obviously, though, are investors – if you are investing in a country with an high inflation rate, then you need outstanding returns to make it worthwhile, and an awful lot of investors think globally (even in property – look at the invvestments in Spain or the US.)

Deflation though, is more subtle. What deflation tends to do is stop people buying. We all know that you should never buy a laptop before Christmas, but wait for the sales… or actually, that you will always get a better deal on such technology items if you wait… but what happens when everything goes down in price? Generally, people come to expect further price decreases, and buy less and less. The experience of Japan over the last ten years has shown us that this leads to companies going down the tubes since no-one will buy their products (they’d rather wait), and therefore jobs are lost.

Likewise, high interest rates tend to put the brakes onto house price rises… though in fact, “brakes” is the wrong metaphor, because if I put the breaks on in my car, it slows down… but doesn’t actually go into reverse.

Low interest rates are, likewise, more pernicious. The problem that Central Banks have is that it tends to be rate CHANGES that have an impact, not the absolute level of rates… so once a rate is at 5%, or 2%, or 0%, the market adjusts to the new level in response. The problem is that, if a rate’s at 5% you can tweak it up or down… if a rate’s already at 0%, you can’t reduce it any further.

So zero interest rates, while good for house buyers who time things right (though actual mortgage rates never go to zero), tend to be bad for economies, because one of the key possible actions that a central bank can use to get things going again is no longer possible.

The ideal for most people seems to be the combination of about 4-5% interest rates, with about 1-2% inflation. We know how to operate in those areas… anything outside tends to be uncharted waters, and the danger is that while some will make a lot of money while gambling right, others will get wiped out – the uncertainty increases the risk.