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?

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 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.

Investors Chronicle article – “Property Swindles Exposed” and the need for licencing of landlords

The current issue of Investors Chronicle has an excellent article alled Property Swindles Exposed. (You can read an outline of the article at their site here.)

Without wishing to re-post the key findings of the article, the author went along to a series of property seminars, and was horrified by what (s)he found. (I’m assuming that Claer is a she, but I’m honestly not sure.)

However, several of the (justified) complaints about the property seminar industry in the article seem to boil down to some key points. [These aren't the points the article lists, by the way, but my overview synthesis of what the complaints the article lists have in common. The article is well worth reading, and I'd strongly recommend you go and get a copy of IC to read if in full.]

• The information provided is basic and aimed at building a dream, rather than actually giving insight
• The presenters (massively) underplay the risk of a number of strategies
• Some of the “deals” presented are, frankly, incredibly poor
• The whole concept of BMV investing relies on exploiting people

To take these one by one.

The information provided is basic and aimed at building a dream, rather than actually giving insight:

I’d agree with that. I’m horrified at what a lot of companies charge for. I’ve seen seminars based around no more content than my “Below Market Value – Parts I-IV” newsletters (where are free starting here!) sold for £500+

The presenters (massively) underplay the risk and effort of a number of strategies:

I’m glad to see other people finally comment on this. Looking back, I first started writing about the risks of property investment back in 2004, and my 2004 CD set talked about the WORK of being a landlord, and tried to dispell the myth of passive income.

Some of the “deals” presented are, frankly, incredibly poor:

Yup. I’d go along with that. I’ve worked with some good finders in the past, but generally people who were sourcing for me on my terms. My worst deals have been through “portfolio companies.” (I’m not saying that they’re all bad, only that I’ve not found one I’ve been able to work with for more than a single transaction!)

The whole concept of BMV investing relies on exploiting people:

I’m not denying that this happens. However, I’ve also seen examples of times when landlords buying to rent-back have worked strongly in favour of people who otherwise were on the brink of homelessness. The comments the article makes about “I caution would-be investors about how they’d feel about evicting a family which defaulted on a tenancy” is hardly specifially about BMV.

I can see that there is a difference between A: simply letting a property on an AST, and then evicting the tenant because you want to live in the property, or sell it, or refurb it to find a higher-paying tenant, and B: buying someone’s house at a cut-down rate, renting it back for 6 months to them at a cheap rent, and then evicting them because you want market rent.

My complaint about the article in this regard isn’t that I’m denying the problem happens, but that the article is seeming to portray “predatory landlording” as either common, or something that seminar companies teach. In my experience, this isn’t the case, and that most landlords do a professional job.

For this reason, I am in favour of the FSA regulating Sale and Rent Back schemes. In fact, in the light of the Rugg report (about which, more on a future date), I’m not opposed to the licencing of ALL landlords, though I’d rather see “Part P-style” accreditation in which organisations like the NLA, the RLA and (if it’s still independant) the NFRL are able to accredit landlords rather than having another central government department responsible for so-doing… or worse, a different accreditation by each council, so that a landlord with 5 properties in 5 towns (which to be fair, isn’t something I’d recommend) needs to pay 5 sets of accreditation fees.

Bank Rates Cut, but don’t expect the savings to be passed on

Yesterday, the Bank of England cut its base rate by 1.5%… taking it down from 4.5% to 3%. Today, the newspapers are full of stories about “greedy bankers” not passing on the rate cuts.

This makes good headlines, after all, we all understand that banks have a lot of money yes?

Well, no actually. The problem isn’t the rates – the problem is the fact that most banks DON’T have a lot of money – at least, they have a lot LESS money than people want to borrow.

The way that interest rates tend to work is as a sort of bidding mechanism. Suppose that we have three people:

• Dave wants to borrow £100, and will pay 8% interest
• Sharon wants to borrow £100, and will pay 7% interest
• Steve wants to borrow £100, and will pay 6.5% interest

You have £100, that you’d like to lend out. Who will you lend it to?

Well, all other things being equal, I’m guessing that you’ll lend to Dave at 8%. OK, it’s more complex, because you’ll probably take into account Dave’s “track record” and other assets, but let’s assume that you know them all equally well, and take the view that each of them is as likely to pay you back as the other.

Now, the Bank of England cuts its rates by a third. Let’s re-run the question:

• Dave wants to borrow £100, and will pay 8% interest
• Sharon wants to borrow £100, and will pay 7% interest
• Steve wants to borrow £100, and will pay 6.5% interest

You have £100, that you’d like to lend out. Who will you lend it to?

If you answered “Dave at 8%”, then you’re a greedy, bloated capitalist. After all, you SHOULD, according to newspaper logic, now be lending at 6.5%. Obviously, you now have a choice of people to lend to – and it really doesn’t matter which one you lend to, because you should be willing to accept the lower return?

Huh? How’s that meant to work then? Surely the idea is that you lend to the person who has the best mix of “rate (s)he’ll pay” and “likelihood of paying back”, depending on how risky you’re feeling, and what other loans you’ve got out there at the moment. You don’t just slash your rates.

The mechanism that ACTUALLY causes rates to be cut is COMPETITION. If you are only lending at 8%, and I come in, with £200, willing to lend at 7%, then you will either get no business at all (and therefore 0%), or you’ll have to drop to 7% to get someone’s business, and you and I will fight it out to make Dave and Sharon both think that we’re a good lender. Obviously, Steve still doesn’t get his loan… unless one of us decides that 6% is better than nothing, and drops the rates again.

The basic problem is twofold:

• There’s still far more of an appetite for loans that there is cash in the lenders’ pockets
• The Government are insisting that banks INCREASE the amount of cash they keep “in reserve” and DON’T lend out, so that they can avoid another Northern Rock.

Very few banks actually borrow from the Bank of England. It’s the Lender of last resort. Kick-starting the mortgage process again isn’t about reducing a “published” rate – it’s about making cash available, and the only real way to do THAT causes inflation, and headlines about the price of bread and fuel increasing. At the moment, inflation still looks a scarey risk.

My “out on a limb prediction”? Give it another year, and the Government will decide that enough is enough, and the pain of inflation is less bad than the paid of more business failures and redundancies – until then, expect headlines about greedy bankers but not real solutions.

My slides on the credit crunch – now online

Last weekend, I gave a presention on the credit crunch at an investors’ event organised by Angela Bryant and Claire Wray in Ipswich.

The slides are now available, either for viewing online or download here.
, or (if you are viewing this directly on my site you may be able to see them below.)

On stage… with Dolf de Roos!

I’ve been asked to speak at an event where the headline speaker is none other than Dolf de Roos!

The event is “Property Magic Live”, which is taking place at the ExCel centre in London, over the weekend of the 4th-5th of October.

For more info:    http://property.infusionsoft.com/go/pmldir/a64/

The event is being organised by my friend Simon Zutshi, author of The Death of Property Investing (which, by the way, if you haven’t read, you should – you can download it from the link above.)

Unlike some events, this has a firm – NO SELLING FROM THE STAGE rule, so I am delighted to be associated with it… plus I get to be on the same stage as Dolf de Roos.

… Oh, and if you come along, and get asked the question red or purple in my talk… the correct answer is RED… more will be revealed on the day

So, have a look at http://property.infusionsoft.com/go/pmldir/a64/ – download your copy of the The Death of Property Investing, and hope to see you on the 4th.