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?

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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.

Want to buy bank shares (If you’re a taxpayer, you just did)

It would appear as if Governments around the world have finally realised that the current financial crisis isn’t just about saving bankers’ bonuses, and that normal businesses and their employees are being affected.

So, we have the UK’s biggest (to date) bank bailout, with the Government putting up to £400,000,000,000 (four hundred billion) of money up.

Basically, in various ways, the Government is becoming a big investor in the stock markets and the money markets as follows:

• Up to £250 billion in loan guarantees. (Basically, a form of insurance policy, where a bank making a loan can pay a premium to the UK Government in exchange for the Government bailing out the loan if the organisation / person who borrowed the money defaults.) Potentially a nice little money-earner… but potentially a way to lose a lot of our cash.
• An increase of £100 billion in the Special Liquidity Scheme. This is a scheme in which we (as taxpayers) lend money to banks, but the banks put up their assets (mortgages) as security, so if the banks default on the loan to the Government, the Government can take over the mortgages.
• A straightforward loan of £25 billion to eight banks.
• An investment of £25 billion in bank “preference” shares.

The preference shares are interesting – they get a guaranteed rate of interest, and get that payout before ordinary shareholders would. However, in order to participate, banks need to make new promises on executive pay and normal dividends (which are likely to be cut.)

The executive pay one is interesting – the normal argument against this is that banks need to attract the “best” managers, and if they are only allowed to pay “only £500,000”, then “the best” will turn down the jobs and go and work overseas. I’m cynical about this – “the best” are, in many cases, the same people who steered the banks into this mess, and it’s not at all clear that economies where the top 1% earn 100 times what the bottom 10% do fare better than those where the ultra-rich / poor gap is a lot closer (say, Germany!)

Overall, there are some fine details to criticise in the plan, but overall it strikes me as a lot better than doing nothing.

However, it’s a gamble – if the economy recovers, then actually, the loans and investments the Government has made could pay off well for us. However, if the economy tanks anyway, then the bailout money could be throwing good after bad. The hope is that, in making this offer, the chances of avoiding a serious recession are much improved. It may well be that, even if this money is lost, it’s still better than the alternative of millions of more people out of work for several years.

Obviously, as a property investor, I’ve got a lot of self-interest riding on this – on the one hand, I want lending rates to come down, and it to be easy to borrow mortgages again… On the other hand, I’d like property prices to come down another 20-25%.

So, a cautious thumbs up, and fingers crossed on this.

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.

How to sell a house on the Internet (in Hawaii)

One of the places I write for is a website called Ezine Articles. I was recently contacted by a lady called Kathy Ostman-Magnusen who is trying to sell her house on Hawaii…

Nothing unusual so far.

In addition to looking for a Realtor, she is also posting about her house on the Internet, on her blog, and on Twitter…
Slightly less common, but still not newsworthy.

Kathy writes that the reason for their move is that her husband, who became ill in Vietman, can’t get help from the Veterans’ Association in Hawaii, but can in California…

Which puts our problems with the NHS into perspective, but is the kind of thing we knew happens in the US 😦

Where Kathy really caught my attention is in the lengths she’s going to to promote the sale – not in an aggressive, spammy way, but by doing interesting things.

The house is undeniably beautiful, which I guess shouldn’t be surprising, since Kathy is an artist, but as a gift the Realtor that sells her house, she’s offered a 24x30x2 giclee on stretched canvas… and blogged about that (with a picture of the artwork in question.)

Now, I know nothing about the property market on Big Island, Hawaii, let alone the investment opportunities, but at £115,000 for a stunning second home it caught my eye, as did the way that she is promoting it!

You can find out more on her blog at http://www.kathysart.blogspot.com/

A key attribute of a successful trader is patience

A key attribute of a successful trader is patience

– Hedge Fund manager

I think it’s worrying how little those of us in property investment seem to learn from other types of investors. The line above is one key thing I picked up from a Hedge Fund meeting, and something that I can’t help feel that we lose sight of sometimes.

For some people “deal flow” is the only source of income – obvious examples are estate agents – they only get paid when transactions happen.

For us investors, though, in many cases it’s more about buying the great deal once in a while, and letting it churn out positive cashflow every month for decades.

There’s also this myth that “no money down” and “passive income” go hand in hand. I’m not denying that No Money Down is (once in a while) possible, but doing it seems to involve a full time job walking up close to the edge of the law…

Alternatively, you can have plenty of passive income if you’re prepared to tie up a few tens of thousands of capital in each investment.

So, in today’s market (late August 2008), I’m perfectly happy to sit here, in the belief that whatever deals there are now… there will be many more in another six months.

Five ways to make money in a property crash – the sixth way

About two weeks ago, I wrote “Five ways to make money in a property crash” – and the feedback (particularly on the more detailed version available to subscribers at yourpropertyexpert.com has been mostly positive.
However, one important bit of feedback to me was that, actually, I’m making things too complex. This was really brought home last week in a series of phone calls with a friend who runs a hedge fund – while the conversation was mostly technical (about under-water rights issues from financial institutions and inefficiencies in the secondary rights issue market), one key phrase that came through from him was:

One of the key attributes of a succesful trader is patience

Now, I don’t consider that Property Investment is trading – since I think it’s wider than that… but the point was well made.

There are two schools of thought about buying property now.

1. In the current market there are a lot of bargains to be picked up.
2. In six months time, it’s likely that there will be EVEN MORE bargains, at better prices.

The question then for property investors is “wait” or “buy now”?

Now, IF (and it’s a big “IF”) you could buy now in a way that had insulation from future market falls, good positive cashflow, didn’t use any of your own capital, and didn’t affect your ability to borrow more in the future, then it would be a good time to buy…

… but I don’t see it.

Yes, I see deals that would be cash-flow positive. I see deals that could (reasonably quickly – in a few months rather than a few hours) be re-financed to return my working capital… but the last point is key – Forget what lenders are doing today. Things are going to get worse for them before they get better, and they are going to look EVEN MORE CLOSELY at borrowers before they start relaxing again. That means that lenders are going to start reviewing entire portfolios and what would in stock- terms be called “marking to market.” That’s to say that, if they think you have borrowed too much on your existing properties, they won’t lend as much (or anything) on additional deals. (I’ve also got a draft article waiting to be finished about what “marking to the market” means in the context of Below Market Value purchasers in a very slow market… which, the more I work on, looks scarier and scarier.)

So, I’m no longer buying. I’m off to do some more interesting things (from a personal / professional perspective) for at least six months. Of course, I’m still a landlord – I’ll still be blogging, and running the newsletter, and my mentoring scheme… but, in my personal circumstances, I think that waiting for a few months is now a good strategy.

Photo copyright Brainware3000 – used under Creative Copyright licence.

Winners without losers

Back in February, I wrote about the concept of the zero-sum game (specifically as it applied to SEO, which is such a thing.) That’s one of the most popular posts ever on this blog (!)

However, it’s also widely misunderstood – one commenter wrote:

How can there be a winner if there’s not a loser?

I wrote a comment back, but I think it’s time to expand on that a little…

The whole capitalist economy is founded on the idea of turning low-value stuff into high-value stuff.

Sand is one of the cheapest things in the world, but silicon chips are valuable and needed to keep the Internet running. So if Intel pay someone to work in a chip factory, turning sand into Pentiums, who loses?

If Steph the 18-year-old decides to train in medicine and becomes a doctor rather than going unemployed, who loses? Even if she has to pay for her education, does the University lose? Does she lose? Do her future patients lose? Even if the taxpayer foots the bill, do we all “lose” because we have a doctor rather than a beggar in the community???

Take another example – my grandfather died before TVs were affordable. My friends grandfather had a black and white TV, and died before colour TVs were affordable. Now I have a 32″ telly (which I hardly ever watch, to be honest), and he has a 42″ plasma – does that mean I’ve “lost” because my telly isn’t as big as my friend’s? Or does it mean that we’ve both won, because both of us have far higher living standards that our grandparents?

If you compare yourself to others around you, and focus on the few things they have that are better than yours, and decide that therefore you’re a loser, that’s very, very, sad.

Been on holiday in the last 2 years? Did you fly? If so, you’ve had a standard of living that was restricted to Millionaires in the 1940s (which is when my parents were born.)

Am I a loser because my brother flies more times a year than me? Or a winner, because for a few hundred quid, I can get to places that were just the stuff of books to my grandparents?

House pricing is another area where things are complex: Is everyone worse off because houses are worth more? Is everyone better off?  It’s not that simple.

When prices rise:

• Property investors do well, because they have more equity that they could “realise”
  by selling.
• Home-owners feel better off because they perceive their house is worth more, but could only realise that gain by selling (at which point they’d have to do something else – buy another house, rent, live with friends, etc.)
• Those who don’t own homes aren’t actually any worse off, because they didn’t own a home before, and still don’t, but they feel worse off because it’s going to become harder for them to do so.

When prices fall, the opposite happens.

With property prices, in terms of how people feel at least, there are lots of winners and losers… but it’s a lot more complex than a zero-sum game… Just because my property has risen in value doesn’t mean that yours has fallen.

Why crashes are bad for estate agents, but good for investors

Over the last three years, I’ve had a bit of a poor reputation on the speaking circuit, for reminding people that there was going to be a housing crash. Others, it seems, have made a good amount of money by preaching that houses and flats only go up in value.

There are some good lessons, however, to be learnt from the 1989-1994 property crash. I’ve mentioned before that calling it the crash of 1989 misses the point – it took about 5 years to work through the UK, starting in London, and then radiating out.

My analysis is that UK housing crashes are caused by a drying up of demand, not a change in supply.

What tends to happen in a stable / slowly rising market is that estate agents have a “book” of properties – maybe 40 at a single-branch agency, and they sell maybe 10 per month. As they sell, more come in the door, but the number of properties actually sitting available to buy stays relatively static.

At some points in the last few years, the number available fell – as soon as things came on the market, they were snapped up by buyers – indeed, at one point, my local agency had but a single 2-bedroom house (a staple in our area) on the market.

Then comes something that triggers buyers to stop buying. I’ll come back to that trigger in a moment.

When buyers dry up, the turnover of the agency (and thus their commission) goes down. Agents don’t do poorly in a crash because houses have gone down 10% and therefore they’re only getting 90% of the commission they used to… they do poorly because rather than selling ten houses this month, they sell one.

Indeed, one of my mentoring clients mentioned last week that an estate agent friend of his has sold nothing for three months.

This isn’t a 10% fall in his income – it’s a 100% fall in his income.

In stock markets, when buyers get scarcer, prices tend to fall – in some cases, very quickly – we all know of the famous Black Friday when the UK markets fell 40%.

In property markets, what tends to happen is that owners decide to not sell, rather than selling at 10% less than previously. However, because of the way that averages are calculated, if only one person is selling, and (s)he sells at 10% less than the property was worth a year ago, it looks as if prices have gone down 10%. This has an impact on the buyers, reinforcing their wish to not buy… and things go on for, well, years

Fantastic news for investors – we know that most potential buyers will hold on, rather than sell, and estate agencies fill up their “books” (or rather, their filing cabinets) with not 40 properties, but 50, then 60, then 70 as more people decide that they’ll try to sell…

… some of these people hit a point where they then feel they must sell, either because their circumstances have changed, or because they get even more paranoid about further crashes – and that’s where you get back to the situation we had when I started as a investor – when I could buy an average flat, rent it out, and make a profit.
Now, I promised I’d come back to that trigger. In the past, it’s been mainly psychological – buyers thinking that now is a bad time to buy. If that mind-set takes full hold, then we can expect to see several years of price declines.

But at the moment, it’s different – there are buyers out there, but what’s locking things up is the mortgage lenders, who are either raising rates, or closing doors to new customers, or both. According to some analysis I’ve seen, there’s about £60billion “missing” in terms of extra liquidity (cash) that would need to go into the markets to start lenders being willing to lend again.

And that’s why the Government’s innovation in MBS (see yesterday’s post) may well be a good thing for the estate agents – it might be enough to get things moving again.

But ask yourself… if you’re investing for property with a 20-year timescale, wouldn’t a nice crash over the next few years be a great thing for your pension?

[Some parts of this post come from my new book – “How to make money in a property crash” – due for publication later in 2008.]

The UK Property Market and Haiku

You probably know some of the rules of the Haiku art form, as taught in infant school:

• Three lines
• Syllables per line: 7 in the first, 5 in the second, 7 in the last

What most people don’t realise is that in Japanese culture there are two additional rules:

• Some reference to the season, normally through weather or trees (“Plum Blossom” is actually a hint that we’re in Spring)
• The first two lines should appear to contradict each other, but the third line should resolve the contradiction

So, here is my Haiku for today’s UK property market:

Mortgage Approvals Slow Down
Nothing is for sale
Sun shines, No UK Market

Let’s take those one by one

• Mortgage Approvals Slow Down. Yesterday, the FT reported that mortgage approvals declined last month to the lowest level in 10 years.
• Nothing is for sale. My local estate agent reports, as of this morning, that he has ZERO 2-bedroomed properties for sale. (Around here, 2-beds are the staple of the investor market).
• Sun shines. OK, it really is sunny down here in West Sussex, to the extent that I actually washed the car yesterday.
• No UK Market. See below 🙂

No UK Market – the FT report was about the UK as a whole, but that’s completely meaningless from the perspective of the typical buyer. The typical buyer, let’s call her Susan, wants to buy, say, a 2-bed flat in Croydon… she’s not worried about whether there are 4-bed houses for sale in Cardiff… because she has friends and a job in Croydon, and frankly a five hour commute each way isn’t going to feel a good trade-off for two extra bedrooms and garden.

In parts of the UK in 2007, we saw big rises. In other parts we saw small falls. The same (though possibly with everything a bit lower, so small rises and big falls) is likely to happen in 2008.

As an investor, that means that I’m (to a certain extent) not fussed about “average house prices” – all that matters to me is what I can buy THAT property for, and what I could rent THAT property for.

2008 is going to be a GREAT year for contrarian property investors. The more people scared about a property crash, the more motivated sellers 🙂

As an aside, I _do_ realise that part of the contradiction between the first two lines of the poem was timing – the mortgage advances were for December, the lack of 2-bedroom houses near here is for January, but the main point still stands.