Today I present two regular charts that unfortunately give me little information this month about what could be occurring in the housing market. They show the UK markets just treading water for the month. The first shows the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 4.05% for March 2010 (actual low was 3.82% in April 2009). This is static compared to the previous month.
Showing posts with label property prices. Show all posts
Showing posts with label property prices. Show all posts
Thursday, 15 April 2010
Tuesday, 13 April 2010
Australian Property Market (Alternate Data) – February 2010 House Price Update
The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy. It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.
Saturday, 3 April 2010
The government keeps spending our taxes to inflate house prices
I am yet to buy a house as I believe that house prices are still overvalued. I try and demonstrate this monthly with the house affordability ratios that I present. This current government however seems intent on using our taxes to prop up this property market bubble. This offends me because my (and your) taxes are being used against me to keep me out of the market and also as an electioneering tool.
Tuesday, 30 March 2010
UK Property Market – March 2010 Update
I am still yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. As I mentioned last month I have now also even stopped looking on the internet at house prices in the area that I am interested as I still think that UK house prices are still overvalued by a huge margin. Today the Nationwide reported that average house prices had risen from £161,320 to £164,519, a monthly rise of £3,199 or 2.0%. On an annualised basis house prices in absolute terms are up by 9.0% and if I look at real (after inflation) returns they are still up by 4.5%. When you live in a society where average assets are increasing at £3,199 per month I ask myself why go to work. Why not just leverage up, buy a few buy to lets and sit at home using your house price increases as a cash machine [sic].
Monday, 29 March 2010
Australian house price anecdotal
My dataset for Logan City which is just south of Brisbane shows that over the last 3 months house prices have risen 4.6% in this part of the world. This seems outrageous to me given the credit crunch that the world has just been through. However I now have a story that I wouldn’t have believed if somebody had told me but that demonstrates just how crazy the property market still is in this part of the world.
Wednesday, 10 March 2010
Australian Property Market (Alternate Data) – February 2010 Update
The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy. It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.
Wednesday, 3 March 2010
Winners and losers of recent government and Bank of England decisions – workers and homeowners
Picking up on Monday’s theme I’d like to have a look at two further winners or losers of the current governments and Bank of England’s decisions. This time is workers and homeowners. One is a winner and the other is a loser. Can you guess who is who? My chart today reveals all.
Firstly let me just benchmark inflation. The retail prices index – RPI, which is represented by the olive line, is current year on year running at 3.7% and since 1991 the arithmetic average of the monthly year on year percentages has been 3.5%. Of interest also is that the inflation trendline is heading in a downwards direction.
Firstly let me just benchmark inflation. The retail prices index – RPI, which is represented by the olive line, is current year on year running at 3.7% and since 1991 the arithmetic average of the monthly year on year percentages has been 3.5%. Of interest also is that the inflation trendline is heading in a downwards direction.
Tuesday, 2 March 2010
UK Mortgage Rates and Approvals – March 2010 Update
Two in my opinion very interesting and somewhat conflicting charts today. The first picks up on yesterday’s theme by showing the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 3.97% (actual low was 3.82% in April 2009). Compare this with CPI of 3.4% and RPI of 3.7% and my comments of yesterday.
Sunday, 28 February 2010
UK Property Market – February 2010 Update
I am still yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. I have now for the time being even stopped looking on the internet at house prices in the area that I am interested. The reason for this is that in my opinion UK house prices are still overvalued by a huge margin. Last week the Nationwide reported that average house prices had fallen from £163,481 to £161,320, a monthly fall of £2,161 or 1.3%. On an annualised basis house prices in absolute terms are still up annually by 9.2% and if I look at real (after inflation) returns they are still up by 6%.
Saturday, 20 February 2010
“How Lloyds TSB is helping first time buyers”
I was amazed but unfortunately not surprised to see the methods that Lloyds TSB (which is being propped up by my taxes) is using to try and cajole first time buyers into the UK housing market. The product being peddled justified a four page advertisement in a major London newspaper and is called the Lend a Hand Mortgage.
The advertisement starts with “as a response to the current market conditions, the Lend a Hand Mortgage is giving first time buyers the opportunity to get help with their mortgage from family and friends.” From what I read it doesn’t look like that great a deal to me.
Lloyds claim that “in 1999, 592,000 first time buyers completed mortgages, by last year it had fallen to 193,000, according to the Council of Mortgage Lenders,” My chart today demonstrates clearly one of the big drivers of why this has occurred. For the year 1999 the ratio of Nationwide Historical House Prices to the Average Earnings Index (LNMM) was an average 742.7 and in 2009 this had risen to 1139.1. That means affordability has reduced by 53%. This un-affordability has been caused by the very same banks that are creating products like that advertised extending ever easier credit which is what put us in the current mess we are in today.
The mortgage advertisement goes on to say “even as recently as a couple of years ago, it was much easier to get a mortgage... and it was not uncommon to get a 100% mortgage that didn’t need a deposit.” As we all now know that was just foolish. I’m still amazed this occurred. If you can’t put together a deposit for a mortgage just how did the banks expect people to be able to afford to repay that mortgage. Additionally the banks were counting on property never decreasing in value plunging people into negative equity. Even the most naive banker by spending 10 minutes on the internet could have found historical data that showed how false this assumption was.
Some more data provided in the mortgage advertisement states that “according to the Council of Mortgage lenders, in July last year 80% of first time buyers were turning to their parents for help, up from 50% in February.” To have included this Lloyds clearly think that this adds to the sell. What’s it saying? Everyone else is doing so you should to? Personally I find that a terrible statistic and quite sad. House prices are so over valued compared to earnings that it is almost impossible for a first home buyer to buy a roof to put over their heads without external support. Basic human needs are food, clothing and shelter. Now we are in a situation where one of the basic human needs is now unobtainable without support. What type of country are we living in?
So how does this product work? Let’s say you want to buy a house for £100,000. As the first home buyer you offer up 5% (£5,000) worth of deposit and your ‘helper’ offers up 20% (£20,000) which is placed in a savings account earning rate of 4.15% for 42 months. Then by magic the first home buyer is able to be given a mortgage of 95% (£95,000) at 5.69% fixed until March 2013 if you don’t pay a product fee (whatever that is). Let’s analyse this a little:
- The ‘helper’ gets their money back after 42 months “provided the buyer doesn’t default on their mortgage payments, and provided the amount of the mortgage compared to the value of the property (LTV) has dropped to 90% or less – as assessed by us...” So Lloyds have cleverly protected themselves from a house price crash of up to 25% for the next 3.5 years by effectively offering a 75% mortgage.
- Should Lloyds have only offered first home buyers the 75% mortgage it would have meant that a £5,000 deposit could have only secured a mortgage of £15,000. Instead, this scheme can leverage the first home buyer up to a mortgage of £95,000 while providing some protection to themselves.
- The mortgage is a repayment mortgage however to demonstrate quickly how much this mortgage benefits Lloyds I’m going to assume an interest only mortgage (ie no principle is repaid). Both final amounts I’ll present would be a little less if calculated as a repayment mortgage although not by much as the principle reduction per year is very small in the early years of a mortgage. Let’s look at what happens in the first year. So the buyer who takes a standard 75% mortgage provides Lloyds with charges of approximately £15,000 x 5.69% = £853.50. Now the buyer who takes a ‘Lend a Hand’ provides Lloyds with charges of approximately £75,000 x 5.69% + £20,000 x (5.69%-4.15%) = £4,575.50.
To me it looks like a continuation of the past:
- The first home buyer ends up over leveraged and indebted for life which is what put us into the credit crunch in the first place.
- Lloyds ends up squeezing more than 5 times the revenue out of the same customer.
The only difference is that this time Lloyds are a bit cleverer and give themselves some more protection than previous times.
I’m not convinced the product is designed to give “more people...a chance to own their first home” more likely a chance for Lloyds to maximise its revenues. I’m remaining out of the house market for now and the more I read about these types of products the more I think current prices are unsustainable.
As always DYOR.
The advertisement starts with “as a response to the current market conditions, the Lend a Hand Mortgage is giving first time buyers the opportunity to get help with their mortgage from family and friends.” From what I read it doesn’t look like that great a deal to me.
Lloyds claim that “in 1999, 592,000 first time buyers completed mortgages, by last year it had fallen to 193,000, according to the Council of Mortgage Lenders,” My chart today demonstrates clearly one of the big drivers of why this has occurred. For the year 1999 the ratio of Nationwide Historical House Prices to the Average Earnings Index (LNMM) was an average 742.7 and in 2009 this had risen to 1139.1. That means affordability has reduced by 53%. This un-affordability has been caused by the very same banks that are creating products like that advertised extending ever easier credit which is what put us in the current mess we are in today.
The mortgage advertisement goes on to say “even as recently as a couple of years ago, it was much easier to get a mortgage... and it was not uncommon to get a 100% mortgage that didn’t need a deposit.” As we all now know that was just foolish. I’m still amazed this occurred. If you can’t put together a deposit for a mortgage just how did the banks expect people to be able to afford to repay that mortgage. Additionally the banks were counting on property never decreasing in value plunging people into negative equity. Even the most naive banker by spending 10 minutes on the internet could have found historical data that showed how false this assumption was.
Some more data provided in the mortgage advertisement states that “according to the Council of Mortgage lenders, in July last year 80% of first time buyers were turning to their parents for help, up from 50% in February.” To have included this Lloyds clearly think that this adds to the sell. What’s it saying? Everyone else is doing so you should to? Personally I find that a terrible statistic and quite sad. House prices are so over valued compared to earnings that it is almost impossible for a first home buyer to buy a roof to put over their heads without external support. Basic human needs are food, clothing and shelter. Now we are in a situation where one of the basic human needs is now unobtainable without support. What type of country are we living in?
So how does this product work? Let’s say you want to buy a house for £100,000. As the first home buyer you offer up 5% (£5,000) worth of deposit and your ‘helper’ offers up 20% (£20,000) which is placed in a savings account earning rate of 4.15% for 42 months. Then by magic the first home buyer is able to be given a mortgage of 95% (£95,000) at 5.69% fixed until March 2013 if you don’t pay a product fee (whatever that is). Let’s analyse this a little:
- The ‘helper’ gets their money back after 42 months “provided the buyer doesn’t default on their mortgage payments, and provided the amount of the mortgage compared to the value of the property (LTV) has dropped to 90% or less – as assessed by us...” So Lloyds have cleverly protected themselves from a house price crash of up to 25% for the next 3.5 years by effectively offering a 75% mortgage.
- Should Lloyds have only offered first home buyers the 75% mortgage it would have meant that a £5,000 deposit could have only secured a mortgage of £15,000. Instead, this scheme can leverage the first home buyer up to a mortgage of £95,000 while providing some protection to themselves.
- The mortgage is a repayment mortgage however to demonstrate quickly how much this mortgage benefits Lloyds I’m going to assume an interest only mortgage (ie no principle is repaid). Both final amounts I’ll present would be a little less if calculated as a repayment mortgage although not by much as the principle reduction per year is very small in the early years of a mortgage. Let’s look at what happens in the first year. So the buyer who takes a standard 75% mortgage provides Lloyds with charges of approximately £15,000 x 5.69% = £853.50. Now the buyer who takes a ‘Lend a Hand’ provides Lloyds with charges of approximately £75,000 x 5.69% + £20,000 x (5.69%-4.15%) = £4,575.50.
To me it looks like a continuation of the past:
- The first home buyer ends up over leveraged and indebted for life which is what put us into the credit crunch in the first place.
- Lloyds ends up squeezing more than 5 times the revenue out of the same customer.
The only difference is that this time Lloyds are a bit cleverer and give themselves some more protection than previous times.
I’m not convinced the product is designed to give “more people...a chance to own their first home” more likely a chance for Lloyds to maximise its revenues. I’m remaining out of the house market for now and the more I read about these types of products the more I think current prices are unsustainable.
As always DYOR.
Wednesday, 10 February 2010
UK House Price Thoughts
As part of my retirement investing strategy at some point I need to buy a house. As I have mentioned before I am not currently buying as I believe house prices are overvalued.
I have been looking for a data set that would show me when average interest rates charged by the banks for house mortgages were starting to rise. I was also looking for a measure that would show increases fairly quickly rather than waiting for lots of old fixed rate mortgages to expire. I thought I had found a good measure and started to see rates rising by using UK resident banks interest rates of new loans secured on dwellings to households when I blogged here.
I’ve been thinking about what loans secured on dwellings means and it seems likely that it includes a lot more than mortgages. I’ve had another trawl through the Bank of England web site and found a data set that should be certainly showing very recent changes to mortgage interest rates and might be more appropriate to use. This data set is the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households not seasonally adjusted (data set IUMTLMV). A chart of this is shown above. Unfortunately, unlike the previous ‘secured on dwellings’ data set variable rates are still at lows of around 4% having been as high as 8.87%. So unfortunately for those (including me) waiting for increasing mortgage rates to potentially reduce house affordability it appears we have a while to wait yet.
On a more positive note it’s not all good news for house prices. Firstly, as reported by the Financial Times lenders “have warned that they will have to slash mortgage lending and raise rates on home loans if the government insists on prompt and full repayment of the £300 billion they have received in state support since 2008”. This is linked to the Special Liquidity Scheme and the Credit Guarantee Scheme which must be repaid by 2012 and 2014. So the banks are back to big profits and big bonuses yet they can’t give the government back the money they have borrowed. That money is my taxes we are talking about. If they can pay bonuses they should be repaying their loans like everyone else. The article goes on to say that the “lenders cannot retain their existing loan books and still make new ones while access to wholesale funds is as limited as it is” and continues with “retail deposits, which are considered far more stable and which bank regulators are encouraging lenders to rely on more heavily as a source of funds for new lending, simply cannot grow quickly enough to make up for the wholesale funds that are being withdrawn.”
Here’s an out of the box idea. How about the government lets the market operate freely rather than distort it with all this intervention. So where do the banks then get their money from? Another ‘crazy’ idea. How about they start paying interest rates on savings that are above inflation and that will encourage people to start saving again. Oh that’s right, that would then force mortgages up and maybe bring house prices back to more sensible levels. Let’s see if the government after the next election gives in to the banks demands.
Secondly, the Financial Times also reports that estate agents have seen the first drop in new buyer enquiries for 14 months. Is this a genuine fall or due to the cold weather that we have been happening? I guess it will all show up in the house price figures in due course.
As always DYOR
I have been looking for a data set that would show me when average interest rates charged by the banks for house mortgages were starting to rise. I was also looking for a measure that would show increases fairly quickly rather than waiting for lots of old fixed rate mortgages to expire. I thought I had found a good measure and started to see rates rising by using UK resident banks interest rates of new loans secured on dwellings to households when I blogged here.
I’ve been thinking about what loans secured on dwellings means and it seems likely that it includes a lot more than mortgages. I’ve had another trawl through the Bank of England web site and found a data set that should be certainly showing very recent changes to mortgage interest rates and might be more appropriate to use. This data set is the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households not seasonally adjusted (data set IUMTLMV). A chart of this is shown above. Unfortunately, unlike the previous ‘secured on dwellings’ data set variable rates are still at lows of around 4% having been as high as 8.87%. So unfortunately for those (including me) waiting for increasing mortgage rates to potentially reduce house affordability it appears we have a while to wait yet.
On a more positive note it’s not all good news for house prices. Firstly, as reported by the Financial Times lenders “have warned that they will have to slash mortgage lending and raise rates on home loans if the government insists on prompt and full repayment of the £300 billion they have received in state support since 2008”. This is linked to the Special Liquidity Scheme and the Credit Guarantee Scheme which must be repaid by 2012 and 2014. So the banks are back to big profits and big bonuses yet they can’t give the government back the money they have borrowed. That money is my taxes we are talking about. If they can pay bonuses they should be repaying their loans like everyone else. The article goes on to say that the “lenders cannot retain their existing loan books and still make new ones while access to wholesale funds is as limited as it is” and continues with “retail deposits, which are considered far more stable and which bank regulators are encouraging lenders to rely on more heavily as a source of funds for new lending, simply cannot grow quickly enough to make up for the wholesale funds that are being withdrawn.”
Here’s an out of the box idea. How about the government lets the market operate freely rather than distort it with all this intervention. So where do the banks then get their money from? Another ‘crazy’ idea. How about they start paying interest rates on savings that are above inflation and that will encourage people to start saving again. Oh that’s right, that would then force mortgages up and maybe bring house prices back to more sensible levels. Let’s see if the government after the next election gives in to the banks demands.
Secondly, the Financial Times also reports that estate agents have seen the first drop in new buyer enquiries for 14 months. Is this a genuine fall or due to the cold weather that we have been happening? I guess it will all show up in the house price figures in due course.
As always DYOR
Monday, 8 February 2010
Australian Property Market (Alternate Data) – February 2010 Update
The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy. It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.
I’m therefore looking for something that helps me keep my finger on the pulse a little more. Certainly monthly figures are desirable. I am going to therefore use housing data published by RPData and in particular I will monitor the Brisbane and Logan City numbers.
The ABS published their quarterly data to December 2009 on Monday. This chance only comes every 3 months and so it is interesting to compare the ABS data with the alternate monthly dataset that I am using from RPData which is shown in the above chart. The ABS shows that for the quarter to December 2009 Brisbane prices have risen by 3.8% with a year on year increase of 10.9%. Remember the ABS reports median prices for detached properties only.
In contrast from RPData I am using what are called recent median house sale prices so I would expect similar data. For Brisbane the data shows increases for the quarter to December 2009 of 5.9% which is significantly different to the ABS. Year on year the increase is 7.1% which is also significantly different to the ABS. If anybody can explain the big difference I would be very interested to know.
Also looking at Logan City the quarter reveals increases of 3.5% while year on year increases have been 7%.
I’m therefore looking for something that helps me keep my finger on the pulse a little more. Certainly monthly figures are desirable. I am going to therefore use housing data published by RPData and in particular I will monitor the Brisbane and Logan City numbers.
The ABS published their quarterly data to December 2009 on Monday. This chance only comes every 3 months and so it is interesting to compare the ABS data with the alternate monthly dataset that I am using from RPData which is shown in the above chart. The ABS shows that for the quarter to December 2009 Brisbane prices have risen by 3.8% with a year on year increase of 10.9%. Remember the ABS reports median prices for detached properties only.
In contrast from RPData I am using what are called recent median house sale prices so I would expect similar data. For Brisbane the data shows increases for the quarter to December 2009 of 5.9% which is significantly different to the ABS. Year on year the increase is 7.1% which is also significantly different to the ABS. If anybody can explain the big difference I would be very interested to know.
Also looking at Logan City the quarter reveals increases of 3.5% while year on year increases have been 7%.
Wednesday, 3 February 2010
UK Mortgage Approvals – February 2010 Update
On Saturday I discussed why I might have been early in my call that we had potentially reached the ‘Return to “normal”’ phase of the UK house market. I would like to revisit this again as I continue seeing data that is potentially starting to point towards a further housing market correction.
The first chart is a repeat of that shown on Saturday. I described how the new interest rates secured on dwellings are still very low at 4.5% compared to the peak of 6.3% and have likely had a big effect on the market. What is of interest however is that this 4.5% increase is 7% more than the low of June 2009 and is trending in an upwards direction with no assistance from the Bank of England.
The second chart today also shows another interesting piece of data. The olive line is the most interesting which shows seasonally adjusted monthly mortgage approvals decreasing for the first time in 13 months dropping from 60,045 to 59,023 in December which is a decrease of 2%.
Rising mortgage interest rates will put pressure on those who have variable rates or are coming off fixed rates. It will also decrease the level of borrowing possible for a new person trying to enter the housing market. Additionally falling mortgage approvals suggests less competition in the market for each house that is for sale.
Could the rules of supply and demand finally start to work in the near future?
Monday, 1 February 2010
Australian Property Market – February 2010 Update
I intend to keep a close eye on Australian house prices as I build my retirement portfolio. This is because Australia is a very likely retirement possibility (if not sooner) for me.
The first chart shows the quarterly Real (adjusted for the Consumer Price Index) Brisbane and Real (again adjusted for CPI) Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index with data taken from the Australian Bureau of Statistics catalogue 6416.0 since 1991. This Index was reset in 2003/2004 and so I have “corrected” pre March 2002 data by taking the ratio’s of the pre and post September 2003 to June 2004 data as a multiplier. This chart carries data only until December 2010 and clearly shows a nice dip at the start of 2009 before the latest data point has taken house prices to new record real highs.
My second chart shows Real Annual Changes in price from 1995 to present. In Real terms over this period Brisbane has seen average increases of 5.3% (up from an average of 5.2% last quarter) and the Australian Eight Cities has seen average increases of 4.9% (up from an average of 4.8% last quarter). Unfortunately for me though the trend lines (particularly for Brisbane) continue to head upwards.
In non-inflation adjusted terms over the period Brisbane prices have seen average increases of 8.1% and the Australian Eight Cities prices have seen average increases of 7.8% (up from an average 7.6% last quarter). Unfortunately if you don’t already own a property you continue to be priced out when compared with average earnings. Using the Australian Bureau of Statistics catalogue 6302.0 (extrapolating the last quarter as the data is not released to the 25 February) which looks at average weekly earnings shows that while house prices have had their long run averages increase this quarter, Total Weekly Earnings have stagnated at a yearly 3.8% and Total Full Time Adult Earnings at 4.3%.
My third chart shows what happens when house prices continue to rise at a rate greater than salaries. Over this period affordability of Brisbane houses when compared to Adult Full Time Weekly Earnings has gone from a low of 0.063 to 0.121 meaning affordability has halved and the Median Eight Cities houses have gone from a low of 0.064 to 0.112 which is a huge reduction. This type of shift is just not sustainable but when/if will the market return to a more sustainable equilibrium.
Looking at the big increases this quarter I can’t help wonder if the data is ‘reliable’ and I would like to see how the histograms have changed since 2008. This is because the government has brought forward demand and changed the dynamic in the market by offering first home buyer grants with changing values depending on the date. If I had have bought before 14 October 2008 I would have received $7,000. Using this as a 5% deposit would mean I could borrow $140,000. If I had have bought a new house between 14 October 2008 and 30 September 2009 I would have received $21,000 which again with a 5% deposit would mean I could borrow $420,000. That has to change the supply and demand dynamic in the market. This ‘stimulus’ has now been gradually withdrawn with first new home buyers being reduced to $14,000 between 01 October 2009 to 31 December 2009. Finally, since 01 January 2010 first home buyers are back to $7,000 meaning we’re back to that $140,000.
So if I was a first home buyer I would have bought between October and September with first home buyer stragglers buying also in October to December. I would now be out of the market. I think the Housing Industry Association (HIA) may have seen in this when they reported that new home sales are down 4.6% in December 2009.
It will be very interesting to see what happens next. Australia has rising interest rates and if supply and demand works (assuming no government intervention) second home buyers may now struggle to sell without reducing prices as their pool of buyers has been reduced, along with the pool that remains having smaller deposits. This should reduce prices going forward. This should then flow through the rest of the market. Interesting times ahead...
Saturday, 30 January 2010
UK Property Market – January 2010 Update
I am yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. The reason for this is that in my opinion UK house prices are still overvalued by a huge margin. Yesterday the Nationwide reported that average house prices had risen from £162,103 to £163,481, a rise of 0.8%, in a single month pushing house prices to yet more highs of un-affordability.
Chart 1 shows the Nationwide Historical House Prices in Real (ie inflation adjusted) terms. The Real increase is much less than that reported by the Nationwide with prices rising from only £163,140 to £163,481 as the UK Retail Prices Index (RPI) also increased by a high of 0.6% in a single month.
This chart also demonstrates that compared to average earnings property is very expensive when a ratio is created of the Nationwide Historical House Prices to the Average Earnings Index (LNMM) and it is for this reason I have yet to buy. In 1996 this ratio was as low as 607 and today the ratio stands at 1,172. If we were to return to that number the average house using the Nationwide Index would be £84,670. Will we ever get that low again?
Last month I questioned whether we may have been at the point of the ‘Return to “normal”’ phase kicking in. Chart 2 today highlights why I may have been early in my call. The red line shows the monthly average of UK resident banks interest rate of new loans secured on dwellings to households. I have taken the average of five data sets which are the floating rate, fixation <=1year, fixation >1year<=5years, fixation >5year<=10years and the fixation >10years. This interest rate had been as high as 6.3% in September 2008 (before the Bank of England panicked and lowered the Official Bank Rate to a record low of 0.5%) and then had reduced to a low of 4.2% by June 2009.
This has meant for new loans the average interest payable has reduced by a 1/3. So when a typical person walks in to a bank and asks for the maximum they can borrow the low interest rate is going to mean they can borrow more principle which will then push up house prices. The good news however is that even though the Bank of England has not moved, the Official Bank Rate the interest paid on loans is starting to increase from the low of 4.2% to 4.5% in November 2009. This will reduce affordability which unless peoples earnings start to increase should start to push house prices back down again and there is little the Bank of England can do unless they completely ignore inflation and drop interest rates even further or perform more Quantitative Easing. They clearly won’t be able to do this without risking a bond strike or hyperinflation however personally I do think they won’t raise interest rates even though inflation is rising quickly when they meet in a few days.
Chart 3 shows the annual change in Nationwide property prices and compares this with the change in the average earnings index extrapolated a couple of months to match the Nationwide time period as LNMM is still only released to November 2009. It shows that the annual change in earnings is now around 1.4% which is significantly less than the Retail Prices Index (RPI) and the increases being seen in house prices.
So in summary house prices are increasing in nominal and to a lesser extent in Real inflation adjusted terms. However in my opinion I suggest that these increases will be short lived. Salaries are increasing at a rate which is less than both inflation and house prices. Bank mortgage rates are starting to increase from their lows which will reduce the level of principle that can be borrowed. The Bank of England and government are powerless to do anything about it without risking the country as a whole. The only fear I have now is that the Bank of England holds interest rates allowing inflation to rise quickly (I think they will) resulting in nominal house price increases but stagnation in Real inflation adjusted house prices. This will be dependent on whether salaries start to increase in line with inflation. The private sector doesn’t seem in a position to do this however while government borrowing is at record highs I fear the government will listen to the Unions requests for big increases as they have an election win to try and buy.
For now I’m staying out of the housing market.
As always DYOR
Assumptions:
LNMM data is extrapolated for December ’09 and January ’10.
LNMM data is extrapolated for December ’09 and January ’10.
Tuesday, 26 January 2010
Stagflation and the UK Q4 GDP Numbers
Firstly, some quotes to think about:
1. "Now in Britain, we are saying, as you know, that inflation is low, interest rates are low and we expect there to be growth.” – Gordon Brown, 2008
2. "We have a strong economy, its momentum will carry us through." – Alistair Darling, 2007
3. "I think the choice is becoming pretty clear. Between a government that is determined at all times to maintain the stability and growth of the British economy. “ – Gordon Brown,2007
4. “...a weak currency arises from a weak economy which in turn is the result of a weak Government.” – Gordon Brown, 1992
So the UK today emerged from recession. What an excellent [sic] job the current government and the Bank of England has done managing the UK economy over the business cycle. Today we find that the UK economy (GDP) has grown by 0.1% in the final three months of 2009. To get these outstanding [sic] results they’ve only had to lower VAT to 15%, lower the Official Bank Rate to 0.5% (the lowest rate in the history of the Bank of England), quantitative ease to the tune of £200 billion and introduce a car scrappage scheme to name but four.
This has all resulted in:
- house prices that are within 13% of record peaks. Of course that’s great news if you’re a “hard working family”, sorry, hard working politician with multiple houses partly paid for by the tax payer.
- a heavily devalued (weak) pound.
- low returns from bank deposits / bonds for those people trying to live on savings or save for retirement.
To go with this we have the Consumer Price Index (CPI) increasing at a rate of 2.9% including the largest month on month in history and a Retail Prices Index (RPI) increasing at a rate of 2.4%.
Now I’m going to get my crystal ball out and predict how the Bank of England is going to respond. I’m betting that they will leave the Official Bank Rate on hold at 0.5%. This in turn will lead to the next big issue for UK PLC. Firstly inflation will take off, then salary inflation will start as the public sector unions negotiate first just before the election and then others join the band wagon. This will then lead to built in inflation which the Bank of England will struggle to get back in hand.
I have one word for where I think the UK economy is headed – stagflation.
To conclude I’m going to modify the four quotes above a little. “Inflation is not low”, “we do not have a strong economy”, “we do not have stability and growth” however we do have “a weak currency”.
1. "Now in Britain, we are saying, as you know, that inflation is low, interest rates are low and we expect there to be growth.” – Gordon Brown, 2008
2. "We have a strong economy, its momentum will carry us through." – Alistair Darling, 2007
3. "I think the choice is becoming pretty clear. Between a government that is determined at all times to maintain the stability and growth of the British economy. “ – Gordon Brown,2007
4. “...a weak currency arises from a weak economy which in turn is the result of a weak Government.” – Gordon Brown, 1992
So the UK today emerged from recession. What an excellent [sic] job the current government and the Bank of England has done managing the UK economy over the business cycle. Today we find that the UK economy (GDP) has grown by 0.1% in the final three months of 2009. To get these outstanding [sic] results they’ve only had to lower VAT to 15%, lower the Official Bank Rate to 0.5% (the lowest rate in the history of the Bank of England), quantitative ease to the tune of £200 billion and introduce a car scrappage scheme to name but four.
This has all resulted in:
- house prices that are within 13% of record peaks. Of course that’s great news if you’re a “hard working family”, sorry, hard working politician with multiple houses partly paid for by the tax payer.
- a heavily devalued (weak) pound.
- low returns from bank deposits / bonds for those people trying to live on savings or save for retirement.
To go with this we have the Consumer Price Index (CPI) increasing at a rate of 2.9% including the largest month on month in history and a Retail Prices Index (RPI) increasing at a rate of 2.4%.
Now I’m going to get my crystal ball out and predict how the Bank of England is going to respond. I’m betting that they will leave the Official Bank Rate on hold at 0.5%. This in turn will lead to the next big issue for UK PLC. Firstly inflation will take off, then salary inflation will start as the public sector unions negotiate first just before the election and then others join the band wagon. This will then lead to built in inflation which the Bank of England will struggle to get back in hand.
I have one word for where I think the UK economy is headed – stagflation.
To conclude I’m going to modify the four quotes above a little. “Inflation is not low”, “we do not have a strong economy”, “we do not have stability and growth” however we do have “a weak currency”.
Wednesday, 13 January 2010
The Recession and Global Financial Crisis is Over. Back to the Boom in House Prices.
You’d be forgiven for thinking that it’s all over if you caught page 19 of the London Evening Standard which has the headline ‘London house prices surge past the pre-recession peak of 2007’. Apparently the suburbs of Mayfair, Knightsbridge, Belgravia, Pimlico, Chelsea, Kensington, Holland Park, Notting Hill and Regent’s Park have risen in price by 51% from their lowest point in March of 2009. As an added bonus they are now 3% above the previous high.
Can you spot a theme with the suburbs? It’s amazing what bailing out the banks, the Bank of England dropping the Official Bank Rate to 0.5% and around £200 billion of Quantitative Easing can achieve. It’s certainly helped some however I don’t think we’re out of the woods yet. Let me provide some further evidence.
I don’t have to look far. Firstly, page 31 leads with ‘More bank losses feared after SocGen writedown’. Society Generale have issued a surprise profit warning stating they have to write down a further EUR1.5 billion on is Collateralised Debt Obligations on residential Mortgage Backed Securities after deciding to take a “stricter assessment” on their value. Now where have I heard those words before?
Until banks face up to their losses and clear their balance how can we move onto the next business cycle. At this rate we’re going to end up just like Japan. A further sobering thought is that this is all still going on and the peak of the Alt-A resets in the US are just starting now.
Secondly, page 33 tells us that ‘Flat manufacturing triggers talk of recession’s return’. Manufacturing output has failed to grow for a second month in a row leaving manufacturing output 5.4% lower than a year earlier.
That doesn’t sound like a boom to me. To me it sounds like it’s going to get worse before it gets better.
Can you spot a theme with the suburbs? It’s amazing what bailing out the banks, the Bank of England dropping the Official Bank Rate to 0.5% and around £200 billion of Quantitative Easing can achieve. It’s certainly helped some however I don’t think we’re out of the woods yet. Let me provide some further evidence.
I don’t have to look far. Firstly, page 31 leads with ‘More bank losses feared after SocGen writedown’. Society Generale have issued a surprise profit warning stating they have to write down a further EUR1.5 billion on is Collateralised Debt Obligations on residential Mortgage Backed Securities after deciding to take a “stricter assessment” on their value. Now where have I heard those words before?
Until banks face up to their losses and clear their balance how can we move onto the next business cycle. At this rate we’re going to end up just like Japan. A further sobering thought is that this is all still going on and the peak of the Alt-A resets in the US are just starting now.
Secondly, page 33 tells us that ‘Flat manufacturing triggers talk of recession’s return’. Manufacturing output has failed to grow for a second month in a row leaving manufacturing output 5.4% lower than a year earlier.
That doesn’t sound like a boom to me. To me it sounds like it’s going to get worse before it gets better.
Australian Property Market (Alternate Data) – January 2009 Update
The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy. It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.
I’m therefore looking for something that helps me keep my finger on the pulse a little more. Certainly monthly figures are desirable. I am going to therefore use housing data published by RPData and in particular I will monitor the Brisbane and Logan City numbers.
The above chart shows the figures to November 2009. With the Reserve Bank of Australia now over their global financial crisis panic and apparently in an interest rate raising cycle plus the government removing housing stimulus by reducing first home buyers grants I ask is the Australian housing market slowing. Brisbane median prices this month have only increased by $100 ($510,000 to $510,100) which is only 0.2% annualised and Logan City median prices by $1,000 ($370,000 to $371,000) which is still 3.2% annualised.
Is the property boom running out of legs?
I’m therefore looking for something that helps me keep my finger on the pulse a little more. Certainly monthly figures are desirable. I am going to therefore use housing data published by RPData and in particular I will monitor the Brisbane and Logan City numbers.
The above chart shows the figures to November 2009. With the Reserve Bank of Australia now over their global financial crisis panic and apparently in an interest rate raising cycle plus the government removing housing stimulus by reducing first home buyers grants I ask is the Australian housing market slowing. Brisbane median prices this month have only increased by $100 ($510,000 to $510,100) which is only 0.2% annualised and Logan City median prices by $1,000 ($370,000 to $371,000) which is still 3.2% annualised.
Is the property boom running out of legs?
Wednesday, 6 January 2010
Australian Property Market – January 2009 Update
I intend to keep a close eye on Australian house prices as I build my retirement portfolio. This is because Australia is a very likely retirement possibility (if not sooner) for me.
The first chart shows the quarterly Real (adjusted for the Consumer Price Index) Brisbane and Real (again adjusted for CPI) Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index with data taken from the Australian Bureau of Statistics catalogue 6416.0 since 1991. This Index was reset in 2003/2004 and so I have “corrected” pre March 2002 data by taking the ratio’s of the pre and post September 2003 to June 2004 data as a multiplier. This chart carries data only until September 2009 and clearly shows a nice dip at the start of 2009. Could this be the Bull Trap phase of my second chart with us now nearing the Return to “Normal” phase?
My third chart shows Real Annual Changes in price from 1995 to present. In Real terms over this period Brisbane has seen average increases of 5.2% and the Australian Eight Cities has seen average increases of 4.8%. Unfortunately for me though the trend lines (particularly for Brisbane) continue to head upwards.
In non-inflation adjusted terms over the period Brisbane prices have seen average increases of 8.1% and the Australian Eight Cities prices have seen average increases of 7.6%. Unfortunately if you don’t already own a property (or three) you continue to be priced out when compared with average earnings. Using the Australian Bureau of Statistics catalogue 6302.0 which looks at average weekly earnings shows that Total Weekly Earnings has only increased by a yearly 3.8% and Total Full Time Adult Earnings by 4.3%.
My fourth chart shows what happens when house prices continue to rise at a rate greater than salaries. Over this period affordability of Brisbane houses when compared to Adult Full Time Weekly Earnings has gone from a low of 0.063 to 0.125 meaning affordability has halved and the Median Eight Cities houses have gone from a low of 0.064 to 0.113 which is a huge reduction. This type of shift is just not sustainable but when will the market turn? Will Australia raising interest rates and reducing first home buyer grants be the catalyst. Only time will tell...
Tuesday, 5 January 2010
The Burj Dubai and Real Estate Cycles
The Burj Dubai has been all over the press in the past couple of days as it had its grand opening. What an engineering spectacle! The tallest building in the world at over 800 metres tall with more than 160 stories and a luxury hotel designed by Giorgio Armani. So what do I think? I think of a great book entitled “The Secret Life of Real Estate : How it moves and why” by Phillip Anderson which states that “the world’s tallest buildings have a consistent habit of being completed right at the top of the real estate cycle ... producing for us – at least so far – the most reliable indicator of an approaching peak”.
Anderson also suggests a 24 Hour Real Estate Clock where hours 1 to 16 take approximately 14 years during which time property values rise reaching a peak and then hours 17 to 24 takes approximately 4 years during which time property values fall. I'll work through an example using a dataset that I’m closely following – raw (not adjusted for inflation) Nationwide UK Historical House Price shown in the chart above.
Anderson suggests that from the previous cycles low, the first 7 years will see property increase in price before a mid cycle recession. Using the Nationwide figures I'll call the low November 1992 and I'll call the recession start April 2000 which is 7 years and 6 months. During this period property increased in value by an average 6.5% per annum. So that fits.
I'll suggest using the Nationwide figures that there was a 6 month mid cycle recession during which time property increases slowed considerably and rose by 1.62% over that 6 months. Still positive as inflation for that 6 months was 0.9%. So that fits.
There is then a second 7 year cycle (completing the first 16 hours of the 24 hour clock) which starts from the onset of the mid cycle recession. During this second cycle property increases at a greater rate than during the first cycle. I'll call this peak October 2007 which is 7 years and 6 months. During this period property increased in value by an average 11.9% as predicted by the Anderson model. So that fits.
Now the fun begins with the 'Keynes crash phase' which runs for 4 years. Using this model we should come back and look at property in October 2011. What are highlights of this cycle - foreclosures and bankruptcies increase (yes!), stocks enter a bear market from past highs (yes!), credit creation institutions reverse policies (yes!), economic activity stalls (started but then QE began, I think we may still be here), wipe out of debts/stagnation (still needs to occur), wreckage is cleared away (still needs to occur) and finally stocks start climbing (they have but was it caused by QE and we are in for another big drop?) then the 18 year cycle can begin again.
As I’ve detailed previously I am yet to buy myself a flat or house. The above indicates that maybe I won’t get the opportunity until late 2011 or so...
Anderson also suggests a 24 Hour Real Estate Clock where hours 1 to 16 take approximately 14 years during which time property values rise reaching a peak and then hours 17 to 24 takes approximately 4 years during which time property values fall. I'll work through an example using a dataset that I’m closely following – raw (not adjusted for inflation) Nationwide UK Historical House Price shown in the chart above.
Anderson suggests that from the previous cycles low, the first 7 years will see property increase in price before a mid cycle recession. Using the Nationwide figures I'll call the low November 1992 and I'll call the recession start April 2000 which is 7 years and 6 months. During this period property increased in value by an average 6.5% per annum. So that fits.
I'll suggest using the Nationwide figures that there was a 6 month mid cycle recession during which time property increases slowed considerably and rose by 1.62% over that 6 months. Still positive as inflation for that 6 months was 0.9%. So that fits.
There is then a second 7 year cycle (completing the first 16 hours of the 24 hour clock) which starts from the onset of the mid cycle recession. During this second cycle property increases at a greater rate than during the first cycle. I'll call this peak October 2007 which is 7 years and 6 months. During this period property increased in value by an average 11.9% as predicted by the Anderson model. So that fits.
Now the fun begins with the 'Keynes crash phase' which runs for 4 years. Using this model we should come back and look at property in October 2011. What are highlights of this cycle - foreclosures and bankruptcies increase (yes!), stocks enter a bear market from past highs (yes!), credit creation institutions reverse policies (yes!), economic activity stalls (started but then QE began, I think we may still be here), wipe out of debts/stagnation (still needs to occur), wreckage is cleared away (still needs to occur) and finally stocks start climbing (they have but was it caused by QE and we are in for another big drop?) then the 18 year cycle can begin again.
As I’ve detailed previously I am yet to buy myself a flat or house. The above indicates that maybe I won’t get the opportunity until late 2011 or so...
Subscribe to:
Posts (Atom)