“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.

Gold Within My Retirement Investing Strategy – February 2010 Update

Within my Retirement Investing Strategy I currently hold 3.2% (up from 3.1% at the last gold update due to a buy decision made this month) of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc).

The first chart shows the updated real price of gold since 1968, with the wild ride that comes with gold obvious. This month the real (after inflation) price of gold has risen by about 0.3% to $1,119.40 per ounce. The trend line however suggests a price today of $631.00 which is the same as the last update. The historical average real gold price from 1968 also remains at $600.52. So by both of these measures gold still appears overpriced.

The correlation between the real S&P 500 (also displayed on the first chart) and real gold also holds from the last update at -0.33. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. Today this ratio has lowered slightly from 1.01 to 0.96. The trend line however suggests a ratio today of 2.63 and the historical average ratio from 1968 to today is 1.63. So this measure would suggest that if you were looking to choose to buy the S&P 500 or gold then the S&P 500 might be the better option.
The final point to make however is that while both the first and second charts suggest gold is overpriced on historic measures I cannot forget that in 1980 gold reached an average real monthly price of $1,728 which is a long way above where we are today.

My investment methods are largely mechanical and given that I am underweight gold against my desired low charge portfolio I should be buying more. Unfortunately all my earnings are made in GBP and in this currency gold is starting to feel expensive. Of course I would never make a decision based on feel so I’m going to do some historic real gold price analysis priced in GBP before making the decision to buy more. Of course I’ll share this analysis with you over the next few days.

As always DYOR.

Assumptions include:
- Last Gold price actual taken on the 16 February 2010
- Last S&P 500 price actual taken on the 12 February 2010.
- All other prices are month averages.
- Inflation data from the Bureau of Labor Statistics. January and February ‘10 inflation is extrapolated.

UK Inflation – February 2010 Update

Yesterday the Office of National Statistics reported the January 2010 UK Consumer Price Index (CPI) as 3.5% up from 2.9% and the UK Retail Price Index (RPI) as 3.7% up from 2.4%. It seems the records just keep being broken. Last month we had “the increase in the CPI annual rate of 1.0 per cent between November and December 2009 is the largest ever increase in the annual rate between two months” and this month we have an ”increase in VAT rate leads to record CPI monthly movement for a December to January period.”

The first chart is tracking the CHAW Index which is the RPI including All Items. I focus on the RPI as my National Savings and Investments Index Linked Savings Certificates use the RPI to index from. The current level of the Index remains above the trend line however what is interesting is that the index is actually starting to fall. In December ’09 it stood at 218 and it is now at 217.9, a fall of 0.1. At first glance this might suggest that the Bank of England has it all under control and inflation is going to start falling towards their 2% CPI target. I’m not convinced as let’s look at what’s happened for the same period over the previous 10 years:
- December ’08 to January ’09, -1.8
- December ’07 to January ’08, -1.1
- December ’06 to January ’07, -1.1
- December ’05 to January ’06, -0.7
- December ’04 to January ’05, -1.0
- Then in order of the previous 5 years -0.4, -0.1, -0.1, -1.1 and -0.7

The second chart is again based on the CHAW Index. This chart shows annual figures based on the previous 3, 6 and 12 month’s worth of data. As of December the 12 month figure is 3.7% (as published by the ONS), the 6 month figure is 4.2% and the 3 month figure is 3.5% annualised. It will be interesting to see what happens next month as I still think the Bank of England are looking for all the excuses to sweet talk the market but are chasing a “little inflation”. This will ease the pain on those who are in debt. That is the government and the public who on average have over extended themselves. Those prudent savers (like myself) will of course be punished as the value of their assets is reduced.

The fact that CPI is so far above the 2% target prompted the Bank of England to write a letter to the Chancellor. What a read. Firstly the excuses:
- “the restoration of the standard rate of VAT to 17.5% is raising prices relative to a year ago.” I think it’s a little hypocritical to use this excuse. When the rate went from 17.5% to 15% a little over a year ago I don’t remember anyone using this effect to help explain why we were seeing deflation. Instead it was quick, panic, drop the Official Bank Rate to record lows and Quantitative Ease (QE). Now the boots on the other foot and we just ignore it.
- “oil prices have risen by around 70%.” Why no mention of the fact that they and the government managed to engineer a currency devaluation knowing that import prices will rise, causing the average punter to pay more for fuel, which feeds into CPI.
- “the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.” As mentioned above all engineered by the Bank and government and now it’s all oh well too bad at least we have an excuse.
Secondly, it is clear we should not worry as the Bank of England knows what it is doing [sic]. Inflation is well above target but the “low level of Bank Rate, will continue to provide a substantial boost to nominal spending for some time to come.” In case that wasn’t inflationary enough “it will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.”
Finally, “equally, if at some point in the future, the medium term outlook for inflation threatened to rise above the 2% target, the Committee would tighten monetary policy.” To me it looks like we are well above the 2% target and that’s why the Bank of England are writing the letter in the first place. The Bank of England next meets on the 04 March however this letter makes it clear. Interest rates won’t be raised and we still have the chance of yet more Quantitative Easing to come. How much more do they want to distort markets and force up asset prices through low interest rates. I hope the bond market soon stops all this nonsense and takes the decisions away from them.

It’s interesting to parallel this with another developed economy central bank. The Reserve Bank of Australia seems to have CPI in control at 2.1% after raising rates a number of times. They are clearly committed to their inflation target as the latest minutes show that the decision to hold rates last month was a close call and that rates would continue to rise in 2010 if the economy continued to grow.

One only has to look at the exchange rate between the countries today to see the attitudes of both banks demonstrated by the markets.

As I stated last month, all I can say is that I’m glad I own Index Linked Savings Certificates and Index Linked Gilts.

As always DYOR.

A History of Severe Real S&P 500 Stock Bear Markets – February Update

Looking at the first chart which shows the real (inflation adjusted) S&P 500 (or its predecessor) stock market I have identified three historic severe stock bear markets. These I am defining as stock markets where from the stock market reaching a new high, they then proceeded to lose in excess of 60% of their real (inflation adjusted) value. These are best demonstrated by the second chart which shows each of these stock bear markets and the fall in percentage terms from the peak. So briefly what were these bear markets (full details here).

The first severe stock bear (marked in purple on the chart) market started with a new real high being reached in September 1906 and incorporated the 1907 Bankers Panic. From the high it took until January 1920 for the stock market to reach a real loss of 60.9% and then until December 1920 to reach its real low of -70.0%. That’s a period of 14 years and 3 months.

The second severe stock bear (marked in blue on the chart) market started with a new real high being reached in September 1929 and is obviously the period of the Great Depression. The markets passed through -60% on a number of occasions. In June 1932 the market reached its real low of -80.6%. That’s only a relatively short period of time however it really wasn’t over then as the market never really recovered and kept dipping back below -60% in real terms. 20 years later the market was still below the real -60% mark.

The third severe stock bear (marked in olive on the chart) market started with a new real high being reached in December 1968, incorporated the stock market crash of 1973 to 1974 and the 1973 Oil Crisis. From the market high it took until March 1982 for the stock market to reach a real loss of -60.9% and then until July 1982 to reach its real low of -62.6%. That’s a period of 13 years and 7 months.

So that brings me, as always, to the last line on the chart marked in red which shows the real bear market that we are currently in. This period began in August 2000 with the Dot Com Crash however we were unable to reach a new real high before the Global Financial Crisis took hold. In this real bear stock market we have been unable to break through -60% ‘only’ reaching -58.6% in March 2009. That is a period of only 8 years and 7 months.

As the second chart clearly shows we have now dipped back below the -40% line to be at -41.9% from -39.4% last month. We are now 9 years and 6 months into this severe bear market which is a relatively short period of time compared with the other severe bears shown. The previous bears all went below -60% in the years to come and at this point were:
- in 1916 at -25.4% and over the next year heading to -33.8%.
- in 1939 at -50.7% and over the next year pretty much standing still in real terms to reach -52.0%.
- in 1978 at -50.1% and over the next year heading to -53.1%.

I’m going to keep watching this comparison as I think it could be just starting to get interesting. Governments around the world are fast running out of borrowing capacity as Greece has aptly demonstrated. Closer to home the Bank of England has stated that more quantitative easing (QE) could be just around the corner. What will that do to inflation? The best growth that can be ‘created’ in the UK even with QE, bank bailouts and “cash for clunkers” is a miserly 0.1%. Finally, despite the big bonuses, I don’t see any evidence that the banking sector has repaired itself. I don’t see other developed economies being a whole lot better. Could we yet see that real -60% bear? History suggests there is still plenty of time for it to occur.

Assumptions include:
- Inflation data from the Bureau of Labor Statistics. January and February ‘10 inflation is extrapolated.
- Prices are month averages except February ‘10 which is the 12 February ’10 S&P 500 stock market close.
- Historic data provided from Professor Shiller website.

Guest post – alternate investing strategy

Today is a guest post from a reader of Retirement Investing Today. Two elements of their investing strategy have inspired me. Firstly, they are in their early twenties and have already clearly accepted full responsibility for their own actions with respect to their own economic well being. I certainly wasn’t at that point at that age. Secondly, rather than just following the herd mentality with regards to investing they have adopted an investing strategy which includes a very interesting asset class – whisky. As with all Retirement Investing Strategy readers I wish them much success and I hope you enjoy reading their story. I know I did.

"
I am fairly new to the investment game, this being my second financial year as an investor. I decided against joining a pension scheme as I do not like the idea of saving for all of my working life and planning my retirement on the faith (that is very low) of an annuity company providing me with a good income. I want to plan my retirement and manage my own investments. I am in my early twenties and my plan is to accumulate enough capital by the time I am in my mid-fifties to provide an acceptable income that can be enjoyed for the rest of my life. When I have finished retiring, the income from my capital will then be able to be enjoyed by my successor(s), rather than an annuity company. Following the recommendation on this blog, I have purchased a copy of “Smarter Investing - Simpler Decisions for Better Results” by Tim Hale. I cannot recommend this book enough.

My target portfolio at the moment is:
Cash - 65%
UK Equities - 25%
Gold - 5%
Whisky - 5%

The large percentage that is allocated to cash is not because I am cautious but because I have a short term goal to save enough to use as a deposit to fund a home within three years, which is too short to invest.

My contribution to this blog today will be about whisky as there is a noticeable lack of information on the Internet about this asset class. Whisky currently makes up approximately 5% of my portfolio.

Whisky is a spirit that is enjoyed all over the world. Recently, we have witnessed a very large growth in the demand of Scottish whisky due mainly to the rapidly growing middle classes in developing countries. Supply has not been expanding nearly as fast (I can tell you this personally as I live in Moray, which has the largest concentration of single-malt distilleries anywhere in Scotland). My reason for allocating 5% of my portfolio to single-malt Scottish whisky is that I aim to profit from the expanding ratio between supply and demand. Historically also, whisky collecting has generally been a very profitable pursuit, although a certain level of knowledge on the subject is essential.

There are essentially three ways to invest in whisky:
1 – Buy shares in a company that makes profit from the whisky industry
2 – Buy young whisky casks en primeur and hold them until that have matured
3 – Buy bottles of whisky and hold them in order to take advantage of dwindling supply.

I am concerned with the third option.

It is important to point out at this point that bottled whisky does not mature further and will not change in character if it is stored correctly (more on this later). It is also important to select bottles from iconic well established distilleries, as these are the ones that will be most in demand. The main distilleries that I am interested in are Ardbeg, MacAllan, Balvenie, Talisker, Glenfiddich and Port Ellen. These are all very well respected and are in high demand all over the world. The last one that I mentioned has closed so it goes without saying that demand for their expressions are going to increase.

Most of these distilleries have an online committee/club that is free to join. Quite often, special limited edition expressions are offered only to member. The last committee exclusive that Ardbeg offered (Ardbeg Supernova) was ranked as the world’s second finest whisky and now sells for 150% of the price less than one year on. In years to come as more of these limited bottles are consumed I expect the value to increase.

The ideal bottle of whisky for investment purposes will be (in order of preference):
1 – From an iconic distillery (and if it has closed even better).
2 – Part of a very limited release
3 – Aged beyond 30 years (although younger expressions are also worth considering if they meet the rest of these requirements)
4 – Mostly unavailable to the open marker (i.e., committee releases or distillery exclusives)
5 – Taste good (I use the latest edition of Jim Murray’s whisky bible for this).

Take note that bottles are also produced by external bottling companies who buy casks en-primeur and bottle them much later. Often this is the only way to buy expressions from closed distilleries. Some external bottling companies to consider include Duncan Taylor & Co and Douglas Laing & Co.

I recently acquired a 30 year old bottle of MacAllan, bottled by Douglas Laing & Co. This particular expression was bottled after the whisky has matured in a rum cask and is one of just under two hundred bottles. I believe that this expression has a very high chance of increasing in value significantly.

There are also quite a few rare bottles that are only available by visiting the distillery. This can be very costly if you do not live near them (this is where I have an advantage). If you are able to visit a distillery at a small cost, it is definitely worth having a look to see what exclusives are available.

Whisky bottles are not as sensitive to wine as they have a high alcohol content. They can be stored anywhere that is not subject to major temperature fluctuations, however they must be stored within their tube or box, to prevent light from oxidising the whisky.

As far as taxes is concerned, duty is obviously paid when you purchase the bottles (unless you buy them from an airport), however I believe that like wine, whisky is exempt from capital gains tax.

I am very optimistic that my ever growing whisky collection will generate a good return for my portfolio however there is the possibility that some bottles will not increase in value as much as I hope they will. If this is the case I might even enjoy a nice dram of scotch when I retire!

Please do your own research.
"

US (S&P 500) Stock Market – February 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller. Background information here.

Chart 1 plots the Shiller PE10. Key points this month are:

Shiller PE10 = 19.9 which is down from 20.6 last month. My UK Equities target asset allocation therefore increases from 18.6% to 18.8%. Additionally my International Equities target asset allocation increases from 13.3% to 13.4%.

Shiller PE10 Average (1881 to Present) = 16.4. This means we are currently still 21% higher than the long run average since 1881.

Shiller PE10 20 Percentile (1881 to Present) = 11.0

Shiller PE10 80 Percentile (1881 to Present) = 20.6. The Shiller PE10 has now fallen back through the 80 Percentile.

Shiller PE10 Correlation with Real (ie after inflation) S&P 500 Price = 0.78

Chart 2 further reinforces why I am using this method. While the R^2 is low there appears to be a trend suggesting that the return in the following year is dependent on the Shiller PE10 value. Using the trend line with a PE10 of 19.9 results in a 1 year expected real (after inflation) earnings projection of 5.2%.

Chart 3 plots Real (after inflation) Earnings and Real Dividends for the S&P 500. Real Dividends are still falling however they are still above their long term trend. Real Earnings have a roller coaster ride continually, particularly since about 1990. If the Standard and Poors forecast earnings are to be believed however we continue to be above the long term earnings trend and climbing.

Assumptions include:
- Q4 ’09 & Q1 ’10 earnings are estimates from Standard & Poors.
- Inflation data from the Bureau of Labor Statistics. January & February ‘10 inflation is extrapolated.
- January & February ‘10 dividends are estimated as December ‘09 dividend.
- Prices are month averages except February ‘10 which is the 11 February ’10 S&P 500 stock market at 1430.
- Historic data provided from Professor Shiller website.

As always DYOR.

My allocation to emerging market equities

Tim Hale in his book ‘Smarter Investing : Simpler Decisions For Better Results’ provides some tips for investing in emerging markets. These are:
“
- do so in moderation;
- Own a diversified pool of markets, rather than putting all your eggs in one basket, such as China, despite what the Sunday papers may say;
- be prepared for the times when returns diverge substantially from UK and developed markets on the downside;
- don’t be overly optimistic about the degree to which a free lunch is on offer
“

Additionally he suggests that the correlation between emerging markets and developed markets is 0.6 although he also states that this could be generous. I have also considered that “from 1987 to 2004 emerging market equities only beat US equities by 1 percent ... but with around twice the level of volatility...”

With all this in mind plus knowing that I want to minimise fees and taxes I have positioned my retirement investing emerging markets equities as follows:

- Investing in moderation with a desired allocation of only 5%.

- The ETF owns a diversified pool of markets which I detail below.

- I am prepared for times when returns diverge substantially which should help me to buy low and sell high as I have described in previous posts.

- I am not being overly optimistic about the free lunch.

- I am buying the ETF’s within my ISA. I have done this as picking up on the high volatility point means that I may have to buy and sell often which is in my opinion best done in a tax wrapper to prevent capital gains tax ever becoming payable.

- I have minimised fees by buying an emerging markets exchange traded fund (ETF)

My Emerging Markets Equity ETF asset allocation is as follows:
- 16.9% China
- 15.7% Brazil
- 12.2% South Korea
- 11.0% Taiwan
- 8.7% India
- 6.9% South Africa
- 6.6% Russia
- 4.3% Mexico
- 2.7% Malaysia
- 14.9% Other

As always DYOR.

Buying Gilts, Property, International Equities and UK Equities

As an employee of a company I have the option to contribute to a pension scheme. I have made the choice as part of my retirement investing strategy to contribute to the pension scheme as the company matches my contributions up to a limit, plus as I salary sacrifice into the pension, they also generously contribute the 12.8% employers national insurance that they would have otherwise paid to HMRC. I will complete a blog on pensions hopefully in the near future.

This is new money that enters every month and is currently the equivalent of about 0.5% of my total retirement investing assets. Another months worth of contribution has just been made. This is currently automated to occur each month and will be invested as follows:

- 4% to Index Linked Gilts. This adds up to be a very small contribution but I want to just keep nibbling a little.

- 60% to UK Commercial Property. A big contribution is made here as my desired low charge portfolio requires 10% asset allocation and my current low charge portfolio is only at 8.1%.

- 21% to International Equities. My desired low charge portfolio currently requires 13.3% asset allocation and my current low charge portfolio is only at 13.1%. This is the only input to International Equities that I am currently exploiting.

- 15% to UK Equities. This is one that requires a little explaining. My desired UK Equities is 18.6% and my current UK Equities is 18.6% so I am where I need to be. Where I am underweight heavily is Emerging Markets Equities by 2.3% and my total Equities exposure is also underweight by 2% at 54%. In an ideal world I would be buying Emerging Markets however my company based pension is inflexible (like a lot of company based schemes I would guess) and the lowest cost Emerging Markets Equity fund that I can buy has fees of 2%. Now I refuse to pay anyone 2% in fees and so the compromise I have made is to try and bolster my Equities allocation while acknowledging I am underweight Emerging Markets. Not ideal I know but fits with strategy to minimise fees.

As always DYOR.

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

My Current Low Charge Portfolio – February 2010

Buying (New money): As always I contributed about 60% of my gross salary towards my retirement investing strategy. Since my last post the allocations I have made are 100% Cash.

Asset Movements: As I detailed here I also moved about 0.6% of my total retirement investing assets from cash to commodities (gold).

Selling: Nothing this month

Dividends: Australian Equites paid dividends equal to 1.6% of the total value of my Australian Equities. These dividends were moved to cash.

Current UK Retail Prices Index: 2.9%

Current Annual Charges: 0.59%

Current Expected Annual Return after Inflation: 4.1%

Current Return Year To Date (from 01 January 2010): -2.8%

How close am I to retirement: 39.7% down from 41.3%. Retirement can move further or closer each month and is affected by movements in asset allocations, asset prices or additions/withdrawals to my current low charge portfolio.

The following are the highlights for the month:

- Desired Cash portion moves from 12.4% to 11.5%. This month I have moved further from the desired by going from 13.5% to 14.0%.

- Desired Bonds portion doesn’t move from 17.4%. This month I have moved further from the desired by going from 20.1% to 20.8%.

- Desired Property stays constant at 10.0%. This month I have moved closer to the desired by going from 7.9% to 8.1%.

- Desired Commodities stays constant at 5.0%. This month I have moved closer to the desired by going from 2.6% to 3.2% with the gold purchase.

- Desired International Equity portion moves from 12.9% to 13.3%. This month I have moved further from the desired by going from 13.3% to 13.1%.

- Desired Emerging Market Equities stays constant at 5.0%. This month I have moved further from the desired by going from 2.9% to 2.7%.

- Desired Australian Equity portion stays moves from 19.3% to 19.2%. This month I have moved closer to the desired by going from 20.5% to 19.5%. As I mentioned above dividends helped me to remove some assets from here.

- Desired UK Equity portion moves from 18.0% to 18.6%. This month I am right on the desired by going from 19.3% to 18.6%.

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%.