Sunday 31 March 2013

UK House Value vs UK House Affordability – March 2013

This is the monthly UK House Affordability update, which is the metric that I believe is the key driver of UK House Prices.  It also updates UK House Value which is the metric I am using to assess when it is time to buy a UK home and Sales Volumes.  The last update can be found here.

Let’s first update the key data being used to calculate both UK House Value and UK House Affordability plus report on Volumes:

  • UK Nominal House Prices.  There are numerous UK House Price Indices which each measure something different.  This analysis has always used the Nationwide Historical House Price dataset which measures the price of a Standard House and so this month we stay with that for consistency.  March 2013 house prices were reported as £164,630.  Month on month that is a rise of £1,992 (+1.2%).  Year on year also sees an increase of £1,303 (+0.8%).
  • UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a different picture.  Month on month that increase of £1,992 turns into an increase of £810 (+0.5%).  Year on year that £1,303 increase turns into a decrease of £4,525 (-2.8%).  In real terms prices are now back to those around January 2003.
  • UK House Sales Volume.  Sales volumes according to the Land Registry were 53,860 in December 2012.  Month on month that is a fall of 14.0% and year on year a fall of 15.3%.  Volumes are now 40% of peak sales in May 2002 and 66% of the dataset average volume.  
  • UK Nominal Earnings.  I choose to use the Office for National Statistics (ONS) Average Weekly Earnings KAB9 dataset which is the seasonally adjusted average weekly earnings of both the public and private sector including bonuses.  January 2013 sees earnings at £470.  Month on month that is a nominal decrease of £2 (-0.4%).  Year on year sees a nominal increase of £5 (+1.1%).  With inflation (the Retail Prices Index) running at 3.3% over the same yearly period the purchasing power of those that work continues to be eroded.
  • UK Mortgage Rates.  The proxy I use to monitor mortgage interest rates is the Bank of England dataset IUMTLMV which is the monthly interest rate of UK resident banks and building societies sterling Standard Variable Rate (SVR) mortgage to households (not seasonally adjusted).  February 2013 sees a mortgage rate of 4.4% which is flat month on month and year on year is an increase of 0.26%.  While this metric sees mortgage rates increasing a number of mortgages are seeing falls largely because of the Funding for Lending Scheme (FLS).  2, 3 and 5 Year Fixed Rate Mortgages with high 25% Loan to Value Ratios (LTV) requirements have seen year on year falls of between 0.5% and 0.59% and at 2.87% for a 2 year effectively mean negative real interest rates.  

Saturday 30 March 2013

Dividend Reinvestment is a must to Maximise Wealth Building

There are almost as many investment strategies as there are financial websites.  These might include everything from you must buy this share as it’s a guaranteed ten bagger through to a fund that looks like it will protect you no matter the economic weather.  Of course the strategies discussed will also likely be dependent on whether the person writing the strategy has a vested interest of some description.

I’ve laid out my strategy for all to see however it glossed over an exceptionally important element.  That element is share dividends and specifically how crucial it is to reinvest them while you are building your portfolio.  If you are a UK Investor Monevator touched on this topic back when I was first starting on my Retirement Investing Today journey and more recently DIY Investor has also reinforced their importance but it’s the must have Investing Bible for UK Investors that really reinforces the point with the section entitled “Spend dividends at your peril”.  Dividend reinvestment is important because it is likely they make up a significant proportion of the total return that comes from your individual share holdings, High Yield Portfolio (HYP) or Index Tracking Fund to name but three.  By reinvesting you both get that extra cash into your portfolio, instead of being tempted to buy something you likely don’t really need, but additionally you also then get those dividends compounding year on year.

Let’s look at whether reinvesting dividends is still important in more recent times using my recently built FTSE100, FTSE250, FTSE Small Cap and FTSE All Share data sets.  For today’s analysis I am using the period 18 March 2008 (the first date I was able to source all data required) to the recent market close of the 28 March 2013.  The annualised return or compound annual growth rate (CAGR) for capital growth only and dividend reinvestment for these four datasets is shown below.

FTSE100, FTSE250, FTSE Small Cap, FTSE All Share Capital CAGR and Dividend Reinvestment CAGR
Click to enlarge   

Saturday 16 March 2013

Building FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Data Sets

There are many UK stock market Indices, each of which is trying to measure something different.  The one mostly reported by the mainstream media is the FTSE 100 which is also the Index we regularly use to value the UK stock market.

This week I was looking to dive a bit deeper into some of these other UK Indices to conduct some more detailed analysis.  I trawled the internet for datasets but surprisingly, given the sheer amount of financial data freely available online, I came up blank for sensible datasets.  I therefore had to put my more detailed analysis on hold and spend a number of hours reconstructing a number of FTSE UK indices.  While I haven’t conducted a large amount of analysis yet I thought it was worth sharing the data as it will form a basis for a number of pieces of analysis I intend to do going forward.

The FTSE indices I’ve chosen to reconstruct are:

  • The FTSE100 Index which consists of the 100 largest UK public companies.  These 100 companies make up about 81% of the UK market. 
  • The FTSE250 Index which is the next 250 largest companies after the FTSE100.  These 250 companies make up about 15% of the UK market.    
  • The FTSE Small Cap Index contains smaller companies outside of the FTSE100 and FTSE250. These companies make up about 2% of the UK market.    
  • The FTSE All Share Index which is a combination of the FTSE100, FTSE250 and FTSE Small Cap Indices.  It therefore contains about 98% of the UK market.

Each of these Indices has two variants.  The first is the Price version of the Index which is the weighted market capitalisation of the companies within the Index on the day of interest.  These are the Indices you usually see on television or in the papers.  The second is the Total Return Index which assumes that all dividends (or other cash distributions) are reinvested back into the Index.  By looking at the change in both of these Index values between any two dates you can calculate a lot of interesting information which includes:

  • The Price Index will allow you to calculate the annualised Capital Gains that you could have achieved, after expenses, if you had bought a tracker fund or ETF and it tracked the index well.
  • By then calculating the annualised gain from the Total Return Index and subtracting the Price Index annualised Capital Gain we can then calculate the additional annual return that could have been gained by that same fund or ETF through reinvested dividends.  I intend to run this analysis in an upcoming post as this is one reason why I was looking for the data in the first instance.

Charts for the FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Price and Total Return Indices can be seen below.  These take the value of the respective Index on the first possible investment day of each month.

Graph of the FTSE100 Price Index and FTSE100 Total Return Index
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Graph of the FTSE250 Price Index and FTSE250 Total Return Index
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Graph of the FTSE Small Cap Price Index and FTSE Small Cap Total Return Index
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Graph of the FTSE All Share Price Index and FTSE All Share Total Return Index
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Thursday 14 March 2013

Gold Priced in British Pounds (GBP or £’s) – March 2013 Update

As I’m writing this post the mainstream media is telling me that Gold, when priced in its globally quoted, currency is trading at $1589.50 an ounce.  In recent times when priced in US Dollars Gold has been tarnishing somewhat (and I used to think that it was only Silver that tarnished).  Compared with the February 2013 average it has fallen in price by 2.3% and compared with the March 2012 average it has fallen by 5.0%.  If you’re an Investor paid or spending in US Dollars then these are probably relevant numbers however as a UK Investor the numbers are bordering on being meaningless.  Let’s therefore have a look at what is happening to Gold when priced in Pound Sterling.  If you’re interested in history the last update of this metric was in January 2013.

The chart below shows the Nominal Monthly Gold Price in £’s since 1979.  The key Nominal Gold metrics are:
  • The Nominal Gold Price is currently £1,054.16 which is 0.3% above the January 2013 Price of £1,051.35.
  • Year on Year Nominal Gold Prices are only 0.4% below the March 2012 Price of £1,057.94. 
Monthly Gold Prices in £’s
Click to enlarge

In contrast with US Dollar Investors we can see that UK Investors are just not seeing price falls.  This is caused by Sterling devaluing against the Dollar at a rate pretty close to the fall in Gold Prices when measured in its globally quoted currency.

Sunday 10 March 2013

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – March 2013 Update

 This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:
  • The FTSE 100 Price is currently 6,484 which is a gain of 2.1% on the 01 February 2013 Price of 6,347 and 9.3% above the 01 March 2012 Price of 5,931.
  • The FTSE 100 Dividend Yield is currently 3.42% which is down against the 01 February 2013 yield of 3.47%.
  • The FTSE 100 Price to Earnings (P/E) Ratio is currently 14.44.  
  • The Price and the P/E Ratio allows us to calculate the FTSE 100 As Reported Earnings (which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings) as 449.  They are down 13.0% month on month and down a large 23.9% year on year.  The Earnings Yield is therefore 6.9%.
So we find ourselves in a continuation of the interesting situation that I highlighted last month.  Nominal Earnings are falling off a cliff and have been consistently falling since October 2011’s Earnings of 628.  They are now down 28.5% since then yet in comparison Prices are increasing.  Nominal Prices are up 27.7% over the same period.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  Look at the trend line of the Real Price.  After you strip out the effects of inflation the perceived market value is doing not much more than oscillating above and below a flat line which we are now sitting on.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

Chart of the FTSE100 Cyclically Adjusted PE, FTSE100 PE and Real FTSE100
Click to enlarge

Thursday 7 March 2013

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – March 2013 Update

With the mainstream media this week reporting new nominal highs for the Dow Jones Industrial Average lets also run our own regular analysis of the US market to get some detail on what is really going on in this market.   As always instead of the Dow, which only looks at 30 large companies, we’ll turn our attention to the S&P500 which looks at 500 leading public companies.  Last month’s update can be found here.

Before we crunch the numbers it’s worth pointing out that while titles like Asian markets climb after Dow Jones hits record high make for great headlines, I can’t help but feel that this is misleading the general public as they might actually think that the market is at new highs.  Of course regular readers will know that Dow isn’t at a new Real (inflation adjusted) high, but only at Nominal highs, as the unit of measure that the Dow and S&P500 is measured in, the US Dollar, is constantly being devalued through inflation.  When it comes to the S&P500, the Real high was way back in 2000 and we are still some 22.5% below that level.  

Let’s now look at the key S&P 500 metrics:
  • The S&P 500 Price is currently 1,543 which is a rise of 2.0% on last month’s Price of 1,512 and 11.1% above this time last year’s monthly Price of 1,389.
  • The S&P 500 Dividend Yield is currently 2.0%.
  • The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $89.63 for an Earnings Yield of 5.8%.
  • The S&P 500 P/E Ratio is currently 17.2 which is up from last month’s 17.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Chart of the S&P500 Cyclically Adjusted PE, S&P500 PE and Real S&P500
Click to enlarge

Sunday 3 March 2013

UK Mortgage Interest Rates – March 2013 Update

This is the regular UK mortgage interest update for March 2013.  The headline for this month is that the UK Government / Bank of England market manipulation scheme known as the Funding for Lending Scheme (FLS) is working.  Last month’s update can be found here.

Let’s firstly look at the raw data.  The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:
  • Standard Variable Rate (SVR) mortgages.  These continue to rise.  Today they sit at 4.4%, up 0.03% month on month and 0.22% year on year.
  • Lifetime Tracker mortgages.  These also continue to rise.  Currently they are 3.68% which is a monthly increase of 0.04% and a yearly increase of 0.11%.
  • 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV) on the other hand are falling significantly.  These are the mortgages you would expect to be affected by the Funding for Lending Scheme.  This is because the Scheme is “theoretically” only available for a limited period.  (As a reminder the scheme started on the 01 August.  From this date Banks and Building Societies have access to the scheme for 18 months with the scheme allowing borrowing for a period of up to 4 years.)  Today we see these mortgages at 3.06% (down 0.29% on the month, 0.21% on the year), 3.41% (down 0.26% on the month, 0.36% on the year) and 3.65% (down 0.24% on the month, 0.53% on the year) respectively.  Since the scheme started the falls are 0.63%, 0.60% and 0.46% respectively.
A history of these mortgage rates can be seen in the chart below which also shows the announcement dates of some of the well known schemes that have had a large effect on the market, namely a Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and Funding for Lending.

UK Standard Variable Rate Mortgages, Lifetime Tracker Mortgages and Fixed Rate Mortgages
Click to enlarge

What this all means is that today an average 2 year fixed mortgage can be had for a real (inflation adjusted) rate of -0.22%.  Yes you read that right.  Mortgage rates in real terms are negative.  3 and 5 year real rates are also negligible at 0.13% and 0.37% respectively.  The question is how much lower can they drive rates in nominal terms?  I can’t see it being much further given that the Bank of England want and will do everything they can to engineer inflation.  Tracking these rates for the next few months will give us a good steer.