Rental Price Growth

Posted by Angela Farrell on October 28, 2008

I thought it was about time I wrote a little piece on what I think is going on at the moment as confusion seems to reign!

I will try and cut through the noise…

…sensationalism and general misinformation which I feel the media are responsible for. I have found the FT one of the only credible sources of information with the depth of journalist understanding to report things in an accurate way. A lot of the other publications seem to be written by people who have no direct experience of what they are writing about – not that this would even matter because I don’t think any of us are under the illusion that their main aim is to do anything but sell newspapers!

The government has been acting in a pretty reactive rather than planned way at the moment which shows me that many things have been taking them by surprise. Mandleson’s appointment is no doubt in part to help Brown manage the media, who it looks like he hasn’t done a great job with- Hence his current dire approval rating in the opinion polls

There seems little doubt…

that we will shortly see a Conservative government, I think it would take something pretty big to change this course. If it’s not true that Brown is an uncharismatic leader that voters can’t connect with then the recent economic events (perceived high consumer inflation, falling house prices and banks going to the wall) are more than a mountain that he must climb

If David Cameron’s policies are better than Brown’s or not (they probably aren’t that different) his ability to communicate and position himself as the solution to people’s concerns over what’s in their pocket will likely create the outcome he wants. Brown cant Teflon coat himself against this, after all he has presided over the country’s finances for the last 11 years and the average voter will see him as partly responsible

My personal view…

is that there is not a lot he could have done, I do buy this as an international problem. However I believe that instead of whittling on about inflation and tinkering with the fire while it burns I think he should have put pressure on the MPC to cut rates earlier like the American’s did. Where is the inflationary pressure going to come from in a year or two when GDP is in reverse!?

Indeed, the bank of England is not necessarily too interested in inflation levels today (although a politically sensitive topic) but where their modelling systems tell them that it is likely to be in 2 years. Indeed, whilst the consumer price index is at 5.2% currently the central prediction is that it will settle to 2% now that oil, commodity and energy inflationary pressure is subsiding

The MPC and ECB are only now showing their resolve to drop interest rates with their coordinated 0.5% one day drop last week. It is looking increasingly likely that the MPC are now on course to drop the base rate to around 3 to 3.5% in 2009. It all seems 6-12 months too late in my opinion though, we could all see it coming so why not have acted earlier!!?

The recent news…

that the government is buying stakes in the banks in a move to part nationalisation (or dare I say it sort term socialism!) looks to have been received well by the markets. Weather Gordon did persuade the American’s and the rest of the world to follow this strategy like his office is suggesting I’m not sure. It could just be a stroke of genius though if he transforms his public image from the iron chancellor to the platinum prime minister!

The banking sector is in the midst of its biggest shock since the 1930s. You have probably seen how a crisis which steamed from the sins of American mortgage lenders writing loans imprudently to people who didn’t have the ability to repay. They then packaged them up into collateralised debt obligations and structured investment vehicles (basically big packets of loans good and bad) which are then sold on to other investors on the wholesale lending market

All sorts of people bought them…

(banks, pension funds, the state of California!!) because the promised returns were higher than other investments and the returns looked low risk because the credit agencies graded them as such

These investors have now been burned big time and it is not surprising that no one wants to buy mortgage debt on the wholesale markets. So it is effectively closed at the moment

It is the institutions that rely on the wholesale debt market to sell their mortgage assets that have run into the most trouble over the last few months. It is no coincidence that Northern Rock, Bradford and Bingley and HBOS are the banks which had the highest imbalance between the money that savers or depositors paid in and the amount they lent out (the balance coming from the wholesale debt market) are the ones that have run into trouble

Something really shocked me…

HBOS really shocked me though as they were doing around 40% of the nations mortgages at one point!). It is also interesting how Northern rock lent out about 7 times more than it had in savers capital, Bradford and Bingley about 1.6 and HBOS a bit less – note the order in which they got into trouble! – It was really the market that decided when it was going to stop dealing with them that killed them and most of it seems to have come from the degree to which each institution appeared to be approaching difficulty in financing their short to medium term debt.

They are probably not bad businesses…

and their loan books still seem to be holding up with a relatively low rate of arrears (with the possible exception of Bradford and Bingley). Counterparty liquidity concerns are creating a self fulfilling prophecy – if a bank looks like it can’t repay, people won’t trade with it and it is dead. This means that the cost of the money which banks lend to each other has gone up hugely (as measured by LIBOR), which they pass on to consumers.

This has so far resulted in increased mortgage lending rates (and the spread between the bank of England base rate of 5% and the mortgage rate which we are being charged, about 6% on most deals depending on loan to value).

So what does all this mean for those of us who are still investing in property?

Things were easing and we had a pretty nice situation with the lending about a month ago until Lehman went to the wall. Libor has soared and lending has been reigned in again. I guess the banks will probably be in this knee jerk phase for 3 months again like last time. They have to come back though, or they won’t make any money. I’m just glad we are in Peterborough because the figures work so we can still get the money even now as long as we borrow at 75% loan to value

The severity and speed in the change of direction in the property market took us all by surprise, it has certainly been faster than the late 80s (but maybe won’t be as deep) (according to some of the old boys with portfolios of 100+ properties that I talk to who were there). But the national statistics from the lenders point to around a 12% decline over the last year.

In terms of what we can buy properties for in Peterborough we have seen a 20% change, but maybe only a 5% lower figure on the revaluations! This is the critical point at the moment, take note!!: the DIFFERENTIAL between what you can achieve on a below market value deal and what the average property is selling for in the same street has widened dramatically. Vendors (sellers) are much much more flexible and I guess that we are pretty much buying for as low as we will be able to. Maybe we will be able to find them for 5% cheaper in a year 18 months, I’m not sure.

Most Investors base the price they will pay for an asset less on its supposed value today rather its expected value next year and the year after and so on which means that most of us are paying 2010 prices!

What about rents?

Well, they are still strengthening, our average time to let a property is down to about 4 days and we are on course for 10% rental growth this year in many areas. Property values and rents often have an inverse (or opposite) relationship. It could be said that they act like a see saw. When values are rising fast rents tend to stagnate as we saw from 2000-2007 but when values stabilise or fall rents tend to take off. Why is this?

Just like in the late 80s…

the following is happening: The first time buyers who aren’t buying at the moment because they can’t get a mortgage or are scared are renting. Many owners on the second or higher rung of the property ladder who want to move are resorting to renting their property out and becoming a tenant in the location where they move to

Which means rental price growth!

Mark Homer

http://www.progressiveproperty.co.uk/book