I’ve been thinking of reentering the housing market of late, not because I think prices have hit the ‘bottom’ but rather because there’s a point at which any further decline is likely to be smaller than the losses incurred via renting. There are probably also smart ways to combine a mortgage with a trading account, for example by taking out an offset mortgage and having one’s main trading capital in this account. Then it can be fed in and out of the brokerage account whenever one has a trade that needs margin. Needless to say I believe in betting small, I’ve seen too many traders blow up because they haven’t had good money management in place. And this is regardless of their ‘edge’.
So where am I thinking of moving? It could well be out of Southport in which sellers seem to be particularly stubborn with their asking prices. I’ve been looking at Skelmersdale for example, where John Littlewood has lived for years plus another good friend of mine. Of course there’s very little in Skelmersdale apart from a TM temple, but at least the yogic flyers won’t think it particularly weird if I start doing some Zhan Zhuang outdoors. I’ve tried it in a local park in Southport and besides the midges I got some funny looks from early morning dog walkers.
BTW, anyone interested in offset mortgages should check out First Direct’s new offerings:
http://www.firstdirect.com/mortgages/offset-overview.shtml
By: Nigel Davies on July 7, 2009
at 10:15 pm
Hi Nigel,
For what its worth we have had a First Direct offset mortgage for just over three years now, we really like the flexibility and control. It also helps that until recently we had been tracking the base rate very happily! We have just fixed it at 2.99% over 2 years, the only gripe being that the arrangement fees for the new deal were quite high, but we view it as a kind of insurance.
Regards, Kevin.
By: kevg on July 8, 2009
at 8:38 am
Hi Kevin,
Interest rates are a very serious question right now and I wonder if we’re going to get a repeat of the early 1990s when they went through the roof in order to curb inflation. The signs with the current UK regime are that they’d do anything to pander to the current generation of credit junkies, for example allowing hyper-inflation. But things can soon change, and indeed the propect of greater fiscal discipline under the tories is probably what’s been behind the rally in sterling.
Nigel
By: Nigel Davies on July 8, 2009
at 9:00 am
Hi Nigel,
Yes indeed. I got on the property ladder in 1989 so have painful memories of having been saddled shortly after with with high interest payments and about a decade of negative equity. This has been a major factor in our decision to fix, I think most people that remember those times think interest rates will inevitably will rise at some point, it’s just that question of when. I’m not sure either party has the answers but I don’t take as much of an interest as you do. I certainly feel a bit smug (and lucky) to have spent a few of the good years paying off my mortgage rather than spending or borrowing.
To go off on a financial tangent, Mark Thomas the comedian (I hate to presume, but I’m fairly sure you won’t agree with his politics) has recently recorded some podcasts which involve interviews with various campaigning financial experts. I have found most of these very eye-opening with respect to subjects such as the tax paid by corporations and rich people, non-doms and the de-regulation of the City of London.
By: kevg on July 8, 2009
at 10:21 am
Hi Nigel,
I used to live in Southport, years ago. Went to Meols Cop High School. Can be a nice area. But I always preferred the areas surrounding Southport rather than Southport itself!
As buying property I think it maybe a dangerous time for it. House prices are low but everything else is more or less doubled in just a few years. So in effect your pound is worth half as much as it used to be. We are being robbed by inflation.
Technically your money is only worth what you can buy with it. For instance: if I have a £100 but food, oil and living cost double then that £100 is now worth only £50 – so to speak.
The politics of our money is a very bitter one. I’ve been saving for a long tme but I feel that the money I’ve saved up has lost half of its value by inflation within just a year…marvelous! It is like they’ve dipped their hands into my saving and took half of it.
Since am a renter I can only talk about buying property in a philosophical way. You are getting the property cheaper but you are also selling your old property cheaper…technically you haven’t lost any money but you’ve not gain anything either. But, inflation is what I would be worried about – everything has doubled in price except for our property. As I’ve wrote before – we have been robbed by inflation!
Hopefully I haven’t confused you because I’ve confused myself….good luck with property hunting!
By: noddyfischer on July 8, 2009
at 12:43 pm
Mark,
The problem is that there may not be too many safe investments right now, and with most of the electorate and most governments in debt I wouldn’t want to bet heavily against continued ‘quantitaive easing’ (aka printing). If they do this then sooner or later we’re going to get inflation.
Amongst the available worthwhile investments in an inflationary scenario the first is ourselves (marketable skills) and the second may be somewhere to live. Property is actually a better inflation hedge than gold because of its utility value. And as for commodities (oil, food etc) they may have their value diminished by people cutting back. For example China was largely responsible for the bull run in commodities but as the west cuts back on Chinese goods they’re going to feel the pinch as well.
So my take on it is that we’re going to get a huge recession in which the ESSENTIALS of life are paramount. And anything without utility value is going to decline (including unused cash). What we don’t know is how much they’ll use the printing presses, but my guess would be that they’ll try to print enough money to stop a very sharp fall in house prices.
Nigel
By: Nigel Davies on July 8, 2009
at 1:43 pm
Kevin,
This Mark Thomas makes some excellent points, but I guess I’d disagree with his diagnosis and any proposed solution, if he ever came up with these things. And lucky for him he wasn’t born in the USSR!
Nigel
By: Nigel Davies on July 8, 2009
at 2:21 pm
Agree with Nigel’s comments above on utility in an inflationary scenario. And in a widely inflationary scenario, renters are actually highly exposed and in fact, double-squeezed: from rising rents payable and the lowering purchasing power/utility of their cash assets.
[A recasting of this idea can be seen from the perspective of the homeowner, in the form of his 'owner’s equivalent rent' or home dividend receivable.
In an inflationary (specifically money supply increases) period, even if the property shows no asset appreciation, the homeowner at the very least enjoys higher utility in the form of increasing owner’s equivalent rent 'cash-flows'.]
And this extends into a very prudent opportunity for those who are able to acquire property beyond home residence for the purpose of rental yield.
Real estate has always been one of the better long-term inflation hedges, barring regulatory/secular/war nasty surprises of course.
Don
By: dustysojourner on July 8, 2009
at 4:07 pm
Nigel,
>>Property is actually a better inflation hedge >>than gold because of its utility value.
Quite agree! This simple point was made to me some years ago by a friend with more financial savvy than I had. At the end of the day, we all need somewhere to live so to some extent there is little point being obsessed with the value of the property you live in (assuming you are lucky enough to own) so much as the cost of living there.
Whilst on the subject of property, let me just mention the unfairness of the leasehold system in this country.
By: kevg on July 8, 2009
at 4:20 pm
Don,
You’re probably right that this is a good time to become a landlord, especially with a lot of their blood on the streets right now. The one scenario that concerns me is if the recession becomes so deep that people start sharing and moving in with parents, creating a large glut of property.
Property bulls often point to divorce rates and such as presenting a case for an ever increasing demand, but a hundred years ago extended families would share a single dwelling. For this reason I’d be very cautious about the amount of leverage applied (ie borrowing to let).
During this conversation an idea has come to mind, which is to offer places to ‘live in’ chess students in a similar way that martial arts masters used to operate. Say, for example, I were to pack 5 in a room, how much could I charge?
Nigel
By: Nigel Davies on July 8, 2009
at 7:04 pm
Nigel,
Interestingly, your prior musings about the dynamics of global vs local socialization, seems to find a voice here.
What you said above about “people start sharing and moving in with parents” and “but a hundred years ago extended families would share a single dwelling” may be a rare occurrence or last resort in the UK; but here in my Asian island country, the former is still pretty much the norm and the latter is not uncommon.
The typical family unit profile here is one of two types:
the basic nuclear family — a set of parents and children;
and the nuclear family++ — a set of parents, children and the grandparent(s).
And you’re right that these factors, along with the usual economic drivers, have to be considered when acquiring investment property for rental yield.
Having said that, we very recently closed on a local investment property at what I personally would say to be not the best deal we could have gotten. While I do not expect to catch the absolute lows of the market (back in March…so far at least), I suspect we may have to suffer some asset price depreciation on this property in the periods ahead.
The deal-clincher for me here though, was that the six-month old apartment came with an existing corporate tenancy contract (with 1.5 years remaining), which is about as good as it gets and cushions the potential downside risks somewhat.
Actually, what you said about ‘live in’ chess students was something I considered doing last year, in looking for a good WeiQi/Go teacher in China for a short/medium term live-in training programme. It is quite common for weiqi instructors in Japan, South Korea and increasingly China, to host such training programmes for students who come from all over the world.
I dunno how much you can charge per pax for your 5 in a room chess programme; but I can imagine you could offer it as a package:
with 5am reveille for early morning zhanzhuang practice, yiquan push-hands and meditation sessions in between long and arduous chess instruction…
Don
By: dustysojourner on July 8, 2009
at 9:39 pm
Don,
I rather expected you to have a well implemented approach to the landlord question. I posted my query as a caution to anyone visiting these pages for financial guidance.
What I’m thinking right now is that if globalisation ultimately produces a breakdown of artifical economic dams (with a resulting ‘equalisation’ of McDonalds prices) then the west is in for quite a shock as far as living standards are concerned. The reaction to this shock may actually be more damaging than the shock itself, I don’t think we’re psychologically prepared.
Nigel
By: Nigel Davies on July 8, 2009
at 10:03 pm
Hi Everyone,
Found a really interesting video on Youtube about the value of Money. It is American but still the way currency is controlled is the same. 5 part film.
Mind you, America effectively caused the World Wide Recession…if it exist that is! I think this recession is an excuse to rob the public out of their assets and wealth.
A recession, in my eyes, is nothing more that theft. The banks are far too powerful, and as one wise man said, ‘I think banks are more damaging than standing armies!’
http://www.youtube.com/watch?v=_dmPchuXIXQ
Come to think of it, your property is worth what you are willing to sell it not what someone says it’s worth! If house prices fell so dramatically that they were worth only a couple hundred pounds in the housing markets nobody would be willing to sell them. So that would force the prices back up.
A friend of mine who lives a few houses down the road from me said, ‘my property is going to be worth hardly anything soon.’
I told him, ‘actually I wouldn’t pay too much attention of what they say your property is worth because if they give it a cheap quote you would never sell it – so therefore it is worth more. I think these recessions are well planned scams to rob the public out of their assets!’
I think these recessions are mathematically planned to brainwash the public into hysterics and encourage them to make bad decisions! The government and banks seem to favour the times when a large percentage of the public will struggle as that will be the time when most of our assets will be stolen from us!
By: noddyfischer on July 9, 2009
at 12:11 am
Mark,
Another way of looking at this might be to consider that American caused a huge world-wide boom, an explosion of credit leading to ideas and inventions to attract all this money that has been sloshing around. Whilst boom and bust is not a good thing I suggest that credit and debt can lead to great inventiveness and growth. As for having the assets ’stolen’, they were never really ‘owned’ in the first place. They were all acquired on the never never with wealth that didn’t really exist.
The problem with all the screaming and finger pointing that’s going on right now is that we actually don’t know how things would have been without credit and debt. And this major error in perception (the grass would have been greener had we done such and such) may well lead is to something much worse.
My great concern right now is that we’re headed down the road of state control, aided and abetted by both popular opinion (‘free market capitalism is bad, let the government take care of it’) and the advances in technology being used for surveillance. And one of the ironies of this scenario would be that the technology was developed because of credit!
Nigel
By: Nigel Davies on July 9, 2009
at 4:52 am
Nigel,
Yes, did not mean to posit any one particular financial+investment view as well. Thanks for the cautionary note.
While I always try to remain agnostic about market directions (which can be dangerous for one’s trading, particularly when trading shorter term timeframes), I can’t help but form certain views for the medium/longer term picture. And these actually lean towards a more cautionary outlook for the near future, best summed up in the following words of a money manager whose thoughtful commentary I try to follow on a regular basis:
John Hussman, Jul 6 2009:
“[...] but it does suggest a near-doubling of the U.S. CPI over the coming decade, with most of the pressure coming several years from now.
That’s enough time that it will be hard for investors to sustain a durable sense of doom about inflation risk – particularly in an economy that’s unlikely to gain a great deal of traction – so it’s not at all clear to me that investors should be rushing for inflation hedges and “reflation trades” here and now. It will be a process of ebb and flow, just like we’re seeing in stocks (and will likely continue to see).”
http://www.hussmanfunds.com/wmc/wmc090706.htm
So if one thinks that markets are likely to be moving in an “ebb and flow” range and that “inflation hedges”+“reflation trades” need not be put on for some time yet; it does seem to be at odds with the drying ink on that property sales agreement…
True. But sometimes, trying to score the most judicious timing in the property market has to be balanced against the utility (read psychological) value for the larger familial need who feels most comfortable holding REAL estate.
I hear what you say about globalisation producing equalisation between the Producers and Consumers and ultimately extending to a ‘normalising’ of living standards, which leads to a reactionary shock, especially when ‘normalised’ from on high downwards.
But perhaps the road ahead, as the global economic forces continue to roil around us in the coming years, need not necessarily has to be one of abrupt and painful changes in living standards. Man is an amazingly adaptable creature. And one instance of his adaptability can be seen in the huge turnaround in the US savings rate since the subprime crisis began:
http://2.bp.blogspot.com/_eKH-tiSXFbc/Skhy8Nn7kYI/AAAAAAAAFgQ/Yrr18AifeNk/s1600-h/savings+rate.GIF
[from macro-man]
I don’t know enough and certainly am not suggesting that a more than 20 year habit (of borrowing rather than saving, of easy access to credit) can be kicked in just a couple of years (and indeed, as you mentioned, there may well be “withdrawal” shock ahead).
You painted the picture of paradoxical perception of the unknowable ‘what-if’s well in your last comment above. And I think you’re right that the coming years shall certainly not be easy ones, and may very well be characterised as:
“It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness”
Don
By: dustysojourner on July 9, 2009
at 9:12 pm
Don,
Thanks for the reminder about John Hussman’s articles. On the Spec-List we used to poke fun at his bearish calls but now I’m going to link to his site for easy reference.
Actually I rather envy traders who are able to have long-term insights and then follow them. Unfortunately I seem cursed with an attention span that can barely last the length of a chess game which makes me one of the world’s worst long term investors. Having said that I’ve been quite lucky with property in the past.
Nigel
By: Nigel Davies on July 9, 2009
at 9:48 pm
Hi Nigel,
Yes, I agree with your response, not entirely, but the point that credit does help society and technology move forward is correct. I’m very impressed with inventive people, especially those that help the world move forward and get better. Humans are capable of a lot, unfortunately there are some bad agendas out there that are fueled by greed and quite possibly evil intentions.
I think that offering credit is a good system as long as it is administered correctly and they don’t just borrow money to anybody – which is obviously bad policy. I think the way things are done will change eventually because what is being used currently doesn’t work!
Well, maybe it is working and recessions are the natural tendency of growth – not everything can grow indefinitely and when things are changing, sometimes things get worse before they get better. You have to expect dips in the graph of growth – even when they sometimes dip uncomfortably!
Probably the biggest credit risk that people and creditors have are in property. This will always be the case as everybody needs somewhere to go and live. I just feel that when the system is abused or run incorrectly it is not just those who are responsible who take the fall – everybody does. Even those that are renting and keep up with the rent have to pay the loses.
Technically speaking we are slaves to a few. Tax is good when it is used for improving society but it can be abused with greed. Sometimes they take just a little too much and that is where collapse happens.
Every single great Empire and Society of the past had collapsed due to greed. Well, we can also say war too – but war is about greed!
What I think the problem is that there is good and bad in the agendas of politics. Most things start from good policies but end up turning into an evil one from good intentions. Ermmm…confusing myself again…lol!
Anyway, think you lot will enjoy these two clips about Investment Bankers, they are not the same video but do start the same:
http://www.youtube.com/watch?v=hXBcmqwTV9s&feature=related
By: noddyfischer on July 10, 2009
at 5:35 pm
I’d recommend Worsley Nigel. It’s very picturesque and boasts good local schools, transport links and facilities. There is also a thriving local Chess club and we’re always looking for new players and have heard you are pretty good
You can also probably bag a bargain around here now too.
By: chrisneale on July 14, 2009
at 12:22 pm
Chris,
The problem is I’ll have to take my son to school in S’Port 2 days a week. Worsley’s a bit far…
Nigel
By: Nigel Davies on July 17, 2009
at 9:08 pm