dothesums blog

Link: http://www.dothesums.co.uk/blog

For most people a house is the largest purchase they will ever make and along with their pension, is the biggest asset they will acquire.
It should be part of a sound and balanced approach to personal investment, including pension provision, savings and cash.

It goes almost without saying, that our houses should be primarily our home and should be chosen on that basis. Why be unhappy living in a property you have only chosen for investment purposes? We choose our own houses to enjoy, but we also recognise that we are investing a considerable amount of capital and cash in it. Capital that we have worked hard for, and as such we need to protect it from and if possible, get it to grow over the longer term. If you don't want to do this consider renting, it is much simpler.

House buying is not to be entered into without some care, consideration and financial analysis; a process usually referred to as ‘Due Diligence’.
Due diligence is the process undertaken by a potential buyer to analyse and assess the desirability, value and potential of an investment. It serves to confirm all material facts prior to purchase.

Ideally it should be carried out alongside the physical surveys, valuation and legal searches and certainly before any exchange of contract. Not to do so, risks future problems with value and resale. It is too late to avoid mistakes, once the property has been purchased.

Obviously getting the best financial deal is important, but this does not necessarily mean buying the cheapest. Buying for VALUE in the long term produces financial reward. This will depend to a large extent on the value growth patterns in the selected locations.

We cannot eliminate risk altogether, but we can make our financial future safer by guarding our capital carefully.
Firstly to preserve capital we should select wisely at the time of purchase through careful analysis of the available data.
Secondly the value of the asset and its alternatives should be monitored regularly.

These two strategies should really be followed for all of our major personal assets such as, pensions, savings, houses, cars and investments.

One fallacy of the property market is that there is one market in the UK. In this country the property market consists of a large number of micro-markets, loosely connected and which don't all behave in the same way. Even at this time in the second quarter of 2009 there are areas where property prices are increasing. [See article by Lucy Denyer in the Sunday Times of 5th.April.]

The principal influence on price is supply and demand, which mostly operates on a very local basis.
Currently demand is being regulated by the banks and building societies, through their various lending policies. But in terms of the physical capacity, the UK has been about thirty five thousand house short of the number of new households being set up and is probably worse than that now, because of the near collapse of new building resulting from the economic recession. The long term average of house price value is about +6.5%, or +2.9% above inflation. The current falls in value are a return to that long term average, following a sustained period of much higher increases.
In the same way that buyers assess a potential purchase by checking nearby planning applications, or whether the property will be subject to flood, buyers will seek to safeguard and defend their capital through a property due diligence examination.

Link: http://www.dothesums.co.uk/blog

It is reported that Mike Ashley, the owner of relegated Newcastle United has expressed regret that he failed to do due diligence – the process of thoroughly checking Newcastle’s finances – before buying the club.

It is common practice in the business world to check on business deals by carrying out 'due diligence' on the purchase of any major asset.

Why do buyers not do due diligence when they choose a house?

Well some do; but only in part. They carry out the legal and physical checks, but fail to do the most important part, the financial check.

In a radically changed economic environment, it is essential to assess the desirability, value and potential of a property, so that buyers can avoid losing capital, perhaps even avoiding negative equity.

Mike Ashley probably wishes he could wind the clock back.

Link: http://www.dothesums.co.uk/blog

On the day after General Motors has filed for bankruptcy, it is self evident that the recession is having a weeding out effect upon the business world.

Although it is hard to accept if you are personally involved, most of the businesses going to the wall have been trading at or below, a break-even point, some for a very long time.
As the pruning process continues, the survivors, those that adapt, will very likely become stronger, because of the reduced competition.
This is Darwinian 'survival of the fittest', at work.

Buying a house for residential, or investment purposes, is much like starting a business, in fact in the case of rental properties, it is actually starting a business.

How can the residential home buyer adapt to the changed economic conditions?

In much the same way as small businesses. That is, when purchasing a major asset due diligence should be carried out to ascertain the potential of that asset.
Due diligence is a process undertaken by a potential investor to analyse and assess the desirability, value and potential of an investment. It serves to confirm all material facts prior to a purchase.
Due diligence should be carried out alongside the physical surveys, valuation and legal searches and before any exchange of contract. Not to do so, risks later problems with value and resale. It is too late to avoid mistakes, once the property has been purchased.

For most residential properties a minimum of two activities should be carried out.
Firstly, a cash forecast, ideally for three years and secondly a forecast of values, also for three years, so that a return on investment can be calculated. We use the Internal Rate of Return of a series of cash flows as our principal measure. (This tool by the way is available in Microsoft Excel under fx, if no specialist software is available to you.)

A more business-like approach to buying the principal assets in our lives, will enable us to survive the more rigorous economic conditions we are likely to encounter in the future.

Link: http://www.dothesums.co.uk/blog

It is widely reported in the news that the average house price has appreciated by £2300 to £154,000, the second rise in three months.

How can this be? Prices that have overshot on the upturn should overshoot on the downturn surely? Those predicting further 'house price crash' falls must be wondering what is happening? Those waiting to come into the market after more price drops will be worried that they have left it too late? Have we reached the bottom of the market and if so, what is the cause?

I think there may a clue in the past performance of financial products.

Twelve months ago a friend received a forecast from the trustees of her pension fund anticipating her retirement in April this year. She has now received the pension and finds that it has been reduced by 17.5% compared to the forecast. This is on top of a long term poor performance record. Fortunately it is not her main vocational pension. Nevertheless this appears not to be unusual, in fact it is becoming the norm. I seem to be meeting more and more people who have been badly let down by the financial services sector in respect of insurance policies, endowments, savings and especially pensions. We ourselves lost money in the collapse of Northern Rock.

Could it be that the public having lost confidence in financial products and want to invest in something they can see, manage and control and the long term asset they are beginning to turn to, is property?

I think it just might be.

Link: http://dothesums.co.uk/blog

I have just come back to the office from a family trip to Huddersfield. It is some years since I was last in that part of West Yorkshire, but it proved very instructive.

With some time to to kill, I had a look around and obviously paid particular attention to the local property market. There seems to have been a lot of recent development with flats and houses, finished with a local sandstone appearance, for sale or to rent, seemingly around every corner. I would estimate that several times more properties have been built, up to the recession that is, than in my own local area.
Indeed my daughter is renting a property on a development in Huddersfield, none of which have been sold and a number of which are empty, because they cannot be let.
Clearly a case of oversupply depressing an already depressed property market in a town where unemployment is rising and personal incomes are falling?

Feeling slightly smug and fairly confident that I would not buy there, I checked the figures.

The five year forecast for semi's, terraced and flats is fairly poor, about 2.5% per annum for the next five years, which is just about equal to expected inflation. In other words, values will remain static in real terms. Only detached, of which there are only a few, had a reasonable gain in value, averaging about 6.0% per annum, say 3.5% in real terms.

Remember that a forecast looks at the expectation for the local economy and the property supply/demand in the locality, rather than any spurious national average put out by banks as a publicity exercise.

I conclude that a fresh pair of eyes and some some common sense produces a view, pretty much supported by the more detailed objective analysis. Personally I want to do both, if I am investing large sums of money in any asset.

The ridiculous days of buying property sight unseen and financially unappraised, I think, I hope, are long gone.