dothesums blog

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

When banks and building societies have been limiting loans to 70% or 75% of the value of a property, young buyers are often resorting to loans from the 'Bank of Mum and Dad'.

This can be in the form of a simple loan and/or by parents acting as guarantors.

There are dangers and risks though, if the house bought is not easily resaleable.  The question will then be, will the responsibility for the loan revert to mum and dad?

Parents have probably lived in the same location for some time, whilst their offspring at the beginning of their careers, may want to move more frequently. This is especially true if they go for their 'dream job', but cannot resell, in which case they may decide to rent in the new location?  This could then pose problems for parents who may be responsible for a loan on an empty property in a place where they would not necessarily live.

For parents and young adults alike check locations carefully.  Do not buy only for value or price, but consider early resaleability?

The selected location may well be not in the smartest or the least favoured places, but somewhere between these two, where there is a known constant turnover of properties.

Check the location and work out the financial sums carefully in order to limit risk.  Check the forecast future values of the property, to limit losses should an early sale be required.

 

 

 

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

We at dothesums don't really like gambling.  But where there is risk, we prefer to have the odds stacked in our favour.

This does not mean we seek to eliminate risk altogether, no investment can do that, but where property is involved, we like to have forecasts where there is an appreciation over a reasonable period.

It follows therefore, that we also seek to identify where prices will stagnate or fall, so that we may avoid those locations.

What the general public does not realise, but we see in our probability analyses and number crunching, is the spread between the best forecasts and the worst.

For example , in the North East of England the difference between the best and the worst five-year forecasts for semi-detached properties, is a massive +68.6%.  This is not an unusual spread.

The worst areas have a negative prediction when we have added up all of the numbers.  The best locations exceed the long term UK residential property price increase of 6.5% per annum.

But we all knew that roughly, anyway?

The question is, where are the locations which will show growth in value and which will suffer a decline?

 

 

 

 

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

For most of us our house is primarily our home, but we recognise that we are investing a considerable amount of capital in it. Capital that we have worked for and need to protect.

So preferably choose a property with your heart, but of a type and in a location where your head tells you it is safe to do so.

The problem is that it is not always obvious where the value of properties will be maintained?

1) The main influences in value still depend upon the relationship between supply and demand for that type of property, in a particular location.

2) It is likely that your property value will be best protected neither in the top priced, nor the bottom priced locations.

At the top end, prices often have nowhere to go and the premium for living there may disappear as fashion change.

At the very bottom of the market prices may be cheaper, but the aspirations of many buyers and therefore demand, may lie elsewhere.

3) If the local economy is buoyant in present circumstances, prices are probably going to be maintained.

4) The image and the historical performance is not necessarily a good guide.

We have recently compiled reports on two similar properties in two very different parts of the country.

They are not interchangeable in terms of facilities, work opportunites or quality of life, but the results illustrate how we all make assumptions based on pre-conceived ideas.

The two flats have a very different asking price of £580,000 and £110,000, each has two bedrooms, but the apartment with the higher price has obviously more space and facilities.

The result of all our number crunching and probability analyses gives a five-year forecast of the higher priced property of -7.3% and that for the lower priced property as +29.6%.

The £580,000 flat is located in HAMPSTEAD in London and the £110,000 priced property is in NORTH SHIELDS in North East England.

 

There are five new essential lessons for house buyers :

Lesson 1 - We can no longer trust financial institutions to assess risk on our behalf.

Lesson 2 - The financial responsibility of buying a house lies with buyers themselves.

Lesson 3 - Buyers should budget for cash.

Lesson 4 - Buyers should budget for capital.

Lesson 5 - Do the sums.

We have previously described how the property market has changed in the last two or three years.

Most people have not yet adjusted to the fact that property buying has changed radically.

The thing that has changed is how we perceive 'risk'.

In the past it has been generally assumed, at least in the UK, that the value of all residential property will increase year upon year.  There may be a period when prices fall, but it has been accepted by most people, that this correction will be relatively short-lived and that prices will then begin to rise again.

But buyers cannot assume any more that mistakes in the choice of property will be corrected by a general increase in the value of all properties, or that the adverse effect of taking out too large a loan will be righted by erosion of that loan by inflation.

The world recession and the collapse of Lehman Bros Bank in September, 2008 have changed all that.

For many of us 'of a certain age', our bank or building society in granting us a mortgage/loan was, in effect, approving our decision to invest our savings, and part of our future earnings, in property.  The old idea was get a mortgage, buy a house and eventually in the fullness of time, in twenty or twenty five years, we would have ownership of that house, live rent free and retire on our pension.

In addition, the local branch manager was often expert in assessing, not just the credit worthiness of the applicants for a loan, but also the present and likely future values of local property.

Taking the long view, this approval suggested that the risk involved in buying all residential property was low.

The banks have changed all of that now; probably forever.

The near collapse of the banking system has shown that not only have the banks been unable to run their own businesses, but worse, coming from a bank, they have not been able to assess the risk of lending their capital. If they cannot judge risk in their own businesses, how can we trust them to advise us about risk in our finances?

Lesson 1 - We can no longer trust these financial institutions to assess risk on our behalf.

The casualties of this recklessness include taxpayers, shareholders, business owners, the unemployed and property owners, everybody really. Very few of us have escaped the effects of this recession, apart apparently from the bankers themselves.

It just seems so unjust. Well there is no such thing as justice in investing, only winners and losers.

In terms of property, what can we learn so that we may avoid being a loser?

The buyers, not the bankers, not the solicitor, not the surveyor and especially not the estate agent, who acts on behalf of the seller, have the authority to do something about it. The buyers are accountable to themselves, if financial problems arise in the future.  The buyers will have to bear the outcomes of those bad decisions, if things go wrong.

(In short, the old saying 'caveat emptor', 'buyer beware' applies.)

Lesson 2 - The financial responsibility of buying a house lies with buyers themselves.

What are the dangers?

There are two main financial hazards, just like any business, inadequate cash flow and the loss of capital.

Cash

When the fear of depression recedes, 'Quantitative Easing' will end and the Bank of England will raise their base rate, which will cause increases in mortgage repayments.

So homebuyers will be paying more and more per month, for the privilege of buying their homes.

It is principally a matter of cash-flow and making provision for increased outflows, either by reducing other spending, or by increased inflows, if possible.  Latest figures suggest that many people are reducing debt and therefore saving on costs, credit card balances is a good example, in preparation for the time when more realistic interest rates return.

Capital

Many property owners have coped with lower values and consequent reduced equity, by concentrating on the long term.  And so they should.  Property should be viewed as a fixed asset with long term potential.  We generally think of three to five years minimum, which enables annual variations in value to be absorbed into a long term appreciating trend.

Cash and Capital Combined

However, there is one nightmare which even we are worried about.  And that is the horror of higher interest rates and simultaneous falling values.

Most of us can probably deal with one or the other, but the prospect of paying more and more, for an asset which is worth less and less is scary, especially if this situation holds for some time.  The horror of these two combining and consuming all of the owners' equity and trapping them in a property because of negative equity is almost too awful to think about.  But it has happened and it will happen again.

House Owning Dangers

Cash

• Rising mortgage repayments.
• Repossession, if payments not maintained.
• Reduced cash flow for other expenditure.
• Owners trapped because it is more difficult to sell.
• Increased maintenance costs compared to renting.

Capital

• Loss of capital.
• Reducing equity.
• Negative equity.
• Difficulty in selling; there will be more sellers in a negative growth area.
• Difficulty in obtaining loans, either for new property or re-mortgage.
• Higher loan to value means fewer available loans, which means it is more difficult to move.
• Reduced mobility (e.g. job change), because of poor saleability.
• Probable decline of neighbourhood.

Is there anything we can do to protect ourselves?

Fortunately there is, and it is a tool familiar to most buyers and is used in business every day.

We need to look forward and anticipate the likely costs and values involved and formulate a plan for the future.  Or more accurately a budget, which is just a plan expressed in financial terms.

As is suggested above, especially at the time of purchase, but for any house, two simple budgets can be prepared, one for cash and one for capital.

We would suggest a period of three to five years.  Use a spreadsheet to forecast the probable monthly inflows and outflows of cash, using realistic estimates.  For example if we suspect that interest rates are going to rise, as seems likely later this year, we can build this into the budget.

Rather than letting things happening to us if we plan ahead we can detect problems early and seek a solution before the problem occurs.  We can also detect when having a large mortgage is too risky.

Lesson 3 - Budget for cash.

Similarly property values can be estimated, the more specific the better.  But if local value forecasts are not available use national or regional stats. The long term average of house price values in the UK is approximately +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.

It goes almost without saying, that our house should be primarily our home and should be chosen on that basis. Why be unhappy living in a property you have chosen for investment purposes only? We choose our own houses to enjoy, but we also recognise that we are investing a considerable amount of capital in it. Capital that we have worked for, and as such we need to protect it 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 and you don't have the maintenance costs.

So preferably choose a property with your heart, but of a type and in a location, where your heads tells you, it is financially safe to do so.

Lesson 4 - Budget for capital.

Dothesums.co.uk

Dothesums combines the client's property details with forecast statistical data to produce a report on the cash and capital budgets for a specific property for a period of five years ahead.

Lesson 5 - Do the sums.

In summary the five new essential lessons for house buyers are:

Lesson 1 - We can no longer trust financial institutions to assess risk on our behalf.

Lesson 2 - The financial responsibility of buying a house lies with buyers themselves.

Lesson 3 - Buyers should budget for cash.

Lesson 4 - Buyers should budget for capital.

Lesson 5 - Do the sums.

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

It is reported in the press that house repossessions in 2009 were 46,000.  It might have been higher had not interest rates been kept very low and that unemployment remained lower than expected.

However, 188,000 borrowers were behind in their mortgage payments and should we see the so-called economic double dip, then we might expect to see the repossession figures rise.  The Council of Mortgage Lenders has warned that there are tough times ahead and forecast 53,000 repossessions this year, with unemployment at 2.4m and 1,400 people losing their jobs every day this may be an underestimate.

We think the crisis is not yet over and that caution has to be exercised in the house buying market.

Most people are forecasting a rise in interest rates and this will probably be the case.  The question is, by how much and when?

Until recently, we thought interest rates would start to converge towards  their long term average.  But there are indications that the Bank of England and some other authorities are now fearing deflation and are watching the numbers with special care.  This means that we have adjusted our thoughts about inflation and consequent interest rates down, in the medium term.

What is also intersting is the emergance of longer term fixed rate loans.  Ten year products have been launched by Britannia and the Co-0perative Bank, at roughly 5.29%, which is about 0.45% above the five year fixed deal from the same lenders.

We think interest rates may stay lower, longer than some people think.

Nevertheless, buyers should do the financial analysis carefully and in some depth if they do not want to lose equity in their homes, or worse.