dothesums blog

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

The first objective in business, just like in our personal lives is financial survival. Continuity is secured through the planning and control of cash. [See blog 'Cash is king in business' dated 14th.April 2008]
Having gained control of the flows of cash, the next requirement is to select and monitor the value of our major assets. Like cash-flow, insufficient data will allow bad decisions to be made. Poor and incomplete information leads to increased risk.

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 be followed for our major personal assets such as, pensions, savings, houses cars and investments. In the context of this blog we are dealing with most people's principal asset, our houses.
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 that capital 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.
The UK 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.]
Valuing properties can be a complex process, but for most homebuyers, simple analysis plus a little common sense will be more than adequate.
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 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 +2.9% above inflation. The current general 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, they will seek to safeguard and defend their capital through a property investment analysis.

The lending institutions will seek to limit their risks also; careers may depend upon it. Not only will the banks differentiate between applicants on their suitability for a mortgage on the basis of their credit worthiness, but they will target loans to those areas where value will not be reduced. It is inevitable that the banks will operate on the basis of the forecast value of the property you are proposing to buy. They also have to defend their capital from negative equity should a repossession occur.

It has been suggested that this may result in the ghettoisation of some areas where mortgages will be more difficult to obtain. Lenders are bound to be more conservative in the future. In the past some areas have been blighted because of planning regulations, we think it unlikely that new ghettos will be created through investment criteria alone, but that in some areas and streets, loans will be easier to obtain.
After all the bank will want to protect its capital just as you want to protect your own.