This is Money Blog

My buy-to-let barometer swings from plus to minus

In April 2009, I launched the This is Money buy-to-let barometer, a very slightly more sophisticated follow--up to my dismal house price predictor which, in June 2007, pointed to house price falls.

How the buy-to-let barometer works

We're lucky enough to have the strength of our content recognised by Google. So when you search buy-to-let our buy-to-let guide is the top result. So if we measure the amount of people clicking on it, we can gauge British appetite for investing in property. Admittedly, the extra variable of schadenfreude BTL searchers may have a slight impact on the results.

I combine this with Google Trends, which gives a rough idea of people searching for particular phrases.

My previous views on the market

I have written recently on how the market has a lot further to fall, if the market realigns itself with the long-term trend of prices versus average salaries.. The average UK house price - currently around £160,000 (Halifax) - should bottom out anywhere between £99,000 and £126,000.

But there's a big but... I've also warned on this blog of how the decline will be undulating - and the market could even see decent, sustained rises. Vast amounts of printed money - quantitative easing - have been pumped into the financial system. This is helping to increase the ability of companies to raise money and for banks to lend money. As I warned before, that could give a fillip to the market. And it looks ever more likely now that they are: [property market latest].

What does the not-so-dismal buy-to-let barometer suggest now?

In June, 2033 people searched 'buy-to-let' and clicked on our BTL guide. The figure spiked in January and fell and has hovered a little above 2,000 since then.
January: 3,322
February: 3,191
March: 2,969
April: 2,101
May: 2,024
June: 2,033

But that's not the real measure. That's because interest in BTL traditionally peaks in January and then falls (see the Google Trends chart below). The more interesting trend is year-on-year. So in January, the number of people reaching our BTL guide leapt 85% on January 2008. But that increased interest appears to evapourated in recent months and was actually down in June...
Year-on-year increase
January: +85%
February: +53%
March: +27%
April: +1%
May: +3%
June: -2%

The property market has benefited from renewed interest - several studies have reported price rises, some over several months. With the Bank of England still merrily pumping money into the system momentum may be sustained. Maybe a second mini-bubble will reinflate. However, confidence alone will not provide solid, long-term returns from property.

Investment bubbles are only fully deflated once nearly all investors give up all hope of the asset ever rising again. Like I said last time, we've got a way to go.

- Andrew Oxlade, Editor, This is Money

P.S. Moneybox on BBC Radio 4 have kindly asked me to come on the show for a live debate tomorrow at midday. Unsurprisingly, I'm arguing the case for the bears.

- www.twitter.com/aoxlade
- www.twitter.com/thisismoney

Number of Google searches for "buy-to-let"

Will Tesco buy Northern Rock and why would it?

Will Tesco buy Northern Rock? A report in today’s Times claims the supermarket giant has expressed ‘provisional interest in buying the bank’.

There's nothing really in the report backing up the story, so essentially it's a rumour, although a Treasury source is there giving a steer on offloading the Rock.

But it would certainly make sense for Tesco to nab itself a bigger slice of the UK banking pie, as it is pushing hard to expand its bank having bought out RBS’ 50% share of joint venture Tesco Personal Finance.

But will this latest report turn out to just be another 'Northern Rock to be bought' red herring?

There have already been plenty of rumours circulating about bidders for the collapsed bank, taken into state control last year after months spent trying to find a buyer. The list of those, along with Tesco, who reckon they could make a go of the bank includes Sir Richard Branson and private equity groups.

But, if no one wanted the bank enough to take it over at a knock down price as it floundered early last year, why would they want it now?

Well, the Government is pretty much a distressed seller, it is strapped for cash and would dearly love to be able to turn around and say 'we made a success of the Northern Rock rescue' before the next election. This theoretically means a canny buyer could potentially name the price and conditions.

The problems our big banks still face is that they got too clever for their own good and rushed gung ho either into investment arms that they believed could never fail, or ramping up their mortgage books on foundations made of sand. But strip away these problems and retail banking is a highly profitable industry.

In April, Tesco revealed record profits of £3.13bn profits: to make this cash it has to run a colossal global retailing organisation.

In January 2007, before everything went catastrophically wrong for it, Northern Rock announced profits of £588m: it was just a UK-based mortgage lender.

Obviously, you would hope, Tesco wouldn’t be pursuing the madcap money market strategy that led to Northern Rock’s collapse, and it shouldn’t need to. It has increased the amount of savings deposits it holds from £2.5bn in mid-October 2008 to £4.5bn this spring, has struck a new insurance deal, and is priming itself for a launch into the mortgage market that should pick up steam as the housing market recovers and interest rates rise.

So that’s why Tesco could want Northern Rock, and why Virgin could too and others also reckon they could make a go of it. The UK banking sector is hamstrung by bad debts, taxpayer investment and a lack of trust, so there are potentially very rich pickings for any fresh blood entering the market.

The only problem is that surely the one lesson to learn from the crisis has been that banks mustn’t be too big to fail. And does a bank owned by the country’s biggest supermarket and retailer not also fall into that too big to fail pot?

- Simon Lambert, assistant editor, This is Money

- How Tesco and Virgin can be the new giants of banking

- Video: Supermarket banking - will it work?

Fixed mortgage rates to fall? Don't bet on it

A lunch meeting gave me an interesting insight into the direction of fixed-rate mortgage rates yesterday.

In early to mid-June, our interest rates round-up warned that City traders were taking an outside punt that the Bank of England may raise the bank rate before the end of the year (the wider economic consensus is that rates will stay at 0.5% well into 2010).

At the same time, experts warned that 'swaps', one market for borrowing which heavily influences the price of fixed-rate mortgage offers, were edging up. Fixed-rate mortgage deals duly followed upwards.

However, I meet with a guy who knows his mortgages. Francis Ghiloni has recently helped set up the www.realpricecomparison.com, which shows full mortgage comparisons. He has lots of experience and a vast knowledge of how the industry works.

He pointed out that swap rates have fallen back again in recent weeks and are, in fact, lower than they were a month ago. So the lenders have presumably passed that on with cheaper rates? Er, no. And Ghiloni suspects they won't, with banks and building societies happy to scoop up bigger profit margins in the meantime. Competition in the mortgage market ain't what it used to be.

So should you fix now or wait? It should be a personal choice rather than a market call [how to decide to on fixed-rate mortgages]. Ghiloni faces the decision personally. 'I won't fix now,' he says. 'I'm waiting for more competition to enter the market.'

Let's hope it does.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

Other posts
- How to decide on fixed rates
- 'Expect rapid rate hikes!' - they wouldn't dare

How much of a property's asking price should you pay?

If you’re buying a property, how low below the asking price should you expect to pay?

This is the ever present dilemma facing any potential homebuyer and despite an almost two-year long property slump, the asking prices people put their homes on the market for regularly astound me.

As a general rule my mind works on the knock off 10% and you’ll get a fair selling price principle.

However, this so often leaves me at the point of thinking something is still overpriced that I figure many sellers take their most hopeful expectation and then add at least an extra 10%.

New figures from the Royal Institution of Chartered Surveyors show its members reporting that the average home is currently selling at 11% below asking price.

It said that the gap between asking and selling prices was narrowing. In Scotland there is the smallest room for manoeuvre, with homes typically fetching 97% of the asking price, while in the North there is a gulf between expectation and reality, with homes going for 74% of the asking price. London properties go for 93% of the asking price.

So, in theory an average buyer should be hoping for at least an 11% discount on a property and the 10% principle is reasonably accurate.

Unfortunately, it’s never that clear cut though and you need to factor in everything from whether the estate agent is greedy or desperate, to whether the seller is a glass half full or half empty kind of person.

My tip would be to go in 10% below what you consider a fair price – but be realistic and don’t make it offensive – and then work up in small steps while letting the seller know you are serious.

And just to spell this out, I mean 10% below what you think is a fair price. So, not the asking price, or even what the seller considers a fair price, but what you consider to be the fair price. If a property is on the market at £330,000 and you think £300,000 is a fair price then you go in 10% below that, so £270,000.

Any form of optimist/pessimist test you can subtly carry out on the buyer and check on what the estate agent is driving (to measure their confidence) could also prove useful.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

I'd like low house prices and higher interest rates

If it came to the crunch which one would you choose: higher interest rates and lower house prices, or vice versa?

I know which way I’d cast my vote: I’ll take lower and more stable house prices with a higher cost of borrowing, please Bob.

Unfortunately, the portents don’t look good for this. Property optimists are getting excited as monthly reports show property price rises, the Royal Institution of Chartered Surveyors reveals high levels of interest, and the economy shows slight signs of perking up.

The pessimists are frantically running around tearing the green shoots up, but there is an undeniable bit of some spring in the property market’s step. Of course, this should not add up to recovery: unemployment is rising, the economy is fragile, lending is still tight, redundancy is a dinner party topic, etc.

Common sense says ‘no to house price rises’. But then common sense has had a terrible run when it comes to the property market.

On top of this, despite the current economic mess, we are failing to reassess our attitude to how the whole property prices game works. The seeds of another boom are being sown now, in the middle of the bust.

Currently there are a lot of people looking at properties 20% cheaper than late 2007, combined with interest rates below 4%, and thinking ‘bargain’.

Except, of course, even at this substantial discount on the peak, most properties are not a bargain. They might look cheap, but that’s because we've become desensitized to ludicrous property prices - and it is low interest rates that have done this.

It is only because the base rate has been at 6% for the past decade, and typically a fair bit below this, that house price inflation spiralled, yet bizarrely there was little attempt to tackle this inflation in a nation of homeowners.

The average house price managed to rise 263%, from £75,751 in June 1999, to peak at £199,612 in August 2007 (Halifax). It has since fallen back by 21% to £158,565, but this remains six times the average wage.

So have there been any beneficiaries of that astronomical rise in house prices? Well some families feel richer because they have a home that’s worth lots, but that’s an illusion.

If you’re mortgaged then high house prices simply mean more debt not more wealth. If you own outright you can only release that gain by selling up and either buying a smaller and inferior house, or leaving your home area, otherwise your rent or any other property you buy will negate your profit.

High house prices deliver a mirage of wealth, make it expensive to move, leave families hugely in debt, mean children can’t buy without parents’ help, and the inevitable popping of a property bubble has catastrophic economic effects.

With a charge sheet like that you wonder why anyone wants high house prices. And then you remember who the winners are: the banks.

If the average home costs £75,000 and you raise a 25% deposit, you have to borrow £56,250 over 25 years; if it costs £200,000 you have to borrow £150,000 (and in the boom years you don't do that you borrow £180,000-plus.) The benefit to the bank from high house prices, in the interest you pay it and the total charge over the 25 years, is substantial.

So while rates had to be slashed to deal with the very real prospect of economic collapse, the cuts have saved many from repossession and I would wish negative equity on no-one, I hope that when house price inflation rears its ugly head again the powers that be tackle it properly through interest rates.

If we are nearing the bottom of the property market, it would be nice if we used this as an opportunity to start again and try to control house prices, because frankly we've given the banks more than enough cash recently.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

Robert Shiller: 'House prices to fall further'

Robert Shiller (pictured) is a renowned US economist. 

Not only is he professor of economics and finance at Yale, he has also written respected books on economics and investor psychology - and his repeat-sales home price indices, developed originally with Karl E. Case, are now published as the Standard & Poor’s/Case Shiller Home Price Indices - a standard measure of the market in America (it suggest prices are down 33% so far). 

As you can imagine, his views carry weight. So it's worth pointing out an article he wrote at the weekend for the New York Times.

In it, he predicts that despite three years of falling house prices he expects more of the same. The health of the US property market is a linchpin for the global economy - further falls mean bigger losses - the extent is unknown - for financial institutions around the world.

He also cites reasons why property declines are so protracted...

• >> Sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.
• >> Few homeowners consider exiting the housing market for purely speculative reasons. Owners don’t like shifting from being owners to renters. It also takes agreement from both halves of a couple - and there are children with school places, and friends, to think about. 'Most decisions to exit the market in favour of renting... are due to economic necessity.'
• >> Young couples, seeing rising unemployment and property turmoil, remain renters. They may not revisit that house-buying decision for some years.
• >> At the other end, elderly couples who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

And the conclusion:

'As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.'

Although he admits these people 'could be made to change their plans if a sharp improvement in the economy got their attention', which might provide an 'upward kick to the market price'. He adds: 'That's why not all economists agree that home price declines are really predictable'.

And the UK impact?

Shiller didn't go into that - so I will. As previously observed on this blog, UK house prices still look wildly overvalued on fundamental measures, such as average wages vs property. However, I also suggested that we may get short-term bounces on the long road down. The Bank of England is dumping billions of pounds of printed money into the economy - that has helped improved confidence and helped make mortgage borrowing cheaper. I would imagine the Government and the BoE must be desperate to stabilise the housing market, knowing that further declines will inflict further bad debts on UK banks. They would surely do anything to protect the recent nascent recovery in banking confidence.

Meanwhile, there are legions of would-be buyers waiting on the sidelines ready to pounce on any sign that the bottom has been reached. A short period of sustained rises could, in theory, be followed by a longer period of sustained rises.

I talked to an estate agent in my area today - the Surrey/London borders - and he said sales dramatically picked up in March, although prices are still not rising. He even has one seller who wants to raise the price of his property.

Prices may rise short-term, but long-term I think Shiller is bang on the money. He points out that after the recession of 1991, US house prices didn't start rising until 1997. In the UK, it was small rises with 1995 with a substantial pick-up in 1997. This recession is far, far deeper than the last and the recovery faces additional headwinds.

- Andrew Oxlade, Editor, This is Money

For a full round-up of the factors, don't miss: What next for property prices?

Archive posts
- Shrewd buy-to-let seller buys again
- My buy-to-let barometer: confidence rises
- Are these towns property-crash proof?
- A Place in the Sun: 'Cape Verde prices will rise 75%'

Deflation: we could do with some real falling prices

The latest inflation figures have prompted yet more warnings of deflation from economists.

The Retail Prices Index' fall to -1.2% has delivered inevitable deflation headlines. Except of course, this isn't strictly deflation.

Deflation would be if the official measure of inflation the consumer prices index (CPI) went negative and that is still above the 2% target, at 2.3%.

But would a good bout of deflation really be that bad?

The criticisms are that it increases borrowing in real terms, leads to wage freezes and slows the economy. But, on the flip side, it's lower mortgage borrowing costs driving deflation, while people's wages are already being frozen, the Government has promised a pensions rise, and aren't lower prices generally used to attract customers?

A look at the inflation data shows why deflation would help the man in the street, despite the economic arguments otherwise.

What is driving RPI deflation is falling housing costs - but this is down to the base rate being slashed to 0.5%, compared to 5% a year ago. Further major factors are cheaper clothing and footwear, as stores desperately discount to sell off goods, and lower motoring costs, but that is compared to exceptionally high petrol costs a year ago.

The vast majority of things are still getting more expensive and that is from a point last year when they were already rising in price.

RPI deflation is being skewed by mortgages and petrol at the moment: and these will drop away within a year, leaving the figures looking very different.

Arguably we could do with the items on the right of the graphs below heading left. Who doesn't want cheaper food, fuel and light (energy bills), household goods, fares and other travel costs? At least it would make up for the pay freezes, inevitable tax rises, and rising unemployment we're already dealing with.

And you never know, we might actually spend more if people stopped ripping us off.

- Simon Lambert, assistant editor, This is Money

Here's the RPI figures:

And here's the CPI figures, the official measure of inflation which is still above the 2% target:

 

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

Andreas Panayiotou: Shrewd buy-to-let seller buys again

Andreas Panayiotou, who off-loaded apartments worth millions in 2006 ahead of the property crash, has called the bottom of the market and is buying again.

Panayiotou (right), a boxer-turned-property-magnate, was on the BBC2's painfully stretched-out Property Watch programme on Monday night, hosted by Kate Silverton (below) and Justin Rowlatt (neither are convincing at staying interested in house prices for a full hour every night).

Panayiotou, who once worked in a laundrette, said: 'Everyone was forgetting the rules. It was all about capital appreciation.'

He said he saw yields fall from 15% to 3% and that his rule was that yields should be higher than the cost of funding and higher than 'interest from the bank'.

'We are at the bottom and starting to see a recovery. We are actively involved and looking for sites. I'm going full-speed back into it. You have to see where interest rates are. Would you rather have your money earning 0.5% or 6% in buy-to-let?'

He says the current 'liquidity crisis' can only be compared with the 1930s with the difference this time being that governments acted quickly to improve the flow of credit. He believes that improving liquidity will even help stem the rising tide of unemployment, as more money flows into companies. Rising unemployment is cited by economists as one of the main drags on property prices. 

Panayiotou left school in east London at 15 without any qualifications and built his fortune by developing blocks of flats on the edge of an up-and-coming area and waiting for prices to rise. He claims to have predicted the success of Shoreditch, Clerkenwell and Hackney before anyone else but sold £750m worth of flats at the end of 2006 when he believed the market would collapse.

In August 2006 he said: 'We are reaching the height of the market… Property values are still increasing but rental income is not catching up, so the yield - your return - is being depressed.'

He instead turned to investing in hotels where he could find a yield of '6-7% compared with 3%' for residential property. He was 158th on the 2008 Sunday Times Rich List and worth £500m, up from £317m in 2003.

In December 2008, he said: 'I saw the bubble inflating - and then I saw it was about to burst and I got out in good time. At present I believe hotels are a much better bet, as long as they are top quality facilities in unique locations.'

You can watch the full interview on the BBC iPlayer for the next five days (flick to 24 and 28 minutes). He was also interviewed on the Truth About Property in May 2008.

So is Panayiotou right?

I think not. And I find it concerning that the property victims on the show are waiting for 'when' prices recover to fix their problems. 'When' could be next year if prices suddently rise 20%. Even if they rise at an optimistic 3% a year, we wouldn't reach previous peaks until 2017. That's not a great prospect for the split-couple waiting for a recovery. 

Britain's perilous long-term finances will undermine long-term prospects. We may have a short-term bounce due to £125bn being pumped into the economy, but rising unemployment and shrinking wages aside, there are basic factors that will weigh on the market:
- Long-term house price vs wages ratios: Prices should fall 38% to 50%
- The reason this slump will last longer than you think - demographics

Also:
- My buy-to-let barometer: Confidence is up... for now
- House prices: News and analysis round-up

One other thing - I don't need to remind This is Money's astute readership (but I will) to take all predictions with a pinch of salt. Correct forecasts get more coverage than failed ones. And even with those with a good track of predictions, there's no guarantee they will repeat the feat. [There's more on this in our stock market predictions round-up].

- Andrew Oxlade, Editor, This is Money

When will interest rates rise again? Ask a child

It’s a fairly safe bet that interest rates will be kept on hold at 0.5% by the Bank of England tomorrow – but when will the base rate rise again?

This is the million dollar question for those trying to make the most of their savings, or decide on a fixed or tracker rate mortgage.

The problem with forecasting what will happen is that no-one really has the faintest idea. Sure, there are plenty of economic forecasts out there, but commentators can’t even reach a consensus on whether deflation or inflation is the real risk.

The world’s governments have thrown so much money and effort at the problem, in a scattergun fashion, and its difficult to know whether it’s actually working or whether we’re about to end straight back in the hole we are trying to dig our way out of.

So what should you do? Voraciously read economic research, work out your own cunning interest rate predictor, flip a coin?

My suggestion would be ask a child. Try and explain the current situation to them simply and carefully and see what they say. You won’t get an answer. They’ll point out the whole situation is bonkers and eventually get bored. (If they don’t they will probably grow up to be an economist, so I’d be wary of any answers).

That solution will then remind you that in the current economic madness you might as well just make a choice and stick by it and not berate yourself when you get it wrong.

Alternatively, you could look at what a whole bunch of people who don’t really know what is going to happen are staking their cash on.

Spread betting firm Spreadex says its punters think we could be looking at very low rates until at least December 2010. It allows investors to bet on future Libor quotes and there is so little movement in future prices that some are heading as far as the end of next year for their bets – and still only predicting between 2.7% and 2.8%, compared to 1.4% now.

Libor measures the rates at which banks lend to each other, and while it doesn’t necessarily move in line with the base rate this indicates betting types in the City, don’t reckon rates are rising by much anytime soon.

Personally, I reckon we might start to see rises from the current 0.5% base rate at the end of the year and be back up to 2% to 3% by the end of next year, which if Libor returns to its normal relationship with the base rate means Spreadex’s punters almost agree with me.

But then I’m neither an economist or a child, so I wouldn’t recommend listening to me either.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

My buy-to-let barometer: Confidence rises

In June 2007, I brought you my dismal house price predictor. This absurdly crude tool suggested prices were set to take a tumble - two months later values started falling fast and the rest, as they say, is history.

Today, I'm introducing my marginally less crude buy-to-let barometer.

How it works

Google Trends gives a rough idea of people searching for particular phrases - but its results can sometimes look a little odd. So my barometer combines Google Trends with our own buy-to-let user numbers.

We're lucky enough to have the strength of our content recognised by Google. So when you search buy-to-let our buy-to-let guide is the top result. So if we measure the amount of people clicking on it, we can gauge British appetite for investing in property. Admittedly, the extra variable of schadenfreude BTL searchers may have a slight impact on the results.

My previous views on the market

I have written recently on how the market has a lot further to fall, if the market realigns itself with the long-term trend of prices versus average salaries.. The average UK house price - currently around £157,000 (Halifax) - should bottom out anywhere between £99,000 and £126,000.

But there's a big but... I've also warned on this blog of how the decline will be undulating - and the market could even see decent, sustained rises. Vast amounts of printed money - quantitative easing - have been pumped into the financial system. This is helping to increase the ability of companies to raise money and for banks to lend money. That could give a fillip to the market - some surveys hint that it already is [also see here].

What does the not-so-dismal buy-to-let barometer suggest?

In April (with two days to go), 2,066 people searched 'buy-to-let' and clicked on our BTL guide. That was a considerable fall from 2,969 in March, 3,191 in February and 3,322 in January.

You would think this trend would suggest declining interest. Possibly - but interest in BTL has traditionally peaked in January and falling over the following months (see the Google Trends chart below). The more interesting trend is that that the searches are considerably higher than a year earlier. For instance, March's 3,191 is 27% higher than 2,472 a year earlier. In February, the year-on-year increase was 53%.

So the property market should feel the benefits of this renewed confidence and optimism in coming months - a classic suckers' rally. Investment bubbles are only fully deflated once nearly all investors give up all hope of the asset ever rising again. We've got a way to go.

- Andrew Oxlade, Editor, This is Money

Number of Google searches for "buy-to-let"