The Experts
Professor Jim Steeley, of Aston Business School - The economist.
He’s an expert on Government debt, the bond market and he is an advisor to the Treasury and the Bank of England.
Simon Zutshi - The investor.
Advises property investors on how to build and manage portfolios that regularly exceed £1m.
Seamus Nugent, Managing Director of Dandara – The developer.
The company behind the V Building in Birmingham (which will become the tallest residential development in the UK) and many large developments across the UK.
Is Northern Rock the tip of an iceberg?
The economist: It appears that Northern Rock was unusual in the high proportion of its mortgage lending activity that was financed by borrowings in the short term money market, where the liquidity has been difficult. While other institutions also have exposure to the securitised mortgage instruments that are being used as collateral for these borrowings, their exposure is less and unlikely to cause difficulties, although it will and is affecting their profits. It is, however, difficult to anticipate where the losses will take place.
The securitised mortgage instruments have become a problem because they have tended to package both high quality and the so-called sub-prime mortgages together, which are widely traded. At the time of issue, interest rates were low, and the securities were rated as investment (as opposed to speculative) grade.
As interest rates have risen, particularly in the USA, where the sub-prime lending market has been huge, defaults have arisen on the mortgages causing a rapid decline in the value of the securitised mortgages, and so making them less attractive as collateral in the money markets. At the same time, the securitised products themselves have been widely traded among the financial institutions, so the exposure to defaults is wide-spread and unpredictable.
This uncertainty has exacerbated the reduction in liquidity. However, the very fact that the exposure is widespread is also fortunate as it means that the impacts can be spread and are unlikely to cause problems for any one particular institution.
The investor: Many of the banks don’t even know the full extent of the damage themselves yet as they are assessing exactly what they have in their securitised loans. I think we can expect more similar situations to Northern Rock ahead.
The developer: Like many other financial institutions, Northern Rock used the money markets as its principle source of mortgage finance.
When the wholesale credit markets began to tighten following the sub-prime situation in the USA, it became difficult for the bank to raise funds and refinance its maturing liabilities; it therefore had to approach the Bank of England to assist with liquidity.
Northern Rock has a good quality loan book with assets of around £113 billion and analysts forecast that despite its recent problems will still make more than £500 million in profit this year. In the current market most lenders are facing funding pressure, and what they need is a return to more normal market conditions as quickly as possible.
Do buy-to-let landlords have it too easy?
The economist: Following on from previous questions, this depends on when the properties were purchased and how big they are.
The investor: Not exactly. The legislation in this country is stacked massively in favour of the tenants. Unfortunately, governments interfere in private markets and implement legislation which is designed for the greater good and to get rid of bad practises but in reality just makes it very difficult for the landlords
The developer: At the beginning of the 20th century, 90 per cent of the UK population lived in privately rented housing. During the next 80 years owner-occupation increased and the state became the largest landlord in the country. However since 1980, a total of 750,000 council homes have been sold without any more being built to replace them; as a result privately-owned rental accommodation has become a vital ‘stop gap’ in an under-supplied market, providing a quality alternative and additional choice for those who cannot afford to purchase their own home.
I don’t believe that landlords have it too easy. For many buy-to-let investors, property is a business and their primary source of income. Landlords are entitled to claim tax relief on rental income, but are still liable to capital gains tax should they sell.
For your money, right now, would you buy, sell or sit tight?
The economist: I would try to sell neither a small dwelling in a high-density development, nor a country estate right now. My impression is that well located family homes are still able to be sold at good prices, though these are unlikely to be among many investment portfolios.
Until there is any sign of the rental market becoming active again, I would not consider buying to let a flat or small house, unless it is a new-build and the builders are offering significant deal sweeteners.
The investor: The market is shaky right now and I believe will come down in some areas, so this is the worst possible time to sell as it is a buyers market. But as an investor, I don’t generally sell, I buy. As long as you know what you are doing, now is a great time to invest as there are lots of motivated sellers out there.
If you have property already, I would suggest you sit tight as long as you can afford the holding costs while we wait for the market to recover which it will.
The developer: I believe that we could be in for a period of strong growth next year as the main underlying factors that drive the market – low unemployment, sustained economic growth, under-supply and increasing demand – will provide a sound base for the housing market.
Interest rates are forecast to be cut at least twice and possibly three times in the next 12 months. Historically when rates start to fall, property prices and rental values begin to climb.
There’s no time like the present, so my advice would be to buy now and make sure you spread your investment over a number of key UK cities to maximise your returns.