Buy-to-Let Confounds the Jeremiahs

Rob Mackrill - Tue 26 Feb, 2008

Over at the Nationwide building society, some more liquidity just drained away. The cheap money days are over we know, but now we begin to see what it means for those looking for a mortgage.

Feeling a little blue?

Well skip Prozac. It doesn’t work says a new study from Hull University. You might as well swallow a sugar cube and think happy thoughts.

Or perhaps investing in commodities might just cheer you up...in time. The natural resource boom has a long way to go says an analyst in Canada’s Globe and Mail.

"It has become clear that this is a once-in-a-millennium commodity boom that will last at least as long as the commodity crash - two decades," says Bank of Montreal Global Portfolio Strategist Don Coxe. What does he know? Well he comes with a glow of visionary kudos having correctly predicted the start of the mining boom six years ago.

Five years ago the market value of the mining industry was $185bn. Today it is over $2,000bn. The Canadian TSX mining index is up 500%. But what goes up eventually has a habit of coming down. Isn’t it fully valued? Not according to My Cox, “the best is yet to come”.

" China's consumption of copper is roughly twice America's, and its demand for iron ore dwarfs U.S. demand. This is no mere hiccup, but a hinge in history," says Mr Cox. He’s also keen on gold:

"In the near term, the golds will continue to outperform the stock markets and act as a form of hedge against two kinds of shocks - financial panics and inflation shocks."

Gold itself has dropped back from a high of $953 to $932 on reports of plans by the International Monetary Fund to sell 400 tonnes. At least it looks a better timed move by the IMF than the Bank of England mustered when we sold off 395 tonnes at an average $275/oz between 1999-2002.

Over at the Nationwide building society, some more liquidity just drained away. The cheap money days are over we know, but now we begin to see what it means for those looking for a mortgage.

Nationwide’s best mortgage rates are now being reserved for customers slapping down at least a 25% deposit, up from 10% previously. Borrowers can go above 75% but they’ll pay an additional 0.2% for the privilege. Higher funding costs and a cooling housing market are the reasons why says a Times report. The news from doorstep lender London Scottish is grimmer. Its subprime lending business lost £15.7m last year as it suffers “soaring bad debts” from its low income clientele. The dividend has been shelved as it scrambles to shore up its reserves under orders from the FSA.

Over in various corners of the property market, there look to be a few signs of cautious optimism for the beaten up sector...

There’s another 10% to come off commercial property prices by mid-year says John Richards, chief executive of FTSE 100 property developer, Hammerson owner of London’s Brent Cross shopping centre and Birmingham’s Bullring. If he’s right, that would bring the fall in commercial property from peak to trough to 20%. Would that be the floor? Hammerson has £600m in undrawn borrowings say reports but is keeping its powder dry until the time is right. It wrote down its own portfolio by 5.5% in the second half of 2007 but still managed to increase net asset value by 3% last year.

More topical corporate news came from Britain’s biggest house builder, Persimmon plc. Its results announced today have been well received by the market and the shares are up 4%. It “offered the first signs of a spring recovery in house buyer confidence,” reports the FT. Visitor numbers have increased every week this year, though still down 13% on the same period last year. Cancellation rates have dropped to 20% from 30% during the credit squeeze with the two interest rate cuts helping consumer sentiment. The order book for 2008 stands at £1.05bn down from £1.3bn last year. Profits were up 2.8% but revenues were down 4%.

And the buy-to-let market, continues to confound the Jeremiahs – which would include us - forecasting a meltdown with a flood of distressed sales from over-indebted investors. The total number of buy-to-let mortgages actually increased 23% in 2007 to over 1m mortgages say the Council of Mortgage Lenders. Plus the percentage of mortgage arrears cases in buy-to-let is two-thirds that in the home buyer market.

Little demand for Prozac...or sugar cubes there.

Regards,

Rob Mackrill

The Daily Reckoning UK