NORTHERN ROCKS LANDLORDS
I’m afraid this week a landlord would have to have been living in a hut on an island in the middle of the South Pacific to have escaped the hullabaloo surrounding the UK’s 5th biggest mortgage lender. Property Hawk sets out to find out what it all means for UK landlords or is it all just another media ‘storm in a tea cup’.
Firstly, Northern Rock is safe. Having secured undertakings from the Bank of England as lender of the last resort, it will have enough funds, up to £24 billion if required to pay out to all its savers. If you as a landlord have a mortgage with the Northern Rock you will be totally unaffected at least in the short term.
Crisis – what crisis?
The fact is that the UK financial system has done exactly what it was designed to do. The Bank of England as the lender of the last resort has stepped in and agreed to loan the Northern Rock the funds it need. In so doing it has being able to prevent what would have been a wider problem in the UK financial system which could have amounted to a crisis. Northern Rock’s problems have been caused by its’ business model which involved borrowing 75% of the funds which it lends to its mortgage customers in the wholesale capital markets. Are you left thinking that as a landlord without a Northern Rock account that all this doesn’t affect me. Is this true?
Northern Rock – the immediate ramifications
The fact is that Northern Rocks problems all stem from the so called ‘credit crunch’.
This will affect all borrowers and therefore probably all UK landlords who have or are looking to obtain a mortgage as debt markets re-price risk and debt becomes relatively more expensive and more difficult to obtain. The main implication for landlords in the short-term is that if they are thinking of obtaining a tracker mortgage. They should act now.
This is because the margins (the difference between the bank base rate and the mortgage rate) for these products are likely to be heading upwards.
The long-term impact
The long-term ramifications of the ‘credit crunch’, the Northern Rock debacle being merely a spin off event, are harder to judge. However, what can be said is that the days of easy cheap credit are over for several years to come. One result of cheap credit is high asset price inflation. For me and you that has meant rising house prices.
The 3 factors that have ensured rising house prices over the last decade are: property affordability, availability of credit & confidence. The first two now seem pretty stretched; much then will depend on how long UK property buyers are prepared to ‘keep the faith’.
Making money in a falling market
One of the problems with housing is that unlike other investments such as shares or commodities is that there is no way that investors can make money, even when they expect markets to fall. With shares there are a range of financial derivatives such as options that allow investors to hedge against a falling market allowing them to safeguard the value of their portfolio or even actively make money from falling stock prices.
This has at least been the presumed wisdom until now. Property Hawk has discovered that there is indeed a way of investors making money out of falling house prices. This is through the practice of spread betting. How it works is that the ‘booky’ in this case www.spreadfair.com will give landlords a series of price projections for house prices at various future dates. A landlord will then effectively bet whether house prices will be below or above these figure and the winnings or losses relate to the difference between the level bet and the actual level of house prices according to the Halifax price index at the date of expiry; currently £199,777.
How does spread betting on house prices work?
EXAMPLE 1 – landlord believes house prices could fall.
If as a landlord you believe house prices could fall from their current average of £199,777 you could place a bet on the sell figure at £161,000. For instance you place a bet of £1000 per £1000 of value (or 1 point). By the end of December 2010 house prices had fallen to £150,000 according to the Halifax price index your winnings would be worth £161,000 – £150,000 = £11,000 or 11 points. Your winnings would therefore be 11* £1000 or £11,000. If house prices had only fallen to £172,000 the difference would be equal but opposite meaning you would have lost £11,000.
EXAMPLE 2 – landlords believe house prices could rise.
If as a landlord you still remain confident in the UK housing market then you could choose to place a bet on the buy figure currently at £180,000 for the end of December 2010. This would mean that say if house prices stayed pretty much where they are at £200,000 winnings would be £200,000 – £180,000 = £20,000 or 20 points. Your winnings on a £1000 stake per point would be £20,000.