Northern Rock, Was This Fun To Watch Or What?

By Andy Shaw | January 23, 2010

Originally Posted 19th September 2007

First off I’ll cover why I think it happened, what the fallout will be and I’ll cover why you can make money thanks to this. I will also cover the events that caused this and why it may help to bring about changes in the future.

On a personal note this was the first time that I’ve been in the spotlight and been interacting with a lot of people when this sort of financial crisis has hit. I must admit to the fact that I really enjoyed it (a bit sad I know), but it sure beats Eastenders (well watching paint dry does that, but that’s not important right now), especially since this crisis is going to make me a lot of money.

What happened was that the sub-prime crisis in the states, led to losses and all the banks getting worried. This led to a reduction in the cash that flows around between them all. This meant that it was harder for the banks to borrow money and then in the end for the most exposed bank, who was only short term funded, it became too hard. So they had to tell the Bank of England (BOE) that they may not be able to meet their cash flow and asked to borrow some from them. They could not do this as they had to follow the rules laid down in banking codes of practice. Even if they could have met their commitments they were below the line and that meant speaking to BOE.

Then came into play the great British public, the BOE and especially The Federal Reserve (The Fed) really weren’t expecting that. But nothing motivates British people more than the threat of their hard earned being lost when they could have just moved it to another place. We are lazy, but not that lazy.

What this showed to me was the lack of financial literacy that there really is in people who have savings, which are actually the ones that you would expect had a fair bit of it. It is understandable that they were concerned to start with as you don’t expect to see people looking at a bank balance sheet and going, ‘well this is still quite safe’.

But when the BOE said that they would support them, then that should have been an end to it. From then on Northern Rock was the safest place in the country to have your money. But thanks to the lack of financial literacy this meant nothing to the public. So finally when the government stepped in and guaranteed the deposits, it brought an end to it.

But even then there were still some queues and I saw one person interviewed who really summed it up. ‘Why are you still looking to withdraw your money?’ asked the reporter, ‘Well I don’t believe a word the government says!’ Made me laugh.

The problem occurred (and I’m very grateful it did) because Northern Rock cashflowed itself very poorly. Primarily their market is mortgages and the average repayment time for a mortgage is 5 – 7 years. In other words, they’ll be getting their money back in 5 – 7 years. They have very low repossessions and arrears situations, so when you hear people say about their irresponsible lending they are not talking about the lending of 120% of purchase price.

It is that they geared themselves too highly on their cashflow. They were buying paper on a 30 day time, which meant that they had capital that came back every 5 – 7 years, but cashflow in place for 30 days. This was irresponsible and I didn’t know they were that exposed.

Northern Rock is very different from most lenders, most banks have protection from the fact that they are in so many markets whereas Northern Rock is very exposed in one area. Most banks gear themselves to 95% and then they have deposits that give them spare cashflow if you like.

So reckless lending in their case means poorly organised cashflow. It is almost unthinkable to believe that a bank had such a cavalier attitude towards its cashflow. But then we only get to see a very little bit of what really goes on anyway.

Well the good thing is that the BOE has now set the precedent and that means that money should now be safe in all banks, which means they will feel confident to lend again. So this crisis is adverted. I was sort of getting a bit of a sick pleasure watching it continue as I was thinking how much longer would the government and the BOE let it go on, as they were clearly trying to teach the money markets a lesson. I sort of hoped that they would wait a little while longer so that we could see which of the next financial institutions started to come unstuck. Even though it wouldn’t have happened, I would have really liked to see a queue at Barclays. This really would have put the cat amongst the pigeons!

I think the main area of further risk is from the fund managers who at times gear their investments to 99.999%, and this was looking like becoming a reality with all the falling values of shares. If the capital value of their assets (shares) fell by too much, then all of a sudden one or more of them could go under and they are the pension funds.

So that’s somewhat more worrying than a bank that has equity in its assets, but no cashflow. Now that would probably be called a catastrophe. This was where the danger sign was and I think this is why the government both held off warning them and then stepped in to stop it happening.

Those guys are probably the reason this mess started with the sub-prime market in the first place (just speculation here really of course as I don’t know this). Well that and the Fed raising rates in a knee-jerk way similar to the BOE. Actually they are worse than the BOE. I saw on a chart today that at one point they raised rates by ¾% in a day and then within six months there were two more raises, one at ¼% and one at ½%. Did they really think that this wouldn’t cause a problem like this?

The way they raised the rates will have caused this, they kept rates too low for too long and then over corrected just as the BOE have done for the last two rate rises at least (probably three). Funny thing is it’s almost exactly two years since the Fed made that very poor Robert Mugabe like financial decision and I say that it takes two years to see the entire roll out of effects from a rate rise. Coincidence? So once again they are forced to over correct, as will be the BOE.

I continually say this, but the BOE do not wait long enough to see the result of what a ¼% rise will do. They are too quick to follow it up if they do not see any change. The economy doesn’t move like that, it is much more like a big oil tanker. You HAVE to think where you want to be a long way in advance, historical information is only a guide and if you have not got people who can see what the effects are going to be steering the ship, then you will have continual over-corrections going on.

Don’t get me wrong, things are much better today than they have been for years, indeed things are a lot better managed and I do get the feeling that they are getting better in this area. But they should be able to keep the country on a great track without ever going below 4.5% or going above 5.25%. The fact that they can’t, says to me that they do not look ahead far enough and that they are looking at the wrong indicators to keep the country on track. It also says that there isn’t anyone on the committee with a pair of binoculars!

I now know that for a fact! How do I know that? Well none of them voted for a rate reduction last month! All nine voted to keep the rates the same and these so called and well paid experts are guiding our economy.

The last two rate rises I have said they should not have happened and the one before that I said was too soon. A poor quality pilot continually has to overcorrect to keep on course. Whereas a pilot who knows how to read the weather forecast can dead reckon his way through with ease.

I had a meeting with someone the other day who has read my book but wanted to offer me help in an area of business in return for me guiding him through a minefield. I don’t usually do this sort of thing, but he wrote a damn good email that sucked me in.

When he was here he said to me that I must get very frustrated that there are people with far less knowledge guiding the country than I have. I think he said they were far less financially literate. This was a very nice compliment to which I replied, I was not that literate and that they can wrap me up in clever terms in no time at all. He said, that’s not what I mean, you fully understand what’s happening, they don’t and that must be very frustrating. I said, “it’s just I seem to be able to read what’s really happening whereas they seem to be continuously reaching the wrong conclusions. Not only that, they still think if we’ve always done it that way then we should continue, whereas I always try to question accepted practices”.

OK enough of the boring stuff, now comes the bit why some of you pay to be here.

So what does this crisis mean for us and how can we use it to make money?!!

Firstly this will have put an end to the banks upward price cycle for interest rates, well at least for now. I was worried that they were going to give us another increase just to be sure they’d done the right thing before Christmas, but that now won’t be happening.

Who knows where their 2% inflation target will take them in the future! The problem is that I find interest rates quite difficult to predict as I’m dealing with decision makers who do not see the economy as clearly as I seem to. So predicting where they are going to go is somewhat tricky. Just as I start to get a feel for them, they change people on the committee, which is probably why they do that.

This should mean that rates will fall by ¼% next month or at the latest, the month after that. They won’t cut rates by a ½% as we are British and we react somewhat more refined than the Americans. I would hope that they cut rates again the following month and then do nothing for the four months following that.

Then they will be just about going into spring, the economy should be buoyant but not too buoyant and we should all be getting along. After that I have not looked into where the bank will send them. However, I do know what they should do and that would be reduce it by ¼% and then say that they are not going to look at them again for 3 months. They should change their policy and only look at the rates four times a year. But they won’t do that. And as I said, predicting people that don’t seem to see where the economy really is going is rather tricky and very irritating.

Next you have all of the confusion, because most property investors will be looking at what has just happened as a very bad thing, because they don’t understand what has happened. This is good news for us. Which should mean more landlords will be selling off their property, so you can buy at hopefully discounted rates. This coupled with the time of year means that there will be less competition from the first time buyer, and thanks to the ill conceived HIPS coming to 3 bed property’s and homeowners deciding to sit and wait rather than be among the first to learn, you should find the property market value wise, slows down for the autumn.

This is good for us, as it means we’ll have six months of a free range of buying, without the press saying ‘get on the ladder’, but with further speculation about the financial crisis and a house price crash, which will mean more landlords putting their properties on the market. Touch!

This also means as usual we can expect a reasonable lift in the property market next year of approx 12%. This crisis really has cleared the air for us and we can go out and buy with confidence, always protecting our cashflows of course and not over buying just because we are in a prime time. As we can see from events this week how not taking them seriously enough means that you can be in trouble.

If you want to stay ahead of other property investors though, I suggest you speak of all doom and gloom about the market and how you are only buying because you may as well put the money somewhere as you do not think it is safe in the banks. After all there’s no need to let all property investors know how good it’s going to be over the next six to nine months. Let the good times roll!

I couldn’t wait to see how this played out so that we could clearly have a direction to head in. I was so excited when it happened last Friday, as this is one of the reasons I set up the site, to be able to give clear direction to people right at the time when you can use it to make money. I thought it was going to kick off a few weeks earlier when Barclays went to the BOE, but unfortunately it didn’t, still the timing was made even better with the delay! Now just imagine if I had been running this site in 2002 when I found the market was undervalued by 30%! :-)

I knew it would work out best for us property investors. There is always a way to turn bad news and panic into profit. When these sorts of things happen in the future, there will be opportunities for making money, it just may mean changing the way we do something.

But there is no need to fear them, as having some clear thinking after one of these has happened is what makes being a member of this site really worthwhile. What is clarity worth to you now? And what will it be worth next time? ;-)

I had an email from a book buyer the other day saying ‘Sell me on why I should pay you £40/mth to be a member, as I already own 19 properties?’ I responded to him, ‘Well to someone like you this site is easily of value, as just one tip from me at the right time will enable you to make hundreds of thousands, so I think £40/mth is an investment waiting for that one tip, forget about everything else. But only you can decide if I’m right!’ He probably thought it was just a sales line.

Best Wishes

Andy

Topics: Free Content, Government, Property, The Economy | Comments Off

Why The Chinese Change of Diet Means We’ll All Be Paying More For Our Mortgages

By Andy Shaw | January 23, 2010

Originally Posted 13th September 2007

Even though I don’t agree with the government’s policy on trying to keep to a 2% inflation figure, their way of pulling the reigns of the UK economy by the means of interest rates, really does have a quick effect on the property market. It’s a shame their clever economists can’t learn to look into the future like they are supposed to, instead of seeing what has happened and then reacting like accountants do. Still that’s for another time.

Read the rest of this entry »

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It’s No Good Building Too Many Homes In The Wrong Area

By Andy Shaw | January 23, 2010

Originally Posted 25th August 2007

The government is trying to build enough homes now; well they think it’s enough anyway. And what they are going to do is let people build properties in the wrong areas, believing the Kevin Costner comment that ‘People Will Come’. I think they are right, Buy to Let Investors will come, but tenants won’t.

Well not for the money that would make it worthwhile for Buy to Let investors to go there in the first place.

But at least the government will be able to say they’ve increased the numbers.

I received this email from a site member the other day following some advice I gave them, they had gone for the easy route and they now found themselves trapped with new build properties in negative equity and negative cashflow.

***Start***

Hi Andy

Having looked at all the options, we realise we have to sit tight and hope that this sector of the market (which seems to be separate from the rest) comes right sooner or later. The big problem is that they are still building these types of property in all the major cities (and otherwise I suppose). Since there is a huge over supply at the moment, it can only get worse and there seems to be no control over the development of these numerous brown sites. I’ve spoken at length recently with estate and letting agents in Manchester and Glasgow and there are large numbers of investors/landlords in dire straits. Also re-letting is getting to be a problem because there are always new properties available, which is driving rentals down. We just found a tenant for our Glasgow property after 5 weeks. Trying to tempt the punters with £100 discount off the first month’s rent didn’t work so I think we’ve got someone now at 50% discount.

The only way we’ll get out of the mess we’re in is to follow your strategy, so thank you again for the book and I hope we’ll get to meet you sometime soon.

Regards

XXXX

***End***

Hi XXXX
I think this sort of thing is going to become much more common place in the news over the next few years. It will be the media’s way of saying to everyone, see we told you Property Investment was a bad idea and look at what has happened to all of these unfortunate people.

As usual they will be generalising and saying the whole market is bad instead of showing the real truth, which I covered in my last article, that some newbie investors through not having a clear strategy opt for an easy route to wealth that could end up eating them alive.

Now I’ll give you my point of view as a property investor. I think it could be a good thing. It keeps the amateurs away from where the real money to be made is. Their future and current failures will keep many more would be clever investors away from the market. The government gets its figures so that it can say ‘well look we’re now building more, maybe it’s not enough but hey we’re getting somewhere’. And from my point of view the housing crisis continues, demand increases, rents go up, capital value goes up.

Life is good for me as a property investor that knows what they are doing.

Best Wishes

Andy

Topics: Free Content, Property | Comments Off

Is This Shortcut The Long Route In Disguise?

By Andy Shaw | January 23, 2010

Originally Posted 25th August 2007

A common question I am often asked is, would I buy a new build property or would I recommend that someone else did? Firstly I’d say no I don’t, but that doesn’t mean to say I wouldn’t.

I think when some people make the choice to go into property investment I think what happens is that they are overloaded with information, and frankly they don’t know which way to go. So what happens at the end of it is an emotional trip whereby they become certain that if they do not do something now that they will not take action and all their efforts will be wasted.

They’ve studied everywhere and they want this elusive fortune that everybody except them is able to get hold of, so in an emotional state they make the decision to take what looks like the easy route. You know the one, the one where everything is done for you, all you need to do is sign on the old dotted line and cough up either a small or no deposit to get to be the proud owner of your first investment property.

Now I am not saying that buying a new build property is wrong, I am saying buying a new build property is wrong when you do not know the market that you are buying in. Without this due diligence then you are just throwing the dice and hoping it will work out. The funny thing is it certainly will work if you have the cashflow to sustain whatever comes along for the next 10 years or so.

Those who do not know their market and have not done adequate cash flow provisioning are suffering the worst fate that any property investor can suffer, repossession. I am asked by people regularly how they can get out of the mess they are in; they bought £1,000,000 portfolios or much more and they are now being eaten alive by mortgages with tenants paying a lot less rent than they have going out, or no rent. The worst case I have seen was a £4,000,000 portfolio that only cost £25,000 to get hold of, but only has 1 tenant in the whole lot of it. These poor people were losing nearly £20,000/mth and were already 4 months behind with their mortgage payments when they spoke to me.

The lure of easy money is very clear when I look at new build, but in my estimation only 5% to 10% of the new build properties deliver all that good that was promised. The rest under perform. Now if you can handle that under performance then there really is no big deal, and why not sit and wait to make your money. Just beware of the pitfalls. The biggest rise in auction properties is coming from newbie property investors getting rid of their new build properties.

There’s an article below that a member sent me from the Daily Telegraph which really demonstrates just how precarious this market really is and just how seriously this market can damage your wealth. Flats that were previously sold for £249,995 last year were sold at auction for just £140,000.

Just buying any old property and expecting to make 10%/year growth doesn’t work! You have to know you’ve made money and released your equity or you have to buy in an area where there will be more than adequate demand.

Think about it, if it’s a new build and there are ten in the block in a town where they are not building any more new builds for at least 18 months, and they are not building within 500 yards of this one, then it is probably a good bet (still a bet mind if you haven’t done your due diligence).

If it’s a new build with a 30% discount and cashback on completion in a block of 50 flats in a town centre where they have recently built over 1,000 new build flats then it is probably a bad bet. It’s not rocket science is it?

You cannot just abdicate control of your money to some developer whose job it is to sell you his property for the maximum he can make out of it.

The advantage you have when buying a single unit at a time and doing it my way is that you are protected from the herd, when new build you are running with the herd and none of the herd is likely to have much of a sense of direction, as they have all probably made the decision to buy in the same way you will have done.

Now I am not saying don’t do it, just consider that this little shortcut may well be the long route in disguise.

Best Wishes

Andy

Telegraph article, read both pages of it

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/23/cmbuytolet23.xml

Topics: Free Content, Property | Comments Off

Is The Obsession With Inflation That Good For The Health Of The Economy?

By Andy Shaw | January 23, 2010

Originally Posted 2nd August 2007

I wrote the other week about how I think that the government are wrong with their efforts to keep inflation at 2%. I agree it should not be allowed to get out of control, but I don’t believe 2% is close to where the long term trend should be and by trying to keep it too low they are attempting to buck the markets and that will cause unnecessary hardship to most areas of the economy.

Read the rest of this entry »

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Continuing On My Thread That There Will Be An Election Called Next Year

By Andy Shaw | January 23, 2010

Originally Posted 30th July 2007

I was amused to see in the paper yesterday that there was even talk of a snap election in the autumn because of the recent excellent poll ratings.

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Well That Was Certainly An Interesting Few Days!

By Andy Shaw | January 23, 2010

Originally Posted 21st July 2007

It’s 6.00am Saturday morning and it’s my little boys eighth birthday, so I’ll be spending the rest of the day with him. But I thought I’d just put up how I feel the last few days went.

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Answer To A Question From My Personal Blog

By Andy Shaw | January 23, 2010

Originally Posted 17th July 2007

Hi Jane,

I was asked the following question on a blog post ‘Small prediction’ yesterday and I thought the answer would benefit everyone. Here’s the post and the question: -

***Small prediction***

Read the rest of this entry »

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More Signs Towards A May Election

By Andy Shaw | January 23, 2010

Originally Posted 13th July 2007

The chancellor is expected to set out a mini budget in October which is ahead of when they usually announce it in November. If they put in some sweeteners into that (such as another 1p off income tax) as well, then I would say that an election in May will be all but certain (but then I got it wrong with the rate rise prediction last week, well having said that I think I got it right saying they shouldn’t raise them and they got it wrong by raising them, but that’s just an opinion :-) ).

Anyway the point is as I said a few weeks ago I think that Gordon Brown wants his own mandate and is going to use his run in the polls and a few cleverly chosen changes to tradition to help him ride a wave through the next election. I’ve got to be honest, I thought he would hold onto the position for a couple of years before having to call an election and by doing so I thought the Conservatives would be more or less assured of victory, but this new play he’s making here is a much better chance for Labour to win. I think this is very clever play and I must admit if I was a betting man (and I’m not) I would bet on an election next May to coincide with the local government elections (70% chance of), and I would bet heavily on a labour win (if the election is called for then 85-90% chance of).

The only way this is not going to happen is if Gordon screws it up somewhere along the line in the PR war. My opinion is that this is much more likely than it was under Tony Blair as frankly Gordon is not as clever a politician and is much more likely to be caught out than Tony was. So if he gets caught out badly somewhere, or one of his ministers screws up publicly, then they might not go for an early election. But this guy is desperate to have his own mandate and that burning desire is going to push through and make it happen unless something big sends him the other way, as he knows just like I do, he has more of a chance to win early on. And he has more chance of forcing the Euro on us if it is done in 2009.

Best Wishes

Andy

Topics: Free Content, Government | Comments Off

So We’re Going To Increase The Supply Of New Houses Are We?

By Andy Shaw | January 23, 2010

Originally Posted 12th July 2007

The new Prime Minister is definitely going for the headlines with this one. I think property is our nations favourite subject so this should help to keep him in the headlines and carry through the ‘good feeling’ factor.

He announced yesterday that he would increase the new building program from it’s current target of 200k to 240k. He’s intending to hit this figure annually by 2016 which could be realistic. Obviously they are not yet hitting the 200k target and in the Times it said that they hit 185k last year but I don’t know if I believe that as their figures are not always accurate.

This figure still is somewhat short of what I think is really necessary say around 300k but at least they are admitting that there is a real problem now. I think all of these efforts will mean that the problem only gets worse rather than getting really bad.

He didn’t bother saying where these homes would go, or who they would go to, or what they would look like so we’ll just have to wait and see on that one as they are apparently releasing details of those little details next week.

The biggest problem I see is (as I have said before) not just the number of new homes but where they are built and I think that this will be a key element to seeing what effect this will have on the UK property market. As before this announcement I was thinking that if they didn’t do something that the market value would spiral up so much that there could be another short term bust, especially if they continued the fight to keep inflation at 2% (see my earlier post on that one).

Of course the bust would recover but it would lead to instability in the property market which is what everyone is trying to avoid. But as I’ve said, it doesn’t matter to me which way the market goes as it’s always a good time to buy, you just need to buy the right property.

My forecast is still for strong growth and further signs today regarding the dollar and the US housing market troubles may help to keep the likelihood of further rate rises under control for a while. But then who knows with these guys as they are trying to hit an unattainable target in my view by trying to buck the markets.

Best Wishes

Andy

Topics: Free Content, Property, The Economy | Comments Off

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