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Every now and then, there is an event that marks a tipping point when, not necessarily with the benefit of hindsight, it is possible to say that things changed or a marker point was identified in a market trend.
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The purchase of Time/Warner by AOL in 1999 was a good example. Here the 'new economy' was buying the 'old economy', but the interesting thing was that AOL, using their stock to buy Time/Warner, valued their own shares at half the prevailing rate at which it was trading in the stock market. What the directors were saying in effect was, 'The market's mad, let's use this crazy inflated currency to get some real assets.' The rest, as they say, is history, but the point of this tale is that here was a point at which an observer could say, rationally, that the top of the market was nigh: exact moment difficult to pinpoint – but nigh nonetheless.
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There was a similar moment this New Year when one of the old building societies announced that it was offering a 130% mortgage into which they would roll up existing credit card and other debt.
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| Let's look at what this means. |
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| Take borrowers who are neither financially sophisticated nor solvent (the chairman of Barclays was only telling the truth when, in a famous 'Ratner moment', he opined that credit card debt is not the most economic way to borrow money). Put them into a position of instant negative equity to the tune of 30%, retire to a safe distance and hope that the market keeps zooming upwards and makes the sums add up. |
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All this financial wizardry is from an old building society – a rather quaint institution that used to put thrifty savers in touch with prudent borrowers, allowing those who had saved a deposit to buy a property and then pay down the principal with a steady long-term savings scheme. Almost every word in that last sentence seems to belong to an age of Morris Minors and Marmite sandwiches.
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| One doesn't have to be a curmudgeonly old stick-in-the-mud to see the dangers here – merely over thirty years of age. After all, it was only twelve years ago that we were sitting in the pit of a recession with widespread negative equity, house repossessions and very unhappy shareholders of mortgage providers. It would not be unreasonable to presume that those now running these institutions were at least shaving or had pierced ears at the time – but maybe they have seen the light and will be applying for one of the exciting new casino licences that the government is proposing. |
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It was only about eight years ago that we approached a lender who specialised in 'high net-worth clients' with an international bias. We had numerous clients, at the time, who were based abroad but buying rental investments in London. They were looking for a 'cash-flow neutral' investment where the interest and outgoings matched each other and were not that keen on upsetting that cash flow with repayment schemes that were designed for owner-occupiers. We were proposing an interest-only mortgage based on a 60% loan-to-value ratio with biannual revaluations which, in the event of a falling market, would give the lender the comfort of keeping the same loan-to-value ratio. At the time, this didn't seem to us to be the outer edges of speculative lunacy – indeed, now it looks as conservative as twin-set and pearls – but the patronising lecture on banking rectitude that we received for our pains still rankles. That bank is now lending, interest-only, at a 100% loan-to-value ratio.
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| What does this tell us? It is said that the top of the market is when the last bear buys – the logic being that when that happens there are no more buyers to pay a higher price. When you see the sort of lending now going on, and the borrowers they are targeting, one has to question how any further increases in the mainstream market can be possible. Does this imply a fall? Not necessarily in a low interest-rate environment where there is a physical shortage of housing stock; Mr Prescott's initiatives are designed to ease the supply side but they must, realistically, take some time to feed through the planning and building process. And even when they do, there are also the upcoming changes to pension regulations which will allow investment by pension funds in residential property. Given the love affair between Britons and property, it is likely that this change will at least underpin the status quo. |
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And the effect on our market (broadly the 'international', at the top end in terms of quality if not price)? Not much – mainly because it is in a different place, rather nicely illustrated by the bar chart above which contrasts the rocket-like quality of the mainstream with a more terrestrial London market over the last three years. Our market is also much less sensitive to interest rates and banks' generosity in terms of lending policy. It is the stockmarket, the employment prospects in Canary Wharf, currencies, geopolitical events and the more ephemeral 'feel-good' factor that are the drivers.
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We love this sort of market as it facilitates activity, without the damaging anticipation of a car crash that accompanies a roaring bull market. Not too hot, not too cold – Goldilocks in fact – but maybe that is tempting fate.
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