It's a sad day in the land of aspiring home ownership. Last week's budget has favoured the institution over the individual with the announcement of the Stamp Duty reforms and the opening of the residential property sector to the REITs market.
The change in Stamp Duty, whilst positive for the larger investor and institutional buyer, is basically the death-knell for aspiring home owners under the age of 45. The changes made, as most of you will have seen, basically mean that there is now a significant tax break when investing in property in bulk.
Property professionals, commentators and the press are obviously making the most of this - citing it as "the big buy to let come-back"; the mortgage providers out there are frantically number-crunching to see what new products they can launch to ride the wave of media attention the sector is getting.
Why am I the only industry pessimist?
To be honest, I am not personally a fan of buy to let anyway - it has been abused as a concept, and extensively mis-sold, not just by agents, but "property gurus" and mortgage providers alike. Aside from this, it is arguably the joint primary reason (combined with irresponsible lending) the housing market is in the state it is in anyway.
No money down, instant equity, interest only mortgage and rental returns are all phrases used to hype the sector up, all of which proved to be impossible to sustain over time - the result being the market shot up, making first time buying (in the traditional sense of the term) impossible.
The Stamp Duty reforms now will do a few things. Short term, we will see a few institutions rubbing their hands with glee at the opportunity to hoover up entire streets full of terraced houses - great for redevelopment of run-down areas.
Larger property owning entities can now form a REIT using residential property - adding a new sub-sector there. REITs in their own right are very handy for investors that want exposure to the property market without taking ownership and the hassles that go with it - the downside being that you don't have much control with regards to the specifics that your money is invested into.
The mortgage industry is having a field day too - yet more products to release onto the unwitting investor whilst interest rates are low (conveniently forgetting the problems that will ensue as rates start to rise), only to run crying to the government, cap in hand for a bail-out when mass default begins to kick in.
Sadly, only one other entity has spotted part of the potential problems. Ratings agency Moody's has quietly suggested that continuing to support lending and home owners in difficulty might not be such a good idea. Well spotted Moody's.
The face of homeownership is changing - permanently. Owning your own home before grey hair and baldness sets in is to become a thing of the past in the UK. Meanwhile, most mortgage providers and property promoters are apparently leaping for joy at the prospect of yet more debt creation, more defaults, more repossessions and general widespread doom.
Is there a light at the end of the tunnel?
In the short term, to be honest it doesn't look like it for most if you only look at your current situation right now. Many property owners are in or approaching negative equity; those that don't own a house cannot afford to get onto the property ladder anyway, and those that can afford it are reluctant to for two reasons: inevitably increasing interest rates, and the actual price of property right now.
In the long term however, things do look slightly different although much of the outlook is reliant upon how long the government allows the banking system to continue to do as it pleases and making adjustments for its shortcomings and failures.
The UK needs basically to free up liquidity - actual cash. The problem is that what little cash the country has is tied up in property and debt. Now, we could let inflation run rampant and let the debt seem to magically disappear - a fanciful idea, which would work but the knock on effect would likely lead to the end of civilization in the UK as we know it. Beer would fast approach 20 pounds a pint and that would be that - the recent riots in London would look like a tea party in comparison to the uproar that would happen.
More quantitative easing could be done - again, an "easy fix now" equals "peril later" approach. Printing more money just fudges the books for a while until the next audit and we start the whole rigmarole all over again - just in a slightly deeper pit of doom.
We could see the government continue down the road it's already on - lending into the market with the idea that it will create stimulus [link to Escher effect] or keep bringing down taxes to create incentives for bulk buyers. The problem with this approach, like the former ideas, is that it doesn't actually create any cash - only debt. In certain circumstances is does help cover some of the outstanding retail debt - but little else.
So what to do?
Sad as it might sound, if you don't already own a house - give up on the idea of owning your own home anytime soon. The way things are now, prices are unlikely to come down to affordable levels when you consider the unemployment rate and the lack of wage rises to stay in line with inflation.
Instead - follow the money. Make what cash you have work for you in a place where it cannot be manipulated by government meddling. Don't get me wrong, this is not to say that property is a poor investment option; it is. All that has changed is how you go about it. Rather than buy a physical property that opens you up to a myriad of exposure to uncontrollable variables, invest in property-related investments that require no leverage or mortgage. REITs, funds, even shares in property companies immediately spring to mind, as does of course our own Secure Exit Strategy applications.
We have all seen how much damage the market can suffer when lending is allowed to get out of control - and there appears to be no moves underway by anyone to control future lending. If you are not on the housing ladder, you are likely in a lucky position (although it might not feel like it right now). Take advantage of the situation, but do it using the same methodology as the corporations, institutions, bulk investors and the government. Use their risk levels rather than yours. Then, when someone passes the bill for common-sense lending in parliament, you should be in position with some cash to buy a property with a reasonable deposit and a lower rate of interest. Sure, we all want to own our own home - but at ANY cost?
- Tuesday 29 March 2011