Would-be first-time buyers have had a hard time of it. They want to buy a house, but time and again many are thwarted by the same problem. They can’t afford to buy a house.
Not being able to afford something is a very common problem in markets. Usually it’s solved by the price of things coming down. But in the case of the housing market, things are a wee bit trickier...
Prices have started to fall, but many still can’t get the mortgage they need to get on the ladder.
I talked about affordability yesterday. I said that from our perspective it doesn’t matter precisely how much house prices fall. We’re confident they will, and our investment strategy reflects that.
Happily, though, a report today puts some numbers into the mix. Apparently, 28% of employed young people can’t afford even their cheapest local properties. In parts of London and the south west, more than 40% are priced out of home ownership.
Hometrack, who published the report, reckons that if prices come down 10%, then the average will drop from 28% to 22.5%. In other words, a fifth of those currently priced out will be able to get their hands on a front door key.
That’s what some (especially those in that magic fifth) would like to see happen. Will it?
Ah, if only economics were that simple! If only we weren’t plagued by all these pesky ‘ifs’ and ‘buts’. But we are. So let’s glove up and pick our way through the brambles...
Affordability is the key. The big thing dampening affordability right now is the tight-as-a-drum credit market. Mortgages you used to be able to get, you now can’t. Those you still can, meanwhile, are more expensive.
Professor Steve Wilcox, the academic who crunched the numbers for the Hometrack report, calculates that the cost of repaying a mortgage rose by 12% last year. But this situation could reverse.
I don’t think it will, however. At least, not enough to reverse the general house price trend, which will carry on downwards.
Today’s report gives us an idea of where prices might end up. But housing market forecasts are ten-a-penny, especially at the moment. I’ve read everything from a predicted 5% drop to an almighty 40% crash.
The trouble is, to put a hard, meaningful number on it, you have to make all sorts of assumptions which themselves are meaningless.
Will the lending market ease up, and if so by how much? How much will would-be buyers rely solely on their own incomes, as opposed to borrowing from other sources, such as relatives?
All these factors make it tricky to obtain a useful forecast for affordability. And then there’s sentiment...
What about those who’ve decided to rent rather than buy? Renting is comparatively cheap right now. But many renters are renting because they don’t want to buy an asset they believe will soon fall in value.
Even if homeownership becomes comparatively less expensive (prices fall, borrowing gets cheaper, or a combination of both), will that fear recede by a proportionate amount? Unlikely. By how much, then, and over what period of time?
Ah, now we’re into the realm of guesswork...
The good news, though, is that it doesn’t actually matter by precisely how much the housing market will fall. Watch the trends; don’t worry about trying to package the world into a neat, numerical model.
The outlook for the UK economy is bleak. It’s not just housing — today we read that the purchasing managers index (PMI) for the service sector fell to 49.8 in May, down from 50.4 in April. A PMI of 50 represents stagnation — neither contraction nor expansion.
So basically, our service industries expanded ever so slightly in April (not good), but contracted a little in May (worse).
You don’t want the fate of your investments to be tightly bound up with the British economy. Because the British economy’s going down. Instead, look for companies making money in expanding foreign markets.
As our research director Theo would surely say: "The UK stock market is your window on the world. Use it!"
The fight for Congo’s mines...
Gold. Copper. Diamonds. Uranium.
Congo has them all, in abundance. And the Chinese are desperate to get their hands on this mineral wealth. They’re investing a whopping $9 billion in the Congo economy.
Below, Garry White explains why. But first, a word from Manraaj Singh, our emerging markets wizard:
"Pow!"
Thanks, Manraaj.
Of course, Manraaj has a LOT more than that to say about Congo. Right now he’s putting the finishing touches on a recommendation that will give you exposure to the very richest mines in this resource-rich country.
"If I’m right about this investment," he says, "it’s going to offer the sort of profits that makes China’s deal with the Congo look small!"
For more details, read today’s free edition of Profit Hunter HERE.
China to build "10 New York Cities" — and this is the commodity they’ll need!
Garry White was full of beans at this morning’s meeting. Our commodities man was at a mining conference yesterday, and he’s come back brimming with verve and new ideas.
"One guy there was saying China’s building the equivalent of 10 New York Cities. Well, they’re gonna need a lot of steel, a lot of concrete, and a lot of electricity once they’re up and running."
Which means one thing. Coal!
"If you don’t have coal in your portfolio, you’re missing out on potentially the biggest commodities bull run of the 21st century so far," says Garry.
Discover how you can play this trend with an investment that not only puts coal in your portfolio, but also gives you a claim on cash from mining monsters BHP Billiton and Rio Tinto!
Until tomorrow
Ben Traynor
