HSBC and Co-op Bank do battle as sub-1% mortgage wars break out

International Business Times Video Link below:

Edmund Shing: HSBC and Co-op Bank do battle as
sub-1% mortgage wars break out

Could the first sub-1% mortgage rate be around the corner? Actually, it is already here. While the Co-op Bank recently launched a 1.09% two-year fixed-rate mortgage (which will move back to the standard variable rate (SVR) at the end of the term), HSBC has beaten this with an initial rate of 0.99% on its two-year discount special mortgage.

It is hardly surprising then that existing homeowners are thinking about remortgaging to lower their monthly mortgage payments. Surprisingly enough, the SVR on mortgages has actually risen since 2010 and now stands at 4.5%.

Figure 1. Two and five-year fixed mortgage rates still falling 

Source: Bank of England

The average two-year fixed mortgage rate has fallen to under 2%, while the average five-year fixed rate is under 3% (Figure 1). And if you shop around, you can now find sub-2% five-year fixed rates too.

Nearly one in six homeowners are thinking about remortgaging over the next six months, according to a recent Nottingham Building Society survey.

They are hoping to save on average £99 per month, or nearly £1,200 per year. This is all thanks to the ongoing mortgage price war, driving rates ever lower. Let's face it, with the Bank of England base rate at a historic 0.5% low, interest rates are likely to only go one way in the long-term – up.

So remortgaging with a multi-year fixed rate will at least insulate the homeowner against the risk of higher rates for the foreseeable future.

Average mortgage rate on outstanding mortgages

But how much is the average mortgage borrower paying at the moment? The Bank of England says "nearly 3.2%" (Figure 2).

Yes, this average rate has come down over the past five years, but it is still a long way from the current best two and five-year fixed and discount rates on offer today.

Figure 2. Average mortgage rate on outstanding mortgages still over 3%

Source: Bank of England

Let's say you are interested in remortgaging your house or flat. Where would you start and what should you watch out for?

Firstly, you can go the well-trodden route of checking out the online mortgage best buy tables at MoneySuperMarket.com, MoneySavingExpert.com or MoneyFacts.

Before going any further, it is probably a good idea to sit down with your existing mortgage provider to see what they can offer you.

Then if you're not satisfied, try the banks and building societies at the top of these tables. Or you could go to a specialist mortgage broker such as John Charcol or London & Country Mortgages.

But beware, some of these lowest interest rates come with catches: you may be hit with a high "arrangement fee" that can go as high as £1,499, or there may be penalties for early repayment. So be careful to examine the details.

Investing in the mortgage market: challenger banks, specialist lenders

There are some interesting ways to invest in a post-election pick-up in mortgage demand. Instead of looking at the Big Four UK banks, I would look to the new "challenger" banks that have recently been established, or look to specialist mortgage lenders.

Listed challenger banks that are making a splash on the savings and loans markets include Virgin Money (code VM.), Secure Trust Bank (STB), OneSavings Bank (OSB) or Aldermore Group (ALD).

Virgin, OneSavings and Aldermore have all recently listed on the London Stock Exchange and are growing their savings and mortgage businesses quickly as they take business away from the Big Four.

Otherwise, for a really focused mortgage growth play, you could look at the Paragon Group of Companies (code PAG). Paragon specialises in residential mortgages (such as buy-to-let), personal and car loans.

They are forecast to grow profits by more than 10% per year for the next two years and trade on a very reasonable valuation.

Bottom line: if you haven't remortgaged already recently, check out the current best remortgage buys and see if you can save on your monthly payments.

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons

International Business Times Video link (click below):

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons 

Could property be the big gainer from David Cameron's election win? Estate agent Foxtons and house builder Berkeley Group jumped 9%+ on 8 May. But why?

Clearly, the stock market has heaved a huge sigh of relief at the demise of the Labour Party. Now there is no fear of a mansion tax hitting London housing.

This is good news for house buyers at the £2m ($3m, €2.7m) plus price bracket, such as foreign buyers in London, who have been holding off any purchases up until now.  

Equally well, with the risk of Labour's threatened rent controls now removed, the buy-to-let market could now see renewed activity.

Now that the Tories are in sole charge, they need to urgently tackle one of Britain's most pressing problems. London and the South East is the UK's economic heartbeat, but is desperately short of affordable housing.

House prices still on the rise – outside London

The Halifax house price index rose 1.6% between March and April, and 8.5% over the last year, for a yearly gain of nearly £20,000 on the average house (Figure 1).

Figure 1: UK house prices up by nearly £20,000 over the last year 

Source: Lloyds Bank

Last year, London properties saw the fastest-rising prices. In contrast, it is the rest of the UK that has enjoyed stronger house price momentum over these last 3 months.

According to the Royal Institute of Charted Surveyors (RICS), London is one of the very few regions where house prices have actually fallen over the last 3 months (Figure 2).

Figure 2: House prices rising fastest in Northern Ireland 

Source: Royal Institute of Chartered Surveyors

Four factors should drive a rebound in buy-to-let house purchases:

1. Lifting of the threat of rent controls;
2. High demand for rental properties (Figure 3);
3. Falling mortgage interest rates: The Co-Op Bank are now offering a new 2-year fixed-rate mortgage at only 1.09%. This suggests that the first sub-1% mortgage rate could soon be here.
4. Falling savings rates: your saved cash is worth less and less in the bank, increasing the attractions of alternative income investments. 

Figure 3: National rental demand remains very high 

Source: Royal Institute of Chartered Surveyors

All good for estate agents and house builders

What are the best ways to invest in the UK housing market? These are my two favourite housing-related industries:

Estate agents: Of course they buy and sell houses, and so make more money as house prices go up. But they also increasingly make money from the buy-to-let market, as they also act as letting agents.

House builders: who benefit from rising house prices as they can sell their newly-built homes for more, meaning higher profits.

My two favourite housing shares: Berkeley Group and LSL

I like the UK house builders as a group; they are all in general cheap, pay big dividends and are very profitable.

My favourite house builder is Berkeley Group (code BKG). It is focused on London and the South East of England, it is a generous income payer with a 6.4% dividend yield, and has been consistently very profitable over the last five years.

There are handful of listed estate agents in the UK. I like LSL Property Services (code LSL). LSL has two distinct sets of businesses:

• 539 estate agent branches under a number of brands, such as Your Move and Reeds Rains;
• Surveying and valuation services.

Both of these sets of businesses will make more money from a booming property market, whether from buying and selling or just from managing rented properties.

LSL is also a cheap stock and a reasonable income payer with a 3.7% yield; it is also consistently very profitable, with profits forecast to grow by 10% this year.

Post-election Friday was a good day for the estate agents and house builders; but there could be many more as the property market heats up again!

UK Housing Becoming a Buyers' Market? Not good for estate agents...

The UK media has not tired of bombarding readers with news stories about the runaway nature of the London property market in particular, and the UK housing market in general, this year. As I have been looking to buy a bolt-hole in London, this strong price momentum has been particularly annoying, with properties literally flying off the shelves soon after being put up for sale.


This trend looks finally to be on the turn, despite continued reports of London seeing 19% price growth in the year to July, according to the Office for National Statistics. 

RICS Survey Points to Big Slowdown

The Royal Institute of Chartered Surveyors' latest monthly survey for August highlights this London slowdown in a number of revealing charts (Figures 1-3):

1. Newly Agreed Sales Are Slowing Fast

2. New Buyers Are Cooling Their Interest Given High Prices

3. Particularly in London

European House Prices Hardly Advance

While UK house prices have gained 12% in the year to July, the latest Knight Frank Global House Price Survey reveals that European house prices overall have only gained 2% over the last 12 months, with certain markets such as Spain still seeing falling prices.  In fact in Europe, only Turkey (+14%) and Ireland (+12.5%) have seen faster house price growth than the UK. But remember, in the case of Ireland, that this rebound in house prices has only come after a terrible 50%+ fall in house prices during the Global Financial Crisis, a far cry from the UK situation today. 

Can we really expect the UK housing market to continue to march upwards, even as affordability ratios deteriorate rapidly and force ever more 20- and 30-year olds live at home for longer in order to try to save up a deposit? And what if the Bank of England decides to begin raising its base rate, even if only gently? This could have a further negative impact on affordability to add to this price growth. 

Seasonal Effects: Q4 is the Weakest Period of the Year for House Prices

I have looked at the quarterly variation in UK house prices from the Nationwide house price index going back to 1952: From this, it is quite clear that Q4 (October-December) is the weakest of the year from the point of view of house price momentum (Figure 4): 

4. Q4 is on Average 0.7% Below Year Average House Price Growth

If we delve deeper and look by month using the Halifax House Price index data back to 1983, we see an even more obvious seasonal effect with August-January registering average house price growth well below the overall long-term average (Figure 5), with a similar if not exactly the same seasonal effect also found in Rightmove monthly asking prices (going back to 2001, Figure 6): 

5. August-January Sees Pronounced Seasonal Weakness in House Prices

6. Rightmove Asking Prices Also See A Weak August-January Trend

Two Conclusions To Reach

1. With discounts of achieved to asking prices currently widening according to Hometrack, it is time for homebuyers, especially in the pricier London and the South East regions, to be more discerning and to bid lower, particularly if a cash or non-chain buyer and thus able to complete relatively quickly.
   
   
2. Estate agents like Foxtons (FOXT.L) and online property listing websites like Rightmove (RMV.L) and the recently-listed Zoopla (ZPLA.L) should see their premium valuations come under further attack as top-line growth inevitably slows along with overall housing market activity. I see a forward P/E of 22x for Rightmove and 27x for Zoopla as far too high when their core market is slowing, particularly as their dominance and cost to estate agents is spawning rivals like Agents' Mutual. Even estate agents are seeing their percentage-based fee structure under attack from fast-growing online estate agents charging a flat fee (e.g. £500) such as sellmyhome.co.uk. Rightmove and Zoopla could thus be interesting short candidates...

There will be a Time when Estate Agents Are Interesting Stocks

There will inevitably be a time to look at estate agents such as Foxtons and LSL Property Services (LSL.L), but I feel that this will be when they trade on single-digit P/Es and dividend yields of well above 5%. Foxtons may have nearly halved from its post-IPO high but has not hit these valuation levels yet, while LSL is not far away (9.8x forcast P/E and 4.9% dividend yield according to Stockopedia) and may warrant further attention in the months ahead. 

But for the moment, I shall be biding my time and keeping a close eye on house price developments, in the hope of buying either a London property in the months ahead, or at least snapping up the shares of a bargain basement estate agent!

Edmund

Hunting Bond-Beating Income Ideas: Stocks, Funds

With short-term bank deposit accounts now offering well under 2% interest, and even loaning money to the UK government for 10 years (via Gilts) only garnering a meagre 2.7%, a lot of savers and investors will be wondering where they can put their money for a better income stream. 

Look to Corporate bonds?

The first obvious port of call could be sterling investment-grade corporate bonds, which offer a 3.8% yield at present, a 1.8% improvement on the yield offered by UK 5-year gilts (Figure 1).  

1. UK Corporate Bonds Offer 3.8% Yield

Source: Bloomberg

The easiest investment vehicle for this would be an ETF like the Core £ Corporate Bond UCITS ETF (code: SLXX), which charges just 0.2% per year in management fees for this bond exposure and yields 3.5% net of fees. 

What about income funds? 

A second possibility would be an income fund of some description, which could potentially yield as much or more than UK corporate bonds, but which can also include some element of dividend growth going forwards.

 An interesting income proposition in the investment trust world could be the income shares of the JPMorgan Income & Growth investment trust (code: JIGI), which invests in blue-chip income stocks. This split-capital trust is due to wind up at the end of November 2016, at which point investors will receive the net asset value per share of the fund less winding-up costs. 

At the moment, these income shares trade at a 8.4% discount to the final Redemption Price of 103.4p, while offering a generous 4.7% dividend yield. If the NAV was to remain at its current level at wind-up date, then income share investors stand to receive 9.9p in cumulative dividends between now and then, plus another 8.6p from the closing of the gap to the redemption value, i.e. 18.5p in total on a 94.75p share price, or nearly 20% return over the next 2.5 years, roughly an 8% annualised return with good visibility. 

Otherwise, an dividend income-focused ETF like the iShares UK Dividend UCITS ETF (code: IUKD) could be an option, offering a 4.0% dividend yield from a dividend-weighted portfolio of UK large-cap stocks including SSE, Imperial Tobacco and BP.

Both of these fund choices would give you a one-stop equity fund offering a yield above the 3.5% from the UK corporate bond ETF. 

Choosing Bond-Beating Income Stocks

The third option is to make up your own income stock portfolio by choosing a number of high-yielding stocks. If we take the target as a current yield above the corporate bond ETF's 3.5%, and add requirements to favour stocks that should also deliver an above-inflation rate of dividend growth going forwards, then we can create our own "bond-beating" stock portfolio. 

Using www.stockopedia.com's UK stock screening tool, I built my own simple screen looking for UK stocks that yield 3.5% or more, whose dividend is covered by earnings to the tune of at least 1.5x (to leave room for future growth) and which are in the top 30% of Stockopedia's combined StockRanks ranking (which combines Value, Quality and Momentum criteria). 

Here is the list of the Top 25 stocks on the resulting screen, ranked by best combined StockRank:

2. Bond-Beaters UK Screen

Source: www.stockopedia.com

This screen, if replicated as a 25-stock equal-weighted portfolio, would have an average dividend yield of 4.6% and dividend cover of nearly 2x, leaving ample room for profit and dividend growth. 

You may notice that a couple of sectors are well-represented here, including the Insurance (Catlin, Amlin) and Property (UK Commercial Property Trust, New River Retail) sectors, which remain two of my personal favourite UK sectors for the moment given their attractive combination of value and momentum.

Of the names in this list, I would be keen on Amlin (code: AML) given its strong record of profitability and very steady historic dividend growth (more detail here), and also New River Retail (code: NRR) given its low level of net gearing for a property company (18% of equity) and leverage to an improving UK consumer (as real average wage growth turns positive at last). 

Edmund

Snap up a DIY bargain in Home Retail

The UK home improvements sector has done very well of late, boosted of course by a combination of a recovering domestic economy, and in particular the feel-good “wealth effect”  which has enveloped home owners as property price inflation has roared back.

Unsurprisingly, retail sales volumes in furniture and lighting have been buoyant, no doubt also aided by purchases following the recent widespread flooding along the Thames Valley – terrible for home owners there and for their insurance companies, but home improvement and furniture retailers have benefited from resultant replacement needs (see UK: Winter storms impact the Home Improvement market). According to Figure 1, furniture & lighting retail sales are showing a 6+% annual growth rate, with a sharp acceleration since the middle of last year.

1. UK FURNITURE & LIGHTING RETAIL SALES TRENDING HIGHER

UK housing the biggest macro driver of DIY

The two biggest quoted UK DIY retailers are Kingfisher (code KGF.L: B&Q in the UK, Castorama in France) and Home Retail (HOME.L: Homebase and Argos in the UK).  The share prices of both of these companies have been somewhat correlated to the UK housing market, with Kingfisher (the green line) in particular following the Royal Institute of Chartered Surveyors UK house price balance index (the black line) very closely over the last few years (Figure 2).

2. KINGFISHER & HOME RETAIL ARE VERY EXPOSED TO HOUSING

Note that Home Retail (the red line) did not rebound in line with the bounce in house prices that started in late 2011, but rather only bottomed out in share price terms in mid-2012, due to company-specific issues in Argos, as it battled a slump in sales of consumer electronics (TVs, audio equipment) with the consumer switching to buying these items online.

To read the rest of the article and see why I find Home Retail attractive,
please click on the web link below: 

  

Snap up a DIY bargain in Home Retail

  
Even if you are not so adept at putting together Ikea flat-pack furtniture, this may still be a great way to get a benefit out of the burgeoning DIY trend! 
  
Edmund 

  

Three reasons not to rush into housebuying now

I came across these charts while trying to figure out the best places to hunt for houses in London on a value-for-money basis; I think they speak for themselves…

1. SLUMP IN NEW BUYER ENQUIRIES POINTS TO SLOWING HOUSE PRICES AHEAD

Source: RICS, Nationwide

To see the rest of the housing charts, please click on the link below:

Three reasons not to rush into housebuying now

Bail on your bank shares! Buy insurance, real estate instead

Look at the widening gap between financial sectors

I think this first chart gives you a good idea of why I am not keen on UK-listed banks at the moment – the stock market has been falling out of love with them over the last 10 months, following a series of frankly poor results (Figure 1).

If you had been invested in the UK Banks sector (HSBC, Barclays, Lloyds TSB, RBS, Standard Chartered) since January of last year, you would today have seen precisely zero price appreciation on average to today – your only gain has been in dividends paid.

Contrast this with the stellar performance of two other UK financial sectors: Insurance and Real Estate, both of which have gained around 30% over the same period. That is a big difference!

 But there are of course some very good reasons for the relative under-performance of Banks – most notably from:

1. Their poor sets of results, generally missing analysts’ estimates for profits and earnings;
2. The ongoing sagas of tighter banking industry regulation and also continual provisions for the costs of various mis-selling and price-fixing scandals, which seem to linger like a bad food odour and taint the industry.

Banking scandals do not go away

I haven’t got enough space in this short article to list all the “bad stuff” that the banks have been caught doing over the past few years – just note that we now have a potential Gold price scandal centred around the daily London pm gold price fix, which involves Barclays and HSBC amongst others.  So this latest scandal can potentially be added to the long list of issues that the banks are already paying for, in the form of fines and compensation to victims.

And bank results have not been good

On the results front, these have been somewhat disappointing; even today Standard Chartered has announced results, another bank undershooting analysts’ profit forecasts for end-2013 (net income reported of $3.99bn versus an average analyst estimate of $4.25bn).

UK banks, particularly those like Barclays, HSBC and RBS that still retain substantial investment banking activities are struggling to bring down costs (principally salaries) sufficiently to reach their targeted cost-income ratios (a measure of banking efficiency). Put simply, if they do not pay high salaries and bonuses to investment bankers who are performing well, these employees will simply jump ship and work elsewhere. And an investment bank is really the sum of its talented individuals – if they all leave, what value is left?

To read the rest of this article, see the charts and my UK large-cap stock recommendations in Financial sectors, click on the link below:

Bail on your bank shares! Buy insurance, real estate instead

Still time to climb on the housebuilders’ ladder

Surely UK house builders have done so well already, that they can’t possibly have much further to go? When the heated state of the UK housing market becomes headline news on a regular basis, then as a stock investor, you have to be worried, right?

While that might normally make sense, in this case I would beg to differ. It is true that, since I wrote my last article extolling the virtues of UK house builders on February 4 (UK Building is All Systems Go!), the Bloomberg UK house builders’ index has risen some 9%, its pullback today notwithstanding.

But let me present a series of data that I find to be compelling evidence that the current bull market in housing-related stocks  still has some way to run…

Item 1: House Builders have 37% to go to Reach their 2007 Highs

Yes it is true! As a group, house builders like Barratt Developments (BDEV), Berkeley Group (BKG) and Persimmon (PSN) have 37% further to rise before they hit their June 2007 share price highs.

Item 2: Housing Starts Are Picking Up, But Still Below Average 

House builders are breaking ground on more new projects today than at any time since the first quarter of 2008. However they are still a long way from climbing back to the average for quarterly housing starts seen pre-Financial Crisis. 

Item 3: and Building Completions Are Even Worse…

If we look at the rate of building completions in the UK, the situation looks even worse...

Item 4: Mortgage Approvals Go Up, Mortgage Rates Down

And all the while, the UK Government is of course doing its bit to help the purchasing of new-build homes with their Help to Buy schemes, effectively guaranteeing the first 20% of a 95% loan-to-value mortgage, allowing first-time buyers to get on the property ladder with only a 5% deposit. No wonder then that the number of mortgage approvals is going up!

To read on, see the charts and see my favoured stocks for this theme,
click on this web link: 

Still time-to climb on the housebuilders' ladder

2014: Walking the Yield Tightrope

A Happy New Year to you!

Looking in the rear-view mirror, 2013 was perhaps surprisingly a very good year for investors willing to take on financial risk in the face of an uncertain macroeconomic climate. Despite the complete lack of growth in the Euro area, question marks over the sustainability of growth in previously fast-growing emerging economic powerhouses such as China and India, and the twin headwinds of a government shutdown and higher taxes Stateside, developed stock markets delivered frankly impressive returns as did a number of other asset classes such as high-yield corporate bonds and residential property.

But as we set foot on the investment path anew in 2014, in what direction should we be heading? Will 2013’s financial market trends be repeated this year, or should we be changing course?

2014 Trend number 1: Still Hunting for Yield

Please click on the web link below to my Mindful Money mini-site to continue reading this article...

2014: Walking the Yield Tightrope

Best wishes for 2014! 

Edmund

Riding the UK Property Rollercoaster

At the risk of seeming a little hyperactive (for an "Idle Investor"), please find below a web link to my latest "Expert Opinion" article on the Mindful Money finance website, on the subject of potential ways to invest in the rising UK property market, without going as far as buying physical bricks and mortar!

Riding the Property Rollercoaster

Please click through to the article, as then I start to build up traffic to my column (hopefully, points win prizes in the end!). As always, your patronage of my column on this website would be much appreciated, as it is a new, exciting venture for me and allows me hopefully a broader platform for disseminating my investment ideas.

PS you can also sign up for a free daily email from the website with their latest feature articles on investing and personal finance:


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Thanks a lot for your help,Edmund