Credit deflation and the reflation cycle to come (part 2)

[Castlevania]

7 hours ago, DurhamBorn said:

South might go down 60% or more inflation adjusted over the cycle.I think the cycle will play out by deleting a lot of equity,then holding steady while inflation and rates increase.The market will do two things before the next cycle ends.First it will destroy the idea of equity release because rates will be too high to justify it.2nd bonds will lose value over the cycle after another year or so and that will see pension pots close to and in drawdown go down to nothing over the decade.In a 60% and 80% bond weighting pension i expect -3% a year returns + 2% fees + draw down amounts say 5%,so down and out over 9ish years.Thats at best.

Very few portfolios these days lean to inflation because nobody expects it.Highly likely they still wont until late in the cycle when they push things parabolic.

The government has created a massive problem since the Blair/Brown government.Benefits and government salaries have swamped the economy.The BOE will monetize,but they only have an 18 month window before the pressure of inflation starts to show,then they will have to release the curve and step back.Massive investment is coming,but not in private housing.The cycles have ended and i dont see southern house prices being back to where they were in anyone lifetime alive now inflation adjusted.

HTB last year anyone?

Depending on area of London, prices in nominal terms peaked anywhere between 2013 and 2018, generally with peak prices starting in the centre and moving outward to the less desirable fringes. 

I read an article the other day from someone that was trying to sell a flat in Stockwell. Paid £500k in 2014. Spent £40k on updating. Had an offer accepted at the start of the year for £500k. Person who offered £500k due to the bat flu revised down the offer to £450k. It’s now back on the market. Once you factor in buying and selling costs you’d have been far better off renting the last 6 years.

So yes in inflation adjusted terms London has long since peaked, and I don’t think they’ll ever reach those levels again in my lifetime.

[CVG]

6 hours ago, DurhamBorn said:

Cross market work to watch that could signal the road map turns earlier could be a Dow/gold ratio of 1.5,Positive real interest rates over a sustained period,gold/silver ratio under 20.

Crikey. And there was me looking to get out at 50!

[ThoughtCriminal]

9000 jobs gone at Rolls Royce this morning.

 

The warmup act is going going swimmingly.

[Barnsey]

5 minutes ago, ThoughtCriminal said:

9000 jobs gone at Rolls Royce this morning.

 

The warmup act is going going swimmingly.

Derby going to be hit hard.

In other news, we’re still looking at deflation in the near to mid term:

 

[CVG]

10 minutes ago, Barnsey said:

In other news, we’re still looking at deflation in the near to mid term:

I know that inflation will hit my pension in the end but in the meantime I'll just enjoy the RPI (1.5%) to CPI (0.9%) differential while it lasts.

[Castlevania]

37 minutes ago, Barnsey said:

Derby going to be hit hard.

In other news, we’re still looking at deflation in the near to mid term:

 

It’s not representative. The biggest drop has been in fuel costs but everyone’s stuck at home. Food costs are up.

[Alifelessbinary]

8 hours ago, BearyBear said:

I know the local market pretty well but have no clue how to look for distressed sellers - any tips/ideas?

Most good probates and development properties go to people who can move quickly (preferably cash buyers) and have a track record with the EA. There is also a trade in ‘finders fees’ but these are illegal. In a good market you won’t be able to compete with the local developer who complete multiple transactions a year, however once the market goes sour things open up.

I brought my house in early 2010 and had my offer on the table for 4 months. During this time I was still looking for other options and had almost forgot about it when the EA called me to say the offer was accepted. The house was structured solid but just need a complete cosmetic overhaul. 

Around 2009/2010 the general consensus in the development community was that the recovery was going to be slow and they’d be lucky to see inflation increase. Prices then shot up in Hackney around 30% and we were off to the races with casino economics. 

Building a rapport  with some local agents can go a long way especially if you can prove you are a good buyer. Auctions are also a good option, but you ideally need a friend whose a Building Surveyor to avoid the hidden stinkers. Although hard you just need to be polite to the EA and try to avoid the idiots who talk up the market. If unemployment hits the figures predicted they will be desperate for sales. 

 

 

[Alifelessbinary]

9 hours ago, DurhamBorn said:

South might go down 60% or more inflation adjusted over the cycle.I think the cycle will play out by deleting a lot of equity,then holding steady while inflation and rates increase.The market will do two things before the next cycle ends.First it will destroy the idea of equity release because rates will be too high to justify it.2nd bonds will lose value over the cycle after another year or so and that will see pension pots close to and in drawdown go down to nothing over the decade.In a 60% and 80% bond weighting pension i expect -3% a year returns + 2% fees + draw down amounts say 5%,so down and out over 9ish years.Thats at best.

Very few portfolios these days lean to inflation because nobody expects it.Highly likely they still wont until late in the cycle when they push things parabolic.

The government has created a massive problem since the Blair/Brown government.Benefits and government salaries have swamped the economy.The BOE will monetize,but they only have an 18 month window before the pressure of inflation starts to show,then they will have to release the curve and step back.Massive investment is coming,but not in private housing.The cycles have ended and i dont see southern house prices being back to where they were in anyone lifetime alive now inflation adjusted.

HTB last year anyone?

I do agree in a worst case scenario that things could get to 60%, but we’ll need at least 12 months to get a slightly clearer look in the crystal ball. The properties most hit will be the high density housing which has sprung up around parts of Canning Town. Most of this has been brought by foreign money looking for safe haven assets, so if they need to liquidise things will get nasty quickly. Quite a lot seems to be dodgy foreign money though, so they can’t repatriate anyway. 

The government will only really care about the nominal figures, as hardly anyone understands or considers inflation, which is scary.

castlevania is spot on about the London peak. Prices have dropper around 20-30% in several central London locations, but because it only impacts rich/foreign buyers the press has stayed very quiet. 

I think I’ve mentioned before that I 100% agree with the strategy your son is using and have helped my sister do the same thing (minus the silver!). If London house prices do take a battering this will ripple out to the rest of the country, although tends to only impact the higher end of the market £400k+. What’s your prediction for the northern property market, 20% drop?

[CVG]

44 minutes ago, Alifelessbinary said:

if they need to liquidise things will get nasty quickly

Certainly fair worse than if they only have to liquidate. (Teasing)

[Democorruptcy]

9 hours ago, Barnsey said:

All I would add is that the unemployment rate has taken just 3 months to rise to levels which took 18 months during the GFC (excluding furloughed), this is anything but gradual, so I’d expect things to liven up after the first 3 month mortgage holidays expire in June and July.

https://www.centreforcities.org/blog/where-has-seen-the-biggest-increase-in-unemployment-since-lockdown-began/

I wouldn't put much store in the 3 month mortgage holidays expiring any time soon. Even before the furlough scheme was extended the FCA were suggesting mortgage holidays would be extended. An article in The Times suggested a year. Got to protect those mortgagees banks.

Quote

 

The new guidance makes clear that firms should grant customers a payment holiday for an initial period of three months and ensure that there is no additional fee or charge (other than additional interest) as a result of the payment holiday.

The FCA said it will review this guidance in the next three months and will issue amended guidance extending the period of the payment holiday if appropriate.

The guidance also sets out the steps firms should take to ensure that the payment holiday does not have a negative impact on the customer’s credit score.

The FCA has also made it clear that in the current circumstances, it does not consider that repossession will be in the best interests of the customer. As a result, repossession should not be commenced or continued with unless the firm can demonstrate clearly that the customer has agreed it is in their best interest.

https://www.financialreporter.co.uk/mortgages/fca-considers-extension-to-three-month-mortgage-holiday.html

 

Edit to add FCA 20th March guidance said review in 3 months

https://www.fca.org.uk/consumers/mortgages-coronavirus-consumers

[DurhamBorn]

46 minutes ago, Alifelessbinary said:

I do agree in a worst case scenario that things could get to 60%, but we’ll need at least 12 months to get a slightly clearer look in the crystal ball. The properties most hit will be the high density housing which has sprung up around parts of Canning Town. Most of this has been brought by foreign money looking for safe haven assets, so if they need to liquidise things will get nasty quickly. Quite a lot seems to be dodgy foreign money though, so they can’t repatriate anyway. 

The government will only really care about the nominal figures, as hardly anyone understands or considers inflation, which is scary.

castlevania is spot on about the London peak. Prices have dropper around 20-30% in several central London locations, but because it only impacts rich/foreign buyers the press has stayed very quiet. 

I think I’ve mentioned before that I 100% agree with the strategy your son is using and have helped my sister do the same thing (minus the silver!). If London house prices do take a battering this will ripple out to the rest of the country, although tends to only impact the higher end of the market £400k+. What’s your prediction for the northern property market, 20% drop?

North is interesting and i think there will be differences.Crap terraces i think will go back down to £40k everywhere,or below.4 bed detached type around the £230k mark will come down 20% as you say,i think thats probably about right.The nice 3 bed semis that are in the £130k,£140k range i think will drop 10% and maybe staight back up.They might even increase slightly.

I think most of the pain in the north will be on the new build estates.They really are terrible.The 3 bed that have been going for £140k on HTB will probably come down to £80k.One estate in Darlington i go to is still being built but mostly finished.The first part has zero grass,trees,open space,none,zip.Its already looking poor,the local housing association took 15% of them and moved in benefit class already and its sinking.The HTB houses nearly all have an Audi and a Mini etc on the drive,obvious younger people up to their necks.The thing is on those though,i wouldnt buy them at any price lower than a 15% yield on rent.

[DurhamBorn]

@Democorruptcy looks certain another 3 months will be added to the payment holiday.They are simply adding on more pain later of course as interest rates increase later in the cycle and bring closer the date when they have no equity in many cases.A family friend got the holiday,she bought with her hubby in 1991 and never been out of work,he has a good job.Shes a hairdresser,turns out they couldnt manage without her wage.They bought a new build about 6 years ago.Her daughter has just complete on a 3 bed detached on the same estate for £168k,shes 21 and is an assistant in a hairdressers and her boyfriend drives a van.HTB.Nuts.

[Democorruptcy]

1 minute ago, DurhamBorn said:

@Democorruptcy looks certain another 3 months will be added to the payment holiday.They are simply adding on more pain later of course as interest rates increase later in the cycle and bring closer the date when they have no equity in many cases.A family friend got the holiday,she bought with her hubby in 1991 and never been out of work,he has a good job.Shes a hairdresser,turns out they couldnt manage without her wage.They bought a new build about 6 years ago.Her daughter has just complete on a 3 bed detached on the same estate for £168k,shes 21 and is an assistant in a hairdressers and her boyfriend drives a van.HTB.Nuts.

I think it will run at least a year. It's win win for banks by adding interest/extending mortgage terms on existing mortgages. The MMR enabled them to do that with new mortgages. The other win for them is that avoiding repos helps to prevent price discovery and so protects the value of their other mortgages. Re HTB the governbankment will be loathe to allow banks to repossess because they know they are on the hook for 20% or 40% in London. First tranche was £12bn, second was £10bn, not sure how much they added on the most recent extension. Avoid repos and push more mortgages into more years at higher rates, what's not to like? All under the guise of "helping" the mortgagees who will be lumbered with more years of debt at higher rates.

[Don Coglione]

4 minutes ago, DurhamBorn said:

@Democorruptcy looks certain another 3 months will be added to the payment holiday.They are simply adding on more pain later of course as interest rates increase later in the cycle and bring closer the date when they have no equity in many cases.A family friend got the holiday,she bought with her hubby in 1991 and never been out of work,he has a good job.Shes a hairdresser,turns out they couldnt manage without her wage.They bought a new build about 6 years ago.Her daughter has just complete on a 3 bed detached on the same estate for £168k,shes 21 and is an assistant in a hairdressers and her boyfriend drives a van.HTB.Nuts.

DB,

Feel for the kids down south - and not even in London or the Home Counties.

My hairdresser (early 20s) is trying to buy with her boyfriend (a mechanic). They were looking at shitty new-builds that were put up in January from £275k to £300k, so they were itching to jump in with HTB before prices went up again...Every time I drive past that estate, I want to commit murder. The houses look like are falling apart, before anyone has even moved in.

I (along with a lot of her older clients, it appeared) screamed at her to do the sums; it is astonishing that so few people understand the long-term implications of buying at these levels, with interest rates where they are and with the added albatross that is HTB.

Fortunately, they decided to rent. 

There is going to be so much financial dislocation to come for those who jumped in blind. just as you have always posited.

[spygirl]

35 minutes ago, DurhamBorn said:

North is interesting and i think there will be differences.Crap terraces i think will go back down to £40k everywhere,or below.4 bed detached type around the £230k mark will come down 20% as you say,i think thats probably about right.The nice 3 bed semis that are in the £130k,£140k range i think will drop 10% and maybe staight back up.They might even increase slightly.

I think most of the pain in the north will be on the new build estates.They really are terrible.The 3 bed that have been going for £140k on HTB will probably come down to £80k.One estate in Darlington i go to is still being built but mostly finished.The first part has zero grass,trees,open space,none,zip.Its already looking poor,the local housing association took 15% of them and moved in benefit class already and its sinking.The HTB houses nearly all have an Audi and a Mini etc on the drive,obvious younger people up to their necks.The thing is on those though,i wouldnt buy them at any price lower than a 15% yield on rent.

15k-20k. They are going at 40k as thats the sweet spot for mortgage//benefits/LLs.

Changes to IRs and/or benefits will see these terraces go back to 15k-20k, where they were selling in the late 80s. 40 years and no nominal increase.

3br semis - 90k-120k, location depending. Simple 25k + 10k earnings minus 10k spend =  max 4 x 25k = ~100k mortgage.

HTB builds will be unsalable in a few years.

The only exit for anyone who's gone HTB, north or south,  is bankruptcy. They are going to be ~50-60% down.

[AWW]

Anyone else finding it very hard to contain their emotions in this crazy market?  My holding in PetroTal halved last week, but having sworn to follow the "buy more or sell" mantra after my brush with CNA, I didn't do anything and am sitting here kicking myself.  I knew it was a knee-jerk spike down, I knew I should have doubled my holding at half price, but the fear gripped me and I missed out on  £500 of upside.

[Democorruptcy]

On 12/03/2020 at 14:59, headrow said:

Look at Standard Life Aberdeen SLA , goes ex div at 14p in 3 weeks time. You can buy it today at 208p. Capitulation.

Cheers 

Got the £286 divi today on the 2,000 I bought that day and made more than that on the buy/sell

[JMD]

10 hours ago, DurhamBorn said:

Looking at silver on the long term roadmap i think the cycle high could be when around 1000oz buys the median house if we see the liquidity injection carry on.So if house prices stayed the same silver should 17 x in price from here.

If we take a minimum 25% off house prices then silver would need to 12x in price,so we should be looking at around $214 oz,i think that is a very good target for the cycle,likely it will go over,but perhaps a target to at least hold some silver miners to.

Cross market work to watch that could signal the road map turns earlier could be a Dow/gold ratio of 1.5,Positive real interest rates over a sustained period,gold/silver ratio under 20.

DurhamBorn, did your roadmap produce that silver/house ratio?

Reason I ask is Mike Maloney has stated a similar metric based on US house prices, I saw interviews with him talking about this shortly after the GFC, so approx. 2010. That is to say, if you guys have arrived at a similar ratio (given UK house prices are higher, I guess your house/silver ratio is broadly similar to Maloney's) then that's a pretty powerful prediction/indicator to use?

Mike Maloney's metric is to sell pm's when US median house price = 500oz Silver or 40oz gold. Current US median house cost is 230k.

[DurhamBorn]

20 minutes ago, spygirl said:

15k-20k. They are going at 40k as thats the sweet spot for mortgage//benefits/LLs.

Changes to IRs and/or benefits will see these terraces go back to 15k-20k, where they were selling in the late 80s. 40 years and no nominal increase.

3br semis - 90k-120k, location depending. Simple 25k + 10k earnings minus 10k spend =  max 4 x 25k = ~100k mortgage.

HTB builds will be unsalable in a few years.

The only exit for anyone who's gone HTB, north or south,  is bankruptcy. They are going to be ~50-60% down.

I think thats right on the 3 bed semis spy in the north,the decent to good will be between £100k and £130k,HTB is stuffed,massive losses there and like you say only way out is live there forever or go bankrupt for most people.Im have zero sympathy for people who bought them and id line their parents up against a wall who didnt try to talk them out of it.Insane.£20k could be right on the crap terraces,maybe the nicer ones hold the £40k to £50k area down from the £80k.

Il never understand how HTB ever came in,and il never understand the crazy regs that force so many houses on plots.Its a disaster in every area.My daughters friend bought a 4 bed in Darlo last year and the estate is already getting flooded with bennies from the housing association,those prices are going to get hammered.Likely almost all HTB has no equity by the time the fixed rates end,they are all going onto SVR,unless the government bails them even more.

[Alex]

29 minutes ago, AWW said:

Anyone else finding it very hard to contain their emotions in this crazy market?  My holding in PetroTal halved last week, but having sworn to follow the "buy more or sell" mantra after my brush with CNA, I didn't do anything and am sitting here kicking myself.  I knew it was a knee-jerk spike down, I knew I should have doubled my holding at half price, but the fear gripped me and I missed out on  £500 of upside.

Learning experience. Emotion is the enemy of investing. If you can learn from this experience then the knowledge will earn you a lot more than the £500 you lost paying for the lesson.

[DurhamBorn]

2 minutes ago, JMD said:

DurhamBorn, did your roadmap produce that silver/house ratio?

Reason I ask is Mike Maloney has stated a similar metric based on US house prices, I saw interviews with him talking about this shortly after the GFC, so approx. 2010. That is to say, if you guys have arrived at a similar ratio (given UK house prices are higher, I guess your house/silver ratio is broadly similar to Maloney's) then that's a pretty powerful prediction/indicator to use?

Mike Maloney's metric is to sell pm's when US median house price = 500oz Silver or 40oz gold. Current US median house cost is 230k.

I based in on all past silver bull markets and house price falls,it actually came out at 900 times,but i rounded it up 10% for the way UK housing tends to over price even when crashed.Its part of the silver road map,but the interesting thing is the liquidity to silver tracker i use also comes out at between $200 and $300oz.I think we have a very good chance of seeing those prices and im going to stick to the roadmap on at least some of my silver miners.Il sell some on the way up though,i even took a few profits in one yesterday (20% of holding) and put into potash.Il juggle all the reflation sectors a bit if some move a lot quicker than others.

[spygirl]

11 minutes ago, DurhamBorn said:

I think thats right on the 3 bed semis spy in the north,the decent to good will be between £100k and £130k,HTB is stuffed,massive losses there and like you say only way out is live there forever or go bankrupt for most people.Im have zero sympathy for people who bought them and id line their parents up against a wall who didnt try to talk them out of it.Insane.£20k could be right on the crap terraces,maybe the nicer ones hold the £40k to £50k area down from the £80k.

Il never understand how HTB ever came in,and il never understand the crazy regs that force so many houses on plots.Its a disaster in every area.My daughters friend bought a 4 bed in Darlo last year and the estate is already getting flooded with bennies from the housing association,those prices are going to get hammered.Likely almost all HTB has no equity by the time the fixed rates end,they are all going onto SVR,unless the government bails them even more.

https://www.economicshelp.org/blog/5709/housing/market/

Mortgages sold/houses bought fell off the cliff in 2007 and remained at the lowest rates in modern time (since 1970s) for 6 years.

 

[M S E Refugee]

A question for DurhamBorn, what do you think of the Oil,Gas pipeline and transportation companies?

I have bought Oneok,Magellan Midstream Partners,Kinder Morgan,Omv and Valero.

They all have done very well in a short space of time and pay decent dividends,Oneok is up 20% since I bought it and pays a 10% dividend.

 

[The Idiocrat]

31 minutes ago, DurhamBorn said:

I think thats right on the 3 bed semis spy in the north,the decent to good will be between £100k and £130k,HTB is stuffed,massive losses there and like you say only way out is live there forever or go bankrupt for most people.Im have zero sympathy for people who bought them and id line their parents up against a wall who didnt try to talk them out of it.Insane.£20k could be right on the crap terraces,maybe the nicer ones hold the £40k to £50k area down from the £80k.

Il never understand how HTB ever came in,and il never understand the crazy regs that force so many houses on plots.Its a disaster in every area.My daughters friend bought a 4 bed in Darlo last year and the estate is already getting flooded with bennies from the housing association,those prices are going to get hammered.Likely almost all HTB has no equity by the time the fixed rates end,they are all going onto SVR,unless the government bails them even more.

I'd quite like to see a misselling case brought against the Government itself! (Yes, I know people who signed up to HTB are idiots/naive kids and shouldn't be bailed out by the rest of us, but that seems to apply to pretty much all previous misselling scandals). Help to Bribe was/is purely to help the builders and banks and as usual is throwing youngsters on the bonfire.

[Castlevania]

24 minutes ago, M S E Refugee said:

A question for DurhamBorn, what do you think of the Oil,Gas pipeline and transportation companies?

I have bought Oneok,Magellan Midstream Partners,Kinder Morgan,Omv and Valero.

They all have done very well in a short space of time and pay decent dividends,Oneok is up 20% since I bought it and pays a 10% dividend.

 

Careful with the Partnerships. I looked into it after being forewarned by @sancho panza

There are A) tax implications if you’re not an American citizen and B) as far as I could gather (and I could be wrong here so erred on the side of caution) they’re unlimited liability I.e. you could lose more than you’re investment.