When I first met Caroline Peers, Bleyer’s CEO, I remember being impressed by the fact that as an asset wealth manager, Caroline had moved out of property in 2006 and into the precious metals. In retrospect, I’m sure many of our well-informed readers will know that the property collapse began the following year in 2007 and hit the headlines in 2008, while the Gold and Silver bull market began to take off around the same time.
In 2013 I joined a team from Bleyer at the London Property Show. There, we gave seminars, discussing the investment advantages of selling property at their peek prices and moving into precious metals while their prices were consolidating. I spoke at length to one large property investor in London, a erudite gentleman, about the simple supply and demand anomalies of Silver. He was wonderful in that he was dispassionate about the metal as such but passionate about basic economic rules of play. For example, his eyes literally lit up when I shared facts such as; “Being generous (and using data from the CPM Group as well as the Silver Institute) there are maybe 1.4 billion ounces of silver coin and bullion in the world, versus roughly 3 billion ounces of gold coins and bullion. Yes, it is true that recently about 80 million more ounces of silver bullion/coins are produced each year than gold ones, but that still means that it will take over 15 years before the silver stockpile in the world even equals that of gold, let alone becomes greater. So why is the price of silver something like 50 times cheaper than gold? Ask the paper speculators above.” (Financial Sense: Applying Common Sense to the Markets) Note: The current silver:gold ratio as it stands right now is 73:1
The very signs that prompted Bleyer to position themselves in both the move into metals in 2006 and the encouragement of others to do the same in 2013 are again worth highlighting in a measured level of urgency this week. For, once again, it is becoming increasingly clear that property is in a bubble and that news is now reaching the more mainstream media outlets:
“The housing bubble has burst, analysts have said, after sellers started slashing money off their asking prices and accepting offers up to 10 per cent less than the property was listed. The average discount on the original price of a property across Britain is now more than £25,000, up £4,000 compared to the discount in January, according to Zoopla, an online property portal. In January, the average amount that a property price dropped between initial listing and sale was £21,560. The price of 29 per cent of listings on the Zoopla website have been cut at least once since they were listed.” (The Independent, 9th May 2016)
Then, this week I read the ultimate sign that the bubble is inflating beyond it’s ability to hold – the return of the 100% mortgage. These were prevalent just before the 2008 financial collapse – in fact there were even some 125% mortgages available. So, how does a 100% mortgage work and why is it a risk?
Dan Hyde from This Is Money explains: “I am scratching my head trying to work out how the property market can go any higher if everyone is priced out. This is not just London either. Houses do not get much cheaper as you head outside the M25. It is now common to spend £300,000- plus on a first home and most young people resort to teaming up with a partner or friend. Against that terrifying backdrop, the 100 per cent mortgage has risen from the ashes of the financial crisis. It was fairly easy to find one until the 2008 crash forced lenders to tighten the purse strings. With property prices stalling (the latest Halifax UK index shows they fell 0.8 per cent last month), banks have realised that the only way to keep the market moving is to plunge young people into even more debt so they can afford the ridiculous prices.With the new Barclays Springboard Mortgage, a parent puts 10 per cent of the price into savings. The child gets a mortgage for the full house price and the parent can withdraw their savings after three years with interest of 2 per cent a year. Brokers say the deal is no more risky to the bank than a mortgage with a 5 per cent deposit (which, by the way, is incredibly risky). On the surface, this seems a super deal for everyone involved, but the catch is that you (and the bank) are taking a gigantic bet that house prices will keep on rising.”
And it’s not just the younger generation that are at risk. Among my loved ones, it’s my elderly parents who, in the bloom of retirement, borrowed from younger family members and bought one property while renting the other for a year, assuming that the price of the latter will keep it’s value, to pay off the loan of the former upon sale. But a year is a very long time in property markets, particularly at this stage of the inflation of the bubble. I will breath a sigh of relief for their sake, when their year comes to an end and their sale goes through this month. Because all the signs and many of the commentators are beginning to agree. As Hyde concludes, “There are warning signs everywhere that the British housing bubble is about to go POP!”
But the property market has another pressure point – interest rates. At the moment, we are sitting in deflation and an upside down notion of negative interest rates, which we’ve discussed in several blogs over the last year. It is easy to forget that interest rates in the UK are not usually this low. When I bought my first property in 1997 the base rate was 9.25% and mortgages didn’t go higher than 95% of the value of the property, in fact, 90% was the norm. That made sure my generation didn’t over-extend our ability to repay the monthly mortgage payment, for which, looking back I am extremely grateful. In addition, interest-only mortgages were so rare I didn’t meet any friends under such a debt obligation until 15 years later. Living with high interest rates also motivated me to switch mortgage providers every two years for the best part of a decade; switching from one 2 year discount rate to another every 24 months. It took an afternoon of my time each two years but saved thousands of pounds. Within historically low interest rates, these external motivators to not over extend don’t apply so acutely today. We have lived in a world where interest base rates have sat at 0.5% for years, with a typical mortgage rate sitting at about 2% above base rate at 2.5%. But the average base rate shouldn’t be 0.5%, it should be 5% in the UK over the last 25 years. – “we can see the record low interest rates that we have been experiencing. Cheap credit has fuelled to recent housing boom but credit is only cheap if the interest rates stay low which people are quick to forget about when jumping into a 25 year mortgage.”
To put that into real terms, I’ve done some research with some figures. If I held a mortgage of say £100,000 today with a mortgage rate of 2.5% (which is competitive but available) and my term was 25 years, I’d be repaying approximately £452 a month. But if interest rates went up to what they were when I first invested in property back in 1997 (9.25%), I’d have to find over double that at around £1,044 each month. That’s an extra £7,100 a year. If interest rates returned to their average of 5% on the same example mortgage, that would be an extra £3500 to find per year. Out of interest, if you’d like to do some sums too, I’ve found a easy to use online Mortgage Rate Change Calculator here. It’s worth planning for the worst but hoping for the best and building in room to breath in our financial decisions.
It is precisely because the buyers market has dried up that I believe banks are beginning once again to offer 100% mortgages, to try to encourage those right on the edge of sensible investing into a decision they may deeply deeply regret on even the smallest rate rise and house price fall. It reminds me of the explosion of “Cash for Gold TV adverts” just before the price of Gold exploded in 2011 and 2012. They knew what was coming and the general public paid the price.
I touched on this bubble within property back in April 2015 when I quoted Mike Maloney, “this is the only true way to measure the ‘value’ of your real estate – against how many ounces it would take to buy it in Gold and / or Silver. His point also reiterates what we were saying earlier, that real estate vs. Gold and Silver work in opposition to each other. So if a mainsteam media financial pundit tells me to go buy real estate and art, I will almost certainly find some spare cash and… go buy some more Physical Gold and Silver while it’s still on sale.” Then I once again felt the impetus to highlight the coming potential for troubles in property again in March 2016, because I believe it would be a good thing to highlight this to our readers and investors as the signs get stronger.
In January of this year, the very bank that is now offering 100% mortgages also released financial charts to show that property is in a bubble: “These scary charts from Barclays suggest that if the UK is in a bubble, it’s proportionately worse than the US housing bubble was when it popped in 2007 during the credit crisis. The London market, in the second chart, is even worse. Indexed to 1975, London houses have added double the value of the average in the UK. The London market is distinct because it’s basically a separate city-state from the UK, and because it is surrounded by an unbuildable “green belt,” which makes it more like an island than a conurbation.” (Business Insider UK, January 2016)
But, are there also signs that we have a little way to go before house prices really do “crash?” The Guardian believes so, in the sense that – while heralding the return of the 100% mortgage – it also mentions that; “The launch of the Barclays 100% mortgage brings the number of products aimed at borrowers who do not have a deposit to its highest since the financial crash. But we are nowhere near the market seen in the run-up to the credit crisis: financial information firm Moneyfacts says there are now eight 100% mortgage deals to choose from, compared with 238 in August 2007.”
So, it’s worth keeping an eye on how many 100% mortgage deals there are over the next few months and whether this number increases exponentially. If it does, the bubble is surely showing extreme strain. And negative interest rates can only go one way – snap back up higher. Bleyer believes strongly in one’s own financial education and we are delighted to chat with our clients, as so many have conducted a high level of personal research and know the history of Physical Gold and Silver.
I also like watching and listening to other major investors in a variety of markets. It’s just interesting to hear their rationale even more than their final economic decisions. One billionaire investor with one of the best long-term track records in money management, was reported last week to be “loading up on gold”. His reasoning is this:
“As bankers experiment with “the absurd notion of negative interest rates,” Druckenmiller said, he’s wagering on gold. “Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.”
First of all, I really like his perspective, because it’s historically accurate. Gold and Silver are “real money” and he’s treating them as such. He continues by examining the wider market fundamentals; “I now feel the weight of the evidence has shifted; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself,” said Druckenmiller, who averaged annual returns of 30 percent from 1986 through 2010 at his Duquesne Capital Management.” (Bloomberg, 4th May 2016)
What he’s saying is, “there’s a bubble in borrowing!” and he’s categorically right. This is precisely the danger inherent in 100% mortgages and excessive borrowing of any kind, either as a means to invest as an individual in an asset who’s price is currently inflated or for national governments, many of whom from the US, China, Japan and the Eurozone, sit in excessive debt to GDP ratios.
It therefore remains sensible to thoroughly research the advantages of holding some Physical Gold and Silver, in case the assets we so often rely on to go up, stop going up and – like 2007 – crash in price. There was a short debate about whether the UK is in a housing bubble in January’s edition of Economia, between Dominic Frisby, financial columnist, performer and writer (who believes we are) and Lucian Cook, head of residential research at international real estate advisor, Savills (who believes we’re not) who go head-to-head in this month’s debate. Read several of these differing views online and decide what you think. If you believe the facts are signalling a price drop in property at some point in the near future and would like to invest in Physical Gold and Silver, call one of the team on 01769 618618. If you’re new to the Physical Gold and Silver market, here are a few initial steps to help you know what to expect:
Introduction: The first step is browse our website or ring the Bleyer Team if you’d like a chat or need some help. You do not need to be sure at this stage what exactly you would like to buy. You may have questions or wish to discuss your options. We pride ourselves on our friendly, approachable and professional client care.
Products: You decide how much Gold and Silver you would like to hold, either personally or in storage. Unlike many Bullion Companies we do not require you to buy in bulk. If you need information that is what you will get from us, we will never try to hard sell you anything. We will guide you if that is what you need but ulitimately leave you to make all the decisions. We provide an extremely personal service enabling you to look at how best to protect your wealth. We can inform you of tax advantages which may be available to you as well as the suitability of certain products. Many of our clients come back to us again and recommend their family and friends to our caring, professional service.
Payment: Our preferred payment method, for large payments in particular, is by Bank Transfer which can be done online, by phone through your telephone banking service or by going to a branch and asking them to ‘move money’ to our account. We now also offer Pingit for those who want to pay through their mobile phone.
You can also use PayPal, credit and debit cards, we get charged a percentage for all of these payment methods, we pass on the charges for PayPal and credit cards* but currently absorb the cost of debit cards. (*Amount including fee being shown on your statement only)
Prices are updated regularly with world spot prices so up to the minute prices are available on our website and you can buy online at any time of day or night.
Terms of Business: For individual purchases over £5000, or cumulative purchases over £10,000 in any 12 month period, we are legally bound to ask you to complete a Client Application Form. We store this under Data Protection Laws. This simply involves you providing two forms of identification. You do not need to send us your original documents. For details please see the document section on our website or request a Client Application Form, together with our Terms and Conditions.
Delivery: We deliver to your home address; or if more convenient to your work or other address by agreement. All our deliveries are Fully Insured, Signed For and Guaranteed Next Day before 1.00pm. Please note that we are only able to deliver to the card billing address.
Selling Gold or Silver: Bleyer will also buy your Gold and Silver bars and coins. These need to be 999.99% pure bars, or bullion coins, from a London Bullion Market Association recognised refiner. If you are selling us back bullion you purchased from us, then this is a very straight-forward process. We offer very competitive rates of up to 98% of the gold price. Please call us for details.
I’d like to conclude with a fairly thoughtful short extract from this morning’s Telegraph by Jeremy Warner, as I believe, financially, it’s quite critical to think through the possibilities that we don’t necessarily wish to, those “surely that’s impossible” scenarios that suddenly happen. Warner takes us back to look in retrospect at several events we really didn’t think were possible as a nation just 10 years ago:
“In Lewis Caroll’s Through the Looking Glass, the White Queen observes that sometimes she’s believed as many as six impossible things before breakfast. Many things previously thought impossible have already happened since the start of the financial crisis nearly ten years ago. Who would have imagined that the US banking system would end up supported wholesale with public money, or that three of Britain’s major banks would be part nationalised, and others closed down entirely? Did anyone even remotely predict a world of negative interest rates, in which investors gladly pay for the privilege of lending to sovereign governments, or that some European nations would actually go bust in all but name and would have to be bailed out by reluctant neighbours? Before the crisis, hardly anyone had ever heard of “quantitative easing”, and few thought money printing could be practiced on anything like the present scale without triggering hyperinflation.”
And so, to plan and reiterate, with the measured voice of John Ficenec from The Telegraph outlines in a short video “Five Reasons Why it is Important for Investors to Own Gold”:
- Inflation Hedge
- Crash Protection
- Low Interest Rates – Gold out performs shares when the interest rate is below 2%.
- Stable Gold Price – Demand for physical over the last year has kept the price ‘stable’.
- The Outlook for the Gold Price
Discuss putting some of your savings into Physical Gold and Silver. Bleyer offer a wide variety of Gold Bars and Coins, and Silver Bars and Coins to match your budget. Either buy in one go or buy a little each month. And it is worth regularly visiting the Special Offer page. If you are looking to purchase a particular bar or coin, and in specific numbers, call the Bleyer Team on 01769 618618 as we offer price breaks on larger quantities. Bleyer also offer the option of holding Gold in a Pension, together with a variety of Storage options from offshore secure facilities to home safes. If you would like to learn more about buying tax efficiently, our in-house bullion experts will help you to save both on VAT and Capital Gains Tax. Call Bleyer today for bespoke customer care and speak to our well informed business team.