Barclays Bank’s profits have just whizzed up to £3bn in the first half of this year; the stock markets are taking-off again; and there is more optimism than in a long time about house prices. But does this make it the right moment to invest in a home or shares?
In recent weeks there has been a sustained recovery on the stock markets, with the FTSE100 exceeding 4700, up from 3600 in March. But this compares to 5500 a year ago.
Meanwhile, house prices across the UK shows signs of gently increasing again, though they are still falling in Northern Ireland. Sterling has strengthened against the euro – rising to €1.17, against less than €1.03 in January. Yet this remains much weaker than the €1.30 level it was approaching at the end of last year.
While the data shows grounds for optimism, there remain many concerns. While some banks are now showing strong profits, others – the taxpayer-rescued Lloyds and Northern Rock – have made massive losses. And Barclays made its profits on its investment banking side, while doubling its expectations of bad debts.
In retail, too, things remain difficult. The British Retail Consortium believes that although shops in the UK did well in the early summer, this will dip as the year goes on with consumers who fear redundancy avoiding buying high cost items. Retailers in Northern Ireland are likely to face the tightest pinch, with sterling strengthening against the euro – leading to fewer cross-border shoppers from the Republic.
NI is worst hit
A recent report from the Centre for Economics and Business Research concluded that Northern Ireland will be the worst hit region of the UK by the recession, in part because of its high dependence on the public sector. Initially the impact of the downturn was probably cushioned by higher than average levels of public spending here, but the burden from bailing-out the banks will lead to major public spending cuts that will severely affect Northern Ireland.
In addition, says Jorg Radeke, an economist at CEBR, the collapse of the housing market in Northern Ireland means the construction sector will suffer for some time, leading to an above average increase in unemployment and further reduced retail spending. Taken together, these factors also mean that there is unlikely to be any quick turn round in the Northern Ireland housing market, he believes.
“There was quite a significant increase in the supply (of housing) in Northern Ireland over the last couple of years,” explains Radeke. “You now have excess supply in Northern Ireland. Earnings growth is going to be significantly below what it was before the recession. Unemployment is going to be higher and will be stubbornly high going forward. We would expect house prices to fall further – another couple of per cent in the UK and you can probably add another per cent on that in Northern Ireland.”
NI houses remain expensive
Martin Gahbauer, economist at the Nationwide Building Society, shares these sentiments. “If you look at the level of house prices in Northern Ireland comparitive to earnings in Northern Ireland, it’s still quite high – even after the correction. So the market is still vulnerable,” he says.
Gahbauer shares the CEBR view that the local economy will suffer badly as public spending is squeezed and that this is likely to increase downward pressure on house prices. He adds: “Our prices [in the Nationwide house price survey] were still falling in the second quarter [of this year in Northern Ireland], where in some regions they were rising.”
Elsewhere in the UK, many investors have called the bottom of the housing market and are starting to buy residential properties again. But whether it is homes or shares, trying to work out the exact bottom of a market is, to an extent, a matter of guesswork. Whether a house is worth the price it is for sale at usually depends how much the buyer wants to live in it. For the amateur, shares are also usually best bought for the long term.
Look for growth, not quick returns
Philippa Gee of fund managers T. Bailey says: “The market return to positivity has been so strong that investors should rein-in their enthusiasm for further investing if it is done in the belief of attracting further double digit returns over a matter of days, or a few weeks. If, instead, the requirement is for a more realistic period of time, investing now for returns over perhaps the next five years, then equities are absolutely the place to be.
“Investing today has to be about the future, not looking at the past and wishing you had been able to benefit from the recent hike. There is still likely to be bad news emerging over the next few months as the downturn continues, but as we know the stockmarket can either shrug off negative sentiment and push forward or dwell on it and push levels downwards. In essence, short term choppy times are likely, but the overall prognosis is positive.”
Ben Yearsley of Hargreaves Lansdown advisers suggests that, on balance, this is a good time to buy. “We have had a pretty strong run in the last month,” he says. “There probably will be a fall back from these levels and we are already beginning to see that. You have missed the early gains, but in early March [when the FTSE 100 was at 3600] there was a lot of uncertainty.”
It may still be possible, says Yearsley, to copy those gains by looking at shares and funds that have not yet had the same level of rebound. Yearsley suggests thinking about ‘defensive’ stocks, such as tobacco and utilities, and the funds that are more heavily invested in them, including the Invesco Perpetual funds.
Mark Dampier, also of Hargreaves Lansdown, suggests that investors consider buying for income rather than capital growth, explaining that there are now many cheap stocks that will provide sustainable yields far outperforming cash holdings – but investors will have to spend time and effort to find the right ones.
It is a useful reminder. Any investment should be backed by knowledge and judgement. It will always be exposed to some risk as well, but with sufficient research that risk can be greatly reduced.
Question of Finance
Q. I was one of the civil servants affected by the theft of a laptop in March as part of a break-in at government offices. Since then I have found that my credit status is poor. This must surely be wrong as my only debt is my mortgage and now I have been turned down for a credit card by Santander. I’m wondering if I am a victim of fraud. HP.
A. “Basically every civil servant was affected” by the laptop theft says a spokesman for the Department of Finance and Personnel. But while the names of all, or nearly all, civil servants were held on the laptop, only a small minority of bank account details were contained. Those whose details were stolen have been contacted directly about this. It seems that your bank information was not there, but if you remain worried about your data being stolen you should go to the front page of the department’s website – www.dfpni.gov.uk – where there is detailed advice.
It is more likely you were turned down simply because you are just too responsible in handling your debts. It might seem strange, but people who regularly obtain credit and then pay it off without missing any payments are regarded as the best credit risks. Those who never get it into debt and therefore have no record of repayments are regarded as higher risks. It makes sense in a rather bizarre way.
You should ask Santander for the reason why it rejected your application. You should also look at your own credit record with the two main credit reference agencies – go to www.equifax.co.uk and www.creditexpert.co.uk.
In addition, make sure you are on the electoral register. Failure to be on the register sends shivvers down the spines of credit issuers as it makes them wonder if you are really who you say you are.
No notice savings account
Anglo Irish Easy Access Deposit 3#
Fixed rate savings account
Bank of Ireland 12 month limited edition fixed term deposit
3.80% at £2,000
City of Derry Building Society
2.25% at £1,000; 3.00% at £50,000
First time buyer mortgage – fixed rate
Progressive Building Society
5.95% fixed to 2011 (terms apply)
First time buyer mortgage – variable rate
3.99% (terms apply)
Information supplied by moneyfacts.co.uk