Month: June 2014

Property prices – where will they stop?

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The National House Building Council announced that the number of new build houses built in the UK between from the month of March to May rose by 4% year on year (2013-2014). Within these three months, there was a total of 37,975 new houses registered. If we annualise this i.e, multiply by 4 to give us an estimate for the year, just over 150,000 homes are being built annually. This is just over half the amount of houses the Future Homes Commission recommended the UK would need to build each year to keep up with household and population growth, not to mention the vast interest from foreign investors in the UK’s thriving capital, London. The current demand is estimated to be almost double the supply, there is no doubt prices will continue to rise for the foreseeable future. The Bank of England announced a cap on mortgage lending last week in an attempt to normalise the housing market. The Financial Policy Committee (FPC) have announced that no more than 15% of any financial institutions (bank/building society) new house purchase lending can be at a Loan to Income (LTI) of 4.5 or more.

Loan to Income example
John earns 55k and Tina earns 45k. Together they want to buy a house. A loan to income of 4.5 essentially means they borrowed 4.5*(45k + 55k) = 4.5*(100k) = 450,000

Institutions have been lending at higher LTI ratios primarily due to a combination of slow living wage growth in the UK and an increase in property prices due to demand outweighing supply and overseas cash buyers.

In my opinion, I don’t believe this will solve the problem. If anything, it will price out more domestic first time buyers out of the market with more power given to foreign investors to continue to drive up prices and make becoming a homeowner an ‘elite’ privilege in the nearer future.

@capitalmoments

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Iraq and the economy

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Over 1000 people have been killed due to the wide-spread violence which has erupted in Iraq in the month of June. Also, around the same number of people were seriously injured due to the unfortunate events which have plagued the country. United Nations Human rights spokesman, Rupert Colville said, “at least 757 civilians were killed and 599 injured in the northern provinces of Nineveh, Diyala and Saladdin between June 5-22.” Over 900 people were reported to have either been killed or injured during the same period in Baghdad. The events which have take place has undeniably had an effect on both the commodity and equity markets

Iraq’s economy is dominated by the oil sector. At it’s peak, it has brought in 95% of Foreign Exchange earnings in recent times. Iraq, OPEC’s second largest oil organisation, produces tons of oil each day (despite the production of oil which has reduced by more than half to 1.5million barrels a day and has over 100 billion barrels of oil in it’s reserves. Although the events in the country hasn’t affected oil supply, the future price of oil have swung over the last few days. Brent Futures experience near the highest of trading levels since September 2013 on the 23rd June but prices have now started to return to expected levels as fears relating to potential disruptions on foreign exports have been allayed.

Investors have been cautious and have been monitoring the current situation in Iraq. Uncertainty from investors has caused UK shares to fall sharply this week. The FTSE ended at 6733.62 on Wednesday 25th June 2014, down 0.8 percent from Tuesday 24th June 2014. The market closed at one of it’s lowest levels since 28th April 2014.

It will be interesting to see how the markets continue to evolve with the current situation in Iraq and the behaviour of investors as further developments unfold in the country.

@capitalmoments

Spread Betting on the World Cup

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Brazil 2014. The most anticipated footballing event of the sports calendar is just around the corner. The World Cup which by God’s grace, Nigeria will be crowned champions18 years on from their Olympic football gold medal. I’m sure readers of Lekanomics (link to his blog) will not be too happy with that!

A World Cup betting report by Regulus Insights has predicted around £800 million pounds worth of stakes will be placed during the World Cup. This is most likely down to the wide range of betting options available for punters to select from as they ponder on where to put their money.

The spread betting markets is an extension is this betting craze. Punters can bet on things such as, the shirt number of a goalscorer, to which two teams will make the World Cup finals and even the total amount of yards accumulated by the number of goals scored throughout the tournament.

Let me explain how the spread betting market works.

Let’s use the total corners market as an example. Currently, this market is being quoted at 643-653. What this means is that you can decide to ‘sell’ at 643 or ‘buy’ at 653.

If Josh Capital believes there will be more than 653 corners in the tournament he will buy at 653, equally, if he thinks there will be less than 643 corners he will sell at 642. What does that mean in practice?

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As you can see in the diagram above, the market can be highly leveraged and an investor’s mentality should be applied – only stake what he/she sees as as a comfortable amount to lose. Take a long term approach to the tournament – assess how the favourites (and England) perform, the leniency of the referees and other factors which could affect the final scoreline.

Good luck to everyone who has money on the tournament – let me know how well you do!

@capitalmoments

ECB rate decision and impacts

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Last Thursday the European Central Bank announced rate cuts as expected to the deposit and refinancing rates within the Eurozone area. The deposit rate is particularly interesting. At -10bps banks now have to pay a small fee to store their money in the central bank. The ECB benchmark interest rate has also been cut by -0.1% from 0.25% to 0.15%. The EURO weakened against the major currencies once the news was announced, with GBPEUR currently trading around €1.23776

What does this mean?
The Eurozone is undergoing a continual and sustained period of recovery and this was seen by many economists as an expected movement by ‘Super Mario’ Draghi and his policy makers to assist in the gradual improvement of the economy.

The ECB took this decision to deter banks from storing money in the Central Bank but to encourage banks to lend to small and medium enterprises to help grow their businesses. In a perfect scenario, companies would borrow from banks to assist in their expansion. Expansion would lead to an increase in demand for workers, pushing up the cost of real wages. This means an increase in the cost of goods/services to the company, translating to an increase in price for the customer. This then from a macroeconomic perspective would translate to an increase in inflation (currently at a low 0.5% for the zone). A weaker Euro also provides opportunities for growth in the external channel (imports & exports), a weaker Euro means that channel is more favourable to people outside the Eurozone.

There are concerns that the current recovery isn’t sustainable, even though the Eurozone economy is growing after many years of recession – so the actions that have been taken along with what has been termed ‘Long Term Refinancing Operations’ where banks are able to use their illiquid assets as collateral for cheap loans up to 3 years, are being seen as the solution to supporting the economic growth of the zone, which was only 0.3 in q1 2014. This would also guard against the possibility of a liquidity trap, where businesses, individuals and banks hold on to their money in times of deflation as the value naturally increases due to the fall in prices of goods and services. The illiquidity means that no cash is being invested into the economy, affecting growth.

Let’s see what happens.

@capitalmoments