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Bearing up

Many times in the past, I have made reference to the special place that residential property enjoys in the minds of the British. Such is the carnage presently taking place in the housebuilding sector that it is not unreasonable to expect this relationship to break down.

Hardly a day goes by without further job losses from the builders or confirmation that house sales have fallen off a cliff. Yet there is buying interest out there. Pessimists point to the long bear market in residential property that has taken place in the US and the swift collapse in house prices in Ireland and Spain. But the situation in this country is very different from the US and in those parts of Europe that are suffering.

Behind these more dramatic falls in values lies a speculative building boom of massive proportions. In Spain, new housing starts were treble the figure here a few years back. Ireland benefited from cheap and plentiful money while a booming economy encouraged speculation which spilled over the border into Northern Ireland. In the US, the looser planning regulations and abundant supply of land led to a building bonanza but who were going to buy all these new homes? Why, those who hitherto could only have dreamed of being homeowners – sub-prime borrowers.

The financial pages are full of stories detailing the problems of this industry. Last week, several thousand construction workers were laid off but this was almost certainly the tip of the iceberg. Suppliers to the building trade, estate agents and service industries associated with newbuild have all suffered from the fallout that the contraction of housebuilding will have caused, yet houses are being sold, albeit at a slower rate than before. Talking to one local builder, I was astounded to learn that four properties had been shifted on the day we met. What was interesting to my point of view was that the buyers had all been professional landlords.

Not so very long ago, we were being told by the Government that not enough houses were being built. The target set by those who should know will be undershot by a significant margin. I am left with the overwhelming opinion that this is less the pricking of an asset bubble than a return to more sensible financing procedures but so swiftly that it has caught an entire industry on the hop. It is inevitable that there will be casualties. Belief that the residential property boom could continue unchecked will have led to some imprudent borrowing decisions. Companies and investors that emerge from this crisis intact will be far stronger as a result.

Last week saw the death of Sir John Templeton, a truly great investor who shared his views on what was needed to make good investment decisions on a regular basis. He maintained that it was time – not timing – that counted in creating a successful portfolio. In other words, as we all really know, equities offer the best long-term returns. Investors need to remember this.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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