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Brian Tora: US political leaders need their heads knocked together

I never expected to be reporting continuing adverse sentiment among investors as a consequence of the failure of the two political parties in the US to reach agreement on what to do about the debt ceiling. But here I am, a full week later, with no deal done.

It really does beggar belief. No wonder the Chinese have questioned America’s competence to be considered a true superpower. Perhaps it is sorted out by now – but if not, who knows what might happen.

It resulted in our own FTSE 100 index hitting a three-month low last week, though further signs that some form of rapprochement with Iran was on the cards and a growing belief that a deal had to be reached in Washington saw the market bounce off its lows. 

Concerns across the Atlantic were insufficient to deter potential buyers of the Royal Mail share issue, which was colossally oversubscribed, with many institutional applicants failing to receive an allocation. It was like the 1980s all over again.

Sticking with domestic issues, the latest report from the Royal Institute of Chartered Surveyors added weight to the belief that house prices were beginning to build up a head of steam as increasing interest from buyers emboldened by Government-backed mortgage schemes found a sad lack of new properties available.

The concern is that the housing shortage brought about by the collapse in development in the wake of the credit crunch will simply fuel a housing bubble. Nobody wants that. 

Indeed, the Government seems to be working on the premise that, by encouraging people on to the housing ladder through making finance easier, builders will be encouraged to develop some of their land banks, increasing the housing stock. 

It is a fine idea but one that could go wrong if the supply of new-build properties does not increase significantly.

Interestingly, the proportion of owner-occupied residential property has been falling. According to Hearthstone Investments, which recently launched a residential property fund, about two-thirds of this market is owner-occupied, with the private rental sector growing and now accounting for a fifth of the total. 

With social housing also falling as a percentage of the whole, it seems that private rented properties are set to grow in importance.

While individual buy-to-let landlords will remain an important component of this sector, institutional landlords could start to feature more. Legal & General recently announced it was considering entering this market, while if the Hearthstone initiative is a success, perhaps we will see imitators. 

Hearthstone points to some solid returns from the residential property market, and its marketing literature suggests that, over 15 years or more, this has beaten other financial assets in terms of total return, including equities and commercial property.

Of course, on the basis that investment should be about managing risk, with diversification across asset classes a desirable way of building a portfolio, many investors may already have a significant exposure to this sector through their homes. 

Still, investing through a fund will have some merits. Selling part of a holding to meet an unexpected demand for cash is achievable. Selling part of an investment property for the same purpose is more difficult.

Still, I’d like to see equities move from under the shadow of US politics. Much of the other news around is increasingly positive and we have yet to see our own benchmark index climb above its 1999 high. Even the tales coming out of Europe are sounding more cheerful. 

With luck, we may be in for a more cheerful autumn, once a few heads have been banged together in the US. 

Brian Tora is an associate with investment managers JM Finn & Co

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