My guide to surviving the current ‘economic crisis’

The Credit Crunch- A new sting in its tail

Credit Crunch Stage 1

This stage was all about poor lending practices in the US and the fact that these lenders in the US had sold their loan books onto other companies around the world. This stage was also about declaring the losses of large institutions, but it didn’t really directly affect the individual investors (like you and I) — except through perception.

Stage 1 also saw many lenders profiteering from the squeeze. Loan to values dropped to 75%-80%, interest rates went from 5.5% to 6.5% and arrangement fees went from 1% to 2%.
The end of the credit crunch appeared to be around the beginning on May when mortgages settled down and lenders began to hold products long enough for people to actually apply for (and get) the mortgage.

All seemed rosy and delightful albeit that prices were falling and the economy slowing. Then came along a new sting…

Credit Crunch Stage 2

One of the byproducts of the credit crunch is that as the rates and arrangement fees increased, and loan to values decreased, a lot of people began to run into difficulties because things had changed so quickly, and to such a great degree. It especially hit those coming off the fixed rates and those with low discretionary incomes.

So the sting in the tail is…

As mortgages became more expensive and harder to secure, more and more people will default on their mortgage payments. Increased defaults mean the lenders who want to sell their loan books off will struggle. This could well have the effect of further prolonging the credit crunch.
I believed that the worst of the credit crunch will be over in the last quarter of the 2008. I still believe this to be the case. Employment is still strong, inflation is high, but most commentators agree that it will come down next year. In addition, it’s mostly food and fuel inflation as opposed to wage and lifestyle inflation which is good news for the Bank of England and for our interest rates as well.
As always the team are happy to discuss the current market with you should you need a little clarification or guidance. In times like these, it’s vital you get quality information, not the sensational bullsh*t being printed in the papers.

What does it all mean?

Don’t get too bogged down in all of the happenings and goings on in the financial markets, to do so will simply scare the pants off you and cause you to take no action.

Supply and Demand…

The single and most important fact right now that you need to bear in mind is Supply and Demand. That supply of property is at an all time low and well below the 250,000 per year required (its about 110,000 this year) and secondly the demand for property is still increasing, when you consider rented property and property for sale.

Sure the demand for property to purchase is at a low because most investors are sheep and follow what the news says. The real investors realise that this is all temporary and that now above all is the time to be jumping at it. Once the markets settle down confidence comes back to the market, everyone will realise that they should have been buying property throughout this past 12 months and over the next 12 months.

I reckon this will be the tail end of 2009 before we are back to normal. That’s when a lot of people will be complaining about missing the boat again and that it’s all too expensive. Typical, please don’t be one of them.

I dare you…

If you don’t think that property is the right thing, the only thing, then call up your pension fund and ask for a statement, then compare with this time last year and the year before that.

It’s a sad fact that most pensions are already down about 30% on last year. Some more!!! It’s what I have been saying for over 10 years now. Having a pension is not the answer, having a portfolio is…
Even if my portfolio has dropped 10% across the board (which is hasn’t) I am still better off than if I had a pension. I have a very close mate in Australia who has seen a 40% drop in his pension or around the last 8 years of payments he and his employer have made, it’s shocking!!! Hmmm, not a good time for pensions…

A portfolio shouldn’t take a huge strain on your time and more importantly, though it may go down in value if you have bought well you will still have equity available.

10 tactics to survive the 2008/2009 downturn

1. Read beyond the headlines

For every dramatic sensational headline you see in the newspaper on the radio or TV make sure that you read the whole thing. More often than not the headline will be ‘Prices drop 30%’ but once you read the text it will say ‘if this continues, if it gets as bad as the nineties’ or one the many permutations of this scaremongering headlines.

There is always a perfect and plausible fundamental explanation as to why it probably won’t happen.
Remember the headlines are there to attract your attention and the negative ’sky is falling in’ sells better than the ‘everything is fine’ headline. It’s just plain old boring human nature at work – Pain sells better than pleasure.

2. Take a long slow breath

Before you run off and slit your wrist just simply take a deep breath and ask yourself ‘How does this really impact me?’ You may be pleasantly surprised to find that most of the doom and gloom doesn’t actually really concern you. Try NOT reading the papers or watching the news for a week. If by the end of the week you are still alive and well then hopefully you have seen how little effect of the negative press really has on your life. If the sky has fallen in then I guess I was wrong! Although I think we both know what the result will be after a week.

Remember whatever happens take a long slow breath and get on with your life.

3. Remember that statistics are based on averages.

That 7% drop that everyone is talking about, of course it is in your street, in fact they are talking about your house aren’t they? It never ceases to amaze me at how humans can take a general statement and personalise it to our lives. Again its just plain human nature. The flip side of this is the human ability to detach. We are so very good at believing it’s someone else’s house not ours.
The bottom line with all of these negative statements is that they are based on averages. Read into them a little more and you might find that your house is not an average house, that your street is not the average street.

4. The 7-10 year cycle always has a downturn.

The shock!!! The horror!!! ‘The property market is having a downturn, why it’s never done that before!’ Well that is not since the last cycle. You guessed it, it has all happened before.
For some strange reason we all act surprised when the property market downturns. Let’s be absolutely clear, the cycle will always have a downturn, always… The reason is simple! Greed… We all get far too greedy and eventually this greed has to be paid for. Again it’s just the basics of human nature and human nature hasn’t changed for thousands of years.

So when you read the paper next week (that’s after your weeks break and the sky hasn’t fallen in) understand that this downturn is as much a part of the process as the boom years, which incidentally come hot on the heels of the down turn.

5. Cash flow is king

If you have the cash to see you through this downturn then you can sit back and forget about Mervyn King, forget about Gordon Brown (I think he still runs the country although I haven’t heard from him for about a year.) You can even forget about the value of your house because with cash flow all things are minor and insignificant.

If you don’t have it or its limited then closely follow it, track it and make sure that you act sooner than later to secure it.

6. Know your indexes

HBOS, Nationwide, land registry, RICS, CML, Rightmove, Findaproperty they all track different data to give them a picture of what the trends are.

RICS will tell you what things are valuing at, CML will tell you what’s happening with mortgages, Land registry will provide the gross prices of property.

They all use different data to produce a different result. Make sure that you compare apples for apples! Let’s face it journalists trying to get your attention will use the data from one index today and then the data from another tomorrow. This is why house prices can be falling and going up at the same time. It’s all about the indexes they are choosing to use.

7. What is an economist!

An economist is a highly academic professional who understands the relationship of things within a political, social and economic framework. They study in detail the relationships between interest rates, wages, unemployment, government spending, consumer sentiment, share prices, consumer debt, consumer spending, household incomes, the economic cycle, exchange rates, foreign debt, and about 1000 other variables.

Based on their understanding of these things they make judgement calls about various things that affect their jobs. You see very few economists that are quoted in the press are actually totally independent. Most work for banks and financial institutions who have hired them to interpret all of the economic, political and social data and make predictions about it.

Now as humans we will always attract that which we are seeking (it’s called the law of attraction) so if you are working for a bank you will attract the data (or ’spin’ the data) which supports your cause and therefore present this angle on things.

This can mean that using the same data you can get different results. The question is what data you believe. This is one of the reasons I have become very experienced in interpreting economic data. My school economics and accounting teachers would be proud to know that these are the two subjects from school that I use most in life.

8. Know your product or trust your broker…

I cannot stress enough about the relationships that you must build and nurture. The better your relationships, the better the advice you will receive and the more certain you will be throughout this period of ‘uncertainty’. I say that word ‘uncertainty’ like this because if you have done everything I have said in my blogs you will have absolute certainty and the uncertainty won’t exist.

The point is that building this relationship will enable you to be certain about the products on offer and therefore you can make fully informed decisions throughout this period.

So many people are concerned in the 6 months leading up to a remortgage because they are hearing the negative and pessimistic news but not checking the reality. Speak to your broker and rest easy and if it will save you the sleepless nights remortgage early to secure your cash flow.

9. Take action early, stress later

Following on from the last point, if you are not passing my ‘Sleep Test’ that’s the one where ‘if you don’t sleep a full night of restful and meaningful sleep waking up refreshed and enlivened then you either need to stop drinking so many coffees or you need to take some action.’ The earlier the better.
Let me make myself absolutely clear…

If you aren’t sleeping because you are worrying then you had better take some action as early as possible. If you then find out that there is nothing you can do at the moment then stop stressing, set a definite date to follow up and forget about it. Now we both know that the game of property is an emotional one so I would be stupid to believe that you are going to full forget so this is where my next point comes in.

10. Who do you call, mentors

So you read the headline and all the text, you took a long slow deep breath, you realised that the statistics are all based on average and you aren’t the average, you know that every cycle has a downturn, you treat your cash flow as king, you understand and can read the various indexes, you know that economists just play with models and data and come up with different results from the same data, you trust your broker BUT you still think its all turning from bad to worse. It’s time to call someone and the ghost busters aren’t going to help you with this one.

These are the times when you need to have mentors that you trust who can direct your attention and your actions towards solutions, not emotions. Call them, sit with them and get very clear about what you options are.

I spend hours and hours every week developing clear strategies with people, giving them certainty and allowing them to pass the sleep test. It’s amazing the difference an unemotional, detached, fresh pair of eyes can have on the situation. For more information check out my free educational blog.

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