During late summer of 2006 I was on a work trip to New York to meet with some of my American colleagues and to visit some of our NY based clients. A very good friend of mine, who I’d met on secondment there in 1997, had been kind enough to arrange for me to be collected from the airport by his ‘usual’ taxi driver, I believe the term the Americans use is town car. My driver was a middle aged Iranian immigrant; he was most friendly and couldn’t do enough to help; he repeatedly told me what a great guy my friend ‘Mr Chris’ was. Luggage in the trunk, boot to you and I, and we were on our way to midtown Manhattan where my hotel was located near Bryant Park.
The journey was slow and the traffic was terrible and throughout my driver ‘Freddy’ was talking away excitedly on the phone. I couldn’t work out exactly what he was talking about but it seemed to me that he was doing business of some sort and it sounded like he was buying but I had no idea what. When Freddy finished his call, or rather in a gap in between calls, my curiosity got the better of me and I asked him politely what he was up to.
“I’m buying and flipping (selling) plots of land in Florida.”
“Wow” I replied ,“that sounds interesting, how is that going for you?”
“It’s going great!” exclaimed Freddy, “I’m doing it with my cousin and land prices are rocketing there, we borrow cheap money from the banks, secured against the land, so we don’t even have to come up with much capital, only the deposit to secure the deal.”
I listened with interest.
“Land prices have more than doubled since we started, we have sold one or two plots but have used the money to buy bigger plots or plots in better locations.”
“Is it easy to get the loans to do this?” I asked.
“My friend, it couldn’t be easier, we use a mortgage broker and simply call him up with the details when we have a new plot we want, he gives us an approval number there and then once we have agreed the interest rate.”
I couldn’t believe this; banks were throwing money at people without even inspecting the plots of land or ascertaining whether these individuals were able to make the loan repayments over the long term without selling a plot here and there to finance loan repayments. This sounded dangerous but Freddy and his cousin seemed to be doing very well, he told me they had both made tens of thousands of pounds of profit, on paper at least. We arrived at my hotel and I thanked Freddy and wished him luck.
Roughly a year later when I’d left work and established my charity and various other projects, I had a similar conversation with a couple of new friends I’d met through an event management business I was running with my brother. One of the girls was working for a property investment company that sold property investments to people on a ‘one stop shop’ basis. Investors bought a property with pre arranged finance and a pre arranged tenant; in many cases the mortgage was 100% or 105% of the price of the property and the rent covered the mortgage payments during the period of the agreed tenancy.
Again I was alarmed, why were banks lending so aggressively, what would happen if the property was empty and the investor couldn’t make mortgage payments, what would happen if property prices declined? The girls assured me that property prices only ever go up and it was easy to find tenants and there really wasn’t anything to worry about.
Within months of this a financial tsunami hit the world, it started in the United States and then swept through the Europe, and to a lesser degree the rest of the world. What started with bad loans (sub prime) in the States soon escalated to a full scale international banking crisis and then a European government debt crisis. Firstly governments bailed out banks then stronger countries bailed out distressed countries such as Portugal, Ireland, Greece and Cyprus. World stock markets collapsed, house prices declined and many companies laid off staff to cope with falling demand.
Many of these individuals who invested in ‘buy to let’ properties lost everything. Tenancies expired and new tenants were hard to find or could only be found at a reduced rental. Those investors who couldn’t afford mortgage payments and needed to sell their properties found, in many cases, that they would have to take 20-40% losses. This was partly due to the change in the market but also due to the fact that they had over paid for the properties through these ‘one stop shops’ that had over charged in order to make their profits.
Anyway, I digress, the point I’m trying to make is by the time the taxi driver and man in the street is talking about property speculation or dot com shares or gold or whatever the asset class might be, it is probably a sign that the market has run its course. This isn’t arrogance or snobbery just an observation based on experience and backed by my theories on maximum optimism and maximum pessimism. Markets are moved by transactions, whether it is company shares or houses, it is the supply versus demand ratio that will determine the direction that an asset price will take. By the time the man in the street enters the investment market and everybody is talking about the ‘hot market’ it is usually a sign that the market is running out of buyers and has run its course. As I mentioned earlier with my 2009 trip to Dubai, this can be said for downward moves in markets and doom and gloom, this perception of maximum pessimism reflected in ‘everybody’ talking about total financial collapse and the end of capitalism as we know it.
As Baron Rothschild said, the time to buy is when there’s blood on the streets.
