Buying to let it's our latest idea of a painless way to make money
CHRISTOPHER FILDES
Every so often, greed triumphs over fear, and otherwise sensible citizens persuade themselves that they have discovered a painless new way to make money. Then they invest in champagne, or start up a website, or sell costume jewellery and knickers to each other, or join Lloyd's of London. (It pays the school fees, old boy — Lloyd's makes your money work harder.') Now, as the word gets around, they are buying to let. Why fool about with shares or ISAs or unit trusts — wretched returns, sank like a stone last year — even if you have the money to spare, when it is so easy to buy a house or a flat, and all you need is a tenant? There are supposed to be hordes of them beating the doors down, and you can collect your income from them until you are ready to take your profit. The house that you own now has gone up in value, so you can remortgage it, take out some money, buy to let (with the help of another mortgage, of course) and look satisfied. The mortgage lenders are anxious to help you, and so, of course, are the estate agents, who have happily hit upon buying to let and are promoting it. What, after all, can go wrong? Well, the boiler, for a start. Things do go wrong with houses, and cost money and effort to fix, and there is no way to fix a bad tenant — destructive, litigious, behind with the rent or just vanishing. Beyond all that, what can go wrong is the arithmetic.
Trading on margin
A HOUSE with a mortgage on it is an investment financed with borrowed money. When you remortgage it, you borrow more. You then buy another house, with another mortgage. If you had invested in shares, you would call this trading on margin, or gearing up. Your potential reward has increased, but your risk has increased, too. You have put all your eggs in one basket, and a fairly small hole in it will break them all. A hole? In a wonderful basket like this, hand-woven, furlined, copper-bottomed? A basket that has carried house prices up by an eighth or so in the last year? Just so, but its performance last year does not guarantee this year's. Morgan Stanley believes that house price inflation is peaking. As people feel less secure in their jobs, they will be less eager to borrow money and bid up for houses — so prices, Morgan Stanley says, will rise more slowly from now on, and by the end of the year they may be going down. That would be bad news for today's buyers to let. They would find out, as the Lloyd's names found out, what can happen to you when you make your money work harder. What you have done is to make it work twice, which is fine until it starts working against you. Then it is fear's turn to triumph.
ICI's raw material
MONEY, said Albert Frost, who was Imperial Chemical Industries' finance director, is a raw material of the chemical industry. His successors have let ICI run short of it, and this week they had to go to the shareholders and ask for £800 million to keep the banks at bay. This was once a great company, with a fund of respect and goodwill and a credit rating to match. Its decline began when ICI took the advice of an abrasive young man in Warburgs called John Mayo, renamed its pharmaceuticals division Zeneca, and spun it off. Since then Zeneca has flourished, but ICI has been left to shuffle its pack of businesses, discarding and drawing without picking up a winning hand, and watching its pile of chips dwindling. As for John Mayo, the scheme made his name and he went on to become finance director of Marconi, which ended up even shorter of money than ICI.
Honour the prophet
THE prophet of doom has been vindicated. Tadashi Nakamae is the original thinker (and contributor, last year, to The Spectator's special issue on finance) who warned us 12 years ago that Japan's mighty stock market bubble was about to turn into a faceful of soap. The Nikkei Dow index was nearing 39,000 and was within a fortnight of its peak. A bear market was on its way, he said, and would not end until the Nikkei fell below the Dow Jones index in New York. In those days the Dow Jones was pottering along a little north of 2,700. At the end of last week the gap closed and the two indices crossed — at 9,907, the Dow Jones was 116 points ahead — so will the curse now lift? The Nikkei has carried on down, the banks' balance sheets look more fictitious than ever and the government is in disarray. In The Spectator, Tadashi Nakamae prophesied more gloom, unemployment and bankruptcies, as Japan came to grips with reality: `Thereafter do not be surprised if Japan's economy is the first to recover.'
Ski and be seen
WHAT you need for Davos is a helicopter and a trophy wife. The helicopter whisks you there and saves you the four-hour trek up the valley from Zurich. Then it takes your wife heli-skiing and returns her in the evening, to cut a suitable dash at the parties. This is the World Economic Forum, a fixture at this time of year, but I am not attending. The Spectator's publisher has made difficulties about providing me with my accessories, and points out that this year's forum has been switched, for reasons of security, from Davos to the Waldorf Astoria Hotel, New York, which is not the same thing. It will go back to Davos next year, when the Swiss have worked out how to protect the assembled grandees (and their wives) from mobs and missiles — but that may not be the same thing, either. Davos is one of those see-and-be-seen events when the formal business scarcely matters but everyone goes because everyone else goes. Another is the International Monetary Fund's Washington meeting, cancelled last year because no one was flying. Events like these depend on habit and may not recover their place in the calendar. Now is the time for the City of London to dream up a new one. Just think what we would save on the helicopters.
Unkindest cut
I HAVE rumbled Rod Eddington's 'Future Size and Shape' for British Airways. He intends to refinance the airline out of the proceeds of confiscating nail-scissors and selling them. I have lost four pairs so far, menace to safety in flight that I am, and they must all mount up.
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