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« Gold: Is the rate cut built in? | Main | Gold: Labour Day and Rising! »
Saturday
Sep152007

Northern Rock Plc: As safe as houses?

Northen Rock logo
Like a Shakespearian play, all is not what it seems as this tragedy starts to unfold. The old adage of ‘As safe as houses’ is being called into question.

Northern Rock Plc was a building society that turned into a bank, a few years ago, which was widely regarded as a safe traditional type of investment. The business model of offering to pay savers say 5% for their cash deposits and then lending it back through mortgages for say 8% is a sound idea in principle. The normal rule for lending was that you could borrow 2.5 times your salary, a useful imposed discipline in our opinion. Since then interest rates have dropped which should have made it easier to pay off such loans, however house prices were chased higher and higher. The old rule of 2.5 times your salary has been replaced by factors of up to 7 times your salary. The dinner party chat has been dominated by how much my house has gone up etc. Add to this the fact that we are witnessing a ‘Buy to Let’ boom whereby people have bought a number of houses as investments to rent out to others. We had 14 properties at one time. Over the years we have been involved in a number of developments, which is a reasonable step for someone to take who is chartered and has spent many years in the construction industry.

Now when the Estates Gazette, an authority on the property market compiles statistics such as the number of landlords has increased 10 fold over a 10 year period but the number of renters has remained pretty much the same, there can only be one outcome: rents will go down. To me this was an indication that the market had peaked and that is was time to cash up and go. On an anecdotal level our cleaner’s assistant recently told me that she had bought her first rental property, confirmation that it is all over in my opinion.

The British people are in debt to the order of about £1.3 trillion via mortgages and credit cards etc. The underlying asset is their own homes, should these property values decline then negative equity arrives and many will suffer badly. It saddens us to see such a mess and know the hardship that it will cause millions of people.

We have suggested that you read as much as you can around this subject in order to protect what you have and avoid some of the misery that is already on its way to others. Read stock market reports, financial newsletters, watch gold futures, silver futures, Canadian gold stocks, world stock markets, etc. Don’t be hemmed in by what the stock market in the country you live in has to offer, get your head up and start thinking globally. If your stockbroker cannot accommodate your requirements get another one who can.

As former shareholders in Northern Rock we sold our holdings some time ago to raise cash for other investments namely precious metals. There is still a long way to go before we will know whether or not we made the correct decision.

However if we compare the performance of Northern Rock against a mid tear gold stock such as Agnico Eagle then it is astonishing. True not all gold stocks have done as well as Agnico Eagle and many banks have done a lot better than Northern Rock. The point is though that one asset class is in the ascendancy and the other is not.

Agnico Eagle logo 14sep07

In 2005 Agnico-Eagle had a market capitalisation of £0.80 billion and Northern Rock had a market capitalisation of £4.0 billion. Today Agnico-Eagle has a market capitalisation of £3.2 billion and Northern Rock has a market capitalisation of £2.1 billion.

A reversal of fortunes for both companies and an indicator that it is the precious metals sector that is the new ‘Buy to Let’ phenomena.

The time has come for the British (includes me by the way) to take a long hard look at their own unique financial position and ask themselves some searching questions. Being ‘busy busy’ is not going to help. You can start by saying I’m busy just once instead of twice. In our view expectations are way too high, life styles should not be predicated on credit so reduce those debts as soon as you can.

Think about what you actually need and not what would be nice to have and life will become easier, you will become more relaxed and ultimately make better decisions.

Have a great weekend

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Reader Comments (2)

If I wrote checks or spent money that I didn't have that would get me in trouble. When I was growing up the numbers racket was run by organized crime but now the politicians are spending money they don't have and setting up a casino everywhere you look. Somebody better tell the Masons they should change their ways and get true values. John

September 17, 2007 | Unregistered Commenterjohn

The problem is that politicians think that they can manage. However they have no prior experience and they are only career politicians where the bigger your department the more important you are. I would laugh if it didnt make me so angry!

September 22, 2007 | Unregistered CommenterGold Prices

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