The old line from Hamlet, "neither a borrower nor a lender be", is actually a pretty useless piece of advice.
Most of us need to borrow money at some point even if we'd never think of taking a personal loan to buy a car or a television, we're more than likely to have to get a mortgage if we ever hope to buy a house. But like it or not, both borrowers and lenders are coming under increasing pressure as the US sub-prime-inspired credit crisis gradually pushes up the cost of money across the economy.
Earlier this week, Andy Hornby, the chief executive of HBOS, the biggest mortgage lender in the UK, called the end of the housing boom. He didn't use those words precisely, but at a speech to the Merrill Lynch banking and insurance conference, he said the company was going to start focusing on making its mortgage business more profitable rather than chasing market share.
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This is extremely important. One of the reasons the housing boom has gone on unchecked for so long is that mortgage lenders have been in a race to see who can grab the biggest share of the market. The way to do this, of course, is to offer the cheapest mortgages possible to as many people as possible.
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For the country's biggest mortgage lender to pull out of this game signals that we're all going to find it much harder to get on the housing ladder and trade up from now on.
As cheap money disappears from the mortgage market, one of the first groups to suffer will be buy-to-let investors, who have pretty much replaced the first-time buyer as the new blood that props up the property market. Indeed, one of HBOS's first moves has been to axe the sub-5% buy-to-let deals it was offering through its subsidiary Birmingham Midshires.
A recent survey from the Association of Residential Letting Agents showed that two-thirds of landlords were making rental returns of 5% or less in August, which is below the cost of a typical buy-to-let (BTL) mortgage. In other words, they are getting less in rent than they're having to pay in mortgage repayments.
That's not a situation most people can afford to sustain for long. In fact, Julian King of National Homebuyers one of the many firms springing up which buys properties at a discount from desperate sellers says: "We have received so many calls from landlords looking for a fast sale that it is obvious that the BTL market was unstable."
Mr King may well be talking up his book somewhat, but I suspect he'll find that business is booming in the months ahead.
Unfortunately, you can't invest in companies which buy up distressed properties as yet, but there are several that might do well out of the credit squeeze. You see, it's not just mortgage lending that's become more expensive; personal loans are too. Only four months ago, sub-6% rates were available, whereas today you would be hard-pushed to get your hands on a rate of less than 7%, according to data firm Moneyfacts.
But the real concern for many overstretched consumers is that banks are also being choosier about whom they lend to.
Doorstep lenders such as Provident Financial (PFG) and Cattles (CTT) have reported rising customer numbers this year, as borrowers who were once able to get loans from banks during the good times are increasingly being forced to turn to sub-prime lenders.
In fact, the good times may well continue for the sector as experienced lenders to those with questionable credit records, they should fare far better than the banks, who have now had their fingers burnt by lending carelessly in recent years. And they don't look that expensive at the moment Cattles trades on a forward price/earnings ratio of about 11 and pays a tempting yield of 4.8%.
However, there's a good reason for that. Even sub-prime lenders might run into trouble if the economy turns nastier which looks highly likely. After all, they are lending to people on the margins of society, who are often the most vulnerable to losing their jobs if the economy runs into trouble, and who will also feel the pain from rising food and fuel prices.
A better bet for investors might be the pawnbroking sector. The whole notion of pawnbroking may seem a little Dickensian, but such chains have been seeing strong growth in profits in recent years.
The benefit of pawnbroking is that the lending is secured against an asset which is then sold on if the borrower doesn't pay the loan back.
There are two main firms in the sector that are listed are Albemarle & Bond (ABM) and the more recently floated H&T (HAT).
ABM yields just under 2%. The stock is trading on a forward p/e ratio of 18.3, but with its pawnbroking loan book growing 22% in the year to June 30, that seems a reasonable valuation for a business that's likely to get even better as more people run into credit problems.
However, its less expensive peer H&T might be an ever better bet it yields 2% and trades on a forward p/e ratio of 16. H&T made a pretax profit of £3.3m in the first half of this year, from a pretax loss of £1.9m at the same time last year. Seymour Pierce analyst Richard Ratner rates the stock a "buy".
First published in The Sunday Times 7/10/07
