Wildly misleading statistic of the day: "41% of homes sold at a loss since 2007"

This got an "oh woe is us" write up in some of the papers, but let's refer back to the original press release from Castle Trust:

Over 130,000 families have sold their homes at a loss since 2007, according to exclusive analysis of housing transactions by housing investment and shared equity provider, Castle Trust.

The initial research, which tracks the proportion of properties selling at a profit or loss, includes an analysis of properties in England and Wales which were bought and sold between January 2007 and January 2013. Of these properties, 40.7% (131,442) were sold at a loss, with the average shortfall being £24,430 (on average 11.0% of the house price).

Over the same period, 55.6% (179,689) of homes sold for a profit generating an average return of £45,199 per transaction (on average 20.4% of the house price) and the remaining 3.7% (12,051) sold for the purchase price.

Let's gloss over the fact that lower house prices do not represent "a loss" for the honest hard working population of this country: the result of lower selling prices is that the purchaser saves more in mortgage repayments than the vendor loses in (negative) return on the cash he invests from the sale. So from our point of view, that's a significant gain and it's only a loss from the banks' point of view.

Let's focus on those two headline numbers: "130,000 families" and "41 per cent".

Readily available statistics, for example HMRC's Property transactions completed in the UK with value £40,000 or above show that there were 5,433,160 sales in the six calendar years 2007 to 2012, plus an unknown number of sales for £40,000 or less.

So either 41% is correct and about 2,200,000 were sold at a loss; or 130,000 is correct and 2.4% were sold at a loss. Or, more likely, both figures are completely wrong.

RETHINK: unless of course they mean homes which were bought after January 2007 and then re-sold before January 2013, in which case the 41% figure is probably about right, seeing as on the whole across England & Wales, house prices have been flat for the last seven or eight years; we'd expect half to have re-sold for a higher and half to have re-sold for a lower price.

Ponzi Scheme Fun

Somebody from Castle Trust left a comment on a post from yesterday and an email exchange ensued. I asked whether I could publish their response on my blog and they agreed.

They said: "Castle Trust uses the returns from Partnership Mortgages to pay HouSA investors returns greater than the Halifax House Price Index" [Their website states: "Income HouSAs provide a fixed quarterly income as well as giving you full access to house price returns" which I think is pretty crystal clear]

I responded: "I'm now even more puzzled - your website says that the borrower doesn't pay anything until the house is sold or 25 years later, so how will you pay a fixed quarterly income to investors? Where does this money come from? New investors?"

They responded: "Castle Trust will keep 20% of all investments through HouSAs in cash to meet our shorter term obligations and use the balance of 80% to lend as Partnership Mortgages. Castle Trust will then use the proceeds from Partnership Mortgages as they are redeemed to fund the returns due on HouSA investments."

Ahem. From Wiki:

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.

Ah well. I suppose the fact that "Its seven part-time directors include... former Financial Services Authority chairman Sir Callum McCarthy" means they won't have too many problems getting this scheme authorised.
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UPDATE, Jack C at HPC recommends the following further reading:

Mortgage Strategy: Is Castle Trust shared equity deal too good to be true?

Money Marketing: Four major lenders will not lend to Castle Trust borrowers

Another day, another reckless throw of the dice (42)

From The Daily Express:

EX-cabinet minister Lord Deben, formerly John Gummer, is among the directors of a new investment and mortgage business promising “to breathe new life into the housing market”.

Newly formed Castle Trust will offer investors the chance to make returns based on house prices. Funds raised will provide householders with loans known as a “partnership mortgage” of 20 per cent of their home’s value. They will not make monthly repayments but after a set period must repay the loan plus 40 per cent of any rise in value. Castle’s key backer is the US private equity firm JC Flowers.

Its seven part-time directors include Gummer, former Financial Services Authority chairman Sir Callum McCarthy and former National Consumer Council chairman Dame Deirdre Hutton.

As I commented over at HPC, These people really are gambling on there being people with a lot more money than sense.

Logic says that

A. Any FALL in house prices will be borne 100% by the people who lend the top twenty per cent of the value of the house - if prices fall 20%, then their "deposit" is wiped out, therefore, depending on what probabilities you ascribe to prices rising or falling and if so by how much, they ought to be asking for nearly 100% of any price increases.

B. Then there is the phenomenon that an 80% mortgage costs (say) 4% interest but a 100% mortgage is (say) 7%, so the effective interest rate on that top slice of 20% is actually (say) 19% (formerly known as Higher Lending Charge). Using a £100,000 house as an example:

£80,000 x 4% = £3,200
£100,000 x 7% = £7,000
By subtraction, the top slice of £20,000 costs £3,800 interest

So we can actually split that 100%/£100,000 loan into a 4% loan for the first £80,000 and a 19% loan on the rest, i.e.
£80,000 x 4% = £3,200
£20,000 x 19% = £3,800
Total mortgage £100,000, total interest = £7,000.

C. Therefore, if you were willing to invest money in this scheme and assumed that there are equal probabilities that house prices go up, stay the same or go down, you ought to be looking for an annual interest of 19%, plus 100% of any increase in house prices, and not be fobbed off with a mere 40% of any price rises (and an unknown fraction of price falls).

For the house on which your investment is secured to cover the whole of the loan, prices would have to be rising by at least 4% a year to cover the £3,800 compound interest in the interim, which pushes the chances of this investment paying off even further into "unlikely" territory.