Market news is being dominated by the coronavirus outbreak at the moment. Monday saw the FTSE 100 close down more than 3%, after Italy reported the largest outbreak outside Asia.

Obviously the human impact of this outbreak is everyone’s top concern. But as investors we’re obliged to consider the economic impact too. I see this as a temporary disruption, but there’s no way of knowing how long or how severe the impact will be. However, my general philosophy is to stay invested at all times. So I don’t plan to make any changes to my personal portfolio or to the SIF fund in response to this outbreak.

Before I start this month’s review of Ashmore and Michelmersh, I’d like to take a look at a domestic story where I do have a strong view. I’m probably a bit late to this, but I’ve noticed worrying signs of ‘innovation’ in the mortgage market. I wonder if this is a sign that housing affordability is finally about to hit the buffers.

Too clever by half?

A recent piece in the FT (paywall) examined the growing trend for “doing the splits”. This means splitting a mortgage into two or three loans with different characteristics. One example given was splitting a loan between interest-only and capital repayment so as to stay below the LTV limit on interest-only mortgages. Various other combinations are described, but from what I can see the underlying motivation is usually to stretch what the borrower can afford.

At the same time, the FCA tells us that 41% of mortgages are now for more than 25 years, up from just 2.5% in 2005. For first-time buyers, 66% of mortgages are for more than 25 years. Most lenders will now offer up to 40 years. That’s a lot of extra compound interest in return for a lower upfront monthly payment.

These mortgage trends suggest a mix of complacency and worsening affordability. It doesn’t seem like a good mix to me in a market that’s been kept high by the intoxicating combination of ultra-cheap debt and Help to Buy.

Demand for affordable housing in major cities may be insatiable. But affordability will only stretch so far. I wonder if we’re nearing that limit.

SIF folio monthly review

As it’s the last week of February, it’s time to take a look at the SIF folio and review stocks that have…

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