People, work and management - Richard Donkin

Details? Who cares about details?

2009-03-09T05:50:00.001-07:00

Thank you to the Strategic Planning Society for reminding me of my membership number (I didn't even know I was a member) in a letter. Next time, perhaps you will include in your strategic planning the necessity to affix a stamp, or, even better, send an email. Or are these the kind of details that do not concern strategic planners? It concerned me. I had to pay the postage and handling fee. I suppose I should plan a strategy for getting it back.

Confirmation that all those long hours are bad for us

2009-02-25T08:40:00.000-08:00

I gave up pastries for lent. Perhaps it should have been work.

Problem solving on the net - more than Factory Balls

2009-02-21T12:28:00.000-08:00

Something big is happening on the internet that is demanding our understanding. I'm not talking about Twitter or any of the other forms of social networking that are fascinating in their own right. I'm talking about flash games.

You may have come across some of these games when whiling away a few minutes at work (which can easily extend to a few hours, hence their notoriety in some workplaces). But what is grabbing my attention, increasingly, is their levels of sophistication in problem solving. I have already enthused about them here but more are appearing all the time and they just get better and better.

I have learned quite a bit about them through my son Robert who has begun making them. He hosts his own games and those of others on his website, BadViking.com.

Last night I was playing this one called Electric Box. Yes it's a game but imagine this was your introduction to physics. I urge you try it. There's a small tutorial to start you off and then you're on your way. Each component and its function in the increasingly complex circuits outlined in the game is explained so that as you move from one level to the next you are building on accumulated knowledge.

Are these games being used in schools? Are they being used in recruitment? If not, they should be. Many of them are marvellous educational aids because they present learning as something that is fun and allow learners to move at their own pace.

Companies are paying consultants small fortunes for delivering so called "training solutions" that are far less sophisticated than this. You want your employees to understand logistics and production flows? Try them out on Factory Balls here. Most flash game developers are relatively young like Robert who is 21. But don't imagine they are not aware of the power of the material they are producing.

Rob has had some success already with his Panda games like this one. His first panda game, Panda Tactical Sniper, has notched up three million plays worldwide. At first sight it looks like a so-called "sniper game" beloved of young teenage boys. But if you try playing it you will find that it's all about problem solving.

He has deliberately avoided shoot 'em up games so that his site concentrates more on thinking or reaction games such as his latest one called Popopop. It seems easy at first. It is not. One thing I like about this game is a feature that allows players to create their own "levels."

I'd like to grab a few graduate recruiters and take them gently by the hand in to this flash games world. The advertising agencies have already discovered it in their search for creatives - but why should they get all the talent? The answer is that too many companies rely on their future talent to come knocking on their doors. But companies can't rely on Robert and his pals, beating a path to their door. They're having too much fun.

Twit

2009-02-19T09:49:00.000-08:00

HR 2.0.,

What about the pay consultants?

2009-02-18T02:58:00.000-08:00

Much has been written these past few days on the size of bank bonuses. The big complaint, understandably, is that in the loss-making banks these can be perceived as rewards for failure.

Most of the criticism on bonus policy is being directed at the banks. These policies, however, are drawn up not by the banks but by their pay consultants who have been keeping their heads down in the past few weeks.

I would welcome some justification for some of these policies from those who advise their corporate clients on incentive pay. But I don't expect to see it.

The relationship between work and pay is complex. Pay does matter but it matters most at the point of negotiation and when there is a perception of injustice. Pay is used as a lure to recruit people but once they are on board it is unlikely to become a source of unrest unless they perceive they are being unfairly treated (something I explored in this column).

In the most senior ranks companies have lived with the reality that sometimes they will be paying for failure for too long.

I have yet to see a convincing argument to support the proliferation of the bonus culture in banks. As for guaranteeing bonuses, that is a nonsense as the only justification for the bonus is that it can be regarded as variable pay, offering some protection for the paying institution if markets take a tumble.

Of course, if employees have done all that is expected of them and more - which is the case for thousands of hard working people in the Royal Bank of Scotland and HBOS - it is natural that many will feel aggrieved to be losing their bonuses as a result of poor decisions at the top of the organisation.

On the other hand they may reflect that their projected bonuses derived from unrealistically high expectations over many years when times appeared good (but in fact, better than reality in a bubble economy). Those that retain their jobs must know they need to take the rough with the smooth.

A bonus must be just that - a sum of money that is not guaranteed and which should not be taken in to account in financial planning. The danger is that some people will have included expected bonuses when stretching their finances to meet a demanding mortgage, for example. They will suffer. But perhaps they should. Overspending on "hope money" is a harsh lesson for anyone, but one that should ensure greater prudence in future. Everyone must learn to live well within their means. That way they should live well.

Pour encourager les autres

2009-02-10T08:38:00.000-08:00

It's all very well hauling bankers before the House of Commons Treasury select committee, but it's not much of a deterrent. Neither is removing their bonuses. The Royal Navy showed how to deal with aberrant leaders when it made an example of Admiral Byng.

It prompted the French writer Voltaire's famous remark, in his novel, Candide, that in England 'it is thought good to kill an admiral from time to time to encourage the others'. Ah, those were the days....

Engelbert to the rescue

2009-02-09T03:11:00.001-08:00

While the newspapers are full of job losses it would be wrong to believe that everyone views the prospect of losing their job with foreboding.

I was chatting with a friend at the rugby match on Saturday who has been weighing up the financial realities of retirement. He's in his mid-fifties in management after spending all of his career with the same employer so the prospects look pretty good. But the company still values his services and is in no hurry to see the back of him.

"How can I hint subtly that I want to go without making it blindingly obvious?" he asked. Another friend came up with the answer: "Download the ringtone of 'Please release me' for your mobile phone." Perfect.

A good day for burying good news

2009-02-03T08:32:00.000-08:00

This is a story I received today in the form of a press release. I hope I am proved wrong, but I suspect that you will not read anything about this in the press. Why? Because newspapers regard every day as a good day for burying good news. I can only extend my apologies to Mrs and Mrs Ward-Henry that instead of the pink pages they find themselves here.

Here it is:

"Hello, our names are Michael & Sarah Ward-Hendry and this is our story as we lurch into the economic tempest that has enveloped us all.

Having started our business Ward-Hendry Photography near Banbury with nothing but personal debt and a great idea following redundancy, we have achieved 5 years of 100% year-on-year growth. Ward-Hendry (as we are known) has become the outstanding schools photography company in the UK and Ireland.

On Wednesday 28th January 2009, we met with our bank, Lloyds TSB, at our offices to review the business's financial performance and hopefully secure the bank's ongoing support regarding existing overdraft facilities and working capital. We were concerned that in the prevailing economic situation the bank's view would be driven by the need for caution.

The outcome of the meeting was not good...it was indeed fantastic and as good as we could have imagined it might be!

In an atmosphere of almost total uncertainty in all aspects of normal day to day business life in the UK, we have received the endorsement of Lloyds TSB for our ongoing overdraft and working capital requirements for the coming year.

From humble beginnings as sole traders working from a wooden shed at the top of our garden in January 2004, the business today employs 35 people, with annual sales in excess of £1.5m expected for the financial year ending March 2009.

Our offer is strikingly contemporary and compelling to the hundreds of schools and hundreds of thousands of parents who are our customers throughout the UK and Ireland.

We are formally endorsed by the National Association of Head Teachers (NAHT) as a 'Partner' of the Union, which represents a membership incorporating over 80% of Primary School Head Teachers, Principles and school leaders in England, Wales and N. Ireland. We are also a 'Sponsor Partner' of the Specialist Schools and Academies Trust (SSAT) where our offer receives similar endorsement and credibility to in excess of 3,000 state senior schools in England and Wales.

We plan to continue our acquisition of market share in the coming year with the aim of achieving £2.4m in sales and employ an additional 10 staff.

The signs are good for our continued growth and it would appear that Lloyds TSB are indeed true to their word and will support viable, sound businesses as we all continue our journey to broader economic recovery."

The greatest asset

2009-01-31T09:40:00.000-08:00

As a columnist with fairly strong views on things I'm used to criticism. But on this occasion I can only assume that it is because my argument has been misunderstood and that's irritating because it means I have not expressed myself well enough.

I was writing in Human Resources Magazine about the lessons that human resources professionals might draw from the bail out of the Royal Bank of Scotland which, without that bail out, would have suffered the fate of the Monty Python Norwegian Blue - it would have ceased to exist.

One of the things I said, and which I continue to say because I think the expression is dishonest, is that it is wrong for a company boss or a head of HR to declare that "our people are our greatest asset."

I say this because of the accounting convention to declare assets on one side of the balance sheet and employers on the other under costs. This also puts employment costs under the heading of liabilities. While I'm sure no-one would declare "our people are our greatest liability," I think few company bosses would demure from considering employees as their greatest cost.

For this reason I don't think it is helpful to use such accounting terms as assets and liabilities when considering the value of a workforce. Of course people are valuable. In some cases they are the only real value a business has apart from other fragile intangibles such as goodwill. It explains why I prefer to think of people as the living, breathing investment capital of a business. When a company recruits someone it is investing hard cash and not a little faith in the ability of the individual to add value to the balance sheet.

Training, promoting and rewarding that individual might well increase their capital worth. That is what investing is all about. But thinking of people in terms of asset values is less helpful since people can never be described as fixed assets. They can improve their value for a business or their value might depreciate.

It is why companies must think of inputs, outputs and value when looking at employees. Nor should they use such assessments purely with internal employees. External skills have a value too. Some companies prosper by outsourcing almost all of their talent. In fact some ventures, such as a West End musical, rely entirely on assemblies of talent. In such productions it is probably better to think of "we" in a collective sense than in the ownership sense of "our people."

Even companies with employees on their payroll should beware the "our people" claim and certainly any boss should be careful about talking about "my people." It is a highly presumptive phrase. People can never be owned. For that reason they should never be regarded as assets, not as long as they have legs to walk away.

You may, of course, believe this to be "tosh" but I don't know how to express my thoughts on this issue any other way. People are our greatest investment - now I can go along with that.

Free office space

2009-01-30T06:00:00.001-08:00

Starting a new business? This new offer from Regus could be worth a look.

25 years, still red hot?

2009-01-27T12:25:00.000-08:00

Virgin Atlantic is celebrating its 25th anniversary. But is it still red hot? A customer takes issue.

Cowbells and cuckoo clocks in Davos

2009-01-27T03:53:00.000-08:00

This week nearly 1,200 chief executives and chairmen, plus another thousand celebrities, politicians, academics and others who might describe themselves as power brokers, not to mention a small army of journalists, lobbyists and public relations people will converge on Davos for the World Economic Forum.

But there will not be very many women according to this article.

Not that women should alarm themselves too much. Davos does not have a great reputation for getting things done. It produces various publications such as its Global Gender Gap Report. But the above article would suggest that its organisers do not read them.

Yes, it has launched various initiatives that have done something to bring together businesses and political administrations. But its biggest benefit seems to be for Davos itself where increased sales of Swiss Army pen knifes, cowbells and cuckoo clocks ensure the continued health of its shopkeepers.

At least it is living proof that man-made global warming is a reality thanks to the billions of cubic meters of hot air it generates each year. Then there's the giant hole in the snow that is the Davos carbon footprint. We might be thankful, however, that this year it is getting some of the world's most senior bankers out of their offices for a while, saving depositors from even more damage, at least for a few days.

They say that pinstripes are out and sack cloth is in this year. Don't you believe it. The ritual massaging of egos and mutual bolstering of confidence among those disillusioned enough to believe in their omnipotence will continue unabated.

Summing up, a precis of the annual output of Davos amounts to this: "We have got to something about X" where X can be: world poverty, AIDS, malaria, global warming, or, this year, the international banking crisis. It would be a refreshing change one year if the bosses admitted that "x" meant "keeping our jobs."

Cook off, says the FT

2009-01-23T04:23:00.000-08:00

I notice that the Financial Times canteen is having a competition among its chefs this lunchtime billed as a "cook off." Several of its editorial staff, meanwhile, have been asked merely to leave.

Back-slapping hacks

2009-01-22T02:20:00.001-08:00

It was cocktails in the swish St Martin's Lane Hotel, London, last night for the Work Foundation's annual Work World Media Awards.

Maybe it was something about the venue but there was a pleasing intimacy about the awards this year and there was plenty of bonhomie, which makes a change among journalists.

Polly Toynbee, the Guardian columnist, seemed genuinely touched at receiving a lifetime achievement award. I suppose this is because it comes from within a relatively small circle of business, management and employment writers who are generally sparing in their mutual back-slapping.

As one of the judges, I can confirm that the BBC's Business Editor, Robert Peston was also a popular choice for two awards this year, including Broadcaster of the Year.

I have known him many years, ever since he came to the FT to take-over the investigative team - just as I left it for the employment beat, funnily enough. I have a lot of respect for the man we used to nickname "The Pest." He is not only a first rate reporter but a fine columnist too and a decent guy. He deserves his success.

I was saddened to hear of so many of my contemporaries at the FT who have decided to leave, taking one of the generous packages on offer just now. As one of them said, "it was too good to ignore." But I know, from my own experience, there will be sadness in going. Businesses are still shedding too much grey hair.

A bank too far

2009-01-20T04:01:00.000-08:00

I can relate to Fred Goodwin, former chief executive of the Royal Bank of Scotland, in more ways than one. We both had relatively poor backgrounds, both went to state grammar school and both worked on the liquidation of the Bank of Credit and Commerce International (BCCI), he as a Touche Ross accountant and I, as a financial reporter.

If only the similarities would end there, but a couple of others remain a source of pain. The first is that I regarded RBS as one of the best run businesses anywhere, not just in the UK, but anywhere.

I was so impressed with its operations - particularly in the way it handled employees - that I persuaded my wife (what's mine is 'ers and vice versa in our household) that RBS shares would make a good investment. I'm not a gambler. Banks are rock solid, I argued, and this is as solid as they come. They were around £12 a share at the time. Today they are trading at about 12p a share.

Goodwin was the Napoleon Bonaparte of banking, a financial general whose troops - or investors - would follow him anywhere. Even when the bank was suffering and instigated a rights issue, we responded in our thousands, like those who rallied to the Marseillaise at Waterloo.

We remembered the glory that was Nat West - Goodwin's Austerlitz. Few takeovers could have been administered with such aplomb so that Nat West's operations were absorbed almost without a hitch. But Goodwin was always eyeing a greater empire.

His own Waterloo was ABN Amro, a bank that he feared would be plucked from his grasp by a Barclay's Bank-led consortium. This was his undoing. Not all of his board was united over the takeover; some thought RBS was paying too much. But Goodwin by now was the general who saw the business as something of a battle for supremacy among banks. It was never that and ABN Amro was a bank too far.

How many times have we seen great enterprises wrecked on the back of a singular ambition? The thing is that there are still great people at RBS. Many of the old guard might have gone, but enough remain to remember the good days. Can they resurrect the best of the bank for taxpayers? I hope so, I really do, but they won't be doing it with any more of our money, other than our taxes. Even fools can learn.

The darker side of social networking

2009-01-17T08:20:00.000-08:00

You open your coffee shop for a new day's trading, a brick comes flying through the window, followed by mayhem. Germany in the 1930s? Think again.

Sitting in judgement

2008-12-10T05:41:00.000-08:00

In case you haven't noticed we are in the middle of the awards season that bridges the Christmas period and runs well in to the New Year.

I'm not sure why, but I'm a sucker for awards panels and have sat on quite a few, including the CBI's Human Resources Awards, the Recruitment and Employment Confederation's individual recruiter awards and the Work Foundation's Workworld Media awards.

I was judging this last one earlier this week. It's good to look at journalism with a more critical eye rather that simply reading a story or feature for its news, information or entertainment value.

Another good thing about awards judging is that you get to hear all kinds of juicy gossip but because this is picked up in what has to be a confidential discussion I don't get to repeat it anywhere (except in other gossipy behind-doors exchanges). That's the thing about gossip - everyone loves it but no-one likes to see it attributed to them, particularly since, by it's very nature,it lacks detail and sometimes accuracy. But what it loses in accuracy, it gains in emotional content. When people relax and chat together you get to understand how they feel about things.

Without going in to detail, it was clear from our conversations yesterday that there are worries about standards, not just among journalists but also in business. One of my fellow judges complained that newspapers were not holding chief executives to account for business failures.

I was surprised as I thought business leaders had come in for a hard time in the press recently. Not hard enough, it seems, but there is plenty of time for that. This week's "loan shares" scandal involving David Ross, the co-founder of Carphone Warehouse is just the tip, I suspect, of a very big iceberg (it's no big deal, says Luke Johnson). By this time next year we might even need a "financial scandal of the year award." Expect some fierce competition.

Seeing eye-to-eye at Cisco

2008-12-01T11:15:00.001-08:00

I visited Cisco's UK headquarters in Feltham today to try out its TelePresence conferencing system. It really was as good as I had heard it was.

All the things that have dogged video conferencing systems in the past - lack of eye contact, voice delays, detached voices - have been put right in this system. Yes, It's expensive at more than $300,000 for the top end of the range but competition will bring the price down over time.

Also I think this system is ideal for the rental market and can imagine pay-per-use conferencing facilities popping up all over the world.

Using this system in Cisco requires some time discipline because of its popularity. Demand is so high that meetings are booked by the hour. This means that there is an incentive to get on with the business in hand.

Technology works best when you hardly notice it and you soon forget that you are not sharing the same room with everyone else in the meeting. Indeed the sound quality is so good you can engage with people in just the same way as you would face-to-face.

Yes you still need to book a meeting just as you would arrange any meeting but the savings in air travel are such that it wouldn't take much use in a big company to justify the expense.

This system and other systems like it have enormous potential for remote working. This is just the beginning. While faster and cheaper air travel helped bring the world together, there was a price to pay in fuel and fatigue. Today we're coming together without leaving our offices. Tomorrow we'll do so without leaving our homes.

The new world of work

2008-11-11T09:19:00.000-08:00

I broke away from research work the other week to contribute some thinking for this FT project on The New World of Work.

Problem solving brilliance on the net

2008-11-05T04:53:00.000-08:00

Writing about officer selection in the Army I was struck by the lasting influence of problem solving exercises that have not changed very much in fifty years. Now I have found similar exercises on the web.

This one, Splitter, is brand new and brilliant. It's one of thousands of cheaply made flash games that are fascinating me just now through the work of my son, Robert Donkin, featured on the web site here and discussed in this blog here.

One of the great things about Splitter is that there is no single solution to the problems. The game, or exercise, could hardly be simpler but there's a time sensitive element too so you need to move quickly.

Companies are spending small fortunes on creativity training and consultants to try and stimulate so called "out of the box" thinking. Yet it's all here - for free. Catch staff playing this in office time, however, and you will probably conclude they are wasting their time. You might be right, but what's the difference between this kind of informal problem solving and creativity training? Nothing but the cost.

Workplace bullying

2008-11-03T03:31:00.000-08:00

I was in London yesterday speaking at an annual gathering called the Battle of Ideas at the Royal College of Art.

We didn't get too many at our session debating bullying in the workplace, a great pity as there were some interesting opinions. What makes these sessions much more stimulating than most seminars is the sharp, often challenging contributions from the audience so that you have a real debate, not just a platform presentation.

Another surprise was the way that audience responses led me to think and say things and head down intellectual avenues, even to the point of defending uncomfortable ideas, that I could not have anticipated beforehand.

Free from the kind of restraints I impose on myself when writing for a corporate audience in the FT, I found myself attacking many of the HR ideas that I have taken for granted over the past few years such as performance management, talent management and employee appraisals.

A distaste of what in an FT column I called the "Vote off society," led me to speculate that perhaps we are all capable of bullying behaviour in certain contexts. As an example I quoted the Stanley Milgram obedience experiment, using electric shocks, discussed here.

There are links here with the kind of dominance and mob behaviour explored by William Golding in "The Lord of the Flies." Bullying in the workplace was discussed by Robert Sutton in his book, The No Asshole Rule, mentioned here. But not enough work has been done to highlight the workplace environments that promote an atmosphere of bullying.

Perhaps there will always be "assholes" in the workplace. But when I started work, when trade unions still had some power, you really could say "you don't get me, I'm part of the union" - the lyrics of the old Strawbs song. I'm not sure we can say that anymore.

BlackBerry's big London adventure

2008-10-28T15:32:00.000-07:00

The BlackBerry trial (see previous blog) has stalled somewhat. I took it with me to London today and decided to consult its map section when I realised I had forgotten my little black book which has old fashioned maps on paper.

I had to speak at a seminar at the London Stock Exchange but was running on a mental programme installed during the 1980s which required a tube trip to Bank Station. Realising the exchange had moved, but forgetting the new location, I couldn't get the BlackBerry map to help me so resorted to that feeble non-digital standby of asking someone the way. It worked a treat.

Once installed at the venue with a bacon sandwich in hand I decided to look at some emails but the batteries were down so the seminar host offered to lend me his charger lead, plugged in to a floor socket. "But I might forget it there," I said.

"Don't worry, I will need to get my lead at the end," he said. An hour-and-a-half later we both took off in separate directions leaving the BlackBerry bleeping away contentedly all by itself, secure in the knowledge that its self-contained GPS system knew its exact position on the planet.

I had hopped on a bus, meanwhile, where I spent the next 10 minutes making faces to a toddler who was munching on half a Rich Tea biscuit. Switching buses I decided to check my emails. No BlackBerry. I believe now it is in the post, probably with my host's cable which I will need to mail back to him.

"You're not fit to have one of those," said Gill. I think she has a point.

Where's the "any" key?

2008-10-23T02:59:00.000-07:00

I suppose it had to happen at some stage. One of BlackBerry's public relations people got wind of some work I was doing on the changing workplace and, since BlackBerry, understandably, believes it is part of that change, she offered me a month's free trial of one of their devices when she discovered I didn't have one.

I don't have a BlackBerry because I haven't yet felt the need for one and I'm wary about their "crackberry" reputation, not to mention the cost of use. I notice that nearly all those people I see with them are salaried staff. Their companies give them BlackBerries to help them do their work.

"They're great," said Neil Buckley in the pub last night. Neil is one of the FT's Lex team. He was running the Moscow bureau but came back to the UK partly so that his wife, Emma Simpson, a BBC broadcast journalist, could resume her career.

I have known Neil a long time, ever since he joined the FT as a graduate. He's a fine journalist and, quite rightly, values his family life as much as anyone. So it was a bit of a shock to the system, he confessed, when he discovered he needed to attend early morning Lex meetings at 8 am every day with demands to file the first Lex notes for the web at noon.

More evidence, then, of workplace change. When I started my career at the FT there was no requirement to come in to work before 11 am. The working hours, protected by trade union agreement, were 11 am to 7pm.

Lex material could be gathered throughout the day in discussions with companies and analysts usually after the publication of some company news or results announcement.

Now notes have to be composed swiftly, often when analysts are too busy filing their own reports to handle queries from journalists. Everyone is indulging in a mad scramble to be first. Of course the FT wants to be first and it wants to be right but the faster you move the easier it is to make mistakes.

Another thing is that the "day after" news was always supposed to be considered analysis and that too is more difficult in the heat of an event. Neil was showing me an "FT Reader" service, available on the BlackBerry device, that lists stories by sector. Neil is a very "grounded" individual, another northerner who doesn't have time for flim flam so his recommendation means something. But he too need not worry about the cost.

It's a clever little gadget I'm thinking, but is it for me? When I was discussing the merits of the BlackBerry with Gill, my wife, I argued that I would be able to check emails in "dead time" on the train.

"But what about looking out of the window?" she said. And what about the other things I do on trains - reading books, newspapers, making notes, thinking, and sometimes, as happened last night for the first time in ages, chatting with a fellow passenger.

By the time I was home the BlackBerry had arrived, the box had been opened by two of my boys and they were busy caressing it, proclaiming it "cool" and reading the instructions. Then one of them did the stuff needed to set it up. So it was all out of my hands.

I didn't look at it until this morning when it took me about 20 minutes to find the "on" button. I shared the confusion of Homer Simpson when asked to press any key on his computer and he said: "But where's the 'any' key?"

Then I looked at some emails in tiny writing and replied to one. The situation lacked authenticity since I was sitting next to my laptop at the time which had my emails open in brilliant technicolour with keys I could use without trying to stub minuscule squares of plastic. I checked the reply on my laptop and found it hadn't sent my mailing address. I suppose I have to programme that in - more work, not good. This meant I had to send another email with the address from my laptop - duplication, not good.

The thing is that I couldn't give a bugger whether the BlackBerry is cool or not. I want to know just how important it is to be in touch with my emails and the web when I'm travelling and unable to use a lap top(which is not all that often). I want to know how easy it is to use. And, unlike all those company employees who use them, I want to know how much it costs to run.

Hang about, it's flashing now. There's an email from the FT. They want me to do a feature. But I'm writing a book. I suppose I can do both. So this is how it works and I'm still asking the question: is this a good thing?

Birds or the bank?

2008-10-14T07:38:00.000-07:00

Not such a tough call any more.

Buy-to-let misery

2008-09-30T22:58:00.000-07:00

Have you noticed how in the furore that has overtaken the financial markets in the past few weeks, the focus of blame has been – rightly, I suppose – on greedy bankers.

There is no doubt that those who lent recklessly in the housing market over the past 10 years should be castigated for pursuing lending policies that were only storing up trouble for the future.

But it takes two make a loan transaction – the lender and the borrower. What of the tens of thousands of buy-to-let borrowers in the past few years? Did they really think they were engaged in a one-way bet?

The proposal was simple. You went to a bank or building society and borrowed the full mortgage on a £100,000 apartment, say. You then rented out the flat to cover the mortgage and, in time, you could sell it at a profit and pocket the capital gain.

In a rising market the prospect seemed viable and, as the market continued to rise beyond all expectations, it grew increasingly attractive. Lenders were happy, because, although they knew there was a risk, they considered that their mainly middle-class borrowers – often with properties of their own – were good for the credit since their earnings would underpin repayments.

But the lenders were so happy they stopped worrying too much about the potential creditworthiness of the borrowers or, indeed, about the value of the property, sometimes lending over and above its value.

In the US this recklessness was taken to extremes on a scale far beyond that in the UK. So it it’s no surprise that when the housing market stalled people began to default on mortgages and what had seemed a lending bonanza turned to junk in a matter of months. It was then that we began to hear much about what the Americans called the “sub-prime” market – house lending to people with poor credit prospects.

As the housing market faltered in the UK those with buy-to-let arrangements began to struggle. Many of these people have indeed decided to dig-in for the long run, taking the loss on their properties. If they bought a few years ago they are probably still holding a capital gain, but the more the market falls, the longer the slump continues, the more they may see this gain dwindle.

Moreover, if at the same time they lose their tenants, or if the rental market declines so that mortgage payments are no longer covered by rents, the buy-to-let speculators face ever increasing burdens in servicing their debt. This is when the market begins to unravel.

It doesn’t take too many foreclosures to force more property on to an already flabby market, driving prices lower, allowing those who do want property to cherry pick their rents or force hard bargains on sales.

I remember the last housing slump in the late 1980s and early 1990s. I know people who held on to their properties, turning down offers which they thought poor, then taking lower offers a year later. When prices begin to fall like this the market usually gets worse before it gets better.

The main point I want to make here, however, is that the greed underpinning this latest financial crisis is distributed far beyond the doors of the banks. That said, while some of those who thought the sun would shine forever could be forgiven their ignorance, the lenders should have known better.

Whatever happened to the sound principles of lending to people with collateral? It is a fundamental principle of lending that you minimise your risk and you do that by assessing people’s ability to service their debt over the long term or, when handing out mortgages, ensuring that a property is worth a good deal more than the loan sum in the event of repossession.

I’m not a financially sophisticated person. But I know that much.