1. David Smith's Sub Prime. . . said...

1. In America, house prices are plunging at the fastest rate since records began...the worst property slump since the 1930s.

2. The country's biggest mortgage provider, Countrywide, has been struggling desperately, while the US offshoot of London estate agent Foxtons is considering calling in the receivers. It has all the hallmarks of a fully-fledged housing market crash.

3. The buy-to-let sector could be the spark for a similar crunch. For a year or more buy-to-let has not been half as good an investment as it used to be: yields have fallen, and so high has the cost of borrowing become that even if the new buyers succeed in getting tenants, they are highly likely to find themselves making a loss on their investment in the first few years. The sector, which was for a decade or so a financial fountain, spurting out a constant stream of money to investors, is now a cash drain -yet more and more investors have dived in.

4. Unhappy investors are selling the shiny new flats they bought only months ago for an average of only 60 per cent the value they originally paid. But while this financial pile up grows on the motorway, thousands more are still taking blithely to the road, with the latest figures showing buy-to-let lending is still growing fast.

5. Like sub-prime mortgages, most buy-to-let lenders fund themselves not from the deposits left by customers but by borrowing from the money markets. This means they have already been forced to raise their rates, because life is now more expensive for those who finance themselves this way - making life even tougher for landlords.

6. To make matters worse, there have been some egregious examples of oversupply in some of Britain's cities. So many flats have been built in Liverpool, Manchester and Leeds that prices have slumped significantly. This may well be a local problem right now, but if more investors start to default and the rest of the property market catches a cold, it will become a national one.

7. Even if there isn't a buy-to-let implosion, house prices are still likely to start falling soon - although not necessarily by much. Lombard Street Research, the economic consultancy with the best forecasting record on the property market in recent years, expects prices to fall by as much as 5 per cent next year.

8. In my mind, prices could fall even further.

Oh dear oh dear oh dear !

3. Batterychicken said...

I've got a lot of respect for Edmund Conway. He seems to take a detached view of it all.

But, as I see it, there are a few more factors in the British market that he hasn't taken into account:

1) Self-Cert mortgages, i.e. lie about your income to get the mortgage you need. This has been a known problem for years but is quietly being ignored. If there is a not a reduction in interest rates soon then a number of people will have to keep tightening their belts because such a significant proportion of their take home pay goes on mortgaeis and this could contribute to a reduction in consumer spending leading to shops etc reducing staff with the accompanying knock on effect.

2) Mortgage Equity Release. If you bought your house 10 years ago and it has doubled in price then you are lucky and can accommodate a price crash. if you bought your house 10 years ago but re-mortgaged last week then you effectively bought your house last week and are more vunerable to a crash.

Over all though, although I'd love to see a HPC of 30-50% which would bring property down to historical multiples of income, I'm just not sure its going to happen due to the sub-prime crisis alone.

He writes about landlords making losses but I doubt if they are if they bought their properties a few years ago.

The other thing is that, at least down my way, rents have increased by about 10% in the past year and cheap flats are very hard to find. This must be covering landlord's increased mortgages.

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7. enuii said...

A friend of my sister has just moved out of a 1 bedroom rented new-build flat with only 1 window with a proper outside view that cost £550pcm after the BTL landlord wanted her to pay the £2400 per year service charge. She has now moved into a 2 bedroom semi detached bungalow with a garden and garage that's costing her the princely sum of £450 per calendar month.

New Build BTL is dead.

9. Justanotherftb said...

Honestly, when you take BTL speculation away, what will hold up the prices?

It's certainly not FTB's, even those with big deposits and good incomes.

The BTL speculators and those willing to take on stupid multiples regardless of the risk have distorted the market, just as "sub prime" lending has in the US.

We will see the same resolution over here - the credit crunch is the trigger, contracting credit will start a domino effect of speculators selling (after a period of denial, we are entering this now IMO), which will undermine confidence of all these blinkeres "property always goes up" types who've put all their eggs into the same basket.

The sad thing is, these are largely the same group of people who got burnt by the .dotcom bubble thus shun the stockmarket, it surely beggars belief that they have so enthusiastically bought into the next highly speculative bubble that came along. Only this time with gearing via a big BTL mortgage!

11. Batterychicken said...

Uncle Chris,

My views are coloured by two things; 1) Not having a brilliant income, 2) Living in London.

People have to live somewhere. Demand for rented accommodation will remain high from people who can't afford to buy and people who are waiting for the crash. If demand is high then rents can increase. And around my way they are increasing and there doesn't seem to be many one bed flats around.

What I am saying is that if a load of landlords decided to sell then their tenants would either have to move to other rented property thus increasing demand and pushing up rents, or would have to buy, thus increasing demand and stopping prices from falling.

The only way to guarantee a HPC is to severely reduce the population in London. This might happen if there was a recession and jobs weren't so easy to come by but this hasn't happened yet.

If you live in another city, one where there is an excess of new build flats for the population, then I can see why you think I am mad.

Britain is different to the US because of the under-supply of property, and different to Japan because of the rising population.

Now, if you don't mind, I'll put my head back in the sand...