Full On Hpc From Aug '06 Onwards

[Prude]

After looking at the Nationwide figures today one thing is very clear. There is total stagnation in the market. Average price has been around £157k for months.

The extended house price inflation we have witnessed has, in my view, been a direct result of many people jumping onto the BTL bandwagon with little analysis, just a hunch that property goes up (everyone knows that) and that a tenant can pay your mortgage while helping you save for your pension through HPI.

However, looking at the Nationwide figures we can project NEGATIVE YOY for the summer months if prices continue to stagnate as Nationwide show prices peaked at nearly £159K in July '05. These -ve figures will be the first since 1995 and will follow a year of virtually 0% HPI. Even the BBC would have trouble spinning this.

It is my view that when many of these nervous first time BTL leandlords will get nervous seeing falls in the market and that they will question the very basis of their investment. I expect to see many trying to bail out and large amounts of property coming onto localised markets as the nerves spread, after all rents barely cover highly geared BTL mortages, managing agent fees, insurance and repairs do they. BTL only makes sense in a rising market even stagnation will equal paper losses for many.

These will be the desperate sellers that we need to start the crash.

Of course only my opinion.

[the end is a bit nigher]

I think the only reason we haven't seen real falls yet is because no-one is buying those lovely 1 and 2 bed flats at their 'new' price - I have posted before (and linked to) 1 and 2 bed flats around here where someone has been trying to off-load at the price they paid and been competing with another in the same block, straight from the developer at £20k less.

just checked on nethouseprices.com and none in the specific development I had posted about before have sold since 29th March 2005!

[Prude]

I think the only reason we haven't seen real falls yet is because no-one is buying those lovely 1 and 2 bed flats at their 'new' price - I have posted before (and linked to) 1 and 2 bed flats around here where someone has been trying to off-load at the price they paid and been competing with another in the same block, straight from the developer at £20k less.

just checked on nethouseprices.com and none in the specific development I had posted about before have sold since 29th March 2005!

I'm currently monitoring the number of "To Let" boards in my area and can see that the majority have been up for months without occupation. There are currently 12 "To Let" properties available in M28 1 (Boothstown) which by the size of our "village" (used to be before the toytown properties invaded in the early 1970s and again in the early 90's) is an awful lot.

Many "To Lets" are done up terraced properties. Ever month unlet is a months income that will not be recouped especially as prices aren't rising to offset this. Nerves must be grwoing.

[doogie]

I think what it comes down to is that there's a lot of rubbish out there that's not selling, but at the same time there are not many forced sellers.

For a crash to happen (rather than a very long drawn-out slide), we need to see large numbers of forced sellers - i.e. repossessions.

In previous cycles, repossessions have been caused by owner-occupiers no longer being able to afford repayments (due to unemployment or unexpectedly high interest rates). However, what's different this time is the number of speculators there are in the market (e.g. heavily geared BTLers and Inside Trackers). When the banks pull the plug on these (which they will because they are not viable in a stagnant market), we'll see shedloads of forced sellers without the need for dramatically higher unemployment or interest rates.

[Goat]

I think the only reason we haven't seen real falls yet is because no-one is buying those lovely 1 and 2 bed flats at their 'new' price

Part of the reason is that many people either expect a crash or have been priced out of the market, the result being that these people simply aren't buying hence the low transaction volumes.

The only people buying at the moment are those who don't believe that prices can go down and are therefore willing to pay whatever the asking price is, with sellers still unwilling to drop the asking price to ensure a sale.

The key is that the current indicies only represent the most optomistic of buyers, with the majority of FTBs now staying away from the market.

I agree that the crash is most likely to start in the BTL market, with no more capital gains in the pipeline the BTLers will soon realise that their business model no longer makes sense. OOs are likely to hold on longer because of "attachment" to the property and because they need a place to live.

Quite possibly the brewing new build pricing scandal is the trigger that could set off the collapse of the whole BTL market.

[Prude]

I think what it comes down to is that there's a lot of rubbish out there that's not selling, but at the same time there are not many forced sellers.

For a crash to happen (rather than a very long drawn-out slide), we need to see large numbers of forced sellers - i.e. repossessions.

In previous cycles, repossessions have been caused by owner-occupiers no longer being able to afford repayments (due to unemployment or unexpectedly high interest rates). However, what's different this time is the number of speculators there are in the market (e.g. heavily geared BTLers and Inside Trackers). When the banks pull the plug on these (which they will because they are not viable in a stagnant market), we'll see shedloads of forced sellers without the need for dramatically higher unemployment or interest rates.

Quite, and I am sticking by Aug 06 as the time we will see all these forced sale boards going up. Before that I expect to see an increasing number of the "To Let" boards change to "For Sale" over the spring.

[Prude]

Also,

if the next move in interest rates is down, as is expected by many, then this will be doubly bad news for the BTL brigade;

1. More people will consider buying over renting (extending the current over supply problem) and

2. Other speculative first time BTLers will be tempted to chance their hand, encouraged by seemingly greater possible yields on the basis of lower interest costs. Amazingly there will still be some people out there who believe that their fortune will be made this way. Of course this will increase competition, lower rents/yields and increase oversupply.

So, as some people seem to agree that BTLers will be first group to cause the market to slide then could it be that we should wish for a rate decrease?

[doogie]

So, as some people seem to agree that BTLers will be first group to cause the market to slide then could it be that we should wish for a rate decrease?

I'd have thought lower interest rates would make existing BTLs more viable as the financing costs would fall, delaying any crash (unless the banks pulled the plug anyway, as well they might).

[Prude]

I'd have thought lower interest rates would make existing BTLs more viable as the financing costs would fall, delaying any crash (unless the banks pulled the plug anyway, as well they might).

Existing BTLs are no good unless they are currently LET. Lower rates is just a longer more painful death for the BTLers. Even the ones that are LET may not remain so as people switch to buy with lower rates.

[johnnyw]

I'd have thought lower interest rates would make existing BTLs more viable as the financing costs would fall, delaying any crash (unless the banks pulled the plug anyway, as well they might).

My view is that it all depends on gearing.

If youve no borrowings on your BTL then you compare your return to a bank deposit/building society deposit. At about 3.5% on deposit compared with about 4 - 5% net rent return theres no big panic. Even if prices dip a bit or go static for a bit you've still no need to panic. I think even the most die hard believers in a crash would accept that if you are looking in really really really long term bricks and mortar is pretty ok as against general inflation.

Its the BTL get rich quick merchants with only 20% or less down and 80% borrowed who will panic if things go wrong. The way the figures stack up they loose money if prices do not go up. 4-5 % rent yield as agsinst say 5 - 6 % interest Their buisiness model needs price growth for it to make sense.

Remember that with 20% deposit, if prices go down 20% youve lost everything, if they go down 10% you loose 50%. Gearing is fine when prices go up but when they stagnate or go down you get burnt.

So if interest rates drop a bit it eases their position a teeny bit, but this is insignificant compared with the pain inflicted by a static or falling market.

[right_freds_dead]

In previous cycles, repossessions have been caused by owner-occupiers no longer being able to afford repayments (due to unemployment or unexpectedly high interest rates). However, what's different this time is the number of speculators there are in the market (e.g. heavily geared BTLers and Inside Trackers). When the banks pull the plug on these (which they will because they are not viable in a stagnant market), we'll see shedloads of forced sellers without the need for dramatically higher unemployment or interest rates.

id go for this too,. and pretty soon. as in next year.

they will reasile they have stuck their money into a stagnent investment and cant get at it without losing a small penalty. the longer they wait - the more they lose. this talk of tenants from inside track is all bullcrap. and the fogs clearing this year because its payback time. these sellers have been holding on for almost 2 years. thats 2 whole years of hassle and stress and for what ? they have made nothing and are still risking everything.

[johnnyw]

id go for this too,. and pretty soon. as in next year.

they will reasile they have stuck their money into a stagnent investment and cant get at it without losing a small penalty. the longer they wait - the more they lose. this talk of tenants from inside track is all bullcrap. and the fogs clearing this year because its payback time. these sellers have been holding on for almost 2 years. thats 2 whole years of hassle and stress and for what ? they have made nothing and are still risking everything.

I agree with you entirely on this point.

Anyone who went into buy to let last year with high gearing must be nervous already.

And the ones who bought "new build" at 120% of their true value because they were sold to by some swish salesman who showed them how new and and shiny it was with a nice designer kitchen and floor coverings "thrown in" will be most nervous of all.

[Prude]

My view is that it all depends on gearing.

Its the BTL get rich quick merchants with only 20% or less down and 80% borrowed who will panic if things go wrong. The way the figures stack up they loose money if prices do not go up. 4-5 % rent yield as agsinst say 5 - 6 % interest Their buisiness model needs price growth for it to make sense.

Remember that with 20% deposit, if prices go down 20% youve lost everything, if they go down 10% you loose 50%. Gearing is fine when prices go up but when they stagnate or go down you get burnt.

This extended bull market has brought many get rich quick merchants to BTL over the past few years Some of the people I know who have got into it, now have multiple properties. They haven't bought these with cash. They have families too and they they will panic because they are not all LET at present. They are already sweating.

[johnnyw]

This extended bull market has brought many get rich quick merchants to BTL over the past few years Some of the people I know who have got into it, now have multiple properties. They haven't bought these with cash. They have families too and they they will panic because they are not all LET at present. They are already sweating.

If you own property in a city, where most of the BTLs are, all you need to do is reduce youre rent for a bit. If its low enough you will always find a tenant. Let at say 10% below market value and it will go within days. Get a tenant who loves the property and in a years time negotiate a modest rent increase.

[right_freds_dead]

i suppose im lucky in a way.

id rather rent and save than to be holding 1 or 2 of those new build btls at those recent prices. id would not like that. at best they MIGHT stagnate, but i feel a lot will want to get their money out as they thought it was an instand 4 month 20k profit thing. (like on tv.)

[johnnyw]

i suppose im lucky in a way.

id rather rent and save than to be holding 1 or 2 of those new build btls at those recent prices. id would not like that. at best they MIGHT stagnate, but i feel a lot will want to get their money out as they thought it was an instand 4 month 20k profit thing. (like on tv.)

Its no secret, you always pay a premium for new build whether its as an owner occupier or BTL. This has always been the case. The only differnce is that in say 2002 to 2004 the rate of property inflation has more than set off that premium.

Its not a lot different from buying a new car. Cars loose '000s in value as soon as you drive them out of the showroom.

[right_freds_dead]

so your saying. it was worth buying a btl in 2000 and then selling in 2005 and taking the capital gain.

rather than jump in within the last 2-3 years, stagnate your finances in the vain glimmer of hope someone thinks paying £210k for a shoe box you just paid £170k is a good thing ?

is it just me, or are new btlrs really brainless ?

[a j]

Its no secret, you always pay a premium for new build whether its as an owner occupier or BTL. This has always been the case. The only differnce is that in say 2002 to 2004 the rate of property inflation has more than set off that premium.

Its not a lot different from buying a new car. Cars loose '000s in value as soon as you drive them out of the showroom.

Why do you believe there is a premium? In my experience the people who buy new builds go for the 'incentives', and generally as a way to avoid saving a deposit. This applies to both owner occupiers and BTL.

[johnnyw]

Why do you believe there is a premium? In my experience the people who buy new builds go for the 'incentives', and generally as a way to avoid saving a deposit. This applies to both owner occupiers and BTL.

Just go out and look at the prices - the new ones are always more per square foot.

Compare say a 1950's flat and a 1970's flat with a 2004 flat and see what the difference is. The "incentives" are worth pennies in reality.

Avoiding paying a deposit is a different issue to the actual price and value for money. And its often a false economy.

Look at the size of the rooms. I had a look round a new development a few weeks ago. I seriously couldnt find the second bedroom. It turned out to be what I had thought was a handy cupboard to keep your vacuum cleaner in.

[jacob]

Also,

if the next move in interest rates is down, as is expected by many, then this will be doubly bad news for the BTL brigade;

1. More people will consider buying over renting (extending the current over supply problem) and

2. Other speculative first time BTLers will be tempted to chance their hand, encouraged by seemingly greater possible yields on the basis of lower interest costs. Amazingly there will still be some people out there who believe that their fortune will be made this way. Of course this will increase competition, lower rents/yields and increase oversupply.

So, as some people seem to agree that BTLers will be first group to cause the market to slide then could it be that we should wish for a rate decrease?

Very good point.

If you are currently priced out what is a 5% or 10% drop going to change? Nothing...

Let's hope for interest rate reductions, an even greater bubble and later the mother of all crashes....

Edited December 30, 2005 by jacob

[doogie]

Let's hope for interest rate reductions, an even greater bubble and later the mother of all crashes....

Let's not. It's going to be painful enough as it is.

[Bubble Pricker]

It is my view that when many of these nervous first time BTL leandlords will get nervous seeing falls in the market and that they will question the very basis of their investment. I expect to see many trying to bail out and large amounts of property coming onto localised markets as the nerves spread, after all rents barely cover highly geared BTL mortages, managing agent fees, insurance and repairs do they. BTL only makes sense in a rising market even stagnation will equal paper losses for many.

These will be the desperate sellers that we need to start the crash.

I'm afraid, I think you are wrong. Amateur BTL investors will not "bail out". Bailing out is something that professional and disciplined investors do, in that case it is called a "stop loss". Amateur investors invariably let losses run, and that is exactly what these amateur BTL investors will do. They will call it "sitting it out", "riding out the storm" or whatever, ploughing money into their "investment" month by month. This will continue for a number of years, until about the time when property hits the bottom, after falls of, say, 30%, perhaps more in those once overpriced BTL flats. Then "experts" like Phil Spencer and Roger Bootle will say that people should stay away from property because it can only lead to losses. That is when the amateur BTL brigade will throw in the towel and sell up (and most of them going into personal bankruptcy as a result), causing a final push down. That will be the time to buy.

If you are hoping the BTL brigade will cause the crash, you are mistaken. The crash will be caused by lack of buyers. This has already happened, and as prices start drifting down, FTBs will be reluctant to buy for fear of negative equity. This will trigger the crash.

[Prude]

I'm afraid, I think you are wrong. Amateur BTL investors will not "bail out". Bailing out is something that professional and disciplined investors do, in that case it is called a "stop loss". Amateur investors invariably let losses run, and that is exactly what these amateur BTL investors will do. They will call it "sitting it out", "riding out the storm" or whatever, ploughing money into their "investment" month by month. This will continue for a number of years, until about the time when property hits the bottom, after falls of, say, 30%, perhaps more in those once overpriced BTL flats. Then "experts" like Phil Spencer and Roger Bootle will say that people should stay away from property because it can only lead to losses. That is when the amateur BTL brigade will throw in the towel and sell up (and most of the going into personal benkruptcy as a result), causing a final push down. That will be the time to buy.

If you are hoping the BTL brigade will cause the crash, you are mistaken. The crash will be caused by lack of buyers. This has already happened, and as prices start drifting down, FTBs will be reluctant to buy for fear of negative equity. This will trigger the crash.

I still beg to differ despite the apparent certainty of your statement.

This bull run has been greater than all others before it. The extended stagnation at its end is a new phenomena. The cause, imho, is a fundamental shift in peoples view of what property is. To many now it is an investment where as in the past it was a home.

The amateur BTLers are the embodyment of this shift in view to the population at large. When they no longer belive property is a money making investment and indeed realise that it has a rather large downside then they will panic. In my view they will bail out and some are planning to do so already. The view that they will sit there whilst their mini empire crumbles is nonsense. Negative equity on their properties, mortgages they can't afford with no tenant, bank pressure etc.. Many may file to become bankcrupt.

There is a definate oversupply of BTL property near me. In my view BTLers should have been looking to bail 18 months ago but many more have got on since then. They have been sold a dream that will lead to the ruin of many of them.

[Swipe]

I'm afraid, I think you are wrong. Amateur BTL investors will not "bail out". Bailing out is something that professional and disciplined investors do, in that case it is called a "stop loss". Amateur investors invariably let losses run, and that is exactly what these amateur BTL investors will do. They will call it "sitting it out", "riding out the storm" or whatever, ploughing money into their "investment" month by month. This will continue for a number of years, until about the time when property hits the bottom, after falls of, say, 30%, perhaps more in those once overpriced BTL flats. Then "experts" like Phil Spencer and Roger Bootle will say that people should stay away from property because it can only lead to losses. That is when the amateur BTL brigade will throw in the towel and sell up (and most of the going into personal benkruptcy as a result), causing a final push down. That will be the time to buy.

If you are hoping the BTL brigade will cause the crash, you are mistaken. The crash will be caused by lack of buyers. This has already happened, and as prices start drifting down, FTBs will be reluctant to buy for fear of negative equity. This will trigger the crash.

Absolutely spot on. Don't forget the ameteur BTL investors are in it for the 'long term' it's their 'pensions' and they believe property ALWAYS goes up in the long-term. They will hang on in there as long as they possibly can, waiting for the recovery which will be too slow in coming. As BP says, by that time it wil be too late and most will be hanging on by the skin of their teeth. Once sentimant in property has shifted, only then will they bail out. I always remember a friend of mine advising me to sell my house in Stoke in 1994 telling me that it will be worth next to nothing in a couple of years time.

Edited December 30, 2005 by Swipe

[Prude]

Absolutely spot on. Don't forget the ameteur BTL investors are in it for the 'long term' it's their 'pensions' and they believe property ALWAYS goes up in the long-term. They will hang on in there as long as they possibly can, waiting for the recovery which will be too slow in coming. As BP says, by that time it wil be too late and most will be hanging on by the skin of their teeth. Once sentimant in property has shifted, only then will they bail out. I always remember a friend of mine advising me to sell my house in Stoke in 1994 telling me that it will be worth next to nothing in a couple of years time.

Amateur BTLers are highly geared and cannot take month on month losses for very long. They have to fund this gap through their normal activities ie their job. They are not stupid and will see the writing on the wall as soon as it is written. This summer will show negative YOY from the Nationwide if things continue to stagnate. This will be the writing they will take notice of. Therefore Aug 06.