Let’s start part two of this Property Market update with some figures.
In the first place I keep saying that rental costs and mortgage costs are roughly in equilibrium in the UK which means house prices are not about to collapse. That means, in the short term, house prices will remain roughly where they are. By short term I mean less than eighteen months.
On the other hand, if wages relative to inflation keep falling, then less money will be available for housing costs, and rents will come under pressure. That pressure may well start to show itself next year.
If rents come down, mortgage costs will start to look expensive. That will put pressure on house prices. If interest rates rise that will put more pressure on house prices. The medium term outlook therefore for house prices is for them to fall. By medium term I mean anything from 1-3 years.
The long term? Oh come on. Dont ask silly questions. Armageddon; the fairy Tinkabel arrives; take your pick.
Long term is a bit dubious owing to the fact that there are about 4,000,000 interest-only mortgages out there in the UK, As it happens, I have one myself. When the term is up (admittedly some considerable number of years away) what am I and my fellow unit holders planning to do? Redeem the darn thing? I should coco. We will all have to roll it over. And what terms will we be offered? At least my interest only mortgage represents less than 30% of the value of the house. In fifteen years time I hope it will represent quite a bit less. On the other hand, how many out there will be hovering close to the actual fire sale value of the house? Nasty!
According to figures published by various organisations the average buy to let (B2L) investor is getting between 4.5% and 7% gross return. Let’s say the general average is therefore 5.5%. If that’s gross then you have to take off insurance, maintenance, breakages, etc. The Inland Revenue, not noted for its generosity, allows 10% to cover all this. Hold on, if you are only getting a 5.5% return on the investment before taking off 10% for expenses………
Yikes, these guys are running on empty. Now what happens when the Bank of England raises interest rates by 1%? Suddenly you have several million mortgage holders going bust at a rather nippy rate of knots. What’s that going to do to the housing market?
Anyone looking to start a business in buy to let needs to take a course in therapy first.
But interest rates aren’t going to rise any time soon, are they? In fact, there is talk of lowering them still further.
Hmmm. Let’s move forward to 2014. Isn’t that when the Bank of England next needs to do some serious refinancing? If the UK is still limping pretty badly this time next year there is a serious risk that the UK will lose its AAA credit rating. That will put a nasty dent in the low interest rate scenario. It could very well lead to the UK having to raise interest rates to at least 1%. That’s enough to do damage to property businesses that are already running at next to no profit. That would lead to at least the worst B2L businesses selling up, which will naturally lead to more downward pressure on house prices.
We already have few first time buyers in the market. If the B2L buyers dry up, and instead become net sellers, then we have nothing driving the bottom end of the market.
With prices continuing to fall the whole scenario of 90% mortgages will also dry up. What sensible business is going to offer 90% finance on a commodity that is losing value by even 5% a year? In twenty-five months the deal will have gone negative.
90% mortgages are likely to disappear if things continue the way they are. The industry is looking at mortgages ranging between 50%-80%. That’s going to seriously impact on the number of buyers.
If the situation develops along those lines you are looking at a serious house price collapse.
Those of us who bought back in the early nineties dont care. We bought cheap. Our mortgages cost us peanuts, and the rent is still coming in. Even if rents drop 20% and mortgage costs double I still have a comfortable business model. But how many people bought property when I first put out my book on buy to let in 1993?
Nobody asks me to join any think tanks on this problem, but here is a thought.
The banks are going to have to set up some kind of arms-length businesses which will buy repossessed properties, and rent them out bringing in an income to service the debt that has built up on the under-water mortgages. I dont know how this would be affected by the regulations they are bound by, but I’m sure a very simple business situation could be legitimately set up to deal with the huge load of non-performing mortgages. I’ve even got a snappy little name for the new scheme: Rent to Redeem. Is that going to be the next property fad?
As you can see things are set to get much worse. After all, you simply cant have a situation where no-one’s making any money out of the real estate on which the country depends for its wealth. The UK no longer exports to the world. We have to rely on some sort of intrinsic wealth. If that is leaking away, we are all in big trouble.
Next week I’ll cast a gloomy eye on some other countries.