Rightmove

I forgot to mention the rightmove survey. This showed an average price fall of 3.2% in December alone. While this was distorted by Hips pushing more smaller properties on the market it shows a sharp move in the market.

January should be better as fewer small properties will be on the market but the trend is turning. Price falls are being widely expected in the market. The question is how far and how fast. At one extreme it is possible the falls will be small.

We currently have an over inflated market. If there is no price correction the overhang could last years. In the 1950s house prices fell for 10 consecutive years.

If the price correction is quick we have a chance to get it over with and come out the other side

Bye Bye Sub Prime Buy to Let

It is a very small part of the market BUT it shows a trend. The number of subprime buy to let mortgages has fallen from 1383 in July to 149 with only 4 lenders in the market.

This shows a trend as the credit crunch extends. Lenders will move away from anything seen as risky. Loan to Values will fall. Criteria will tighten. Rates will increase. Income multiples will fall.

Demand will fall as people cannot get mortgages they could in the past.

Demand will fall as others are concerned they will not be able to remortgage.

As mentioned before many will not be able to remortgage and will have to stay at high rates.

Buy to Let collapses

The proportion of properties purchased on buy to let fell from 44% last year to 18% this year.

Ouch.

Buy to Let Quitters

RICS have released that landlords are selling up at the highest rate for 3 years (6.5% sell at the end of a tenancy rather than 6.1%) This will have an effect on the housing market as more properties become available.

The suprise is though they are doing it now. In April they can expect that the capital gains rate will fall from 40% to 18% so why sell now?

Perhaps they don't expect the property to sell before April?

FSA

The FSA today warning about over 1.4 million people having fixed rates that expire this year and being unable to remortgage to cheaper rates

"which will leave them facing a significantly higher rate on their borrowings, which may prove too much for them to afford."

Looks like the 50% increase in repossessions is an underestimate

House Builders share price collapse

The price of house builders shares have fallen by 50% in the last six months. According to Roger Bootle this has happened three times before and each preceded a major fall in house prices.

The derivitives market is also predicting a 7% fall in the Halifax house price index for next year.

The "smart money" seems to be on a fall.

Buy to lose

The buy to let sector has suffered a number of problems this week. They include
- a major "redevelopment builder" stating it would not build more properties until it had sold its existing stock (and who can blame them)
- PARA GONE the third largest buy to lose lender hitting the buffers. While they are not likely to go bust it seems likely/possible new lending will stop or collapse
- Flats a number of lenders further tightend their lending criteria on the purchase of flats. Why because the actual price paid has been considerably lower than the price declared.

This is a sector waiting for a huge hit especially in Manchester, Liverpool, etc

PARA GONE - BUY TO LET

The big news of the week is PARA GONE as ftaphavile call it. The specialist buy to let lender has hit the buffers big time. It has a £2 billion warehouse lending facility where lenders provide funds prior to securitisation. Only it will not have it after February as the lenders are indicating they will not renew it.

This leaves securitisation. Oh dear that market has stopped.

This leaves a £280m rescue rights issue to allow the lender wind its operations down. While it is unlikely to go Norther pebble it is unlikely to be lending more.

As Queen said "Another one bites the dust."

LIBOR

A quick apology. I checked the LIBOR rates for a couple of lenders and they are worse than I thought. Platform is 6.75% and GMAC is 6.9%. This means sub prime lenders are paying not 0.83% more than you would think but either 1% or 1.2% the problems are getting worse

Repossessions

The council of mortgage lenders expects a 50% increase in repossessions next year. This is clearly a low estimate. It takes into account the worsening economic status but I don't believe it takes into account the credit crunch.

As I posted earlier existing sub prime borrowers are facing a large increase in rates. The news is worse for new borrowers.

Many of the lenders have ceased trading. The rest have tightend their criteria and increased rates. This is bad news for people with arrears. In the past when faced with repossession they could remortgage and go elsewhere. This has kept the repossession numbers significantly lower than it historically was. I arranged a number of mortgages to stop repossessions

This will get harder and harder

Sub Prime Problems

There is a problem in the property market that few are talking about. It is the problems of sub prime. Not the USA which we have heard loads of, it is the problem in the UK. There are hundreds of thousands of people on sub prime mortgages. In the main the rates they pay are linked to Libor (London inter bank offered rate.) In the past this was close to Bank of England Base Rate.

No Longer.

LIBOR is at 6.58% this means that subprime borrowers have had an increase in rates of 0.83% while BOE rates have stayed the same. On a 150K mortgage that is an increase of £104 a month while rates have stayed the same.

Oh dear.

Buy to let remortgage?

Here is a prediction for you. It will become more and more difficult to remortgage your buy to let property. Banks have been burnt big time by mortgages in the USA and are tighteing their loan requirements. If you are borrowing at 40 or 50% loan to value no problems but 80 or 85% thanks but no thanks. This means as the introductory rate on aklmost all mortgages ends borrowers will end up paying standard rates which could be 2% higher.

So lets take an example you bought a 200K flat for 170K with a 170K mortgage through one of the many buy to let clubs. You flat is now worth 17)K though many have a 200K price tag but no one is buying at that level. Your mortgage was at 5% fixed and you are coming to the end of your deal. Your rental is £750 a month (though your real rent is less 10% agent fees 1 months vacant per year and say £250 of repairs a year which works out as a real rent of £666 per month.)

Your reversion rate on your interest only mortgage is 7.5% so your mortgage goes up from £708 a month to £1063. You have moved from a position of roughly break even to subsidising your tenant to around £300 a month.

You cant remortgage. No one will have you. What do you do. Do you hang in there. Losing 3.5K a year. You might if prices are expected to rise. But what if they are expected to stay flat or even drop?

If you put the property on the market you are losing £1063 a month as you won't sell it easily with a tenant in (or not for full value.) You get an offer for £150K (still 30K more than you might get in a repossesion)

You then say Oh F*** and decline the word. I'm F***ed, your F***ed we are all F***ed

What do you do?

Oh dear I bought a buy to let flat

If you bought a buy to let flat recently you could be in trouble

http://news.bbc.co.uk/1/hi/business/7040061.stm

This shows how you are likely to have to subsidise your tenant for a few years.

If you cannot afford this you may make a stinging capital loss. Flat repossesions are in many cases achieving only 60% of their purchase price. So if you bought a 200k flat even with a 15% discount (who paid the full price?) for 170K your flat could only achieve 120K on a forced sale at an auction. This has been shown at auctions in Manchester, Birmingham, Norwich, etc.

So who wants to be in buy to let to achieve these returns

Certainly on one who who has bought recently. This may seem bad but it is only the beginning. The only buy to lets selling are the very savy or the ones going bust. How many will look to sell if they see no capital gains and low or negative income gains. This may cause a deluge of forced sellers on the market causing a viscious circle of falling prices and more forced sellers

the end of buy to let?

Buy to let has been a huge success. It has largely driven first time buyers out of the market. It no longer stacks up though.

see http://news.bbc.co.uk/1/hi/business/7083446.stm

This shows to be a buy to let investor you need a 30 % deposit. You also need to be investing in the long term 5 - 25 years.

How many people will invest in a product where they expect below average returns for the next 5 years.

This causes a huge risk that many people will sell. There are almost 1 million buy to let properties out there and as it becomes obvious many will fall in value many will look to sell. Many will have to sell as they can't afford the shortfall between trent and mortgage. If and it is still (just) an if a large number of forced sellers come on the market prices are f**ked.

Many do not understand the difference between a forced seller and a normal seller. If you are forced to sell you have to accept what any one will pay. A normal seller (who lives in the property) will wait untill they get the price they expect.

Buy to Let owners are likely to be forced sellers. If they rent it they cannot sell (at least at a reasonable price as tenants dont make the most of a property so they can be thrown out on the street) or they suffer an income loss and have a property empty with a mortgage going out each month and no income.

The bad(ish) news: IVAs are down

It may sound stupid but there is a problem IVAs are down. These are Individual Volountary Arrangements - this is where some one who is financially fucked agrees a series of repayments over a period of, I believe 5 years, and the balance of the debt is written off. The IVA is an option of resolving debts short of bankruptcy and for many lenders has less stigma. It must be passed by the majority of creditors - lenders

So why should a reduction be bad news? It depends why. This is not because less people are in financial problems it is because lenders are objecting to IVAs and stating they are not in the individuals & lenders interest.

The bad news is not that IVAs are dropping but that those in the category are being refused by lenders. If the lenders are right to refuse it means that a lot of people are already in inappropiate IVAs and a misselling scandal looms. If they are acting in only there interest will people go for the more dramatic bankruptcy option?

Damned lies and statistics

Those hoping for good news on the info front can point to a decline in repossesions and IVAs

BUT

The repossesions at 1% less are statistically irrelevant. They also do not point to the future. They are largely pre credit crunch. If you were in arears on your mortgage no matter how badly or with which lender you could borrow up to 70% of the value of your property and stop a repossesion.

No more. I'l admit I'm not up to date on all the offers but there is no doubt they are a lot fewer than they used to be. They are also a lot more expensive than they used to be. So people who could have put off repossesion 6 months ago will have to sell quick or have a permanent black mark against their credit history.

Is that good for house prices?

Answers in two letters beggining with N

Its going to get ugly out there

I haven't posted in a while but lets face it the news is going the way I predicted. The only question is how bad will it get. The USA is awful but will the UK be worse. We have seen the first falls in property prices in the UK (according to Hometrack) for a few years.

The problems though are considerable

House prices have increased 60% above their inflation adjusted yield. (i.e in the past it cost roughly the same to buy as rent its now 40% cheaper to rent (or 60% to buy)).

The only thing keeping prices high is the expectation of increases in capital value for buy to let and buy to bet investors. If this disappears they will sell, this will flood the market with properties looking to sell.

Many will not think of the difference. But I can give you one from bitter experience. I bought my first house in Cheylesmore Coventry. It soared in value and had nearly doubled in value in less than 12 months but I didn't sell it. I moved location and the house went on the market. The estate agents were crap (putting calls to a number I wasn't at) and prices started to fall.

Prices fell in Cheylesmore fater than almost anywhere else in Coventry.

Why?

The houses coming for sale were due to grandparents dying. They died at the same rate whether the market was boom or bust.

IT WAS A FORCED SALE.

So will buy to lets. People getting less in rent than their expenses will look to sell. This will push prices of properties down. Other buy to lets will not be able to remortgage as they do not have enough equity to satisfy a new lender. Their expenses will go up (possibly around 50%)

They will look to sell

Viscous cycle encourages more to sel et etc etc

Mortgage rates

The percentage of salary by first time buyers is the highest for 15 years. It also doesn't include the last base rate increase. This problem with affordibility is likely to grow further with BOE warning of rates hitting 6%.

Buy to Let Bureacracy

It is being proposed that all rented property be altered to allow disabled access if the tenant asks for it.

I am not aware who will have to pay for it but its an extra burden for landlords squeezed by rising interest rates

Mortgage rates

Around a million borrowers could see a surge in mortgage payments in the next few months as fixed rate deals end. In the summer of 2005 2 year fixed rates hit as low as 4.25% but are now around 6%. (If the borrower doesn’t shop around the rates are even worse.) On an interest only mortgage that is an increase of over 40% on the monthly payments.

For buy to let landlords a number will now have to pay out more on their mortgage than they will receive from their rent.

Not good news for the property market.

Buy to Let Tax

The reveune have announced 80,000 buy to let landlords have paid too little tax. They believe that people have deducted the capital payments on their mortgages off their tax (you are only allowed the interest part.)

Home loans

The home loans for last month were down 15% on the previous month. (This though is still 1% higher than last year.)

Those figures included remortgages. Loans for purchases fell from 75K to 65K giving a trend downwards.

This suggests the market is cooling, with the large number of properties on the market it should give buyers more power

Inflation and the property market

When talking about inflation for property we normally are talking about the rate housing prices are going up. There is though the wider inflation rate. This has been high, RPI is currently 4.5%, and the situation worldwide is looking poor.

The world has had a one off benefit with China and India starting to industrialise. This has pushed manufactured costs very low. The problem is now that commodities have increased. We all know about the effect on the oil price but it is also hitting metals and foodstuffs. The price of manufactured goods could also increase as the new economies start to consume.

Inflation hits property owners and the market in the short term as interest rates rise. In the long term it erodes the value of debt.

Fixed rate mortgage anyone.

London property market

Is the London property market different? One of the questions to ask is is the UK property market one market. The answer is no though there are linkages. Northern Ireland is unique and so is London. London has been buoyed by large city bonuses and russian "businessmen" at the top end.

How long will this continue?

Any thoughts anyone.

HIP fiasco

The HIP fiasco continues. This half baked piece of legislation was "delayed" just days before due to come into effect.

This has already led to a flood of property onto the market at short notice. This will change the nature of the supply and demand. While it will take months to come through in official figures this risks undermining prices. The data for prices will not be comparable and this inturn risks the MPC ignoring figures it doesn't like.

The government is facing legal action from the poor sods who spent thousands training up.

There is also the suggestion that the inspectors will not complete their courses. This would mean the HIPs can never be introduced as there aren't the inspectors.

Property market news - flats

The suggestion is that the market is vastly over supplied with flats is shown in the figures. While detatched houses have doubled in price over the last 7 years flats have increased by only 11%.

The following is a quote from the House builders Association

He said that in Manchester alone there were 20,000 flats awaiting planning permission against "just a handful" of new houses. "It's across the country - a tidal wave of new flats waiting to come on to the system. They can never possibly hope to sell them all," he said.

Thinking of buying a flat?

The answer seems to be think again

Buy to let risk to property market?

The current uk property market has been buoyed by buy to let investors. Many have become signifcantly rich as the prices of property have risen ever upward. The property slump of the late 80s and early 90s have become a distant bad dream

But are buy to let investors more risky to the house market than first time buyers?

A number of investors are not buy to let. They are leaving the properties empty and just looking for capital gains. In some towns 25% of new build properties are vacant.

[Why are they doing this? rental yields are so low. In my town the gross rental yield for flats (rent /property price) is less than 5%. When you knock off costs such as voids, repairs and management fees the yield will be sub 4%. The view is why risk hitting your capital values with tenants who cause damage etc. and if its empty its easy to sell.]

This is not investing for a return it is betting in capital growth. (I argue if there is not an income it is a bet not an investment, I give you not an original concept.)

So if the market slows down the owners of these empty properties have costs (rates, service charges, etc.) and are seeing low, no or negative capital growth are going to be tempted to sell.

Unlike other investments such as shares, gilts or bonds properties are unique. You do not ring your broker up for 5 buy to let flats. Similarly if you sell you have to find a specific buyer for the flats (which is where I believe the problem is most acute.) If the market turns down who is going to buy these flats.

Not other investors yields are too low and without a rise in rents are not going to increase.

First time buyers are priced out of these properties and why would they want them. You can buy a house for roughly the same price as the flats. Maybe not as trendy. But unless you are earning huge amounts you need to be a couple to afford them. By the time people can look round to buying in couples you can add the thought of children (if not now in a couple of years.) Who wants kids in a flat especially taking prams etc up lifts.

The amount of buy to lets in flats is huge. The main area around me for flats is over 80% buy to lets (or buy to bets.)

If the market changes these people could look to get out quick. They are not living in them. They do not need them, unlike first time buyers. This means a down turn could turn ugly much quicker in the buy to bet arenathan the rest.

Remember flats suffered disproportionately in the last down turn. They will again

UK Property Prices

This is a blog about UK property prices.

The areas it will cover is where are property prices heading?

Is there an imminent crash awaiting in the Uk market as appears likely in the Spanish Market where oversupply and the end of a speculative bubble.

There certainly are some warning signs. I'll look at these over the next few posts.