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
Saturday, 24 November 2007
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."
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
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.
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.
Saturday, 10 November 2007
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?
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
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.
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.
Friday, 2 November 2007
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?
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
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
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
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