Columnist James Saft argues elsewhere on Reuters that the buy-to-let market in the UK is our version of the US sub-prime catastrophe and that the Northern Rock debacle will prove to be the needle that pops the bubble.
Is such an alarmist view justified? Anyone trawling property Web sites for a house or flat in the UK will surely have noticed that affordable entry-level homes remain as difficult to find as ever. Even if property prices stagnate, most buy-to-let investors will have enjoyed hefty rises over the past few years, which means only those who got in way too late — perhaps only in the past few months after interest rates began going up — may be caught by the squeeze between low-to-zero capital gains and rising mortgage costs.
Saft also acknowledges there could be few forced sellers because unemployment and interest rates both remain low, unlike the position of the late 1980s when the housing market crashed. But even if there were more forced sellers, would it really spark a serious downturn in the market?
The experts have been telling us for ages that the reason values stayed resolutely high is that there is a drastic shortage of affordable property. It’s a basic law of supply and demand, driven not so much by the number of buy-to-let investors out there but by a national failure over many years to build enough new houses. Surely you’d need really drastic numbers of buy-to-let investors, far more than there are today, to cause such severe shortages in affordable housing?
So what now? Even if the Royal Institution of Chartered Surveyors says there’s a 10 percent chance of a housing crash in the UK, that’s still a 90 percent chance that there won’t be one. If you own a house, or are thinking of buying one, which way will you be betting? We’re keen to hear what you think.
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10 comments so far
I’ve been betting on sanity returning to the housing markets since, at least, 2003. I didn’t believe the banks when they said that “interest rates will be low forever” - though I can imagine plenty of people getting taken in by the claim.
I believe that the change in credit conditions will definitely have an impact on house prices. House prices have behaved as if they were stocks in a bull market - and we’re entering a bear market. Buyers will be looking for proven value from here on in, which - in my opinion - can be found at around half the current asking prices. Subject to a correction of this magnitude, the vast majority of UK mortgages issued in the past 5 years will be sub-prime.
If interest rates are cut to avoid the crash, we’re in for massive inflation - and, possibly, the destabilisation of Sterling. The mess so far is only the tip of a gargantuan iceberg.
- Posted by SteveIf the supply and demand argument was valid, then it would imply that rents should have significantly increased alongside house prices. The fact that this has not happened (rents have gone up roughly with wage inflation) puts this argument straight to bed. The real reason for the dramatic acceleration of house prices over the last few years has been the continual loosening of credit requirements. This is now drying up abruptly. The only thing that’s going to keep the bubble going is intervention by governments to loosen things up again - The recent actions by the BOE indicate that this is likely to happen, but ultimately this approach will fail and asset prices will swing back to what is reasonable based on fundamentals. It is just a question of time.
- Posted by BenUnfortunately, for first time buyers and buy-to-letters there is no way of knowing how long it’s all going to take to play out. With no intervention I have no doubt that it would start to correct right now. But then again it should have corrected back in 2005 (based on fundamentals) - it didn’t because the BOE dropped interest rates.
Also, one wonders how the RICS came to that magic figure of 10%. Totally meaningless if you ask me; though I suppose the fact that they feel the need to put a figure on it shows that they are worried about it…
Surely whether or not those with hefty exposure to buy-to-let are endangered depends on available tenants numbers, not just capital growth. More recent deals may go bad because capital growth has slowed and rental income cannot cover holding costs. However, the UK’s buy-to-let scenario is nothing like the US sub-prime situation. In the US unprecedented foreclosures of owner occupied homes began some time ago and is accelerating exponentially as we speak. The number of properties listed for sale has been at an all time high for two years or more. Supply in the US (so much cheap land) is way above demand for homes and the scale of the real estate market there makes the UK a pea on a drum skin. Furthermore, house price inflation in the US, aside from one or two areas, was/is all hype. House prices generally have been falling for over three years. Yesterday’s move by the Federal Reserve is one step in the right direction but even a rate cut over there has no immediate impact on mortgage costs since these are based on bond yields not interest rates per se. Given the scale of the UK’s immigrant worker scenario and low levels of available property and land to build, buy-to-let in the right places and of the right types of property still makes sense.
- Posted by graham mellorThe market is going to hell in a hand basket, the government are playing with our future by manipulating everything just to get re-elected.
Recession and massive hopuse price crash coming to a town near you when the real fundementals come back into market play.
Buy gold, it will be the only thing that saves you from this big big mess perpetuated by ten years of a credit bindge.
- Posted by Paul SmithI am selling my 3 bed because with 4 kids I simply need a bigger house, but I cannot afford to buy a decent 4 bed at all. There are a few that I would be hard pressed to consider possibilities.
- Posted by Colin JonesSo I am taking my equity and running, using that to pay for the part of the rent to offset the difference between mortgage and rent.
That said when I bought first time, it was far cheaper to buy than to rent and that is now about face, so I pay less rent than I would on a mortgage, and I have money in the bank.
There are risks but they are ones I am happier to live with than triple my mortgage payments.
The housing bubble is not about to burst because there are so many people out there who still believe that house prices will NEVER go down. Forget fundamentals, the herd mentaility will carry the market and soon their view will probably be reinforced by a rate cut in the UK.However, the game will be up one day when people realise that REAL inflation is out of control. We have record wheat prices, record oil prices, record gold prices and everything else except telephone call charges is going up, bread, milk, cheese you name it. Also, let’s not forget the wonderful deflationary effect of China - it’s now going into reverse and we are importing inflation!
- Posted by Naresh PatelAt some point, this massive pyramid selling scam comes crashing down. No amount of fiddling the figures can put it off indefinitely.
When it’s more than twice as expensive to buy than rent, and BTL yields are less than bank deposits, lending multiples at record levels, mortgage lenders going bust … well who in their right mind is signing up to 25 years hard work for a house?
- Posted by Steve HardyI sold my 3 bed house in NW london earlier this year to a buy to let investor. After stamp duty this “investor” is going to be making less than 4% gross yield on my ex-home. I will be making close to a 7% on my savings account…
- Posted by Matt GrunThe property market moves in cycles. It always has and always will. Unfortunately for some and fortunately for others we are at the start of the next downwave. Property prices are set to fall by 30-40% and even more in extremis.
- Posted by MichaelThe main reason for the dramatic rise in house prices has been speculation. People seen that prices were rising fast and wanted a piece in a hurry. Now, the realisation that prices have reached a ceiling will have the opposite effect and prices will plummet. It’s simply a matter of when and by how much. Who reading this now would honestly say that now is a good time to buy a house, or even to trade up? You’re mad if you do.
- Posted by Gerard