"Husband and wife magnates Fergus and Judith Wilson have just signed a deal to buy their 700th house. If things go to plan, they will become the country's first buy-to-let billionaires. Every week they buy another house - and on one day alone spent £10m buying 40 properties off a distressed developer.
In the early 1990s the Wilsons were marking maths homework and writing school reports at a Blackheath comprehensive. Today their property empire is worth £240m - almost all of it within commuting distance of the Eurostar terminal in Ashford, Kent. They put their personal wealth at £180m - leaving them on a par with Anita Roddick and singer Phil Collins in the Sunday Times Rich List. And with property prices climbing at £40 a day, their personal wealth rises by £28,000 every time they get out of bed."
There is only one way that Fergus and Judith could have ended up with a "property empire worth £240 million". Some foolish bank lent them the money. Which must mean that Fergus and Judith owe millions to some deluded financial institution.
Just think about that for a moment; a pair of school teachers managed to buy hundreds of houses on credit. Whatever wealth they may have accumulated was due to a self-replicating bubble. Easy credit created the demand that pushed property prices higher. This pushed people like Fergus and Judith to take out more credit to buy more houses, pushing demand even higher.
It would not be such a problem if Fergus and Judith were the only ones leveraging nothing into a multi-million pound portfolio. There are now close to a million buy-to-let mortgages in the UK; which is about one in eleven of all mortgages. In reality, that number understates the true extent of buy-to-let speculation. Many investors misled banks and took out loans posing as owner-occupiers when they were actually buying rental properties.
For the typical buy-to-let investor, there is an unshakable optimism in the future. In that happy hereafter, house prices rise perpetually, whipping up an infinity of wealth for those owning property. It is a faith buttressed by higher divorce rates, stringent planning procedures, and low interest rates. The UK will be eternally short of houses, and packed out with people desperately looking for homes. It all means one thing, prices can never go down.
However, the past tells a different story. Back in 1989, house prices crashed, and kept on falling until 1996. Moreover, the decline was significant; in real terms prices fell 35 percent. For the buy-to-let generation, it provokes a dark nagging thought; perhaps, prices could slide again. Over the last couple of months, those nagging thoughts have morphed into reality. Prices are falling.
Over time, buy-to-let investors will lose money. Even Fergus and Judith can expect their net wealth to take a hit. Declining rental yields and falling prices will force a fire sale of buy-to-let properties. Many properties will be sold at a loss. Many investors will default, creating a huge cesspit of bad loans.
Alas, buy-to-let losses will not remain a private matter. Burgeoning banking sector problems will transform buy-to-let into a matter of public policy. It was banks that made Fergus and Judith possible. It was banks that put out a million buy-to-let mortgages and when it all turns ghastly, it will be the banks that will see their balance sheets deteriorate.
There may be some people who think that this will not happen, or who think that the UK financial system is simply too strong and too well supervised. Think again, the crisis is already here; Northern Rock is already down; Paragon is about to go, while the Derbyshire Building Society is facing a ratings downgrade. Meanwhile the remaining banks are urgently trying to exit the market. Unsurprisingly, mortgage lending volumes are down 43 percent compared to last year.
The housing crash is now gathering momentum. However, property market losses is really only a marginal issue. The real concern is the banks. Banking crises are horrible; they undermine the payments system, generate extremely persistent credit contractions, and spark recessions. This might be the ultimate legacy of the buy-to-let bubble.