Sunday, 20 January 2008

Don't worry about house prices, worry about the banks

"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.

13 comments:

Rick said...

If they had been English teachers they might have heard the proverb about not putting all their eggs in one basket.

Budvar said...

I remember watching these 2 on "Property millionaires" a few years ago. The thing that stood out in my mind was the closing scene where he said "There's only one way property prices go, and thats up".
The thing that amazes me most is his entire property portfolio is financed with interest only loans!!
Not only is he one arrogant twat, but I wouldn't be at all surprised to hear of them both found on the moors sat in the car with a hose through the window and the engine running in the not too distant future.

Slagella said...

"the Eurostar terminal in Ashford, Kent"

Err, would that be the Eurostar terminal in Ashford that's just been terminated? (Or as good as.)

traderboy said...

just fyi, you know that article is over a year old, from Dec 2006?

Anyway...how many people really commute by eurostar every day?? surely can't be many.

Anonymous said...

"Banking crises are horrible; .... This might be the ultimate legacy of the buy-to-let bubble."

Once again, I am afraid I disagree, the buy to let bubble was/is a symptom of the underlying problem, that is the government - US and UK, have no restraint on their borrowing and or spending.

Longterm capital management, the dot com bubble, the housing bubble were all SYMPTOMS of the same underlying cause. Excessive taxation and profligate government spending.

The politicians will tell us the solution is to give them more control, the tragedy will be that many people will believe them, not realizing, we are where we are now because of politicians - not the likes of Fergus and Judith.

Mark Zist said...

Fergus and Judith are the rotting toenails of the fungoid-infested foot of capitalism.

HousingFinland said...

"And with property prices climbing at £40 a day, their personal wealth rises by £28,000 every time they get out of bed."

How about now? prices are falling by 80£ a day that makes them poor of £56,000 every time they wake up...I advise them not to wake up ;->

ukhousingbubble said...

Mark Zist

"Fergus and Judith are the rotting toenails of the fungoid-infested foot of capitalism."

Ouch, that is harsh. I suppose the housing crash is the anti-fungal cream.

Alice

Anonymous said...

"Fergus and Judith are the rotting toenails of the fungoid-infested foot of capitalism."

Ha! The irony there of course is that we are suffering the credit crunch and housing bust, because of too much socialism rather than too much capitalism.

Anonymous said...

"Fergus and Judith are the rotting toenails of the fungoid-infested foot of capitalism."

Ha! The irony there of course is that we are suffering the credit crunch and housing bust, because of too much socialism rather than too much capitalism.

T.Pettinger said...

People often fail to see that prices will always continue to rise, just think of Japan in the 90s. But, I doubt UK prices will crash completely

Guy Sanftleben said...
This comment has been removed by the author.
Guy Sanftleben said...

Everytime I think of this terrible BTL bubble, I think of these two maths teachers.

One would have expected them to be quite savy of course - the types who would have avoided over exposure.

However, given that their business plan depended on leveraging up on equity from their rising porfolio value, I can only imagine that their portfolio is very 'top heavy' i.e. most of it was bought recently at inflated values.

Unless they have been very smart with their borrowing arrangements (i.e fixed for long terms or hedged against rising rates) then surely this couple are prime bankruptcy targets?

It would not surprise me in the least to learn of this couple going bust at some point in the fairly near future.

The most worrying aspect of this of course, is how many more like them are there?