Sadly, I don't get many opportunities to visit the North of England. This has led to a somewhat blinkered "southern perspective" on my part. This lack of perspective has meant that I haven't given enough weight to the the Northern BTL apartment bubble. Instead, this blog has tended to focus on the overpriced nature of London property, along with the excessive credit growth of British banks.
Sunday's observer alerted me to the essential differences between the property market north of the Watford Gap and the one down here in London. It reported that "council tax data shows that as many as 30 per cent of city centre apartments in Leeds are empty, either because they have not sold or because their buyers don't want them any more. " This massive oversupply coming from a construction boom is not something that is seen in London.
In some respects, this problem sounds rather like the condo glut that has afflicted many bubble cities in North America. While credit availability remains an important factor, the role of the apartment buying BTL investor has also played a significant role in northern cities like Leeds, Manchester and Newcastle.
It is hard to conceive of Leeds as Britain's answer to Florida, but condos the world over have the same dark attraction. Their small size and comparatively limited financial outlay always attracts the same kind of people. Naive but greedy investors, with some spare cash, anxious to gamble and leverage themselves into ruin with borrowed money.
While people are beginning to wake up to the fact that the bubble is over, there is still a mistaken belief that the adjustment will be gradual, manageable and temporary. In the back of people's mind, there is still the idea that 2 years down the road, the housing market will be blowing up again, with steady and reliable capital gains.
Many BTL investors have begun to make that long journey that ends with them recogning that when 30 percent of new apartments are empty in a single city then the inevitable adjustment requires massive financial losses. The journey starts with them moving into a fuzzy grey area, where coping strategies are the dominant themes. On the one hand investors know that the market is in trouble and that the short term profits that characterized this caper are no longer there. On the other hand, investors are absorbing the losses that come from limited cash flow and low rental yields. People are digging into other income sources or possibly withdrawing equity to manage the mortgage payments.
Yet these coping strategies only make sense if there is a hope that prices will recover. Soon, and we won't have to wait too long, hope within the BTL market will collapse, and then we will witness a financial meltdown the like of which we haven't seen in our lifetime.