Tuesday, 4 March 2008

Now over a million buy-to-let mortgages

(Click on chart for a larger version)

Buy to let investors will bring the UK housing market crashing down. These so-called investors are out of control. Driven by unrealistic expectations of double digit capital appreciation, investors have dived in and bought houses with reckless abandon.

Last week, the council of mortgage lenders announced that as of December 2007, lenders had originated over one million buy-to-let mortgages. However, this number almost certainly understates the true level of small time property speculation. Many buy-to-let mortgages were obtained fraudulently, as investors masqueraded as residential home buyers.

In the last two years alone, banks and building societies have originated over 337,000 of these loan products. Buy-to-let investors used those loans to buy rental properties at the top of the market and at a time when rental yields were at an all time low. With the economy slowing, these overpriced properties are prime candidates for being fast-tracked into repossession.

(click on chart for a larger version)

Back in the mid-90s, the buy-to-let mortgages accounted for a negligible share of the market. Today, it accounts for almost 9 percent of all outstanding mortgages. In fact, buy-to-let investors now rivals first time buyers as a source of housing demand. Last year, banks issued 192,000 buy-to-let loans compared to 357,000 loans for first time buyers.

(Click on chart for a larger version)

However, the number of buy to let mortgages in arrears is also rising rapidly, albeit from a somewhat low base. This will be the number to watch in the future. The credit crunch has made banks increasingly wary of these small time speculators. Many banks are now pulling back, and as they do, prices are beginning to soften. Already, the Halifax has reported that house prices began falling last July and are now down almost five percent compared to the peak. As prices fall, many buy-to-let investors will drift into negative equity territory and as they do, default rates will rise.

Already, around 1,200 buy-to-let properties have been repossessed, while around 8,000 were in arrears of 3 months. These are a small numbers compared to the total stock of buy-to-let investments. However, both buy-to-let repossessions and arrears are rising at explosive rates and certainly fast enough to bring the whole rotten trade down with a crash.


josh said...

wow, a million punters taking a one way bet on btl.


Anonymous said...

And in the USA...

Housing is in its "deepest, most rapid downswing since the Great Depression," the chief economist for the National Association of Home Builders said Wednesday, and the downward momentum on housing prices appears to be accelerating.

The UK will not escape the tsunami. Set your clocks for ALARM.

traderboy said...

i still think it's slightly different in the UK. recourse lending means a much bigger incentive to keep paying your mortgage. no walking away like the US, without the banks coming after all your other assets.

it's still going down big time, but it won't be as bad as the US. that's my guess.

also i still don't think the lending standards were as lax as the US was. I may be wrong and don't have any evidence to back that up, but that's my gut.

Andy said...

If we assume that the UK housing market completely lost touch with reality circa 2003 (many would say earlier), then we are looking at, conservatively, 500,000 BTL mortgages that are oversized.

There will be different sectors - those who have bought city center flats, especially through investor clubs, will be completely shafted - rents don't cover mortgages now, and as other flats in a given block go into reposession and standing charges go unpaid, security will break down, squatters will move in and.. you get the picture. A fair chunk of recent flat blocks will probably end up valueless and demolished within a decade.

Those who bought houses AND had decent rental coverage (i.e. pre-2003) will probably do OK. Those on IO loans may get caught between higher interest rates and negative equity. Not such a problem if you only have 1 or 2 BTL properties and can subsidise them.. if you have 5 or 10, then you will be bankrupted.

And again there's a feedback process of reposessions leading to price drops leading to higher IRs leading to more reposessions..

Lending standards have not been quite as bad as in the US - we don't have the insane negative amortization loans, although the 125% mortgage is very close to that. But there's a lot of IO and self-cert out there. Watch for the wave of complaints in 10-15 years time as holders of IO mortgages suddenly realise that they haven't paid their mortgage off.

Mark_ski_bike said...

Well Alice I agree that the housing market is madness but if you check out todays FT.com, you will see that the BTL market increased it's share in the overall market in fourth quarter of 2007.
It doesn't take Einstein to work out that unless they get capital growth, then the numbers just don't stack up - so are the BTL brigade still trying to hype the market up or are these people in denial ?

Anonymous said...

Another good and clear presentation of the numbers, so thanks Alice.

What I'm really interested in is how BTL losses affect the rest of the market. My current guess is this:

1. Prices are set at the margin, so one overpriced purchase drives up everyone else's supposed equity. By having BTL compete with first time buyers it massively increased entry-level demand and created the liquidity in housing chains for trade-ups by increasing the base number for the trade-up equity multiplier. That's gone now, so all those trade-up houses lose value too

2. There's been a massive misallocation of capital as those amateur investors with cash / home equity threw it into BTL deposits and "improvements". That capital can't just be pulled out again and used productively. Especially a problem if it was for retirement

3. What happens to the credit scores of those who get repossessed? Not only do they take a loss but I imagine a whole generation of borrowers is going to struggle to obtain credit at any price, much less normal 20/80 mortgages. That's less demand for a decade or so.

4. The above-mentioned negative effects of repossessions. It's not just a correction to sustainable averages. These flats will get wrecked and drag surrounding values down.

I wish somebody could quantify this (hint). The decision to require 20% down by most lenders recently is massive in and of itself. Given the destruction of capital and near-zero UK savings rate you have to ask who in the UK could actually afford a deposit to even bid on a house?

Not a recent graduate saddled with student debt and a low wage. Mummy and Daddy have lost the equity they might use to help out their kids.

I've never seen figures comparing average per capita savings with average house prices, or some other way to do a macro link between our lack of savings and need for a deposit compared to house prices.


ukhousingbubble said...


Hold on a few days and you might get a post that shines at least some light on your question re: BTL and the rest of the market.


Anonymous said...

* holds breath in anticipation *