Panic selling by landlords could turn slump into rout

dopester

IveSeenTheLight wrote: »

I think your 2002+ date may be a bit more realistic if you said 2005+, however I managed to buy one property in Jan 2007 and the figures added up, so it was still possible.

Apologies for quoting this below for the third time.. I just want to put it across to IveSeenTheLight that I'm not the only person who thinks landlords who came in at 2002/2003 are at risk - if not of negative equity on one property, then if they've used it as security for other BTL purchases say in 2004, or 2005 or 2007 even - or just cutting back imagined equity profits MEW'ed from a single BTL property.

Moneyweek - (Merryn Somerset Webb) - Otober 2007.

James Ferguson (economist at Pali International):

JF: That means the guys who are most at risk are the ones sitting there saying, “I started five years ago and I’ve made a fortune and I’m going to sit it out because I’m taking the long-term view”. This is a massive Ponzi scheme because all buy-to-let investors are governed by the same equation and the first guy out wins – anyone who waits is toast.

JF: I would advise a buy-to-let investor to sell his entire portfolio. And anyone who advises a buy-to-let investor to buy right now, should, I think, be legally sueable – because to do so is irresponsible. The thing is, when the maths is no longer there to justify doing the trade – yet everyone keeps doing it – they are doing it for the momentum. They are doing it because it’s worked in the past, and therefore they are assuming it will work again. And the usual trade-off statement is, “I’m not short-term, I’m doing it for the long-term”. And that’s the easiest way to lose your shirt that was ever invented.

IveSeenTheLight

dopester wrote: »

Apologies for quoting this below for the third time.. I just want to put it across to IveSeenTheLight that I'm not the only person who thinks landlords who came in at 2002/2003 are at risk - if not of negative equity on one property, then if they've used it as security for other BTL purchases say in 2004, or 2005 or 2007 even - or just cutting back imagined equity profits MEW'ed from a single BTL property.

Moneyweek - (Merryn Somerset Webb) - Otober 2007.

James Ferguson (economist at Pali International):

Time to move on, you take one guys quote.

I'll look at the figures released by the CML and assess for my own needs.

Generali

IveSeenTheLight wrote: »

Well, personally speaking as a landlord who bought post 2002. the gains made allow for a drop of at least 22% before it gets back to the price I paid for them. Even more till negative equity hits me. Definately no panicking here

I'm not concerned with paper valuation dropping. I will only concern myself about this if / when I sell, which will be a long way away (at least 15 years).

There will be some landlords that will want to capitalise on equity increase in the last few years, this maybe was their strategy, is it the majority?, I would doubt that.

I think your 2002+ date may be a bit more realistic if you said 2005+, however I managed to buy one property in Jan 2007 and the figures added up, so it was still possible.

Less than 1% of BTL mortgages had missed payments more than 3 months. The percentage is slightly higher when you look at wider mortgages.
This is what makes me think that some may panic, but I doubt the majority will.
To give this perspective, the CML statistics webpage under Buy-to-let mortgages, market summary shows that the average outstanding mortgages is 117.5k. Given that the UK average house price is 173K, this shows quite a bit of equity before the BTL empire goes into negative equity.
I repeat, LL's may decide to capitalise on this equity and sell, will this be panic selling, I dont think so.

On the flip side there does appear to be 300,000 more BTL mortgages than there was at the end of 2005, so there is a potential that these people will have a higher LTV.

0.9% is reported as having more than 3 months defaulted payments, this is 9,660 out of 1,073,300 BTL outstanding mortgages

The thing with BTL investors is that nobody knows how they are going to react to losing money if the value of their houses declines.

Generally the profile of a small BTL investor is that they tend to be in middle age (often late middle age), with a pretty low LTV (60% if memory serves) and above average income.

This means that on average, most small BTL investors will be pretty well placed to ride out the storm if they so choose. The nub of the matter is what will they choose to do? Many of these investors are approaching retirement, exactly the point in your life where you don't want to have your capital erroded as it's a big hit on your potential retirement income.

So how do they react? Well they may just decide to hang on to the BTL place. You don't need to sell the house or flat to get an income after all. You can decide to sell and use the capital to provide an income but you can just take the rent. Obvoiusly there's a risk there as you may not always have a reliable tenant but it can be done.

Alternatively, they may decide to sell out while they can still maintain their profits or cut prices just a little so they can get out with a pretty decent profit on top of their initial investment. If lots of investors decide to take that course then things start getting interesting - as I have said ad boredom in the past, property is a highly illiquid asset and if a lot of people try to sell up at once then they'll be in for a nasty lesson in liquidity and asset pricing.

The thing with the distress figures isn't so much the number of investors that are having trouble keeping up their payments it's the speed at which the numbers are increasing. You are right to point out that the number of people in trouble is still very low.

This article keeps coming back to mind: link If they cut off the sewage to the block then the flats aren't going to be worth very much!

PayDay

IveSeenTheLight wrote: »

Donald Trump built his empire buying property in New York with money he did not have at a time when everyone was selling and property was on the decline.

I doubt there was a credit crunch then, so money would have been easier to get. Many here have bought their BTLs in the last few years - in a rising market. They bought at the peak, not in a decline. It became the in thing to get a BTL.

I know a lot of people who have bought their BTLs in the last 2 years and they spend a lot of time time reading books by theses type of people. Richard Branson and the books by some of the dragons from Dragons Den seem to be the favourites.

IveSeenTheLight

Generali wrote: »

The thing with BTL investors is that nobody knows how they are going to react to losing money if the value of their houses declines.

This is exactly my point. Nobody knows. I accept people could go either way.

The way I am going as a 34 year old is to hold on.
Without any additional payments the two properties I have will be paid off in 9 years. I'm working to pay them off earlier than that.
If I achieve both properties mortgage free by the time I am 40, then I will have what I consider a good pension / income going forward.

IveSeenTheLight

PayDay, I agree with your post.
The point at the time of the thread was discussing buying in a falling market

PayDay

IveSeenTheLight wrote: »

PayDay, I agree with your post.
The point at the time of the thread was discussing buying in a falling market

My point was really was that Donald Trump wasn't hampered in his buying by the credit crunch.

I digressed onto the fact that the new BTLers seem to read books by people who have made money, as I assumed it was reading these books and fantasising about doing it too, had spurred them on to get BTLs. Perhaps looking at their market and noticing that everyone was doing the same thing, might have been a better use of their time.

Generali

IveSeenTheLight wrote: »

This is exactly my point. Nobody knows. I accept people could go either way.

A lot of people post as if they are certain what is going to happen during the current house market travails. The fact is that nobody can have any idea how BTLers will react to losing money as it's not really happened before.

IveSeenTheLight wrote: »

The way I am going as a 34 year old is to hold on.
Without any additional payments the two properties I have will be paid off in 9 years. I'm working to pay them off earlier than that.
If I achieve both properties mortgage free by the time I am 40, then I will have what I consider a good pension / income going forward.

I hope you make money. I suspect you'd make more by selling and buying back but you've made your choice and I hope it's the right one.

dopester

PayDay wrote: »

Richard Branson and the books by some of the dragons from Dragons Den seem to be the favourites.

Even Richard Branson has been under the cosh by the banks. Early days of Virgin Airlines, he had the bank manager at the door to his home threatening to take action over the level of debt / debt facility. Yet strangely so many posters at MSE think banks are cuddly things who will be all understanding when they miss a mortgage payment or two.

http://webpages.csus.edu/~xc28/brandson's%20real%20life.htm

Virgin made its name as a record label in the '70s, signing punkers the Sex Pistols. But during the recession of the early 1990s, Branson was forced by his bankers to sell the record business to raise cash for his struggling startup, Virgin Air. Branson still mourns the loss of the music business. ''I had to sell a company I loved,'' he says. Branson insists he'll never put himself at the mercy of bank lenders again.

WTF?_2

IveSeenTheLight wrote: »

This is exactly my point. Nobody knows. I accept people could go either way.

The way I am going as a 34 year old is to hold on.
Without any additional payments the two properties I have will be paid off in 9 years. I'm working to pay them off earlier than that.
If I achieve both properties mortgage free by the time I am 40, then I will have what I consider a good pension / income going forward.

And that's a pretty fantastic situation to be in. However, can you honestly say that if you were at the stage of your life where you were first buying, in the environment of the last three or four years would you have been able to do what you did?