Wednesday, August 22, 2007

Fear and Loathing In Buy-to-Let

There have been forecasts of a price crash in the UK property market for several years now, with many commentators highlighting the booming, and still immature, buy-to-let market as a potential weak point.

Yet every year, prices have confounded the sceptics, and continued to motor northwards. Making millionaires of some amateur landlords, and confounding the best efforts of the Bank of England Monetary Policy Committee.

Until now.

The odd thing is, while in the past there have been plenty screaming front page headlines predicting a crash that never came; now it appears to be looming over the horizon, there has been little said.

Like trees falling in the forest, if prices fall, and no front page headlines proclaim it, has it really fallen?

I got into the buy-to-let market by default, when I was stiffed by Mark Hubbock on the sale of my flat. As it happens, this turned out to be a well disguised lucky break, as the flat is worth a good few quid more than when the sale fell through.

Given my freelance occupation, having a sideline business makes a lot of sense so I had planned to expand my property empire thereafter.

Eventually I put my efforts on hold. Partly to keep life simple, and partly because it just didn't seem worthwhile.

Every property I looked at was swarming with potential buyers, with deep pockets, or more likely generous lenders, and little self restraint. I couldn't justify the prices they were paying, and bowed out gracefully.

With interest rates rising recently, and ripples in the US sub-prime sector spawning tsunamis across the world financial markets, I've reignited my interest in the sector.

Price falls in the US and Spain seemed to provide a foretaste of what could happen to the UK market.

Not a time when short term speculators are likely to prosper - such as the ones who buy off-plan and attempt to sell on at a profit before the property is even complete - but a definite buying opportunity for those with a longer term perspective.

My attention was taken by a property in one of the swish new developments that are dotted all across Glasgow.

Three bedrooms, decent specification, and available vacant for early entry. So little had it been occupied, the labels applied in the factory were still attached to the doors of the oven in the designer kitchen.

It was at auction with a guide of around £140k, having sold new for £190k+ two years ago. It failed to sell, even when later offered at a fixed price of £125k.

I was gobsmacked. Even more so when the auctioneer claimed it had been sold on previously for almost £240k - though I was unable to find evidence of this transaction.

It looked too good to be true. There had to be a catch. Detective Div got to work, and discovered a tale of woe.

It seems there were problems with security in this development from the outset. Poor design and build of doors, lack of CCTV, etc. which led to break-ins to both apartments and cars.

It is a common - and shameful - theme with developers that they advertise apartments as plush and luxurious, then skimp on the basics to boost their margins a little higher. At the expense, of course, of their customers who by now have handed over the full purchase price.

There had also been conflict between the apartment owners and the factors - the term in Scotland for an organisation who levy a charge on each apartment in return for managing the common areas of the development. Eventually the factors resigned.

Part of the problem was many people failed to pay their factors fees. There was much speculation from live-in residents that these were primarily hard up BTL investors who'd gotten out of their depth, and either couldn't, or wouldn't stump up the cash.

In desperation it seemed many of the buy-to-let brigade were letting out their apartments to inappropriate tenants, and flouting the laws on letting to multiple occupants.

All of which of course made the apartments harder to let to people willing to pay an appropriate level of rent, and almost impossible to sell, leading to plummeting values.

A classic vicious circle, made worse by shortsightedness and ineptitude within the new breed of landlords and rising interest rates.

From £190k+ new, to circa £120k in the space of two years. Now that IS a crash.

There's no doubt in my mind this cannot be an isolated case. Across the UK other BTL landlords must be in a similar predicament, with nervous lenders getting more and more trigger happy as the flight from risk in the money markets seems unlikely to abate for quite a while. It could be a bumper time for auctioneers and bailiffs.

All of which seems to me to present a selective buying opportunity, and I'm now watching the market with great interest.

Even that apartment of doom, with it's £70k of negative equity, is likely to be a winner in the medium to long term.

It's in a bad area, that's slowly coming good. The sort of area a wise investor buys cheap, and holds long term.

If bought now the purchaser will no doubt be profiting from the misfortune of another, but I've never heard a property developer complain prices are too high, so I'll feel no sympathy for someone who got a little too greedy and went bust trying to make a quick buck.

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