You learn something new every day…
At school, probably my least favourite subject was economics. This continued into adulthood, with my dislike blossoming into a general hate for all the ‘grown up’ stuff like politics and current affairs.
My attitude was always “I’ll become concerned when we own a company about to float on the stock exchange. For now it’s just not relevant.”This changed, the day I found out that knowing what was about to happen would shape the amount profit we would generate in any of our companies - especially in property.
You’ve probably heard the recent rantings of the British press with regards to the “Sub Prime Crisis”. Everyone seems to have a slightly different take on the causes and effects, but for any one that needs a brief overview
1) The US debt market primarily consists of loans, mortgages and credit cards. Some of this money is leant to people with less than perfect credit or with ‘questionable means’ of paying this money back. In short, this is the sub prime market.
2) Following problems in the US economy, much of this lending began to default. This would have only affected US lenders, however this became widespread due to the packaging and overseas sale of debt. As many of these debts defaulted, financial institutions ran into problems, and lending between these institutions dropped dramatically.
3) With less money available, banks and lenders reduced lending significantly, with the greatest shake up at the bottom - the subprime sector.
What does this mean for the BMV sector?
This news should greatly affect your strategy over the coming year. In my opinion:
- First time buyers with poor credit will find it harder to qualify for a mortgage - hence increased rental demand in this sector
- FTBs with average credit will fall down the ‘mortgage food chain’ slightly as lending becomes scarcer. The highly favourable rates of past will disappear and mortgages with high repayments will deter more people from buying at this period - hence increased rental demand in this sector
- Even with the recent interest rate cut, this saving was mostly not passed on to the mortgage consumer. Rising interest rates equal rising repossession rates (and trust us - they are rising) which means increased supply of property. Coupled with less demand from the above two factors, and prices are indeed likely to fall as predicted. With so many first time investors having little equity in their property from over valued no money down deals, the effect will be increased sales / repossessions in this sector.
- Rising mortgage costs have forced many mid sized buy to let investors to dispose of at least some of their portfolio through offering their tenants a no money down option to buy. This will inevitably reduce the number of buy to let properties available (but in fairness, will reduce the number of buy to let tenants accordingly as they become homeowners)
All the signs point to an increase in demand for affordable but to let. Naturally, the only way a BTL will be affordable is if the purchase is made at a level which is significantly below current “market value” - but that’s the reason why we’re here.
So, if your strategy involves flipping a property for a quick sale, 2008 may be the time to reconsider. Attempting to sell property through such a troubled period is unlikely to generate the profit you would hope for. Providing it’s feasible to do so, hang on to your property as a letting for at least three years, or until the UK recovers from this impending crisis.
Tags: Below Market Value, bmv, buying bmv property, repossession property, subprime crisis