Just how bad will things get in the housing market? Look at the state of Britain’s tenth largest mortgage lender Bradford & Bingley and it is clear the answer is “very bad indeed.”
The key numbers to look at are these. First, B&B has seen the number of mortgages in arrears double to 8,333 or 2.16% of all its business. That’s against an industry average of – so far – more like 1.1%. Second, over half of its lending is in the form of buy-to-let mortgages – B&B is responsible for 25% of all the buy-to-let mortgages in the UK.
And finally in the first four months of last year B&B made a profit of £107m. In the first four months of this year, thanks to the rising cost of credit and hence to falling profit margins, it lost £8m. We have long been concerned that buy-to-let would become Britain’s very own sub-prime in that as house prices started to fall, buy-to-let investors, stuck with both negative cash flow and the threat of negative equity, would abandon their financial responsibilities in droves.
It now looks like that is exactly what is beginning to happen. This makes sense: you might fight to maintain a roof over your own family’s head, but who’s going to put in the same effort to keep a roof over a tenant's head? However, what we have seen so far is probably only just the beginning. The problems at B&B suggest that mortgage rates there will soon be rising at speed: it needs to restore its margins and it needs to avoid taking on much in the way of new business until it has sorted its balance sheet out.
That means that its many clients – many of them now coming to the end of cheap two-year fixed deals – are going to get pretty short shift when they try to remortgage. But they may also find that however bad the new deal they get from B&B, it is either that deal or no deal: very few lenders are actively looking for more buy-to-let exposure and those that are in the market are not exactly pricing their mortgages to go.
And what does an investor do when it becomes clear that high mortgage rates (and mortgage payments higher than rental payments) are here to stay, as are falling prices (note that in almost all UK city centres the prices of the new-build flats favoured by buy-to-let investors are reported to have fallen 30-40%)? They sell or, worst to worst, they just stop paying.
None of this is good news for a housing market already in freefall: mortgage approvals this April came in at 58,000, half their level of last April and the lowest level since the Bank of England started compiling these numbers back in 1993. The good news however is all this news appears to finally be dragging the UK population out of denial. Just look at the TV schedules. Last night there wasn’t a rerun of Location Location Location in sight. Instead, an entire Panorama was devoted to cataloguing the misery caused by rising rates and falling house prices across the UK.
There were a variety of case studies but most interestingly a young man who worked as an estate agent, who two years ago bought himself a home of his own and a buy-to-let property. This time last year he probably thought he was living the dream. This year it is more of a nightmare. His tenant pays him less than the cost of his mortgage and both of his loans are on the verge of being reset - something that he seemed to think would make them both unaffordable. When asked, he agreed that maybe property was not the key to free money after all. So why hadn’t he grasped this earlier? He felt he had just been “unlucky” buying at the top and then needing resets just as the B&Bs of the world implode.
