Property landlords sell up as chief economist warns of major UK recession.

Article by Toby Serter

Tuesday 25th September 2007, 18:37

Some of the first signs of failing economic stability, especially in the housing market, is the rush from buy-to-let property owners to dump their stock.

Certainly this appears to be happening across the country with London leading the way – in the last three weeks, the Lettings Estate Agents report has shown a stark increase in the number of properties coming onto the market with a 46% increase on last month.

The Association of Estate Agents declare that the majority of properties coming onto the market are indeed buy-to-let properties that no longer represent a sound and stable investment and with interest rates biting hard, the global credit crisis and other domestic troubles affecting the UK economy, many home owners are feeling the pinch and buy-to-let landlords are running for cover.

“The signs of a market crash have never been clearer and yet the government and the Bank of England try to stave off market fears of a crash by playing the situation down” says Phillip Haston, chief economic director at W.H. Hills finance in the City. “However the truth is, the UK economy is heading into a very turbulent period indeed” he added.

The credit crunch which led to the Northern Rock crisis was the result of a more hard-headed approach to risk by international lenders. But now there is evidence that a similar scenario is being played out at the consumer level in the UK.

Since the Northern Rock crisis, many mortgage lenders have increased interest rates on sub-prime mortgages. Some have withdrawn deals altogether. Others are considering raising their rates for non sub-prime borrowers in spite of the Bank Of England’s expected rate cut next month.

“The Bank Of England may well cut the base rate, but it is too little, too late – cutting the base rate by a quarter of one percent will do nothing to help the situation because it’s the banks themselves who are controlling their own rates”.

There are fears that many more banks will suffer from the US credit crunch. One company - Victoria Mortgages - recently went bust because their own lenders pulled the plug.

And a table of 26 lenders drawn up by Moneyfacts.co.uk shows that other firms, like the Alliance and Leicester, have increased all sub-prime fixed-rate mortgages by up to 1.5%. All the firms surveyed have either raised their rates to sub-prime borrowers, or limited the circumstances in which they will lend money.

 

“This all indicates that the future will be a lot harder in terms of borrowing, buying property and when there are no buyers, the prices fall” said Peter Van Houden, sales director at London Estates. “Prices in London have already shown a slight dip and properties are taking longer to sell. There is definitely a problem out there”.

In the United States, where the current crisis began, the situation is just as bleak for sub-prime firms. On Monday one of the biggest lenders - Nationstar Mortgage - announced it was no longer accepting new loan applications from brokers. Analysts saw this as a sure sign that the lender was winding down its operations altogether.

There are further signs that the days of easy credit for all are coming to an end. On Monday Barclaycard confirmed it had reduced credit limits for 500,000 of its customers. A Barclaycard spokesman said a review the credit-worthiness of all its 9.6m UK customers had begun last year, and was not linked to the Northern Rock affair.

"We became aware in 2006 of the growing potential problem of bad debt, and our review was a response to that," said the spokesman.

Affected by the restrictions are the so-called "risky" customers: such as multiple credit-card holders who borrow to pay off their loans. For the first time Barclaycard is turning down more potential customers than it approves: latest figures show that the company granted credit cards to just 48-49% of total applicants

“But there are other serious factors that are set to cause misery to the UK economy” says Angela Stevens – head financial economist at CityBank UK. “The Foot and Mouth crisis is hitting the UK economy harder than is being reported” he said “and the government are trying to keep a lid on the media reports through fears of sparking widespread panic”.

Other factors such as the newly discovered ‘Bluetongue’ disease is also threatening to cause yet more problems for the UK economy, and the British farming industry is already reeling from one of the worst crop yields in recent times because of the recent floods.

The farm ministry on Tuesday reported a third case of bluetongue disease in an animal in Suffolk.

The Department for Environment, Food and Rural Affairs (DEFRA) said an animal had tested positive in a premises near Lowestoft, Suffolk.

Britain's first ever case of bluetongue was reported on Saturday in Baylham, also in Suffolk, and a second case was reported at the same farm on Monday.

Bluetongue causes fever and mouth ulcers and in some cases turns an animal's tongue blue. It is transmitted by insects such as midges and can be highly dangerous to sheep and cows, although it does not affect humans.

The disease is mostly found in Mediterranean countries such as Italy, Spain and in North Africa, but has spread this year across five more northerly EU countries -- Belgium, France, Germany, Luxembourg and the Netherlands.

A 3km exclusion zone has been set up after a suspected case of foot-and-mouth disease was found in Wiltshire.

The site of the suspected case is Little Buckholt Farm near Tytherley in south Wiltshire.

The exclusion zone means no livestock can be moved across, into or out of the marked area.

Tests are being carried out to determine whether the case is foot-and-mouth disease.

Further trouble in the banking industry is also going to affect the British economy further - the bad news for the likes of Wolseley is that it's not just the US that's facing trouble in the property markets...

The International Monetary Fund reckons that the subprime problem in the US is going to keep unfolding for much longer than most commentators currently suspect. It will continue "at least through 2008", with many more defaults to come as more 'teaser' interest rates reset to higher levels.

Moreover, even if house prices were to fall by just 5% and then stabilise, losses from subprime defaults would still hit $170bn - a quarter of which would fall on the banks, and 75% on those holding mortgage-backed securities, says The Telegraph.

It puts the blame for the current crisis on opaque credit derivatives, globalisation meaning we don't know where these derivatives end up, and an over-reliance on credit rating agencies to tell us that these derivatives are safe (when in fact they're lethal). So far, so what. We know all this, and most people in fact knew it before it all blew up - they just wanted to make as much money as they could before the music stopped.

But what many people might be surprised by is the IMF's assertion that the UK has a similar subprime problem to the US. According to Edmund Conway in The Telegraph, the IMF "singled out the UK's low-income mortgage market as a key area of risk for the financial system."

The report says "the UK non-conforming mortgage market is somewhat comparable to the US subprime market, though about one half of the outstandings." For the IMF - which is hardly the most sensationalist organisation - that's pretty strong stuff.

All in all, this is not the ideal time to be heavily in debt. But that's exactly what Britain is. Public borrowing hit its highest level for the month of August since records began. It's another low note to kick off Alistair Darling's time as Chancellor - though he'll probably be less worried about this than he was about the queues outside Northern Rock. Just like Ben Bernanke, Darling has taken over just as all the consequences of his predecessor's lax policies are hitting home.

But let's not feel too sorry for him. After all, regardless of whichever cloud he leaves office under, he'll have a juicy minister's pension to look forward to. But that's not something that most of the rest of us can rely on - so what should you do about your own investments? Well, at the end of last week I wrote about which sectors still look good value (Forget banks - here are some real investment opportunities), and in this week's issue of MoneyWeek we'll be looking at whether Asian markets will be able to pick up the slack if the US economy falters...

 

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