Graham Brown Property

First-time buyers have ‘massive opportunities’ to grab a bargain
Monday, July 28, 2008

First-time buyers who have deposits are likely to benefit from the slump in the housing market as well as those who have built up equity in their homes. .. read more..

House prices to rise by 25% by 2013
Monday, July 28, 2008

A new report claims house prices will rise as much as 25% over the next five years as supply fails to keep up with demand .. read more..

uk property: How Long Do House Price Falls Last?
Monday, July 28, 2008

Post war data suggests that periods of house price falls can last for upto 4 years. The last major housing bust in the UK was between: 1989 Q3 when house prices peaked at: 62,782 and 1993 Q1 when house prices reached a low of 50,128 UK Historical House prices Why Do Housing Posted in Simplifying Fin.. .. read more..

uk property: Hometrack: House prices lowest for decade
Monday, July 28, 2008

The latest research from property information service Hometrack find the rate of decline in UK property prices has continued to accelerate. .. read more..

uk property: London and UK property markets - where is safe?
Monday, July 28, 2008

Liam Bailey at Knight Frank casts his eye over the UK property markets to see if any areas are safe from the downturn. Author: cantosTV Keywords: property mortgages housing london commentary analysis news cantos Added: July 28, 2008 .. read more..

UK Property News from the Web

• ing to move to council house
• why are developers not willing to reduce price?
• UK house prices, home and property values
• July Market Update
• Rightmove Advertising - Rental
• Almosty 3m ‘home pensions’ are at risk
• Britain is on the brink of recession
• uk property: FT: Rich look abroad for buy-to-let loans
• Conservatory and 4 year rule
• uk property: Parent Landlords A Good Option?

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If you think BMVers have got it bad, spare a thought for Mortgage Express, the BMV investor’s back-to-back financier of choice - one of the few lenders back in the day who accepted multilet valuations and same day refinance.

The credit crisis has more than pinched most lenders so MX is not unique in that respect. What is perhaps distinct in MX’s suffering is the ongoing woes that beset its owners Bradford and Bingley.

As the biggest lender to the residential investor market in the UK the bank, through MX, was always going to be exposed. However, B+B were always on record stating that the very entrenchment in BTL mortgages effectively mitigated its exposure to the crunch as landlords were savvier than your average Joe.

B+Bs chief exec resigned late Spring due to a recurring “heart condition”. One can only imagine what levels of stress he was taking on board when the full extent of exposure to bad debt in most banks had yet to be declared.

The whole issue of illiquidity would give even the fittest bank CEO a minor coronary condition. When banks are unable to borrow and/or sell on their debt to the bond markets, their funds run dry. Or worse still their existing assets are written down, severely limiting their future borrowing capacity.

When TPG offered a lifeline to B+B earlier in Summer it seemed the US private equity group would bail out the bank by injecting hard cash into its money supply. And it was the very act of downgrading B+Bs credit rating as a result of exposure that allowed TPG to exercise a MAC (material adverse change) clause in their agreement to reverse the £179m investment effectively leaving the bank and MX without any recourse to capital in the short term.

Now the B+B board finds itself both in the precarious position of going cap in hand to its 4 biggest shareholders to cover the shortfall and facing a shareholder revolt for alleged blunders in the aborted TPG deal.

MX, as the riskier arm of B+B, operates on borrowed time. Any shareholders that muscle their way onto the board as a result of reforms will want to see the exposed elements of the business cut loose. Will we see the toning down or even withdrawal of an old BMV bellweather this year?

I’m starting to see 3 beds with 2 receptions come onto the market in PO postcodes now for sub £130k, where last year these were in the £140-£150k band.

Within 1 mile of the University, these can be converted into 4 or 5 bed HMOs for students fetching £1000pcm.

Graham Brown’s Property Market Analysis July 2008

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Feel free to forward but do take note that I am not offering any investment advice nor am qualified to impart this advice. I write on the basis of the fact that I’ve built a career around understanding consumers and analyzing global markets.

Property prices set for “major correction”

I read with great concern the predictions of leading fund manager John Paulson in the FT today. Quick background on the guy. Paulson, the world’s leading alpha fund manager, made $3.7 billion last year by successfully “shorting” the mortgage market failure back in 2006 - ie he bet on a mortgage market collapse when everyone else was surfing the wave of optimism.

Simultaneously I read with interest the number of posts on another well known investor forum blaming naysayers for “talking us into recession”. The irony is that if Paulson’s doing the talking and making nearly $4 bn annually and an increasing number of shortsighted and overoptimistic landlords are being repossessed, whose advice would you rather follow?

So one can assume Paulson knows his stuff when it comes to understanding the mechanics of money markets. His latest predictions focus on the UK market - in which he “anticipated a major correction once longer term interest rates move higher”. We have already seen a mid term upward movement in the LIBOR signalling the market is indication the liquidity problems we are currently facing are in fact worsening.

Of major concern is Paulson’s thoughts on the structure of the mortgage markets. “90 percent of the mortgage market”, he writes ” is supported by two private companies losing vast sums of money operating with no equity”. Names such as Freddie Mac, Fannie Mae, AMBAC and MBIA may not seem household names for BMVers but these are level 0 in the non-standard liquidity market house of cards.

Goldman Sachs shorted a bunch of developers today with news that earnings would be down 90 percent. Interestingly, there are rumours “on the street” that a major development porfolio is to be liquidated shortly. I’ve just advised my mum not to go ahead and purchase a newbuild on the basis the roof was still missing and yet to complete. Of course there are legal guarantees but no one wants to have their hopes set on one property only for the developer to freeze the project or go under.

Combine this with “expert” predictions that retail gas prices are to rise 40 percent by Christmas we have, perhaps for the first time in 20 years reason to be concerned about the economic fundamentals.

Now whether you think the housing market will remain robust remains irrelevant now because when you have both the world’s leading fund manager and leading investment bank saying it’s heading south, the money follows. Bradford and Bingley’s incoming CEO certainly isn’t going to let Mortgage Express go native and start injecting more capital into the property market.

So what does this mean? It means that the mortgage liquidity problem has yet to really set in. Compound this with a serious upward pressure on fuel and food prices you will see a major squeeze on the residential property market in the next 6 months, with the pain starting to be felt in September.

What does this mean for you?

* Media coverage
Look out for newpapers scaremongering “property market crash” as finally some of the london market froth clears.

* Rent and payment defaults to increase
Expect rental demand and yields to remain high but defaults also to increase signifiying a greater than ever need to hedge against letting to workers most exposed to the credit crisis.

* HMO utility bills increase
HMOs may seem a good option in the current market, but your tenants certainly won’t be open to the prospect of significant rent increases as your utility bills add another £1000 a year to your outgoings.

* Mortgage
Charges, ERCs and terms are getting tighter by the day. I am currently very cautious of borrowing through a vehicle on the basis of a later “drawdown” as opposed to a remortgage. Such drawdowns can be withdrawn leaving you with money dead in the deal. Similarly now we’ve moved from back-to-back deals to longer refinancing windows we should also consider that our exit route is no longer certain - these can be pulled at any time.

* Best time to be friends with investors
Expect some real property bargains to manifest post Summer when the natural annual optimism turns to the task ahead. 3 beds with two receptions on at 145k last November are now presenting decent HMO or student let’s at offers around 100k. You’ll need to exercise what Robert KIyosaki calls “the ultimate skill” of the entrepreneur - the ability to raise finance. And I’m not talking about filling out a form for MX here but networking and presenting a proposal that speaks in their terms - “yield”, “exit strategies” rather than “BMV”.

In summary

The next 12 months will see a watershed in the property market separating the entrepreneurial investor from the amateur. The trillions of dollars “lost” in the market didn’t disappear, the simply changed hands.

The point is, as we keep being told, this is a time of opportunity but if you stick to the same old methods, lenders and keep telling everyone not to “talk us into recession” you’ll end up like the ex-owner of the portfolio of 12 properties I visited the other day - overgeared and overstretched heading towards repossession.

Landlords are exiting the market with many either returning to their day jobs or putting speculative activity on hold. Needless to say, less investors means less people to share the profits with.

Paulson noted the “decline is accelerating”. Simply waiting for things to get worse before changing your strategy gives you little scope for making a difference. Paulson’s words are highly respected because he has trust with investors, now is the time we have to get out there and court those with liquid assets.