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by Graham Brown (LoveProperty)

According to Seth Godin, the Dip is the manifestation of the belief that “The old saying is wrong-winners do quit, and quitters do win.”

We’re certainly going through the real estate property industry Dip right now. RICS says it’s a 30 year low in property sales and there’s certainly no shortage of property investors quitting and heading back to their day jobs or worse still, filing for bankruptcy.

On the one had, pundits reflect the professional sentiment - we have tasted the beginnings of the meltdown but may have saved ourselves from being forcefed the full 3 courses.

So what exactly should we be quitting?

There is Still a Pulse…

You could be convinced otherwise that things are really that bad, there’s still a number of ready made BMV deals coming through the pipeline, some markets are still bearing up (according to the agents and Rhett Lewis), some lenders such as Nationwide have made tentative moves to cut their rates, others are still bullish such as Vanessa Warwick and  some are just fed-up with the naysayers. Paragon claim that landlord rental demand is “strong” and the FT reports that agent activity is on the way up, so what gives?

What is suffering right now is property investment that was the easiest foot on the ladder for would-be pundits - ie the product of common sense. Some talk of the unravelling of buy to let scams. Sale and rent back is also coming under tighter supervision with the latest NLA announcements.

Either way, time to quit means time to give up on the old business model.

Bottom Fishing - not there yet

But it’s maybe too earlier to proclaim a brave new dawn for the Property 2.0 investor, we have still to hit the capitulation point that analysts refer to as “the bottom” - the point at which assets would be going out of fashion, which for those that are selling will last an eternity but for the rest of us - a few days.

Mark Harrison recommends that we take a straw sample of our own immediate environment to see if the credit crunch is real. His analysis of the credit crunch and the average Joe is very interesting, worth reading, suggesting that there is still some length in this one before we reach the turnaround.

While pundits claims we are out of the woods and that prices could rightside themselves by 2010, I’d err on the side of caution for the meantime. FT’s aptly named feature section “Financial Panic” leads with “The panic passes but the causes remains“. The paper continues to suggest (through Landlord Zone) that we still have a 30% correction (drop) to run before we get there and latest research from Savills suggests that all markets are exposed. Rob Best also provides a good insight into the current state of the lending markets and what it means to us as investors.

Emerging markets a safe haven? Maybe not in the short term if you take the advice of this blog, although there’ll always be a market squirreled away somewhere that developers will tells us is recession-proof. This time it’s Canada (apparently).

What lies on the other side?

The money markets are still disfunctioning and there are 5 good reasons why they may never return to the good old bad old days of the early 21st century (download the free ebook on the future of BMV investing). We can see evidence of this in the current lack of appetite for lending. Although lending rates should recede, lenders are imposing increasingly punitive terms on their mortgages (such as axeing all 85% LTV BTL mortgages) to frighten off all but the most diligent and persistent of investors. Hip Consultant provides a reasonable analysis of recent developments.

Robert Peston (BBC) reports that the wholesale markets inactivity is forcing banks to reduce their lending and as ever, property investors are at the mercy of the US financial markets (download Ebook here).

We also still have a hyperactive LIBOR refuses to come down to market representing more expensive borrowing (although the LIBOR has eased slightly in last week) and the spectre of higher oil prices. Donald Trumps makes a good point for all investors in paying more attention to OPEC than their central bank as an indicator to recovery.

Still economic woes don’t curtail all market activity, here’s some good news…

Now is a good time to own an apartment building according to Bigger Pockets, providing us with 15 reasons to take the plunge. John Lee of PropertyCow reckons that he can make good even 15% BMV deals that most would now be throwing away due to inability to raise adequate finance.

And if your tenants feel the themselves and stop paying, then fear not because there are plenty of ingenious ways to name and shame them. Here’s one such method I recently became aware of through Property Owl.

Plus, there are still plenty of determined entrepreneurs out there - just check out Graham Brown’s Property Radio interview with Rhys Morton and Tom Sanderson regarding the adventurer spirit (link here).

Find yourself stuck with a development you can’t sell off quick enough? As housebuilders are forever cooking up new ways to move their stock, one creative developer  has decided to raffle off his £1.7m development to the lucky ticketholder. On examination of the numbers, he’s onto a good thing - wins both ways. As they say, necessity is the mother of invention and he’s certainly come up trumps with this one. However, don’t get too excited - looks like the Gambling Commission have cottoned on to a similar scheme for a £1m house down in Devon (thanks to Rat&Mouse for the tip).

So I’ll leave you with the outro provided by the agents Alexandre Boyes who are putting a brave face on everything (hat tip to FindaProperty blog):

We’ll move again, don’t know where, don’t know when,
But I know we’ll move again, some sunny day.
Keep smiling through, just like you always do,
‘Til the billions drive the credit crunch away.

For more information on beating the credit crunch, check out my 20 Links for BMV investors to help beat the credit crunch or dowload the Free Ebook written by LoveProperty members: Free EBOOK - 5 Things You Can Do Monday Morning to Reduce BMV Risk in the Coming Global Financial Meltdown

Technorati Tags: graham brown, graham brown property, bmv, free ebook, love property, bmv deals, nmd deals, property investment, real estate

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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?

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

Listen to the Audio Podcast (click play button below)

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.