This week the UK property news streams have been inundated with Buy to Let this and Buy to Let that – all neatly squashed in between the press throwing stones in their veritable greenhouses about who hacked who's phone, what one might do if they won Euromillions, and the latest strange names for celebrity babies.
Apparently the number of Buy to Let mortgage products has risen by 35% over the last quarter, an astonishing number given the state of the UK economy at the moment and the virtual stagnation of the property market.
For me, it begs the question "are these new products actually going to help the property market or property investors/buyers?"
So far, it would appear not – the number of property sales completing doesn't appear to have jumped suddenly – and neither has there been a significant increase in mortgages approved. Who knows? Perhaps next month we'll hear a resounding cry from the press that the housing market is back on track, and the property market will boom once again. The reality is more likely to be further doom, if anything at all.
So why all these new mortgage products?
Two words sum it up quite nicely really – Bandwagon and Fees.
As we are all aware, banks make lots of money by charging their customers fees. Big fat fees that they can spend on champagne and fast cars. The more products they have the more champagne and fast cars they can drink or crash.
The banks themselves will of course attempt to suggest that they are supplying demand, which we know is not there simply by looking at the bank's own statistics on average prices, mortgage approvals and other vague numbers that add up to not much at all.
So if it isn't demand – why the rise in mortgage products?
The secondary justification for the creation of mortgage products that aren't needed is arguably the media's interpretation of the rentals market.
Almost daily reports are published that housing stocks are low, the number of people renting is rising, demand is going through the roof and the cost of renting is rising.
Now I don't doubt for a moment that the cost to rent is rising – there are a couple of sources that will clarify that; the problem is that they can and will only rise so far. Unemployment figures are far from healthy – propped up only by the fact that workers are being asked to take pay cuts instead of being made redundant. As a result, average wages are falling and the cost of living is rising.
This brings me neatly to an interesting quandary.
If wages are coming down, and houses are not selling, this subsequently means that mortgages are not being taken or approved. This being the case, why a rise in mortgage products of 35%?
The answer is simple:
Rentals appear to be going up, and house prices appear to be lower. The reality however is that because everyone has less money the banks need to find a way to create some money to fill in the shortfall – and dress it up in a pretty little party frock and call it an investment.
Rental prices are certainly going up on paper, but much of this rise could easily be attributed to new listings on the market having high rents on them because their bank manager/rental management company/local paper/mate down the pub said that rents are rising.
It's not uncommon to find a block of flats that has many of the units for rent by private owners. As a rule of thumb, if the flat has a long term tenant in it the landlord has got his pricing right for the area; if it still looks clean and shiny - but empty – the landlord has got it wrong.
The fact remains that the rising rental market has a self creating end to it – the public only have a limited amount of money and when that limit is reached the rental market will grind to a halt too.
As much as Buy to Let in certain circumstances is a good idea – like in the US under Section 8 for example (a Federal Government backed social housing system) or French leaseback - the random "willy-nillyness" of the UK market only exists because of the press and the banks.
You cannot win under the present legislation in the UK. Very little regulation exists on how mortgage products are created or are sold, and the media can print whatever it likes to hype or hinder the market.
I don't doubt that many an expert will disagree and spout no end of justification as to why – my ultimate point is that lending money to someone in an unstable finance market, with the intent that they invest that loan into an unstable asset market, is just pure insanity.
- Friday 15 July 2011