James Daley: It's time to batten down the hatches

The clearest sign that an investment bubble is in desperate danger of bursting is the moment you discover that those with a vested interest are the only ones still insisting that everything's going to be OK.

So, when a press release from Bradford & Bingley (the UK's largest buy-to-let mortgage lender) landed in my inbox this week, boasting that Britain's landlords are "upbeat" about the prospects for the residential-property sector in 2008, it finally became abundantly clear to me just how bad things are looking for the UK housing market over the next 12 months.

In fact, in spite of the happy headline on B&B's press release, the lender's statistics tell the true story very well. Apparently, 95 per cent of landlords are positive about rental yields in 2008. No wonder, because as house prices start to nosedive, the one upside for the buy-to-let landlord is that rents will represent a bigger proportion of their properties' values, hence bigger yields. Unfortunately, however, this will not necessarily make up for the massive fall in capital values.

Many landlords especially those with just one or two properties who have taken their first steps into the market over the last year are now badly exposed. Rental yields have fallen so low in many parts of the country over the past couple of years under 5 per cent in parts of the South-east that landlords have been tempted to opt for lower mortgage interest rates, but with higher fees, sometimes running into tens of thousands of pounds. This means that while their rent will cover their mortgage payments, the extra fee ends up lumped on to the rest of the mortgage, in the hope that house-price growth will eventually pay for it.

Such a model works just fine when house prices are perpetually rising. But that's no longer the case. Furthermore, the small falls in residential property values, that Halifax and Nationwide have recorded over the past few months, are just the start of it. Don't be surprised if your house is worth 20 per cent less than you think it's worth by next summer.

Unfortunately, lenders' insistence that the housing shortage in the UK will always prop up prices is simply not true. Britain was faced with a similar situation during the last housing crash 15 years ago. When bad sentiment grips a market in this case, exacerbated by the credit crisis supply-and-demand patterns shift dramatically. In the long, long run, the lenders will probably be proved right, but it is quite possible that the housing market remains depressed for several years, regardless of the long-term supply constraints.

For new buy-to-let investors, there are now certainly much more attractive opportunities elsewhere, while for those who still want to buy in the UK, it will now be that much harder to get appropriate financing in the wake of the credit crisis. The lack of new buyers could have a disproportionately bad effect on the market.

Another bubble that is about to burst is the mining sector. Reading Ian Henderson, the manager of JP Morgan's Natural Resources fund, saying that we are at the beginning of a 100-year bull market in commodities was all the proof I needed that this market, too, is in for a nasty shock over the next few years. Again, the claim by Henderson and others, that demand from Asia will continue to drive up commodity prices, is probably correct in the long term. But that does not mean sentiment cannot get the better of the market over the next few years.

Chinese inflation is currently running at 7 per cent, and there are concerns that the country's economy is now overheating. If the Chinese economy caught a cold, a global recession would almost certainly follow and commodity prices would come down with most other asset classes.

Caution is the watchword, then, in 2008. Save more, spend less and invest defensively. The economic storm will pass, but conditions are certain to get much tougher before they improve. Merry Christmas.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Guru Careers: Application Support Analyst / 1st Line Support

    £25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

    Guru Careers: .NET Developer / Web Developer

    £45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence