James Daley: It's time to batten down the hatches
Saturday 15 December 2007
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; request a free guide on NISAs from Hargreaves Lansdown
Buyers beware of new-build home headaches
Five Questions: Changes to car tax discs
Bargain Hunter: There's one day left to book a bargain flight with Air Asia
A student's guide to financial survival: You don't have to drown in debt at university
How to save money: UK is crashing down the European league table for putting money away
- 1 Keira Knightley topless: Usually conservative actress does own take on #Freethenipple campaign for Interview Magazine
- 2 Joan Rivers: 'Palestinians deserve to be dead'
- 3 Lady al-Qa’ida: On the trail of Dr Aafia Siddiqui, the world’s most wanted prisoner
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 It's not just the savagery of Isis that is shocking – its weaponry is too
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
With Douglas Carswell joining Ukip, my party has taken another giant step forward
- < Previous
- Next >
iJobs Money & Business
Highly Attractive Salary: Austen Lloyd: BRISTOL - This is a very unusual law c...
£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...
£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...
£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony