The UK's property boom has to large part been fed by an army of buy to let investors (many of whom are amateur landlords). This is illustrated by the estimate of 1,000,000 buy to let mortgages, up from barely 20,000 ten years ago. However for some time new buy to let investors have been increasingly banking on capital gains rather then rental incomes covering the costs, which given the most recent HBOS statistics of 2 months of consecutive price drops for Sept and Oct 07, increasingly looks less likely going forward and hence primes the buy to let market to lead the stampede for the exit, resulting in a sharp drop in UK house prices.

Buy to lets typically produce yields of between 3% and 5% of their current value, and therefore now present a poor investment compared to the situation barely 4 years ago.

The timing for the sharp drop is likely to coincide with Labour's change on capital gains tax which effectively cuts the tax payable on gains accumulated over the last few years to 18% from 40%. This tax change comes into force on 1st of April 2008 and thus the expectation is for an avalanche of selling amongst buy to let investors to lock in profits.

This also means that the market will to some degree be artificially supported going into April 08, but still will not be enough to prevent a wider decline in UK house prices but rather could register a drop of as much as 5% in the quarter April 08 to June 08, which would represent a crash in UK house prices.

Additionally there are an estimated 100,000 buy to let investors who took out mortgages this year and face going into negative equity, and thus stand to suffer capital losses. For these the greater benefit is in acting before end of this tax year.

UK property is at historically high unaffordability levels as illustrated by the Market Oracle UK House Price Affordability Index. Therefore the trend is for a sustained drop in UK house prices over several years.

The Market Oracle has been warning of an impending housing bear market since the 1st of May 07, unfortunately those that did not heed the warnings of selling while you can, are going to have to make harsh decisions in the face of falling prices and worsening economic conditions as a consequence of the unfolding credit crisis.

Credit Crunch - The Worst is Yet to Come!

The credit crunch goes from bad to worse as the financial sector crash continues. The banks are continuously writing down the value of debt packages that are backed by assets such as the US housing stock that continues to fall in value. If UK banks have suffered to such an extent to date from the US housing bust, imagine the fallout that is expected once the UK housing market decline gathers pace. The result of this will be a further tightening in credit throughout the mortgage industry where all mortgage holders will find it increasingly difficult to re mortgage at the end of expiring fixed deals, thus resulting in several percentage jumps in the rate of repayment, this against a climate of low rental yields will hasten the liquidation of buy to let investments during 2008.

UK Housing Market Forecast for 2008-09 - As of 22nd August 2007

UK House Prices to fall by 15% over two years, falling prices to be accompanied by cuts in UK interest rates. (22nd Aug 07),

1st May 07 - UK Housing Market Heading for a Property Crash

25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!

28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall

By Nadeem Walayat
Copyright (c) 2005-07 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

Comments

Jim
19 Apr 08, 12:04

Housing Recession

I fear there will be a housing recession, however I hope it does not lead to a economic recession for the UK

Jim

http://www.bulgariasfinest.com

Jenny
26 Apr 08, 00:42

Buy to let crash

The times reports that the big banks have pulled virtually all buy to let loans. looks like your buy to let lead crash for April may prove spot on !

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