6pm...It’s Getting Cold

So now we have owner-occupiers buying properties that are too small for what they’re worth, and owner-occupiers with high income multiple mortgages, but not a speculative or professional investor in sight. The market has gone stagnant. Renters are unwilling to buy and move into a property that is smaller than what they are renting, owner-occupiers are stuck into a property that is not growing as before, speculative investors are not interested because on the face of it there is no gain to be had and the professional investor has long gone due to it being unprofitable at 3pm. So who is left buying?

The owner-occupier! The owner-occupier is overstretching themselves by accepting unsuitable properties or going to high income multiple lenders (the self-certified borrower who has lied about their income is also buying but this is a small percentage of the overall buyers at 6pm).

The inevitable is about to happen. Interest rates will rise. This is the only thing that can jolt the market. Now I’m not saying a few quarter point interest rate rises. I’m talking about a 2%+ rise from its lowest point. This is when it begins to hurt.

Two terms then start to rear their ugly heads (in order):

Negative Equity

• owner-occupiers who wish to move;
• lenders wishing to access their security on defaulting borrowers;
• the economy due to the feel-good factor being lost, hence a reduction in spending;
• the property market as fewer property deals are done thus estate agents, brokers and other industries surrounding the property market feel the pinch.

Repossession

This is when the lender legally enforces the sale of a property they have lent on due to the borrower defaulting on their mortgage payments. This situation occurs when:

• interest rates rise making the mortgage repayments unaffordable;
• job losses happen within the household so the mortgage payments become unaffordable.

The number of repossessions occurring every month are directly related to the economy as repossessions are a function of interest rates and job losses. So if interest rates rose to 20% and/or everyone lost their job then everyone would get repossessed and lose their home. If interest rates were 0% and unemployment rates were 0% then no one would lose their home. We are somewhere in between.

6pm – 9pm

So at 6pm we only have the owner-occupiers buying unsuitable properties at inflated prices or obtaining finance from high income multiple lenders. Property prices now reach their maximum. This is due to married (or co-habiting) owner-occupiers being unable to buy as lending is restricted to 2.75 times joint salary or individual owner-occupiers being restricted to 4.93 times salary. Speculative investors are unable to buy as lending is restricted to 130% of the mortgage payment.

The buyers at 6pm are the last weight of buyers and are buying at the peak. As usual the private individual is the one who suffers – they buy high and are forced to sell low. These buyers have not factored in interest rate rises. There are also owner-occupiers who have previously bought and accessed their equity from high income-multiple lenders (greater than four times salary) and second charge lenders with less strict lending criteria. They have ignored warnings that rates will rise.

Rates do begin to rise, but only modestly, to attract overseas investment in government gilts to fund the deficit being experienced as a result of over-consumption. The press start to hint at negative equity spreading across thousands of households in the future due to the now upward trend of interest rates.

Repossession rates are followed closely by the press to see if they are increasing month by month. If there is an increase you can be sure it’s front page news on some of the tabloids. A sense of fear sets in even though there has been no real change in property prices. Properties for sale remain in the windows of estate agents with none of the vendors willing to drop their prices (because they don’t have to) and none of the buyers able to afford what is for sale.

TV ads for loans start to decline. Stories of how people have made a fortune in property now seem stale and also unrealistic within the current environment. Some speculative investors who were breaking even are now losing money due to the slight increase in interest rates. The speculative investor is not forced to sell (due to the loss being only small and manageable) but chooses to sell as the investment is taking money out of their pocket and they can bank a gain if they sell now. So several properties come onto the market requiring a quick sale from the speculative investors.

As they already have a gain locked in the speculative investor will reduce their price for a genuine quick sale. Property prices start to reduce and creep back to affordable levels. Some speculators are lucky and sell to frustrated owner-occupiers dying to get on the property ladder. Other speculative investors are not so lucky as owner-occupiers get wise and think it’s better to wait and see if prices drop further or if a better property comes on to the market...

Rates rise again. And again. Repossession rates have risen for the first time and it’s splashed over the press. Certain areas are reported to be in negative equity. The owner-occupier seeking a home to buy is now smiling as they think property prices will drop further. Estate agents are convincing their vendors to reduce their prices to attract people through the door.

Lenders are losing as a result of the repossessions as after all legal costs have been taken into account the monies raised from the sale do not cover the amount they lent and all other costs of repossession. Lenders start to restrict lending. This further stagnates the market. Property prices fall further.

Second charge lenders and unsecured lenders start experiencing defaults due to the borrower choosing to pay their mortgage rather than their second charge and unsecured debts. Regret for the holidays and cars that were bought with this money starts to set in. People start to restrict what they spend on the high street and try to liquidise some of the assets bought with their remortgaged money. Suddenly saving seems better than spending! The feel-good factor has now been lost. Property prices start falling further due to the lack of buyers.

Speculative investors are now happy to get back what they had paid for the property as it is better to get rid of a property that is costing them every month. The gain once promised from these properties fails to materialise. Some speculative investors actually lose capital to obtain a quick sale. Property investment starts to get a bad name. Some speculative investors see some of their hard-earned savings lost to free them from the bind of the poor performing investment property or properties.

Rates rise further. Repossession rates rise further. Everyone who had bought at 6pm is now in negative equity. More and more owner-occupiers are struggling to pay their mortgages and they want to sell. The market gets flooded with properties for sale by desperate vendors. The problem is it is neither a buyers’ market nor a sellers’ market! Some are lucky and sell to other owner-occupiers, others are not so fortunate and get repossessed.

All the owner-occupiers who had overstretched themselves by over-borrowing can no longer meet the higher repayments produced by the interest rate rises. Supply of property is now well in excess of demand. Prices have to fall even further.

The only real saviour in this falling market, with any kind of buying clout to prevent prices falling to ridiculous levels, is the professional investor. At 9pm they see that prices have fallen to a level where, if they were to buy, the purchase will put money into their pocket at a rate greater than leaving the money in the bank even though property prices are falling. So, the clock strikes 9pm. Welcome back the professional investor.

Looking at it as a sweeping hand of the clock: