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Repossessions: property market commentary with Merryn Somerset Webb
In 2007, 27,100 homes in the UK were repossessed. That might not sound too serious, but it is, writes Merryn Somerset Webb
Not only do the bare statistics disguise an extraordinary amount of pain on the part of the families made homeless as a result, but the number is up 20 per cent on 2006. It is also already well over a third of its level in the worst days of the bear market in house prices at the end of the 1990s.
But worse still, it reflects the state of the market before the credit crunch really started kicking in, before mortgage rates really started rising and, of course, before house prices started falling.
Yes, the market was turning nasty at the end of 2007 – and these numbers do include that period – but there's quite a time lag between missing a payment and losing your house.
Anyone who lost their house in the last quarter of 2007 got into trouble some months earlier – ie: when rates were low and credit easy to get.
And anyone who got into trouble in November or December last year isn't homeless quite yet: their losses are only going to show up in the 2008 numbers, along with those of the many thousands of people who are only now losing control of their repayments.
So how many repossessions will there be this year? Some estimates suggest up to 60,000. However, I wouldn't be altogether surprised if the number was even higher, given the dismal state of our economy, the approaching prospect of rising unemployment (a survey out over the weekend suggested that 40 per cent of employers are planning redundancies), the hideous news on inflation which makes it plain that interest rates can’t come down in a hurry and, finally, given the increasing evidence that over the last few years thousands of people have grossly overpaid for their properties.
The true meaning of 'market value'
Everyone will have at some point in the last five years come across some organisation or another offering to sell them new build flats at 'below market value' or, in property wheeler dealer scam talk, 'BMV'. The problem here is the definition of 'market value'. Writing in the London Evening Standard last week Peter Bill said the key factor used by valuers for mortgage companies when trying to figure out the market value of a flat is how much similar properties are selling for.
And 'naughty developers' are not above selling the first few flats in a development to 'friends and family' at inflated prices to set a high benchmark.
Then they – in cahoots with the buy-to-let clubs – can offer punters a 10-15 per cent 'discount' from their made-up 'market value', and still be well in the money: you think you are making what the clubs like to call 'instant equity', but you are in fact being fleeced.
That this has been the case all too often became painfully plain in spring 2006 when the buy-to-let frenzy was cooling. Plain, because the sale prices of repossessed flats were falling well below the outstanding mortgage.
It is irritating that any vaguely-educated adult can fall for the idea that it is possible to buy something at a price below its market value (there is, you see, no such thing as BMV; in any true market the price you pay is the market price). But that doesn't take away from the nastiness of this kind of deal, or of its architects.
The property bubble predators
All great bubbles carry with them predators, who feed off the gullibility of the great mass of ambitious financial illiterates.
In the tech bubble it was the stock promoters and the fund managers. In the great property bubble of this decade it has been the property developers and many of the buy-to-let clubs.
I don't suppose they'll be at it for much longer – the pool of potential victims must be depleting - but they will leave behind them an awful lot of 'investors', paying mortgages on properties worth less than the debt secured on them.
Would you keep paying if you were one of them? Probably not. Look for repossessions on the rise in cities across the nation.
I also wouldn't be altogether surprised if a good number of repossessions took place in central London over the next few years. I don't think many people are still clinging to the foolish notion that prices here won't fall along with those in the rest of the country.
They already are (one agent, caught off his guard, has told me that prices are already down 10-15 per cent in some areas) and as jobs go in the City and our non-doms scarper, they'll keep doing so. And London home owners are at least as – probably even more – mortgaged up to the hilt as non-London homeowners.
A sign of the times? Last week, the publicity for Allsops' February 13 property auction (with nearly 40 per cent of the lots being repossessions) included details of a whole house in Batoum Gardens, west London.
Batoum Gardens is just off Brook Green (a small piece of grubby grass sandwiched between Hammersmith and Shepherd's Bush), an area that has been a huge beneficiary of the London bubble.
This time last year if you'd wanted a house in Brook Green you'd have ended up in a bidding war and ended up with no change from £1.6m. So what's the price this year? If the house hasn't been withdrawn - I spoke to one of the many estate agents marketing it last week and she was hopeful of finding a buyer pre-auction - then I wouldn't bet against a drop in price.
* Merryn Somerset Webb is the editor of Moneyweek and writes a column on investments every month in Saga Magazine. Her opinions are her own and for general information only. Always seek independent financial advice.
