Turning a Retreat Into a Rout

I've been fairly sangiune about the UK housing market: sure, we'll see a fall in prices but I didn't think it was going to amount to anything serious (as opposed to uncomfortable for many). But I've just learnt that there's a nasty little trigger hidden in the system:

Buy-to-let landlords will have to raid their savings and inject extra capital into their homes, under an obscure clause in their mortgage contracts, if house prices continue to fall.

Both Bradford & Bingley and HBOS-owned Birmingham Midshires, the two largest buy-to-let mortgage providers, each with 20pc of the market, require customers to top up their initial deposits if falling house prices mean the size of their mortgage rises above 85pc of the value of the home.

Now this does only happen when people have to refinance their mortgages. But then again, according to the same report, many buy to let properties are on fixed rate mortgages which will need refinancing in the coming year or two. And that would seem to me to create a more serious problem: very much like what we've seen in the bank write downs recently.

So as prices fall, more of these buy to let properties fall below the necessary 15% equity cushion. The owners thus need to either pump in more capital or sell up and clearly some will indeed sell, taking whatever loss they have (or possibly small profit). Which lowers the value of the typical buy to let (urban flats and new developments against older single family housing) property against the market in general. Which pushes more below the equity requirement and triggers a fresh round of such sales.

This is the bit that I didn't think existed, the ability to turn a retreat into a rout. But if we've got this sort of cascade effect then a rout is indeed possible. The size and extent of it depends upon how many buy to let landlords are in this position and also how important buy to let is in the housing market as a whole?

Of course there's also good news possible in such a rout. Anyone who is actually liquid should be able to pick up some very good bargains in a year or two: who knows, prices on the typical buy to let might fall far  enough that it makes sense to own them purely for the rental (as opposed to presumed capital gains) income. That would be a time to pile back into the market, wouldn't it?

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