There is speculation among some financial experts that property prices are rising too fast, leading to a second housing crisis by the end of this or early next year. Now, The Independent's Emily Dugan gives us another cause for concern: shrinking savings among Britons. Dugan's April 14 story makes no bones about the fact that the majority of UK renters and homeowners are but one pay cheque away from losing their homes. This obviously raises the concern about the possibility of more repossessed houses in the future.
Some of the data used to support Dugan's position comes by way of a YouGov poll that shows 4 million renters and homeowners struggle with savings and, indeed, more than half (2.4 million) have absolutely no savings at all. You can see where this leads if you step back and consider all of the things that could potentially cause a disruption in family income. For example, an emergency family situation that kept a worker home for a month or two could be devastating.
Having said all that, any increase in the number of repossessed houses would be beneficial to investors. Repossessed houses often make very attractive investments if these are priced right and located in desirable neighbourhoods. So much so that the glut of repossessed houses a few years ago resulted in more people than ever getting involved in the buy-to-let property market.
Why are these houses so attractive? Because investment companies can source these properties directly from banks and building societies interested in getting them off their books. Moreover, the longer a property remains unsold, the more the bank or building society is willing to take a lower price. Fruitful Property is a property investment company that takes this approach. It finds off-market properties that enable their clients to make money on equity as soon as the transaction is complete.
Overall Market Values
Unfortunately, UK homeowners have one additional thing to worry about – overall market values. The truth is that the majority of UK homeowners will not suffer any financially devastating conditions resulting in the loss of their homes in the near future. However, even if just 10% of them do, a spike in the number of repossessed houses will be a drag on overall property values. The gains the market has made since 2012 could be lost very quickly if we found ourselves in the midst of another repossession crisis.
One could easily make the case that rising property values are providing the fuel for a potentially dangerous explosion in housing. For example, prices in London and the South-East rose at more than twice the rate of the rest of the country in 2013. Those who argue such prices are not sustainable forever have a very valid case. Nevertheless, if London and the South-East fall hard and fast, it stands to reason the rest of the country will go with them.
For the benefit of private and investment property owners, one can only hope the fears of a new repossession crisis do not come to fruition. While such a crisis would be beneficial to the investor, it would be disastrous to the overall market. There are enough properties still available to investors; they do not need more repossessed houses to continue building their portfolios.
Help to Buy
Dugan makes the case in her piece that the government's Help to Buy scheme is partly responsible for the crisis some believe is coming. She may have a point here as well. Help to Buy allows qualified homebuyers to finance up to 95% of their purchase. Moreover, while this is good for first-time buyers, it creates a hazardous situation should property values fall. This is what led to so many repossessed houses during the 2007/2008 crash.
When property values fall, equity is wiped out with them. This often results in homeowners owing more on their mortgage than the property is worth, a condition known as negative equity. It is a tolerable situation if the homeowner still has enough income to pay his or her mortgage safely until property prices rebound. However, any loss of income could lead to a repossession situation. No personal savings just makes it too difficult to overcome negative financial circumstances.
In the end, it seems there is a very real possibility for an increased number of repossessed houses over the next 16 to 18 months. Let's hope it doesn't happen for the sake of everyone involved. If it does happen, so many repossessed houses could be a boon for property investors.