Sunday, September 28, 2008

Buy To Let Or Bought A Toilet?

With the announcement of the government bail out of Bradford and Bingley first thing in the morning, there has to a be a few quaking in their boots with a buy to let mortgage hanging over them.

What does this mean to everyone?

Northern Rock has been nationalised and seems to be doing OK!

On the face of it, this would appear to be the case. We at the Investment Property Rumour Mill are going to take the toilet brush of property investment and see just how clean under the rim it all is by delving a little deeper and look into how the banks got into this state in the first place, what all this means to the layman investor who thought they might set themselves up for life, and what the likely or possible outcomes are for all involved.

It has long been a British institution to "get a foot on the property ladder" with school, college and university leavers urged on by their parents to buy a house and leave home. We have all heard the saying "as safe as houses". Obviously there aren't too many teenage millionaires these days apart from the most successful of hoodies of course, so one is invariably off to the bank to get a mortgage.

Nothing wrong with any of that you might think, which was true until the banking world discovered marketing and interbank lending, and the concept of buying houses in other countries that we hadn't heard of until last week.

Buy to Let or B2L was born, along with various other acronyms. The criteria to lend came down as the purse strings of the institutions slackened, everyone was jolly with a shiny red smiley government in power offering prosperity and stability and all was good.

When potential property purchasers went to the bank to get a mortgage, few were turned down, and even if they were, there was another bank just itching to lend in on top on behalf of that bank, creating the interbank lending and making the books look good. It even created one of the most amusing acronyms of the mortgage world, a NINJA mortgage (No Income, No Job or Assets)

As a result, the state of play now is a large number of banks with enormous mortgage books that far outweigh their savings and investment balance. According to Bloomberg,

"Deposits at the bank amount to only slightly more than half of loans outstanding, which means it depends on capital markets for about half of its financing. Bradford & Bingley was forced to curtail new business when those markets dried up and the cost of inter-bank borrowing soared causing banks to hoard cash following the collapse of the U.S. subprime mortgage-market. "

So lets just clarify what that means for a moment, Bradders and Bingers, the gents in bowlers have lent out almost twice what they have! Some way to run a bank!

What does this mean for the short term?

Well, those that can pay their mortgages will still need to pay them, the money will just go into the government so it can try and recoup some of the money. The savings arm of Bradford and Bingley will go up for private sale, probably to be hoovered up by the banking behemoth that is Banco Santander.

The medium term?

This is what we fear most have overlooked, and isn't likely to come out for quite some time. The British government is bailing out to because it has no choice, not because it makes financial sense. The Labour party, love 'em or hate 'em isn't fairing well in the polls, and has to earn some brownie points and create some election credibility from somewhere. The key point that remains to be seen here is simple.

The Bank of England sold its' gold reserves a few years ago, (at the lowest price in modern day markets)

The UK no longer exports or produces anything of any significance. As a result, no real income from exports.

The government is about to own a very large number of properties that no one can afford to pay for, (perhaps they can sell them off as Olympic housing, at least they will be ready to use in time!)

The Future of Buy To Let?

Its true, anyone can rant and rave about the failings of others, play the blame game, and say "well you should have" Here are some sound suggestions, take them as you will, they are based on logic, fact and reality, instead of hype, spin and sales banter.

If you are going to buy to let, look for an economy that actually runs on that method. At least with then you know that the common mentality works in tandem with the way you intend to make money.

Unpopular as they might be with the British, the French and German house buying mentality is very different. The general workforce there does not purchase a home until they reach their mid to late 40's, renting for their entire life until then. Why? Partly due to expense, but primarily because they don't have the property ladder greed mentality beaten into them at an early age.

What this means is that as Johnny Foreigner, you can buy a property in France or Germany and rent it to the locals long term, your rent is guaranteed if you do it properly, and you can get a mortgage at Euroland rate.

It wont make you a millionaire in 5 minutes, but then the surrounding properties will still be there and occupied in 10 years time and not sold to a farmer for a fiver because the government needs to buy some paperclips and has run out of cash.

All in all, research first! Just because you can "keep a eye on your investment" in the next street, it doesn't make it a wise investment. If everyone is doing the exact same thing in the same place, no one will be successful. Look to take advantage of systems that work, don't be greedy, and believe it or not, politicians do lie occasionally, and even if they don't, they can get incredibly economical in the truth department. Most of all, beware the seminars and investment property promises of riches. There are some well researched investments out there, just read the small print, research, and make sure you can afford it even if the local economy goes wrong!

Many thanks to for the Toilet Shaped House image.
Apparently the rent on that property is in the realms of $50k a week!

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