Buy-to-let Meltdown?

The real estate 'four horseman of the apocolypse' have so far avoided riding into the UK. One suspects they are a bit busy in the US. The UK may be in a position to avoid such a meltdown but it looks to me like its going to be a close run thing.

House prices are falling.. fast. The fall is at a faster rate than the late 80's early 90's and if you remember that time is was not pretty. 'Negative Equity' is a phrase that hasn't been heard for some time but one which is sure to grace the UK newspapers over the coming months. If you are a bank executive you must be losing more sleep than ever.

The problem for many banks is they gorged on the housing market. Self-certification loans may prove to be a disasterous product for the banks and the homeowner, buy-to-let loans are certainly fragile. On this point many argue that people still need places to live and rents will continue, this is very true, but a lot of people leveraged themselves heavily and any rise in the interest rate could prove overwhelming. Passing on interest rate rise through rent is not an easy task.

The greater problem for this sector, and the housing market in general, is if the army of buy-to-let landlords start to de-leverage. Drops in house prices at the moment are, in some part, inevitably the result of some of this going on, but an increase in the sale of multiple homes would be a disaster.

Enter Bradford & Bingley. Assuming it succeeds in raising its £400m capital injection from shareholders it will be, in the words of its executive chairman Rod Kent, 'one of the best capitalised banks in Britain'.

It's going to need to be. Given the profile of its lending (buy-to-let, specialist loan books and so on) it could be one of the worst hit for arrears and further losses and write downs on bad debts. It's going to need the capital it's raising now, not to give it a chance of weathering the onslaught to come, but to give it breathing space until a takeover can be agreed or a run off of its business arranged.

Back in June 2007 James Hamilton, a banking analyst at Numis said "A lot of people have made very good money in the past from buy-to-let. But if the housing market goes flat, there is every likelihood that many of them will want to sell up."

Hamilton warned that there were massive potential problems because many individuals have invested huge amounts of their total wealth in buy-to-let. 'Some retail investors have taken the very high risk strategy with such a high concentration of their money in a single asset class.

At the time a source 'close to Bradford & Bingley' said "'Hypothetically he's right, but that's not what the trading statement is saying. Of course, if the buy-to-let market goes into meltdown B&B would be in trouble but then we'd all be in trouble."

A prophetic statement with hindsight.....