Fergus and Judith Wilson, a couple of maths teachers from Kent, became the unlikely pin-ups of the buy-to-let industry during the property boom years.
In an interview at the weekend with The Guardian, the pair discussed their decision to retire. Retiring seems a bit of a premature description. They still have to offload their properties – all 700-odd – before they’re free of the landlord business.
We’ll ignore that for the moment. The Wilsons’ story is fascinating for all sorts of reasons. But what’s most useful to us is what their tale tells us about the crash of 2008, and about how the property market managed to rebound so strongly last year.
Most importantly, it shows why any respite for the market can only be temporary…
How the Bank of England saved the Wilsons – and stuffed savers
Buy-to-let is “absolutely dead and will never return,” according to Fergus and Judith Wilson in an interview in the Guardian. 2008 wasn’t a great year for the Wilsons. By October, more than one in ten of their 700 or so homes in Kent was being lived in by tenants who were unable to pay the whole rent. And with banks pulling out of the buy-to-let lending business as fast as they could – this was a whole year after the run on Northern Rock – they were having a nightmare refinancing their debts.
“We were going to be, to put it bluntly, stuffed,” Fergus tells Patrick Collinson in the Guardian. So what saved them? The Bank of England. When interest rates were slashed to 0.5%, their loans mostly reverted to base-rate trackers. So their interest payment bills dived.
You can argue the toss about the morality of all this – actually, scratch that, you can’t. It’s a travesty. It’s a complete betrayal of the capitalist system and anyone who foolishly thought that this was how the game was played.
The Wilsons took what was unarguably a stupid risk. They built a huge portfolio of houses focused in one small area of the country. If the Bank of England hadn’t bailed them out (and note that many of their home loans were with a unit of Bradford & Bingley, and so are now owned by the taxpayer), they’d have likely gone bust.
The banks would have had to have a fire-sale of their houses, and first-time buyers in Ashford could have had a field day. Instead, the Wilsons are still trying to flog their homes at £180,000 a pop, and first-time buyers are still living in rental properties. And the Bank of England is subsidising landlords’ profits.
The Wilsons are of course, just the tip of the iceberg. There are plenty of other over-stretched borrowers who have remained in business only thanks to low rates and the tolerance of lenders who know that they’d be stuffed too if asset prices fell sharply.
Who will buy their houses?
But how long can this last? The Wilsons are now trying to sell their portfolio, piece by piece. But who will buy their homes? Not other buy-to-let landlords – the costs would be too high, particularly given the level of competition in the area. Not first-time buyers – to get a 25% deposit together on a £180,000 ‘starter’ home, they’d need to fork out £45,000 upfront (not to mention the £1,800 stamp duty). And a two-bed in Ashford is hardly the sort of trophy asset that a rich, European buyer is going to snap up.
Special FREE report from MoneyWeek magazine: When will house prices bottom out – and how will you know?
- Why UK property prices are going to fall 50%
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If the Wilsons want to sell their portfolio, it needs to be attractive to first-time buyers. So either banks have to lighten up on their lending criteria – hard to imagine, when base rates are at rock bottom anyway – or prices have to fall. And the more supply that comes on to the market, the more likely that is.
In fact, the Royal Institution of Chartered Surveyors (Rics) reported this morning that in February, the number of homes coming onto the market outstripped the number of new buyer enquiries for the second month in a row. This represents the “first sustained shift towards supply for two years”, said Rics.
Meanwhile, a net balance of 17% of agents said prices had risen over the past three months. That’s a lot lower than the 31% who reported rises in January. And sales per agent fell by nearly 5%, to 17.6 in February. Before the crunch, the number of sales averaged 25.
What will happen if the cost of lending rises?
But you could argue that nobody’s being forced to sell. That’s as maybe. But what happens if lending costs go up? Let’s go back to the Wilsons. According to Collinson, “once the base rate goes above 3.5%, the cost of servicing their debt will begin to exceed the rental income.” Judith’s response? “Interest rates are not going to rise quickly. If they do, then the whole country is bust.”
But we wouldn’t be so confident. Kate Barker, a member of the Bank of England’s interest-rate-setting Monetary Policy Committee, is starting to worry about inflation. “It is not easy to reconcile a large negative output gap with recent upward surprises on inflation,” she said recently. To explain, the ‘negative output gap’ just means that there seems to be plenty of spare capacity in the economy, which should normally swamp any inflationary pressures. The fact that this isn’t happening suggests that the Bank might have got its sums wrong.
Britain’s economy looks more vulnerable than most
We’re still not completely decided on whether inflation or deflation is the greatest threat – we’ll be getting a panel of experts in next month to try to hammer out the debate once and for all. But it’s fair to say that if one economy looks more vulnerable than almost any other at the moment, it’s Britain’s. My colleague David Stevenson has already pointed out that if inflation continues to be a problem, the Bank may have no choice but to raise rates, regardless of what it believes the long-term outlook is.
And as James Ferguson pointed out in a recent MoneyWeek magazine cover story (Don’t be fooled – house prices will fall again), if interest rates don’t rise, it’ll only be because the economy is heading for a double-dip recession. That would mean higher unemployment, and more forced sales. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)
One way or another, British house prices are going to fall. The Wilsons had better flog those houses fast.
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