My sister called me in tears on Tuesday. Her purchase of a £900,000 house in Balham has just fallen through – the day before exchange. What do I do, she wailed? Count your lucky stars, I said. You’ve just saved yourself a good couple of hundred grand. There is absolutely nothing left to support the housing bubble. Subprime lenders have started pulling out of the market and even outside this extra-risky sector lenders have started muttering about tightening up their lending criteria.
The result? The two lots of people holding up the market – buy-to-letters and mid-ranking City men – are in trouble. The buy-to-letters for obvious reasons (who’d lend hundreds of thousands of pounds to someone to buy an ‘investment’ with a negative yield?) and the City men because they won’t be able to get bonus mortgages any more.
Such mortgages work – or worked – on the basis that while a stockbroker might only get a salary of, say, £110,000, he also gets whopping great bonuses, and hence it’s not a problem to lend him £800,000. He can just pay it off in annual chunks – quarter of a million here, quarter of a million there, until the debt’s gone. Unless, of course, he doesn’t get a bonus. Whoops. So, as I said to my sister (I was cheering her up no end by this point), if she still really wants an unmodernised, three-bedroom, semi-detached Victorian ‘villa’ in a grubby London suburb in 12 months’ time, she should be able to pick one up for more like £500,000 than £900,000. Better still, at that price she might even be able to afford the mortgage payments on it. House prices are already falling in Wales, the Midlands and the southwest. Balham’s next.
Of course, it won’t stop there – I don’t think that the end of the property bubble is going to be the only one of MoneyWeek’s top themes to get its time in the limelight over the next few months. It seems that the Great Unwind of the credit bubble, which I’ve been waiting for and Bill Bonner has been longing for over the last few years, is finally here. This might be bad for credit markets, for most of the hedge funds out there, for private equity, for property and for equity markets in general, but it should also be good for some of our favourite assets. The yen carry trade has already started to unwind – it’s up 6% against the pound in the last three weeks – and if confusion turns to panic in the markets (as it often does), it should move a lot further very fast (as it did in the last financial crisis in 1998). If I was a spreadbetter (which I’m not) I’d be tempted to put a few pounds on the yen. Precious metals should also turn out to be a winner. Central banks’ sales have kept a lid on prices recently – and there have been rumours of another big seller out there – but as the dust settles, investors should remember that, in times of crisis, gold has always been a splendid safe haven. An awful lot of them could really do with one of those right now.