Buy-to-let mortgage at greater risk of repossession.
Buy-to-let mortgages are at a greater risk of repossession than owner-occupier mortgages.
According to a recent Standard and Poor’s report the risk of house repossession through the buy-to-let market has increased dramatically due to declining property prices and the reduction in mortgage products.
The report has estimated that approximately 20% to 40% of buy-to-let borrowers may fall into negative equity by Q2 2009.
When you compare this figure to the market as a whole at 14% to 20% it becomes apparent how deep this issue could become for the sector. Of course this large percentage is built on the fact that many buy-to-let mortgages were taken out at 90% or more LTV (loan to value) ratios, some over 100%.
In addition to this, many buy-to-let residential properties were new build flats with little scarcity when purchased. Today new-build flats compete directly with similar new builds left and right which are vacant. Meanwhile construction firms bend over backwards to sell remaining stock.
The report helps to outline fundamental property issues which are reflected in pure economic theory, supply and demand and the value of scarcity. When you have new build flats all built on top of each other in a cookie cutter format they offer no unique selling point (USP) and crucially… no land and no scarcity. You could buy any number of flats in a given area and developers can make more money whilst flooding the supply with each and every floor they build skywards. The summation theory of valuation equates market value as Land + Building = Market Value. Over time the scarcity is within the land, not the building, the building depreciates and can simply be replaced by bricks and mortar, (just as a car depreciates) the land is the part of the asset to rise in value due to inherent scarcity.
Back to report however which based its analysis of around 200,000 securitised buy-to-let loans – representing around 20% of the buy-to-let market – buy-to-let arrears were 3.7% at the end of June, compared with 2.9% of arrears in a sample of prime owner-occupied mortgages.
Kate Livesey, surveillance credit analyst at Standard & Poor’s, said: “While older buy-to-let mortgages outperform similar loans made to prime owner-occupiers, newer buy-to-let mortgages are now underperforming, given looser initial underwriting standards and lower absolute growth in rental coverage since origination.” The rental part of the equation is also an issue, new build buy-to-lets compete directly for tenants with owners of the flats to their left, right upstairs and downstairs. Flats with land compete with only those with land, which there are far fewer of and therefore, due to scarcity perform better on average.
Livesey said that this makes performance of the buy-to-let sector more sensitive to the currently difficult credit environment: “In a downturn we believe that the current stock of buy-to-let loans will carry higher credit risk than the stock of loans to prime owner-occupiers.”
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