busiNess
The unravelling of the great buy-to-let scam
Ross Clark says speculators and fraudsters saw easy money in buying city-centre flats with borrowed money — but investors and lenders now face huge losses as prices crash Ihave developed a rather ghoulish pastime. It involves thumbing through auction results for repossessed apartments in city centres, then checking what those same properties sold for when new, a year or two ago. My record so far is a two-bedroom flat in a development called Beauchamp Place, Coventry, which was auctioned in September for £85,000 — less than 40 per cent of the £214,000 for which it was sold new in June 2006.
That flat has, however, performed better as an investment than the shares of the company that led the buy-to-let boom. The share price of Bradford & Bingley, the former building society whose subsidiary Mortgage Express lent more money to property investors than any other in 2007, collapsed from 450 pence to 20 pence before being suspended when the government moved in to nationalise it. There will be no more multi-million-pound loans for budding tycoons whose business model was based on the fateful premise that house prices only ever go up.
A year ago I rang Mortgage Express because I wanted to speak to one of these mystery investors whom anecdote had it were walking on to building sites and buying up flats by the dozen. I was put in touch with a 29-year-old who ran a training company and, in his spare time, managed a portfolio of 38 houses and flats in the north-east. On paper he certainly looked wealthy. His properties, he said, were worth £8.5 million, producing a monthly rental income of £37,000. He wasn’t bothered that he had mortgages of £5 million and that his monthly interest payments came to £30,000. In fact, even though Northern Rock had just collapsed, sending fixed-rate mortgages soaring, his optimism would have impressed Mr Micawber.
‘I’m pretty well protected,’ he told me. ‘A lot of my loans were taken out when interest rates were lower. Some of them are at 4.84 per cent, and some at 4.55 per cent. And the fixed rates are staggered to expire at different times, in 2008, 2009 and 2010. By the time it comes to renewing them, hopefully rates will have come down again. Or maybe rents will be higher in a year’s time. If they’re not, I may sell some of the properties.’ I have been trying to speak to him again this past week, but his business number is now unobtainable and for some reason he doesn’t answer his mobile. But let’s do the maths for him. He won’t be getting a very attractive rate from the Bradford & Bingley any more — if indeed it will offer him another fixed rate at all. So I tried a bit of shopping around. The best rate, it turned out, was from the Norwich and Peterborough Building Society — at 6.59 per cent fixed. By my reckoning, his £30,000 monthly repayments are, when he is forced to remortgage, going to come to around £42,000.
Assuming he can fill his properties — unlike, say, the owners of an estimated 1,000 empty flats in central Leeds — and that his rents have risen in line with the 3.3 per cent national trend, he will now be earning £38,200 a month. That leaves a shortfall of some £4,000 a month between his rental income and his mortgage payments. As for selling off any of his properties quickly, he may as well forget it. The 12 per cent fall in house prices measured by the Halifax over the past year doesn’t tell the whole story: for many properties there are simply no buyers at all. Between July and August, net mortgage lending fell by 95 per cent.
Buy-to-let — or B2L as it was once fashionably known — has the potential to become one of the biggest investment scandals of all time, putting timeshares and tulip bulbs in the shade. Huge numbers of people are involved: this time last year the Council of Mortgage Lenders knew of 920,000 outstanding buy-tolet mortgages. At least those who have made direct investments in the property market have acquired some sort of asset — unlike the many thousands who signed up with Inside Track, the property investment company which went bust in May. This company used to charge £2,500 for the privilege of attending one of its seminars, and wide-eyed investors were then invited to part with another £6,495 to join its exclusive ‘club’, a sister company by the name of Instant Access Properties, which was supposed to give them opportunities to buy properties at discounted prices. Janet Lay, a 54-year-old divorcee from Leamington Spa, is one who wishes she hadn’t fallen for it. She says she lost £40,000 in her attempt to invest in two properties, one in Florida, the other in Basingstoke. She lost her deposit on the Basingstoke flat when she was unable to complete because mortgage lenders valued it at less than the supposed discount price.
In September, Instant Access Properties, too, went into administration, with 4,500 investors yet to complete on their purchases. The company’s website seeks to reassure them that a new company, IAP Global, has been formed to help them reach completion. Anyone concerned is invited to sign up for a ‘clinic’ to learn all about it. But I suspect investors may be a little tired of seminars by now.
‘Buy-to-let’ has become something of a misnomer over the past four years: it has been less about letting than about pure speculation. Since 2004, it has been hard to find a property anywhere in the country, apart perhaps from a large house with a dozen students squashed into it, where the net rental income would pay the mortgage. Many investment properties were deliberately left empty: why risk compromising your capital gain by letting grubby tenants put scuff marks all over the fancy fitted kitchen — the essential buy-to-let feature, according to estate agents — in return for a 2.5 per cent rental yield?
Some of this speculative activity has been outright fraud, involving inflated valuations by corrupt surveyors and repeated remortgaging, yielding a cash profit at each turn, as prices rose. But far more widespread than that is a sleight-of-hand which has helped investors build up property empires while putting down next to no cash. You’ve probably seen the signs on building sites over the past few years: ‘We pay your 5 per cent deposit for you.’ It should be obvious that the offer is a nonsense: the developer is paying the money to himself. What is really happening is that the developer is knocking 5 per cent off an inflated list price — and the buyer is taking out a 100 per cent mortgage.
I say it should be obvious — to everyone except mortgage-lenders, who have been massively and repeatedly deceived. Often the price entered on the conveyancing deed was the full list price, leading the lender to believe it was advancing a 95 per cent mortgage when in fact it was advancing a 100 per cent one. So long as house prices rose, speculators were making fortunes out of virtually nothing; the moment prices started to fall, they started making huge losses. No wonder auction catalogues are full of repossessed city-centre apartments — and the great property shortage which ministers were fretting about until recently has evaporated.
Perhaps the greatest scandal of the buy-tolet boom is that it has swallowed a decade’s worth of urban regeneration money. Huge grants have been poured into remodelling rundown city centres with block after block of apartments that were only ever designed to attract speculators. Birmingham, Manchester, Leeds and Newcastle, whose centres had been depopulated for decades, were marketed as hip places for young people to live — but in reality, there were never going to be enough young buyers to fill the apartments. In January I spoke to a middle-aged couple in Sunderland who had sold their suburban home to buy a city-centre apartment, only to find themselves, even after several months, almost the only people living there: most of the flats had been bought by Irish investors, who could not let them. There was no infrastructure of shops, schools or anything else to support a community: just flats and more flats.
The future for many of these flats, I suspect, will be as social housing. In June the government made £200 million available for housing associations and councils to buy empty new homes, and you can bet there will be more as local authorities work out that buying flats at distressed prices is a cheap way to house social tenants. We’ll be back where we started: with inner cities full of council tenants. But at least they’ll have a better class of kitchen.
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