Housing bubble about to burst?

by Caroline Colebrook

ECONOMISTS are predicting that a downturn in London’s buy-to-let property market could be the first sign of the imminent bursting of the housing bubble that has drawn up the price of homes and rents to ridiculous heights — but which has sustained Chancellor George Osborne’s claims of growth in our economy.

The rising prices have attracted many investors to become landlords as a quick way to get rich, using buy-tolet mortgages to buy the properties and then let them out.

A small rise in interest rates can trigger a mass selloff of these properties, resulting in a sudden crash in prices. This has a domino effect, as the sub-prime mortgage collapse in the United States showed in 2007/8.

Those who are buying houses to live in can find themselves with negative equity — where the house they own is now worth a lot less than the mortgage they are paying for it and they then cannot sell except at a great loss.

The interest rates have not gone up but a new report from the National Landlords’ Association (NLA) states that the collapse in prices may have begun.

The Times reported on Wednesday that 500,000 buyto- let properties could be sold off in the next year alone, followed by 100,000 per year until 2021.

It is difficult to rely on forecasts but the figures from the survey by the NLA are considered worth noting. The proportion of its members signalling intentions to sell with the next year has jumped from seven per cent in July to 19 per cent.

The chief executive officer of the NLA laid the problem squarely at the feet of the Chancellor himself: “Two speeches from the chancellor in 2015 have led to a crisis in confidence greater than when all but a few buy-to-let products were immediately withdrawn from the market following the 2007 financial crash.”

Less than a month before this report was issued one of the City of London’s leading bear strategists warned of an impending crash in 2016. Albert Edwards told an investment conference in London that: “Developments in the global economy will push the US back into recession.

“The financial crisis will reawaken. It will be every bit as bad as in 2008—09 and it will turn very ugly indeed.”

Edwards pinned the expected crash of 2016 firmly on the same banks which caused the Financial Crisis in 2007/8, and the policy makers — like George Osborne and the Bank of England Governor Mark Carney — who failed to rein them in afterwards.

“They didn’t understand the system then and they don’t understand how they are screwing up again. Deflation is upon us and the central banks can’t see it.”

Edwards was backed up by the Royal Bank of Scotland, who issued a “sell everything” warning in the same month — which means exactly what it says: sell everything, the market is about to crash.

Economists are expressing concern about the lack of any corrective action from the Government in the face of these dire warnings. Whether it is the astronomical spike in house prices, the sudden crisis-in-confidence in the buy-to-let market, the crisis in China, the crash in prices of Brent Crude oil, or the litany of other red flags — the major indicators of an impending crash are present today.

They are saying that the Conservative government is woefully under-prepared to deal with such a crash if and when it happens. This could be the cause of the sudden rumours of a snap election in 2016.

David Cameron has spent the last five-and-a-half years making an unholy mess of the nation’s finances. But he may not be hanging around for the clean-up.

Earlier this week Shadow Defence Minister Toby Perkins said Labour had to be prepared for David Cameron to quit after the European Union referendum, even if he is on the winning side.

Writing on the Labour-List website, Perkins warned: “If Labour is confronted with a general election whilst intellectually and organisationally underprepared, divided and under resourced, we would be hurtling towards catastrophe.”

He expressed concern that a new Tory leader may feel it is the right time to trigger a snap election.

If Labour is caught unprepared it would be a disaster for Jeremy Corbyn. And if Corbyn won the election he could be left with a new financial collapse to cope with.