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Are the UK Banks causing a second dip?

There is a lot of talk in the media at the moment of the possibility of a second dip in the UK housing market. There is a good chance that there could be a second dip particularly when the banks release all of the repossessed property that they are currently holding, into the market. When the supply increases then house prices could fall further, if the demand is not sufficient to soak up the extra supply.

However, I would argue that the demand is there. The two groups who stimulate the market are investors and first time buyers. Investors realise that properties stack up well at the moment, far better than they have for a few years. If you are investing for the long term it does not matter if prices fall in the short term, as long as you can afford to hold by ensuring you buy in an area with strong rental demand and positive cash flow each month after all the expenses. First time buyers are also keen to get on the ladder before prices go up although many of them are uncertain about what the future holds due to all the scare mongering in the press.

The main problem lies with the UK banks and their lending policy. Understandably they have learnt their lesson and I am sure will now lend more responsibly than in the past, which has got to be a good thing. However, for the UK market to recover the lending availability has to improve. The banks are already being cautious by restricting their lending on Buy to Lets to 75% Loan to Value so they have plenty of buffer in case prices fall.

They are also being careful of whom they lend to although I would question the logic behind some of their decisions. The Lloyds TSB banking group now owned by the government (or rather the tax payer) restrict the number of mortgage across its brands to a maximum of nine. Most experienced investors, with a reasonable sized portfolio, would exceed this limit and so would not be able to get further mortgages for any lender in the group including; Birmingham Midshires, Halifax, Lloyds and C&G. Ironically these banks seem to be happy to lend to a complete novice investor, with absolutely no experience and so someone far more likely to make mistakes than an experienced investor to whom they will not lend. It does not really make sense.

But the real problem is that the banks are instructing surveyors to down value properties in their surveys. Most surveyors would say that a property is worth what someone is prepared to pay for it. However, this wide spread policy of down valuing property ignores the fact that there are buyers prepared to pay the agreed price. When the property is down valued the mortgage offer is adjusted down and often not sufficient enough for the buyer to afford the property, so the sale falls through. The surveyors are under pressure from the banks and they don’t want to be sued for getting it wrong.

Willing buyers are not able to make the purchase they want and so the market stagnates as people get stuck in chains and the net effect is less sales. Less sales will lead to a fall in prices and a general down valuing of the market. Thus the second dip that the press seem determined to talk us into.

This is bad news for everyone, including the banks who will have even less security and equity on their existing lending. With many people potentially in negative equity unable to afford to move, the market will stagnate further and take even longer to recover. Again bad news for everyone.

If we are not careful we will get to the point where no one can sell or buy and the only solution will be to do every property transaction as an option. I am convinced purchase lease options will become far more common place over the next few years.

What we need is some positivity in the press to encourage first time buyers to stimulate the market and general easing of lending criteria so that more people can access the funds to buy the property they want to purchase. And ideally an end to this policy of Banks telling surveyors to down value property.

Come on UK Banks….sort it out. As owners of many of the banks, the new government should wake up, smell the coffee and realise what is going on. Unless something changes I predict that the UK Banks will cause a second dip in the UK house market.

Simon Zutshi
Founder, Property Investors Network

11 thoughts on “Are the UK Banks causing a second dip?

  1. dan

    Great artcile, not sure what you mean by “When the property is down valued the mortgage offer is adjusted down and often not sufficient enough for the buyer to afford the property, so the sale falls through” if the prop is dv the mortgage will be cheaper so will affordability?

  2. Jamie Wood

    I was reading a book about circumstances for business in 1805. In it it was suggested that all people of capital should be allowed to kill one lawyer per year without anf fear of imprisonmentt. 200 years later, change the word lawyers to bankers( and politicians) and we see how many of us feel. One section of society is still above the law and able to cause mayhem due to their hubris and greed, and incredibly the guilty go unpunished and the innocent suffer yet again. Some things never change.

  3. Simon Hildebrand

    In answer to Dan, if you expect a property to value up at £100k and you promise the vendor £75k. If you get down valued to £90k then you wont be able to pay the vendor what they need without additional deposit if you are using creative financing / NMD.

    If there is a double dip or at least a stagnant market -its going to make life tough for a lot of vendors. Finding those vendors and making win-windeals with them is going to be very lucrative in near future.

  4. Bobby Gill

    The Banks were technically bankrupt a couple of years ago but got bailed out by us. Now they want as much cash in as possible, despite the cost to businesses and the economy.

    Unfortunately the Banks are not run by people but systems and organic robots – they are only interested in their bottom line and do not care about the economy, taxpayers, you or me.

    The dip is coming, not good news for people with equity to lose or poor cash flow – but an opportunity for investors to stock up on houses!

    Bobby

  5. Simon Zutshi

    Yes I agree. As the market conditions get tougher educated investors like us will be able to find more motivated sellers.

    I still feel sorry for everyone else who are suffering because of the actions taken by the banks.

  6. Gary Edgar

    If a property is “down valued” by a surveying company there has to be a reason for it. Comparable evidence is currently difficult to find in some areas and many corporate surveyors are being encouraged to do six or seven valuations a day and will look for the easier option when providing the market value. So, if they quickly find three comparables sold within the last six months, then it justifies their figure.

    The comparable properties may be forced sales and may not always be ideal comparables. So, consider finding your own comparable evidence or seek advice from a local estate agent or independent chartered surveyor. You do no want the mortgage refused due to a down value (unless it helps get the price down from the vendor) so if you are convinced on the value, fight your corner and get some help.

  7. Simon Zutshi

    Hi Gary,

    Many thanks for this good advice. I have doen this myself and it has generally worked well.

    There are surveyors who refuse to take any information. Unfortunately it is these few jobs worths that get a bad name for surveyors.

    Kind regards

    Simon

  8. dazzavazza

    Lloyds banking group policy has been changed to allow only 3 BTL mortgages. I had an approval in principal about 8 weeks ago, and the following week the offer was accepted but my app was declined as the weekend before they had updated the policy…. 🙁
    Had to use Mortgage works now….slow and inefficient

  9. Mike Clarke

    The Double dip in the economy is now well and truly with us. While the 20 richest nations meet in Seoul to discuss the global economy and how to stem the economic meltdown of many countries including the UK.
    The USA want China to make the first move by accepting more imports to bail out the USA who caused the whole global financial mess in the first place.
    The Chinese are shrewd businessmen and are funding mortgages for a lucky few. You see we investors use property as our investment vehicles the same as the banks do.
    Is it more a case of the UK/US banks have lost faith in their own abilities because of extending credit to the sub prime market and taking on a few too many toxic loans?
    Loans that we as taxpayers are supposed to fund.

    The banks should bring in a few property investment experts who could help to re-educate the executives!

    Mike