I don’t want to go down that well trodden road of anecdotal evidence of £4m townhouses in Islington or £500k flats in Hackney, I want to talk about the bigger picture here. The caveat here is that London is a more robust market than the rest of the UK, i.e. when the there is a recession the top assets are less affected that the junk at the bottom which has become far removed from their fundamentals i.e. a 2-bed new-build in Aldershot going for £350k.

The key to understanding the market that so many people misunderstand is that it’s not all about Mr and Mrs A who have just bought their first house at the top end of the cycle – OK these guys may feel the squeeze from interest rate increases if they have paid over the odds but this is non-discretionary income. From a purely market-economics perspective, even if these guys lose their home due to the fact that they can’t afford say 120% of their repayments (they shouldn’t have been lent the money in the first place), there is a swell of buyers waiting to jump in on this at the first sign of weakness in market prices, i.e. the simple market dynamics are there – demand outweighs supply and the London market is more robust.

Moreover, the fact is that if Mr and Mrs A can afford the mortgage then they have an underlying asset that will in the long term (i.e. the length of the mortgage) either return to an asset price that gives them an out or actually reaches a price that is higher than they paid. Therefore they can grin and bear it if negative equity comes knocking on their door.

Like I said, I’m not concerned with this Mr & Mrs A scenario; it is the Buy-to-Let (BTL) market that has me spooked.

BTL is a timebomb that has just about ticked over to 00:00 on the clock, with Paragon and Northern Rock feeling the burn from an unsustainable business model (i.e. lending money long term and, at times, interest only (no amortising debt) and borrowing short term in the inter-bank markets). The fact is that when the credit crunch hit, this business model failed it (where it is continuing to work). The immediate impacts of this and the credit crunch on the BTL market is that Loan-To-Value (LTV) levels (the amount of money you can borrow as a percent of the underlying assets value) will have decreased and general tightening of lending appetite.

However, I don’t think this is quite what’s going to hit the BTL market the hardest; it’s the actual players in that market that concerns me. Picture the scene, you bought a house in 1990 for £100k, in 2000 it’s worth £1m (or some equally crazy number) and you think to yourself: “you know what? I must be pretty fucking clever to have turned £100k into £1m. This property malarky is pretty much like printing money. I’m going to leverage up against the equity in my house and start buying and renting more properties”. The backdrop to this phenomenal asset value growth was the seemingly endless commissioning of property drivel on TV which indoctrinated all of the baby boomers to the mantra – strip the floorboards, paint everything off-white and watch the cash roll in.

A generation of asset-rich older folk strode (with their copy of Sarah Beeny’s latest book under their arm) confidently into their nearest bank and laid out their ‘grand designs’.

The problem with this is that term, asset-rich. This does not imply liquidity i.e. I have 20 quid in my pocket as opposed to having to wait to liquidate assets to get £20. The impacts on the BTL market is two-fold:

Increased Rents – if you’ve seen any news will know there has been 5 interest rate rises over the last 15 months. The simple maths is that on variable rate debt (most BTL players will be on a base + a margin rate) as rates go up, so does the amount of money required to pay off the bank loans. Suddenly, the ‘net profit’ on each property is shrinking as debt servicing is eating up more of the rental. The impact is simple – pass on the cost to the tenants. I’ve been watching the market informally by tracking gumtree. The fact is that the rental prices of 2 bedroom flats in North London are increasing at a noticeable rate, this can’t be due to economic conditions as people aren’t get paid any more and the cost of living has actually been increasing…it’s just the landlords passing on the rate hikes.

Defaults – Without getting into the finer details, if landlords keep passing on rate hikes, defaults will go up amongst tenants and that whole liquidity dilemma becomes an issue again for the BTL player. If they need rents to pay the debts and then they have increased voids, suddenly they may be defaulting on their debts and may have to prune their portfolio to cover debt servicing i.e. leading to more properties entering the market, thus reducing asset values (if the correction goes beyond the bottleneck built up on the demand side).

So like I said, I think the UK property market (like every mug out there) is too hot and reflects a bubble created through leveraging against increasing asset values, widespread liquidity in the capital markets and relaxed credit controls on behalf of lenders. London will be more robust than the wider UK property market but I still expect 10-20% to fall off assets in London which are not in prime areas i.e. Zone 1 -2 and those other areas with exceptional transport links.

I despair for places like Devon, which I refuse to believe has the robustness of demand or liquidity of counterparties to maintain at anywhere near the current price levels.

Although on the flipside I’ve go my eye on a nice little cottage by the coast which I may snap up once the SHTF (shit hits the fan).

For an insight into where is already feeling the burn, check out this website, I watch it weekly – it tracks house price reductions and can be searched by post code.