THE SCENE: A beautiful couple – they might be models fresh from a home shopping catalogue photoshoot – relax in their sixth-floor two-bedroom, two-bathroom, new build apartment.
He is in the kitchen area, mixing up mojitos on the island unit. She is on the balcony, gazing across the city landscape (an out-of-focus backdrop of railway tracks, supermarket car parks and the back of the block next door). And unseen in these shiny advertisements is the Buy-To-Let (BTL) investor in the suburbs, tearing her hair out as she tries to make the maths work.
Welcome to the bursting edge of Britain’s housing bubble. Get out while you can.
Living the city centre dream
Britain, like the US, has seen a resurgence in city centre living in the past decade. The US led the way, with New York’s radical loft-living artists like Andy Warhol in the 1960s and ’70s followed by Wall Street bankers in the ’80s, and providing an aspirational goal for the 1990s. ‘Downtown’ was transformed from a cardboard shantytown by night into an after dark playground for the ‘young professionals’ beloved of TV property gurus.
The ’90s template established by Clerkenwell and Shoreditch lofts in London
Loft living offered a second chance for the hole at the centre of the metropolitan demographic donut – a means of tackling the flight of the affluent and the departure of light industry that had hollowed out the city centre.
Specialists like the Manhattan Loft Corporation and Urban Splash combined sympathetic restoration with cutting-edge design. The resulting homes were a stark counterpoint to the volume builders’ obsession with rabbit hutch housing for the workers and mock Tudor for the executives.
Those early warehouse conversions and the best of the rest that followed have been one of the great – and rare – success stories in British residential housing in the past 50 years. They’re to be applauded.
But this story isn’t about them. It’s about what happened next.
City-centre new build: Lofty aspirations meet good old avarice
The 1990s’ city centre pioneers like Harry Handelsman and Tom Bloxham were idealists with a genuine passion for architecture and urban regeneration. But inevitably, the construction industry’s traditionalists who said “It can’t be done!” had to find a way into the game when the new entrants proved it could.
Enter the mass-volume new build apartments that have sprung up in every major British city since 2000, aided by the Government’s understandable focus on ‘brownfield’ redevelopment. With these white cliff-like walls rising everywhere flanked by cranes working on the new build next door, thoroughly landlocked cities like Manchester have at times more resembled the seaside port of Dover.
There was nothing wrong with providing some new build housing when the warehouses ripe for conversion ran out, although much of the output was deadeningly unimaginative as volume took precedence over architectural flair. But supply soon overshot owner-occupier demand.
Even leaving aside the cookie-cutter design – the laminate flooring that apes the loft’s stripped floorboards, the floor-to-ceiling windows that substitute for their tall, bright spaces – the sudden flood of these complexes coming on-stream always spelt trouble in the short-term because, outside of London, there are only so many childless young professionals to go around.
When aspirational city centre flats are rented out to students, you know the mathematics has gone horribly wrong. How did it happen?
Buy-to-let today, repent tomorrow
The underlying flaw in the new build city centre renaissance has been the enormous uptake in Buy-To-Let mortgages since the turn of the century, and the concurrent soaring in property prices. It’s made owner-occupation of new build flats unaffordable, and investment unprofitable.
The idea of a person seeking to make a profit from property is fair enough – the public has not exactly faired well at the hands of mass landlords prior to BTL. And today, a renter enjoys more choice, higher quality, and keener prices than a decade ago.
Unfortunately for many BTL investors, this increase in the typical urban renter’s standard of living has been paid for by their poor investment decisions.
BTL investors flocked lemming-like to the superficial security and glossy brochures that come with every new build development. Today the majority of homes on these modern estates are owned by BTL investors and let out to populations of short-term renters.
Young would-be owner-occupiers typically can’t afford to buy there. The older ones who can need more room for imminent families, burgeoning shoe collections or simply cat swinging, and tend to prefer traditional terraces in the up-and-coming outskirts that offer more floor space and bedrooms for the buck.
Once shunned by homemakers, the city centre has now priced itself out of their budgets.
But this dearth of owner-occupation hasn’t deterred the BTLers. In fact, in the early days of the new build boom, investors didn’t even have to let the property to profit. The UK was introduced to ‘flipping‘, where you buy a property off-plan before it’s completed, and sell at a profit when the developer’s finishing touches come on the back of another 12-18 months of 20% price growth.
Some investors even hold on to completed empty apartments for years, with capital gains on selling a brand new apartment years down the line hopefully outweighing the hassle of renting the flat out to cover the very low mortgages typical of recent times.
However such a strategy only works when rates are low, prices are rising and demand exceeds supply. Today, with prices stagnant or even falling, we see the flipside to flipping – the risk of committing upfront to a future capital loss.
Indeed, few BTL investors seem to realise they’re actually paying a hefty price for those shiny new build flats. Fresh paint, unblemished kitchens and the perk of having the keys handed to you by that charming sales rep can come at a 20% premium to buying a second hand home.
Some people may feel this is a price worth paying, just as there’s a huge market willing to sacrifice 30% of the cost of a new car the second they drive it away from the showroom. But why would anyone pay tens of thousands of pounds to give their tenants this brand new buzz for free?
Any attempt to charge a higher rent to reflect the shiny status of the new build will likely be undercut by the BTLer next door. With rents barely covering mortgage costs, investors are turning on each other as they try to keep their property portfolios afloat.
Prices falling, costs increasing – bubble bursting?
Even the mainstream media is finally picking up on the trouble brewing in new build Buy-To-Let.
This is Money, from the Daily Mail stable, reports that 52-year old ‘Anne’ invested thousands into new build apartments following her attendance at a property investment seminar in London in 2002. She’s been rewarded with long periods where her properties have been empty, mortgage costs that outweigh her rental income, and a £100,000 debt run up trying to make good the difference:
All four properties are in negative equity. The mortgage shortfalls, interest arrears and redemption penalties total £210,000. Anne has also built up a £100,000 debt in the form of loans taken out to try to meet the mortgage bills.
Her total debts exceed £300,000. She has already lost her car and faces the loss of her home in which there is £30,000 equity – her only asset.
The buy-to-let lender, Mortgage Express, will not escape unscathed either. Even if it bankrupts Anne, it is set to lose more than £200,000 through its loans to her.
While Anne must be responsible for her own actions, it’s hard not to feel sorry for someone who has so clearly gotten out of her depth.
‘I went on that property investment course and I came back full of promises, bowled over with what could be achieved. I was told I could make £100,000 on these properties. I didn’t know that hundreds of people were trying to do the same thing.’
Expect much more of the same in the years ahead. The BTL warning lights have been flashing for years now, but while property prices were increasing and mortgage rates stayed low, tales of fortunes made in earlier years swamped talk of the losses made by more recent entrants. That could change fast.
In fact, even if UK property avoids the price fall that an elementary study of the cost of renting versus buying suggests is long overdue, the prognosis for new build BTL looks poor.
Priced for perfection – a perfect economy and a perfect paint job – the mass investor take-up of new build leaves it especially exposed to any bumps, whether in the poorly ageing laminate flooring or the housing market.
A stampede for the exit, and the blurry yet twinkling urban landscape familiar from the developers’ brochures could suddenly be brought into very sharp focus indeed.
