The ‘property as pension’ era may face a bumpy end

Spare a thought for poor Dion Dublin. After seven glorious years as a co-presenter of Homes Under the Hammer, the former Manchester United striker must be wondering what the future holds for the BBC’S day-time property programme as talk grows of a housing market crash.

The format, for the uninitiated, is that investors snap up rundown properties at auction, then give them a quick makeover. The budding property moguls then either flip their new purchases for a quick profit, rent them out or choose to live in them.

Running for nearly two decades, the show has become the unlikeliest of TV smash hits, with Meryl Streep and Sir Paul Mccartney among its fans.

Yet, it may also find itself an unlikely casualty of Kwasi Kwarteng’s min-budget. Homes Under the Hammer isn’t just a celebration of Britain’s longstanding obsession with property, it was a reflection of the growth of the buy-to-let sector from a niche into a mainstream retirement strategy.

Could the fallout from the Treasury’s tax cuts bring down the hammer on the market for good? Along with the residential market, the buy-to-let craze had begun cooling before the new Chancellor chucked his tax grenade into financial markets on Friday.

Lenders had begun pulling back after a rush of landlords seeking to lock in cheaper rates overloaded their systems. Seven, including the Cambridge, Bath, and Harpenden building societies, either gutted their product range or paused lending altogether at the end of August.

But this week’s events have triggered a stampede in the mortgage market. On Monday, there were 7,490 residential and buy-to-let mortgage products available but by Tuesday the number had shrunk to 6,609, a fall of nearly 12 per cent in just 36 hours.

By yesterday, a further 935 products had disappeared, according to the financial website Moneyfacts – the biggest fall it had registered since it began monitoring numbers in November 2011. It is also around double the previous record, when availability decreased by 462 on a single day, at the beginning of the Covid pandemic.

The Bank of England’s extraordinary intervention in the bond market, with a form of quantitative easing, calmed financial markets to a point. It doesn’t change the bigger picture dramatically, however. Interest rate expectations remain worryingly high, with obvious implications for Britain’s overheated housing market and a generation of investors that piled into the market, often in search of an easy fortune.

The boom has been astonishing. Ultra-low interest rates have meant rock bottom savings rates but dirtcheap mortgages. Investors have increasingly sought to fund their retirements by piling into housing.

This phenomenon created an entirely new cohort of small landlords. One recent estimate put the number of privately rented homes in England alone at 4.8million. Based on an average house price of £292,000, that values the entire market at £1.4trillion.

Many landlords have gone on to amass huge property empires by riding the seemingly unstoppable growth in house prices. The trick was simple enough – cash in on the price rise of one house by remortgaging and releasing capital to buy another.

Investors live off the rent or use it to supplement their income, while hoping to benefit from capital growth long term, with one crucial caveat: that house prices continue to rise.

The meltdown in markets after Kwarteng’s £45billion unfunded tax giveaway obviously throws that basic assumption straight out of the window.

As Huw Pill, the Bank of England’s chief economist, said, the tax cuts would almost certainly inflame inflationary pressures, with the result that interest rates would need to go higher than previously forecast.

The question then is simply how high and how quickly? The expectation in financial markets before the Bank stepped in yesterday was for it to announce a 1.5 per cent rise to 3.75 in November and for the base rate to have rocketed to 6 per cent by May. At those levels, with prices where they are, affordability would crash to levels not seen for more than 30 years.

Forecasts have adjusted down slightly to 5.75 per cent after the Bank scrambled to stabilise markets but a difference of 0.25 per cent really is nominal. As scores of banks and building societies run for the hills, experts predict that by next week, it will be hard to find a mortgage with less than 5 per cent interest. This time last year, Halifax was offering a two-year 0.83 per cent fixed rate.

A housing market correction looks nailed on, a full-blown crash increasingly likely. Forced sellers will flood the market as first-time buyers are shut out, causing massive oversupply just as demand craters.

Estimates are for prices to dip from 10 to 30 per cent. Buy-to-let landlords look especially exposed, many having built portfolios on interest-only loans. The era of using property as a pension may be coming to a bumpy end.