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A consumer&#39s view

It was only a matter of time before it happened but nobody wanted to listen to the warnings. South London estate agent Peter Burchell recently remarked about falling yields in the buy-to-let market: “We are finding that more and more people are putting their property on the market to sell or let and they take which ever deal comes first.”

It has been obvious for some time that the London buy-to-let market has overheated and that supply substantially exceeds demand. Rents are falling and if landlords can find a tenant at all, it is at an increasingly depressed rental level. It is only a matter of time before the buy-to-let recession spreads out to commuterland and the rest of the South-east.

But what is worrying is the blithe assumption by these novice landlords that even if they cannot find a tenant, they will be able to sell at a hefty profit on the price they paid. Clearly, this could be true if you have owned a property for five years or more. But the vast majority of buy-to-let sellers – and there will be an ever increasing number of them in the months ahead – will be getting rid of their property because they have to.

If they bought relatively recently with a large loan to value and they are unable to find a tenant prepared to pay sufficient to cover the mortgage costs, then they must sell to protect the deposit they put into the investment and the high costs of buying now. They will find that stamp duty really bites. Negative equity is, once again, a real possibility.

Add to this the massive number of investment properties that have yet to come on to the rental market – the whole of Paddington Basin, most of Imperial Wharf in Chelsea, not to mention hundreds of other new developments – and there could easily be a bloodbath in both the rental and selling market in London.

Interest rates may be low but this will be no consolation to those who see the value of their investment property falling. There could easily be a mad rush for the exit – and don&#39t think it couldn&#39t happen.

Asset prices elsewhere in the economy have suffered dramatic setbacks and there is no reason to think that property is immune. It is all part of what could turn into global deflation.

Even the International Monetary Fund which oversees the world&#39s financial institutions and economies is starting to get worried. As one expert described the IMF&#39s recent World Economic Report: “It is a picture of a global economy, stacked precariously like a house of cards waiting for a hit from just one more morsel of economic misery to bring on a global recession.” War with Iraq could be just that hit.

Deflation is now a very real possibility and there are some – admittedly few – pundits who believe we now face the possibility of the worst recession since the 1930s. The economic problems suffered by Japan over the past decade have widely been regarded as the exception. But economists are at last beginning to admit that we might all be going down a similar path.

If share prices do not recover fairly swiftly, how solvent are our life companies? Have the banks really written off all the loans they know will not be repaid or are they just whistling in the dark to keep their spirits up and not revealing the full extent of their bad debts to shareholders? How many more Enrons and Worldcoms will emerge?

This is all very bad news both for individuals and for their advisers. If buy to let goes the way of share prices, where can investors go for a secure, reasonable return on their money? If the answer is, as seems obvious, gilts and cash deposits, how will IFAs survive in this new investment climate?

You do not earn much commission by singing the praises of compound interest but that is the reality with which investors and their advisers have got to learn to live. The much opposed proposals to switch to a fee-based advice service could prove to be a blessing in disguise.


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