The UK property market is collapsing. But some people still don’t get it – cut off from credit in the UK, they are borrowing money against their holiday homes to fund further purchases in Britain. This is utter madness, says Merryn Somerset Webb – here’s why.
Will the madness never end? Just as we thought that the nation was gradually coming to its senses about property, a press release arrives from a "specialist property finance broker" Assetz Finance. It suggests that those wishing to raise funds in the UK to buy property or to "help their children buy their first home" do so by taking out mortgages on any foreign properties they own.
Why? Because while UK banks have "severely restricted" their lending criteria, European banks are apparently "still doing business as normal." So why not use your French holiday home to "raise £100,000 using a 20-year euro mortgage from a French lender" and, like case study James Langworth, use it to buy a home in the UK?
Now is definitely not the time to buy a house
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It's hard to know where to begin with this one. Lets start with Mr Langworth himself. He is already the proud owner of two buy-to-let properties in the UK, as well as his ski chalet in France. So you might have thought that he had quite enough exposure to the world's current riskiest asset class without leveraging it up to buy more.
Furthermore, you might have thought that he might have a go at listening to the message the market is attempting to deliver to him. He had hoped to borrow money against his UK buy-to-lets to get enough together for a deposit on another house. But, says the press release, thanks to the credit crunch, he has not been able to - presumably because mainstream lenders consider him to have quite enough debt relative to his income and assets already.
This, coupled with the fact that the value of UK property is currently falling at a couple of percent a month, would tell most of us, I think, that now is not the time to buy a house. But those who follow Assetz's advice and take out foreign mortgages will be doing more than just shackling themselves to a depreciating asset in the UK. They'll also be exposing themselves to a huge amount of currency risk. "I am... benefiting hugely from the current strength of the euro against the pound," says James. And no doubt he is. For now.
The markets could turn on the euro next
But the European economy isn't exactly covering itself with glory at the moment, is it? Its stock markets are a disaster; its export industries are being hit by a double whammy of global slowdown and a strong currency; and its own property markets are faring little better than our own. I wonder how easy it would be to flog the average ski chalet in a hurry, if you suddenly found you were a tad over-leveraged.
The point is this: the pound is currently everyone's pet hate, but that state of affairs won't last forever. Perhaps the markets will turn on the euro next. Then James will be left with two heavily mortgaged buy-to-lets in the UK (I'm assuming this from the fact that he can't withdraw any equity from them); one heavily mortgaged owner occupied home in the UK (he's only planning to raise a deposit from his French house); and one French ski chalet, on which he will have a mortgage - the payments on which will be unpredictable; and the total value of which in sterling terms is rising not falling. All in a falling market.
It's a feisty strategy. And it may, of course, all work out for the best. Sadly, I suspect it will not. In which case, James might be well advised to get himself a copy of new book just released by Kath Kelly. Its title? "
." He won't be the only reader. So many of the credit-crunched are looking to emulate Ms Kelly that her book is currently out of stock on Amazon.
This article is taken from Merryn Somerset Webb's weekly Money Sense email.Sign up to Money Sense here.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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