Paragon deals blow to housing market

Paragon (PAG), Britain's number-three buy-to-let lender, has become the latest credit-crunch victim. It has warned that borrowing from other banks is becoming too expensive and so it has lined up an emergency £280m rights issue.

Paragon is having to scale back growth, effectively closing to new business from February, noted Philip Aldrick in The Daily Telegraph.

Meanwhile, Bradford & Bingley (BB), the buy-to-let sector's largest lender, has had to sell off £4bn of loans to shore up its balance sheet.

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What next for the housing market?

In the past three years, buy-to-let investors have filled the gap left by first- time buyers priced out of the housing market, said James Rossiter said in The Times; thanks to an abundance of cheap deals, buy-to-let loans have rocketed over the past five years.

But the surge is set to "come to a halt". Yields have now plummeted as house prices have soared, with recent investors facing mortgages of over 6%, while net yields are 3.5%, according to James Hamilton of Numis. And now that house prices are no longer rising rapidly, "the maths just does not work", as Credit Suisse put it.

Meanwhile, buyer numbers are likely to shrink now that credit is tightening and Paragon's difficulties presage less lending and higher mortgage rates; Bradford & Bingley, moreover, has said it won't be "charging back into the market" to offer cheap rates.

All this portends more buy-to-let sellers and fewer buyers, with the drop in demand and rising supply denting house prices; with this year's higher interest rates putting upward pressure on repossessions, a jump in forced selling would accelerate price falls. As Hamilton said, it looks as though the UK property market's "massive bubble" is "about to pop".