The UK property market is a house of cards

With the housing market weakening rapidly, sellers seem to be willing to do anything to close a deal. John Bradley, selling a three-bedroom house near Lymington in Hampshire, will throw in a £20,000 Porsche Boxster with only 12,000 miles on the clock. Or, if you want to get away from the UK altogether, Michael and Selma Decker are offering a four-week break in their St Lucia Villa if you take their £1.25m home on London's South Bank off their hands.

But when it comes to throwing in sweeteners, no one is more accomplished at the art than property developers. Ross Clark in The Times highlights one lucky buyer on a development in Ipswich who secured £1,000 cashback, £5,000 in furnishings and her 5% deposit paid by the developer on a £110,000 flat. Sounds great. But, of course, it's nothing of the kind. All of these little extras' are simply paid for by an inflated asking price.

That's salesmanship, you might argue everywhere, from car showrooms to supermarkets, businesses make use of liberal special offers that are usually nothing like as generous as they claim to be. The trouble is, the sleight of hand used by property developers and housebuilders can have much more damaging ramifications for the wider property market. Indeed, in this sector sweeteners have sometimes even proved an open invitation to fraud, which is only now coming to light as the boom dies.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Handing out freebies is a practise that partly reflects the difficulties that developers are having selling in areas where there has been over-enthusiastic building, notes Clark. As the BBC's Hugh Pym points out, apartment blocks have been springing up "as developers tried to meet the demand from buy-to-let" investors in particular. In 1997,just 16% of new housing projects were accounted for by flats and maisonettes. Last year, the figure was 46%. With a glut of flats in Manchester, Leeds, Nottingham and Birmingham, for example, it's becoming hard to conceal the fact that prices are falling.

Developers don't want to be seen to be cutting their prices the housing market, particularly in the buy-to-let sector, is driven by a buyer's belief that their investment can only increase in value. So rather than cut prices in a visible way, developers prefer to offer discounts in the form of deposits and the like.

However, when a buyer applies for a mortgage on a new-build, they apply for the full headline price. The lender values the property on the basis of the prices fetched for similar homes in the area, as recorded in the Land Registry. But as the stated price won't reflect the incentives, it may overstate the real value of the home.

Lenders were pretty unconcerned about that when it seemed that prices could only go up. But now that prices have stopped rising, and repossessions are starting to creep up, lenders are discovering that the properties returning to their books are worth far less than they'd expected. Clark cites the case of a two-bedroom flat in Ipswich that finally ended up selling for just half of what had been paid for it. And lax lending standards combined with these largely unrecorded incentives seem to have created a fertile breeding ground for fraud.

The Financial Services Authority has already admitted that new-build property fraud "is more serious than originally feared", according to Citywire. Organised gangs are "using mortgage and property fraud to make significant profits", says the FSA's crime director Philip Robinson. The average loss per property has been estimated at around £45,000. The frauds involve "bogus surveys and mortgage applications that artificially inflate the value of the property". The scale of the problem has caught the regulator by surprise.

As Sharlene Goff explains in the FT, when the lender passes on the funds, fraudsters have been pocketing the difference between the loan and the actual property price. In many cases, they simply disappear with the money altogether. "In areas where there has been an oversupply of city-centre flats, mortgage fraud has been endemic," Nationwide's Matthew Wyles told the FT. Lenders, already feeling the pinch, are being forced to kill lending to new properties, or withdraw from the market entirely. The Council of Mortgage Lenders has rewritten its Lenders' Handbook to warn conveyancing solicitors to disclose the value of any incentives involved in a property deal.

But the reality is that lenders have known about this potential problem for a long time. As far back as 2005, Portman Building Society (now part of Nationwide) said it would no longer lend on new-build properties. However, just as lenders were happy to offer people six times their income to buy a home at the height of the boom, so it seems that most were happy to overlook the realism, or otherwise, of the survey price.

Now, as credit conditions tighten, with repossessions set to rise above 50,000 this year, the true scale of criminal activity is likely to be unearthed. After years of reckless mortgage lending, chronic oversupply of new flats and widespread fraud, Britain's "house of cards" is about to collapse, as Alastair Stewart of Dresdner Kleinwort puts it.