Why thousands of people have overpaid for property

This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense

In 2007 27,100 homes in the UK were repossessed. That might not sound too serious, but it is.

Not only do the bare statistics disguise an extraordinary amount of pain on the part of the families made homeless by them but the number is up 20% on 2006 and already well over a third of its level in the worst days of the bear market in house prices at the end of the 1990s. But worse, it reflects the state of the market before the credit crunch really started kicking in, before mortgage rates really started rising and of course before house prices started falling.

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Yes, the market was turning nasty at the end of 2007 and these numbers do include that period but there's quite a time lag between missing a payment and losing your house. Anyone who lost their house in the last quarter of 2007 got into trouble some months earlier ie when rates were low and credit easy to get. And anyone who got into trouble in November or December last year isn't homeless quite yet: their losses are only going to show up in the 2008 numbers along with those of the many thousands of people who are only now losing control of their repayments.

So how many repossesions will there be this year? Some estimates suggest up to 60,000 but I wouldn't be altogether surprised if the number was even higher, given the dismal state of our economy, the approaching prospect of rising unemployment (a survey out over the weekend suggested that 40% of employers are planning redundancies), the hideous news on inflation (see The horrible truth about inflation - it just won't go away for details) which makes it plain that interest rates can't come down in a hurry, and finally given the increasing evidence that over the last few years thousands of people have grossly overpaid for their properties.

The true meaning of 'market value'

Everyone will have at some point in the last five years come across some organisation or another offering to sell them new build flats at "below market value" or, in property wheeler dealer scam talk, "BMV." The problem here is the definition of market value.' Peter Bill writing in the Evening Standard last week pointed out the key factor used by valuers for mortgage companies when trying to figure out the market value of a flat is how much similar properties are selling for. And "naughty developers" are not above selling the first few flats in a development to "friends and family" at inflated prices to set a high benchmark. Then they in cahoots with the buy to let clubs can offer punters a 10-15% "discount" from their made up "market value" and still be well in the money: you think you are making what the clubs like to call "instant equity" but you are in fact being fleeced.

That this has been the case all too often became painfully plain back in the spring of 2006 when the buy to let frenzy was cooling. "Plain, because the sale prices of repossessed flats were falling well below the outstanding mortgage." It is irritating that any vaguely educated adult can fall for the idea that it is possible to buy something at a price below its market value (there is, you see, no such thing as BMV in any true market the price you pay is the market price) but that doesn't take away from the nastiness of this kind of deal or of its architects.

The property bubble predators

All great bubbles carry with them predators who feed off the gullibility of the great mass of amibitious financial illiterates. In the tech bubble it was the stock promotors and the fund managers. In the great property bubble of this decade it has been the property developers and many of the the buy to let clubs.

I don't suppose they'll be at it for much longer the pool of potential victims must be depleting rather - but they will leave behind them an awful lot of investors' paying mortgages on properties worth less than the debt secured on them. Would you keep paying if you were one of them? Probably not. Look for repossessions all over the nation's regional city centres to keep rising.

This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense

I also wouldn't be altogether surprised if a good number of repossesions took place in central London over the next few years. I don't think many people are still clinging to the foolish notion that prices here won't fall with those around the rest of the country. They already are (one agent caught off his guard told me a few weeks ago that going on his experience prices are already off 10-15% in some areas) and as jobs go in the City and our non doms scarper they'll keep doing so. (For more, see: London property - where have all the buyers gone?) And London home owners are at least as probably even more mortgaged up to the hilt as non London homeowners.

A sign of the times? Last week the publicity for Allsops February 13th property auction (nearly 40% of the lots in which are repossesions) included details of a whole house in Batoum Gardens. Batoum Gardens is just off Brook Green (a small piece of grubby grass sandwiched between Hammersmith and Shepherd's Bush), an area that has been a huge beneficiary of the London bubble. This time last year if you'd wanted a house in Brook Green you'd have ended up in a bidding war and ended up with no change from £1.6m. What's the price this year? If the house hasn't been withdrawn I spoke to one of the many estate agents marketing it last week and she was hopeful of finding a buyer pre auction - we'll find out tomorrow.