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U.K.'s Conservative party have shown themselves to be the party of the rich, just not the Nuevo rich

One of the most fascinating implications of the recent property boom in the U.K. has been the creation of an entirely new class of wealthy property owners who came from very modest backgrounds. These investors, many of whom did not even have a job at the time they jumped with both feet onto the property ladder, were able to become very rich very fast due to the banks’ willingness to lend to just about anyone, with or without any real income, who was willing to take out a mortgage on a property. As far as the banks were concerned, of course, the risks were minimal. Even if the borrower could not repay the loan, the unquestionable rise in the price of the underlying property meant that it could be resold at the time of repossession for a profit. Consequently, the most likely scenario in case of non-payment was that the buyers themselves sold the property and pocketed the profits. But why should there be a default at all when mortgage rates were low, the property prices were rising rapidly, and there were a huge number of wannabe first time buyers who were forced into renting since they were neither crooked enough nor courageous enough to outbid the ever growing army of these types of property investors.

These new investors had nothing to lose. They had started with nothing, so everything they had made was a bonus. More importantly, however, they genuinely believed that prices will never come down, so they never even contemplated that there would ever be a risk of default. And, the banks shared their enthusiasm. In fact, the market had become so hot that many would take out interest only loans, since they wanted to even have some money left over from renting the properties they have purchased with 100% or more mortgages. As the property prices were shooting up, the value of the property would over a short period of time dwarf the size of the mortgage, even if it was for 100% of the purchase price. And, they did end up having not only investments in properties whose prices were going through the roof, they also had some money left over from renting them thanks to the ever tightening rental market.

Of course, we all know that the property market faced a severe correction, and many banks were sitting on a huge number of bad loans, some of which have yet to be recognized. But, the prices did not fall as some, such as myself, had predicted. An important reason why property prices did not collapse despite the sharp economic slowdown was that unemployment did not reach the levels that I, for example, had expected; although the length of time that people have remained unemployed is probably where I thought it would be.

More importantly, however, these properties could still be rented out despite the increasing longevity of the long-term employed because many could rent their properties to those who received housing benefits from the U.K. government. There are some interesting stories of people moving to the U.K. and living in properties that were costing the state around £2000 a week simply because they had too many children. But, irrespective of these uniquely outrageous situations, most landlords could hold onto their properties because interest rates were cut drastically post-crisis, which also reduced their mortgage payments, and they could rent them out to tenants who were financed by the government. This created an artificial floor for the rental market and allowed other landlords to maintain their prices despite the economic slowdown.

Well, the new government, despite the pleas of some of their more socialist coalition partners, is putting an end to the entire thing.

The first thing they did was to introduce very severe austerity measures. The result is that many, including the government, expect that unemployment will go up, making it more difficult to find tenants who can continue to pay the rents on their homes or people who can continue to make payments on their mortgages. Of course, this also extends the unemployment longevity of those who were already unemployed thanks to the recent crisis. The market was already feeling the pain in recent weeks from those homeowners who had kept up with repayments on their homes in the hope that they will find a job when the economy turns a corner but have now accepted that they will be unemployed for a while, stopped making mortgage payments from their ever decreasing savings, and have had their homes repossessed. The number of such properties in the market had already pushed prices down in many metropolitan areas, including London.

The final nail in the coffin of this group of Nuevo rich will come in the form of limits on housing benefit. If the limits of £400 per week are imposed this would mean that many homeowners in the metropolitan areas will struggle to maintain mortgage payments by relying on income from tenants who are financed by the government. As these properties are vacated and tenants move to either cheaper locations in their localities or even to more rural areas, the price of properties in those markets that have experienced the sharpest increases will start to fall even faster than they have been in recent months.

The result is that many of the Nuevo rich property investors will find themselves being forced to default on their own mortgages and pushed into repossessions. Somehow, I doubt that the banks are ready for such a mass exodus by these investors and the huge number of properties that will be returned to them. This would, of course, be a tremendous opportunity for the genuinely wealthy individuals, or “old money” as they are called, to pick up some prime properties at heavily discounted prices.

And, more importantly, the Conservatives can take credit for restoring equilibrium within the U.K. class system.

Comments

This is such an informative synoptisis which details the economic in such a clear and consise manner. The actions which homeowners need to undertake require deliberation and tactical know how...the rate of unemployment has been a major factor, and currently, as it appears shows no/little indication of improvement. We have witnessed that flats in the Wirral are becoming of higher interests, particularly to those who had home repossessed...We shall have to wait and see!

What about interest rates? Money is cretaed (borrowed) to pay interest (on loan # 1). So, more money has been borrowed (created) to pay such interest (loan # 2). Loans and the cycle begins the force of the economy (eg apples) to grow. However, no increase is not a new loan = not enough money to repay loan # 1 = depression. So, if we are still growing, we do not get hyper-inflation or depression. But how big we can grow before you destroy the environment?

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