Negative carry in housing investments

Escrito el 30 Noviembre 2007 por Juan Toro en Financial Markets

New assessments on housing prices focusing in the UK property market show strong overvaluations. A recent report by HSBC foresees a similar movement in the UK property market to that going through currently in the US. The Land Registry (a very reliable source of house price data) pinpointed that that property prices fell by 0.6 per cent in October in London or 6 % annually approximately. HSBC reckons that overvaluations go as far as 30 % in the UK housing sector. HSBC is not the only institution to have offered such a gloomy picture of the housing market in the UK. Last month the International Monetary Fund (IMF) estimated an overvaluation of 40 % in UK housing prices.

The question is whether we will see any correction of this overvaluation and how will that happen? HSBC suggests that the process triggering this price correction will come from the credit tight conditions and the large growth of let to-buy-market in the last years. The current conditions imply that you have a negative carry on your property investment (mortgage payment exceed rental income) and any one that holds property as an investment will be loosing money each day it holds into that investment. Things might get worse if prices go down. Buy-to-let investors will be loosing on the carry (mortgage payment minus rental income) but also in the value of the asset. This will make many buy-to-let investors that are leveraged dump their properties into the market depressing prices and inducing a vicious circle.
The dangerous thing in this process is that the same logic is applicable to any nation that has been hit by the credit squeeze either direct or indirectly. Euribor markets have been under a huge stress in the last weeks due to credit conditions that have worsened because of year end cash needs. If things do not improve, many mortgage holders will see their payments increase for the next year (as rates are reset end or start of the year). Things might get better in the spring but many loan holders will still carry the burden of the December 2007 Euribor stress.
Is everyone aware of this?


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