Buy-to-Let Stats Hide Surge in Bad Debts

Published Wednesday August 27th 2008.

At first glance the statistics on buy-to-let mortgage numbers, arrears and repossessions, released yesterday by the Council of Mortgage Lenders, would seem not that bad. The sense you get from the accompanying press release is that BTLers are weathering the current market better than encumbered owner-occupiers. Closer inspection would suggest that the BTL sector is deteriorating ... and fast.

To start we shall look at the most impressive part of the data, the continued growth in the number of BTL mortgages.

The total number of BTL mortgages outstanding rose by 78,700 in the first half of 2008, to 1,103,000. Even more impressive when you think that the number of residential mortages actually contracted by 81,000 in the same period. Though it needs to be kept in mind that the residential market is ahead of the BTL-curve in repossessions and properties becoming unencumbered.

The good news seems to end there.

The press release made a point of the arrears, especially focussing on the percentage being less those being experienced by their enmortgaged residential counterparts.

However, the CML numbers only quote percentages. Unlike the residential stats, no exact numbers are in the released data. Once you do the math the truth behind the numbers becomes clearer.

You can see how the total number of mortgages in 3+ months arrears, the blue columns, have risen dramatically in the last 9 months. Since 2006 Q3 quarterly stats have been released which also include a breakdown of the number of properties being repossessed, the green column. Knowing that gives us another, more revealing, number.

A property is not going to be repossesed spontaneously. For the situation to deteriorate that far many mortgage payments are likely to be missed. In which case, those properties that were repossesed this quarter were most likely in the arrears column in the previous quarter. Which means . . .

Increase in total arrears PLUS Repossesions EQUALS Actual new arrears. Which is the red column.

Technically, there could be more new arrears as some past arrears cases are no more as the missed mortgage payments have been caught up. But the calculation above makes sense as a general rule of thumb.

What we get are figures for new arrears even larger than the surging numbers the naked stats would have you believe. It is also far removed from the rose-tinted BTL world being painted.

To emphasise the point, the chart below compares how the last three quarter's arrears stack up against those which had previously been accumulated.

The extreme increase in delinquencies could not be more obvious.

As of Q3 2007 the total number of BTL mortgages with 3+ months of arrears was 5,974. In Q4 the total number increased by 1,518, the largest increase in the history of BTL. The largest until Q1 2008, which saw a 2,149 increase. Which was then trumped by Q2 2008 with a 2,499 increase. In percentage terms those are increases of 25.4%, 28.7% and 26% respectively.

Using the minimum actual new arrears numbers instead things look even bleaker. 2,122 new arrears cases in Q3 2007, 3,015 in Q1 2008 and 3,421 in Q2 2008. All record busting numbers. Increases of 35.5%, 40.2% and 35.5% on total arrears respectively.

What does this trend suggest? Unless the market improves and criteria loosen, unlikely, the in:specie™ projection for the second half of the year is:

  • 9,000 new '3+ months' arrears cases;
  • 7,000 increase in total arrears;
  • 2,000 repossessions.

 

First published at inspecie.co.uk. Reprinted with permission.