Prices for new two-bedroom flats will crash and leave many buy-to-let investors facing losses, a leading analyst has warned.
Alastair Stewart of Dresdner Kleinwort Wasserstein said in a note to fund mangers last week that “a potential crisis of oversupply is looming”.
Land Registry figures show that prices of new flats have fallen by 5.6% in the past quarter, despite a rise in new-build prices in general. Stewart said discounts of 15% “are now common”.
“There is simply too much stock for companies to sell them at their originally targeted margins,” said the DKW analyst, adding that builders needed to consider bulk sales to housing associations or “widespread” price cuts.
Stewart blames the “speculative ‘investor club’ end of the market” for fuelling the boom in buy-to-let flats. Gross advances from this sector have boomed from 20,000 in 2000 to 120,000 at end-2004 (see table).
“Two-bed, two-bath new-build flats are the product of choice for the buy-to-let and the more recent phenomenon ‘buy-to-flip’ investors. They come from increasingly discredited ‘make yourself a millionaire’ investor clubs,” he said.
The proportion of apartments has risen from 21% in 2000 to 46% of total housebuilding starts today. Planning approvals are running at rates higher than annual production.
“We believe the phenomenon of oversupply of the wrong type of property will present a serious challenge to many housebuilders for many months or perhaps years to come,” warned Stewart, adding that companies like Barratt, Bellway and Berkeley “have the biggest exposure to flats”.
