Margin calls begin for leveraged property speculators
Posted: April 4th, 2009 | Author: James | Filed under: Uncategorized |The FT is reporting that borrow to letters are facing the arrival of the margin call. This is an very important development. A lot of people have been criticising the bankers recently for leveraged speculation, but most people do not realise that the man on the street only has one option for leveraged speculation: property. The thing about leveraged speculation is that when prices rise, it is extremely profitable. When prices fall, however, you either need to find cash quickly or face being closed out of your position by the lender. This forces you to take the loss even if prices may return in the longer term.
Up until now, the lenders have avoided this. It is partly a prisoners dilemma problem where if one bank starts margin calls it may well cause further distressed sales and therefore more downward pressure on prices which would in turn require more margin calls. However, the FT story indicates that this attitude is changing.
I’m not sure how to feel about this… a margin call seems like a sensible precaution by lenders monitoring borrowers with correctly structured debts to support the properties which they let.
Assuming these landlords are working within their means, then this should help restrict some of the excesses we have seen in the past and act as a brake on the expansion of those landlords.
The problem really arises with those amateur landlords who are borrowing on “non buy-to-let” basis and who will not have this oversight of their affairs.
They will not have these margin calls and can continue to overextend as far as they like.
As we have seen on the forum, this could quickly lead to many properties becoming subject to arrears as overextended landlords have the rugs suddenly pulled from under them…