Last Updated: Tuesday, 5 February 2008, 11:50 GMT
Transcript - Bursting the House Price Bubble
NB: THIS TRANSCRIPT WAS TYPED FROM A TRANSCRIPTION UNIT RECORDING AND NOT COPIED FROM AN ORIGINAL SCRIPT: BECAUSE OF THE POSSIBILITY OF MIS-HEARING AND THE DIFFICULTY, IN SOME CASES OF IDENTIFYING INDIVIDUAL SPEAKERS, THE BBC CANNOT VOUCH FOR ITS ACCURACY.
BURSTING THE HOUSE PRICE BUBBLE
Reporter: RAPHAEL ROWE
RECORDED FROM TRANSMISSION: BBC ONE
JEREMY VINE: Good evening, I'm Jeremy Vine and this is Panorama. Is your home worth what you think it is?
People believe that property can only ever rise but the general value of property is incorrect.
VINE: Some have seen the value of their properties plummet by more than 60%.
It's become a nightmare. I've lost everything that I've ever worked for in my life.
VINE: And the man who has made 69 million pounds from our obsession with property. Enough money to help buy a football club. But are the celebrations about to end in tears? First time buyers are unable to get on the housing ladder while armchair investors with practically no savings are offered the chance to build up property portfolios worth millions. It could only be the British housing market. But as prices level off and reality starts to return, investigators are now moving in to find out whether buyers and lenders have been the target of widespread fraud.
RAPHAEL ROWE: In the past eight years property prices across most of Britain have doubled in a seemingly endless house party. Those buying in the right place became property millionaires, developers and lenders joined in, urged on by successive governments to give us all the chance to become home owners. But there are still some who have been left behind. In Nottingham trainee fire-fighter Kieran Squire earns £20,000 a year. He wants to set down roots in the community he serves but he can't.
Most places was out of my reach within Nottingham to get myself a mortgage of my own.. on my own to live where I wanted to live really.
ROWE: Kieran has a 50 mile round trip on top of his 12 hour shifts.
KIERAN: It does become depressing looking at house prices and estate agents knowing the fact that I won't be able to afford them and probably still won't be able to afford them in the future.
ROWE: So why do Kieran and thousands like him find it so difficult to get on the property ladder? Well, research to be presented to the government later this week confirms for the first time that the boom in the buy-to-let market plays a part in squeezing first time buyers out of the property market. Across town in Nottingham I met someone who had been part of that boom. Londoner Maria Rusk is taking me to see a flat she picked out of a developers brochure just two years ago and bought without even seeing. The plan was that rent from some of Nottingham's 100,000 students would pay for her mortgage but it didn't work out that way and the flat was finally repossessed. Today she's meeting its new owner.
MARIA RUSK: So how long have you had the flat?
EUSTACE OKERE: For about 3 weeks.
MARIA: And if you don't mind my asking, how much did you actually pay for this property?
I got it for about £74,900, that was about three weeks ago.
MARIA: You might be surprised to learn that I was actually sold this property for about £200,000.
MARIA: Does that shock you?
EUSTACE: It does. It does. That's on the high side.
ROWE: So, Eustace paid almost £75,000 for a flat valued at £200,000 in 2006, a drop of £125,000. Maria's was just one of a million buy-to-let mortgages taken out over the last decade. Initially meant for savvy investors, they're completely unregulated. But the boom in property prices and fears over pension funds has drawn I many amateur investors who, like Maria, had little money to fall back on. With the developers promise of £1200 a month rental income Maria thought she was onto a winner. But the reality was there wasn't enough tenants to pay that amount of money and she couldn't afford her mortgage. The flat's new owner who lives locally has done his homework.
MARIA: And what sort of rental income do you expect to receive?
EUSTACE: Personally I would think about £600 to £650 but I think that's a rough estimate.
MARIA: So you think £1200 per calendar month might be a bit high?
EUSTACE: No, I don't think so.
ROWE: Maria's dream of becoming a property millionaire was sold to her by this company, Morris Properties. In its sales pitch it offers to look after the property, the tenants and the rents, so all investors like Maria have to do is... well - nothing! We met a chilly reception at Morris Properties Headquarters in Leeds when we turned up unannounced. In a speech last year its boss claimed his company had sold one and a half billion pounds worth of property across Britain since 2002. As the boom times recede Morris Properties pricing practices are now being subjected to scrutiny. The Land Registry keeps a record of the price paid for every property sold in England and Wales. It shows Maria paid just under £200,000 for the flat in Nottingham only she didn't.
And what did you pay for it?
I paid just under £170,000, that was my mortgage.
ROWE: So you paid £170,000 for the property and it's on the Land Registry as £199.995.
ROWE: So there's a difference.
MARIA: There's a difference of 15%.
ROWE: The Land Registry says the figure it requires is the actual price Maria paid for the property on the day of completion. The one it has makes it look as though she paid £29,000 more than she really did. It's something we'll come across repeatedly with Morris Properties. But does it really matter? Well yes it does because to decide how much a property is worth valuers routinely use Land Registry figures to find three comparable sales in the same area.
Council of Mortgage Lenders
It's important for the Land Registry to have accurate prices paid as it is for all house price indices to be accurate because they're used by valuers to compare future sales on other properties in the same area or in the same block, and if the wrong price is used the first time, that will continue the problem across the whole series of development.
ROWE: Panorama has seen dozens of forms signed by the owner of Morris Properties, all stating the price paid as higher than it really was. These forms go to the buyer's solicitor who sends them to the Land Registry. If they're not corrected then the official record is not showing the true price paid and everyone is being misled over property values. Morris Properties says its not aware of any systematic wrongdoing by its employees. To justify the price tag of £200,000 that Maria paid for her flat valuers came here to these flats. But they'd also been sold by Morris Properties and it was the same as in Maria's development, inflated prices, unrealistic promises on rent and repossessions galore. After her flat was resold at its much lower value, Maria still owes her mortgage lender £100,000.
MARIA: I now run the risk of losing my own home so potentially 2008 I could be homeless.
ROWE: Since the buy-to-let market expanded 11 years ago banks have poured more than a hundred billion pounds into it. With a standard mortgage, how much you can borrow is based on how much you earn. With a buy-to-let you can borrow what you like, as long as the expected rent covers it, so it's vital that estimate is realistic. Morris Properties says Maria's house and the development used to value it are in an area later referred to as the ?gun capital? of the country. As a result, students were advised not to rent in this area. While Maria lost her buy-to-let gamble, Simon Morris, the owner of Morris Properties is a winner. At just 29 he made it into the Sunday Times rich list with an estimated £69 million fortune, not bad for a man who dropped out of university in his first year.
In 2004 he bought into Leeds United and became a director. He was there for ten months before selling to Ken Baits. A flamboyant character, Simon Morris has attracted attention, not all of it good. It was claimed he plotted to drug or injure some of the most expensive Leeds United players in a bid to cut the wage bill, an allegation he denies. Reports he was shot at last year are being investigated by the police. Simon Morris is now besieged on all fronts. While some of his customers may have profited, he's facing large numbers of complaints from buy-to-let investors, former student tenants and even building contractors. His company's activities are also under investigation by government regulators and the Serious Fraud Office. Going online to check out property prices is irresistible but are we seeing a true picture? Not according to one of the new top tier of financial experts set up last year.
Chartered Financial Planner
People believe government statistics as the reality. I personally believe that Land Registry house price indices have been inaccurate for the past few years. Because house prices have apparently risen as fast as they've apparently risen, more and more people have been sucked like a mania into this market.
ROWE: To see that mania in action take the records for an ordinary house in Leeds - No.2 Pearson Terrace. In September 2005 it was owned by a Saudi businessman. He then sells it to a company based in the Virgin Islands. In December Morris Properties snaps it up and four months later, after doing it up, it's sold to a buy-to-let investor for double the price. Morris Properties says its houses are independently valued for the lenders who used up to twenty different valuers and at least half a dozen different solicitors all of whom acted independently. So any allegation that it somehow conspired with valuers and solicitors is entirely rejected. In the ongoing fraud investigation into Morris Properties seven valuers including the one who valued No.2 Pearson Terrace have been arrested. Buy-to-let mortgages usually require a hefty deposit because lenders think they're a bigger risk. This could deter would-be buyers who don't have the cash to put down. But with Morris Properties there's a way round it. No deposit needn't mean no mortgage. This is the man who bought the house in Pearson Terrace.
Morris Properties were offering us investors a deal whereby they would pay the 11% deposit.
ROWE: So what was the difference in the Land Registry price and the price you actually paid?
BAUDINET: About 11%.
ROWE: It works out about £33,000.
BAUDINET: Yes, if that's the value, yes.
ROWE: So a good deal.
BAUDINET: Yes, yes, very good. Very good.
ROWE: The mortgage lenders told us it wouldn't have agreed to this mortgage if it had known Mr Baudinet wasn't paying the deposit himself. Just look at what happened. It's completion day when all the money is handed over. First the mortgage lender pays £266,965 pounds. This is the agreed 89% mortgage. What would now happen in a normal house sale is that Mr Baudinet would hand over his deposit, £33,000. But he doesn't, instead Morris Properties pays the deposit out of its own bank account. That money goes to the buyer's solicitor where it joins the lender's money. Within a few hours it all comes straight back to Morris Properties' solicitors. So only the mortgage lender has actually paid out any money for this house.
Council of Mortgage Lenders
All lenders are going to want to make sure they lend the correct amount based on the correct valuation and if they don't know about a deposit that has been given or a payment back, a cash back or incentive given by a developer to a customer they may simply lend too much money. They may wish to only lend 75% say and they end up lending nearer 100% of the value because they haven't appreciated what's been going on in relation to the developer and the customer.
ROWE: If lenders are deliberately misled then that can amount to mortgage fraud, but whose responsibility is it to tell them of any such deals? The buyer's solicitor. Morris Property says it provided incentives with full knowledge of solicitors acting for both lenders and purchasers, more generally its improved business practices and developed dramatically different and more stringent procedures. Customers of Morris Properties we've spoken to say it was made clear they'd only get their gifted deposits if they used a firm called Watson and Brown in South Shields.
BAUDINET: Morris sold us these properties and they offered this incentive providing we used the solicitors they allocated to us.
ROWE: And if you didn't agree to this?
BAUDINET: Well we would have to come up with the full deposit, all the stamp duty and everything, all the costs.
ROWE: Two lenders told us if they'd known they were gifted deposits of this size they wouldn't have approved them. Morris Property says while customers were incentivised to commit to a fast purchase, using different solicitors did not have any bearing on their entitlement to the incentive. The Solicitors' Regulation Authority is investigating 60 solicitors firms nationwide about allegations of overvaluing and mortgage fraud.
Solicitors Regulation Authority
Clearly there is a public interest that this activity is controlled as soon as possible.
CALVERT: Because of the harm that's done. Not only are properties inflated in price, it means that people who genuinely need those properties are unlikely to get hold of them. And so people are, I think, being excluded from the property market and from owning their own property.
ROWE: Watson and Brown is also under investigation. Solicitors have a professional duty to act in the best interest of buyers. Owner Karen Brown declined to be interviewed citing client confidentiality. So I tried I tried to put some questions to her in person.
Karen Brown, hi, Raphael Rowe from the BBC, Panorama. I just want to ask you a couple of questions.
KAREN BROWN: Sorry, we'll send you a statement.
ROWE: But don't you want to answer questions for your clients who have had their properties repossessed? Surely you want to answer questions?
In a statement Karen Brown said strict duties of privilege and confidentiality made it impossible for the firm to comment. The legal watchdog wouldn't discuss Watson and Brown but admits its concerned about increasing fraud.
CALVERT: We are looking at people who are doing this on a fairly industrial scale and making use of the services of a handful of solicitors.
ROWE: What's the biggest case that you yourself have investigated?
CALVERT: Well, I can say for example that one solicitor we have investigated has been responsible for transacting something in excess of 80 million pounds.
ROWE: Like Maria, Mr Baudinet found the rental income to be nowhere near that promised by Morris Properties. The house was repossessed. If it doesn't sell for what he paid for it, he'll be liable to pay the difference. In 2006 he took on mortgages of half a million pounds for two properties in Pearson Terrace. So what are they worth now?
Well what have you found out?
BAUDINET: Down in the market for £180,000. They've had offers on both properties at £177,000. I'm astounded.
ROWE: You're going to have to fork out the difference.
BAUDIENT: Yes, I will have to, yes. I'm going to have to find that or have to come up with that at some point.
ROWE: It's a loss of around £147,000 and you might think more fool him. Certainly some who've been piling into property could be accused of acting rashly in their rush to invest. Derby, a town whereby the magic of buy-to-let and Morris Properties a woman on £50,000 a year was able to buy 1.8 million pounds worth of property without paying any deposits. Like many armchair investors caught up in Britain's buy-to-let fever Johnette Motler took a lot on trust. She bought these four terraced student lets without seeing them using gifted deposits. Morris Properties promised to refurbish them.
What stopped you from coming here yourself and just looking and sort of saying...
JOHNETTE: I said to them I wanted to come down, I said I'd like to go in. They said: ?Johnette, you can't go in because the whole place is gutted.?
ROWE: When her tenants complained she belatedly went to see for herself.
I was absolutely appalled by the condition because we had black mould in the bathrooms. We had plaster cracks, we had the kitchens in deplorable conditions. Nothing was working.
ROWE: With her properties unrentable repossession was inevitable. They were revalued at nearly half the price they were sold to her. After resale Jeanette expects to owe her mortgage lender at least £700,000. She's now filing for bankruptcy. ?Not our fault? says Morris Properties, adding it was under no duty to examine the suitability of purchasers to look after their property investment, although it says it's now vetting them more closely. It added that the unravelling of this particular market is the function of individuals attempting to make quick profits without the requisite skills for managing property portfolios in a tightening economic environment. The Serious Fraud Office investigation into Morris Properties has so far seen the seven valuers arrested, a hundred investors interviewed with hundreds more to go. It's one of the biggest property fraud investigations seen in the UK. Meanwhile Morris Properties has now morphed into Intellectual Property. The company categorically denies any wrongdoing. Some believe watchdogs have been asleep on the job, failing to protect the Johnette's of this world.
Chartered Financial Planner
It is not solely the responsibility of developers to regulate this market. They're in the business of developing properties and selling them. Where is the regulation? I haven't seen much of it.
ROWE: And the lenders only seem to have heard the alarm bells ringing when the good times stopped rolling.
Property Analyst, Dresdner Kleinwort
All of this started to ferment in the period when house prices were going up very rapidly where everybody was making quick bucks and there was a very brisk market to sell things onto. During this period not too many questions were asked. People kept their eyes off the ball and the chickens are only now coming home to roost.
ROWE: The credit crunch has hit borrowers because lenders couldn't raise money for new loans, but is there a second body blow about to land as lenders face huge losses from repossessions?
Council of Mortgage Lenders
Now that sort of experience will obviously create nervousness amongst individual lenders, that they don't want to lose money in the future, they'll obviously tighten how much they're prepared to lend, but if they haven't got confidence that they've got clear transparency by the developer or aren't sure that their customer is telling them the whole truth, then maybe it's easier simply not to lend in that market.
ROWE: The Council of Mortgage Lenders has held talks with the Home Builders Federation to ask developers to be more open with lenders and the true value of gifted deposits and other incentives. Britain's biggest house builder, Barrat Homes, has been involved in the regeneration of Thamesmead in South East London. The development was meant to be a young professional's dream and with a well paid TV job Nana Akua was an ideal buyer.
I know what you're thinking, just another bunch of stalls.
Why take the ferry when you can swim?
ROWE: The two bedroom flat she bought off plan had a price tag of £304,000. One of the first to move in she paid a 10% deposit from her own savings with Barratt adding another 5%, a standard sale.
It was quite an expensive place to live, especially for around here, so to get better neighbours, you know, to have a high calibre of tenant around me, because obviously with the prices they were charging, it should have been that not anyone could have moved in. The whole thing was supposed to be secure, up-market development.
ROWE: As sales dropped off Barratt didn't cut its prices to attract customers, instead it up'd its incentives to as much as 20% off the purchase price.
NANA: The bigger incentive attracted clients who had very little money because if you don't have to put a deposit down, if you don't need to pay your stamp duty, if you don't need to pay your legal fees then what do you need to pay?
ROWE: The great offers brought in many buy-to-let investors, absent landlords.
NANA: Well the knock on effect is that the kind of calibre of tenant that came to the development decreased. It became a place that you just.. the doors never shut, nothing locked, everything was broken. The kind of people that live in there are making noise, parties every night. All sorts of weird and wonderful things going on.
ROWE: So just who were the tenants living in Tideslea Path? On this floor ten people are registered in a two bedroom flat. Upstairs a flat was used by a gang of fraudsters to swindle £100,000 in student loans. There was even a bogus bank and its headquarters was in a flat down this corridor. And last summer there was even a brothel in one of these flats. So all in all not the sort of neighbours Nana was hoping for. Barratt says it's surprised at any suggestion that incentives may have caused antisocial behaviour and says it's already spent a considerable sum to improve the estate and earmarked further monies for things like CCTV coverage and a concierge office. It's not just the neighbours residents are complaining about. Some we spoke to believe the sales incentives helped inflate the original value of their homes. This is one of several documents we've seen. The buyer doesn't want to be identified but it says here that Barratt homes say the price of the flat is £276,000. The lender agreed an 85% mortgage of £234,000 so long as the buyer came up with the £42,000 deposit. But it didn't happen that way. Instead Barratt waived the deposit. So the price paid on the day was £234,000 effectively making it a 100% mortgage. The lease drawn up by Barratt lawyers still shows the full amount and it was this lease the buyer's solicitor then passed to the Land Registry. So the figure held at the Registry is £42,000 higher than the actual price paid. There's no suggestion of fraud by Barratt. It's the buyer's solicitor's job to report the waived deposit to the lender and the actual price paid to the Land Registry. It says its marketing and incentives are transparent and there's nothing sinister or wrong with them and categorically rejects any suggestion it's a party to false prices being recorded. It says the lease it draws up simply sets out the gross price agreed prior to incentives and adds that this is industry standard practice. Other developers have a different policy and insist that the price given in the lease has all incentives deducted. Gifted deposits and incentives are legal and widely used, but why not simply cut prices?
JONATHAN DAVIS: The property development industry has been extremely reluctant to reduce prices because then they would have to admit finally that property prices were over inflated.
ROWE: So how has this affected Nana? The flat she was sold for £304,000 has just been valued again at £200,000.
Obviously my property now is ultimately in negative equity, so what I paid for it I'm just not going to get back right now. Maybe in about a year's time when all the repossessions have gone, then the property prices will start to rise.
ROWE: Barratt says its Thamesmead incentives weren't replicated nationally and local price falls are not its fault. It seems the great British house party is well and truly over, for now at least. The resulting hangover could mean more bad news for recent buyers. And those who've stretched their finances to join the property party can only hope the doom mongers are wrong. Remember our trainee fire fighter? He's made it onto that first rung but at a price.
I ended up having to have help from another source which was my brother, you know, going halves on a house with myself in order to fund it and to actually get on the ladder.
ROWE: This still 25 miles from where Kieran wants to be, in the city centre, and their mortgage is five times Kieran's wages and four times his brother's.
KIERAN: That was the only way really I could afford to do it, having no deposit and having to get a 100% mortgage.
VINE: Raphael Rowe reporting and Kieran you might want to put your fingers in your ears now because figures show that house prices have fallen for the last three months across the country and some experts are predicting a 35% drop in property prices in the next five years.
Next Monday, no more Mandelas. With the new leader of the ANC facing corruption charges Fergal Keene returns to South Africa to discover what happened to the rainbow nation.