Top British hedge fund manager Crispin Odey is worried about a bubble.
The boss of Odey Asset Management told the Sunday Telegraph that 2016 is said to be a rough year for investors due to China’s slowdown, uncertainty over US interest rate rises, and, ominously, a worry that Europe’s current growth is just fuelled by another housing bubble.
When Odey talks, people listen. He founded £13.7 billion ($20.2 billion) London hedge fund Odey Asset Management in 1991 and is one of the industries best-known names in Britain.
Here’s what he said on housing specifically:
Has Europe, including the UK, only rediscovered the housing bubble route to economic growth that got them into trouble in 2007 and 2008?
For those who need a refresher, 2007 and 2008 was when the world economy more or less collapsed, sparked by a wave of defaults for “sub-prime” mortgages in the US — people who were lent money to buy a house but couldn’t actually afford to pay it back.
House prices have been rocketing in the UK over the last 18 months and are above their pre-crisis peak in most of the UK. There are growing fears that the spiralling price rises, which are boosting the economy as a whole, are unsustainable.
The problem is particularly pronounced in certain segments of the market. In London, for instance, price rises are astronomic. Deutsche Bank predicts that this “bubble” will come to a nasty end.
And in buy-to-let specifically — the part of the market where people borrow to buy a house they will rent out — market watchers are concerned that activity has become too heated.
The number of buy-to-let mortgages doled out recently surpassed the pre-crisis peak and Bank of England governor Mark Carney has signalled he is closely watching the sector. Carney says he “will take action” if things get out of hand. Barclays also recently noted that there is a “wall of worry” surrounding the sector.
Buy-to-let mortgages are riskier than traditional mortgages as the interest on them resets at a higher level than traditional mortgages if interest rates rise. The lending criteria for buy-to-let mortgages can also be looser — more about the property than the borrower.
That means that when UK interest rates rise, as they’re looking increasingly likely to this year, we could see a wave of buy-to-let borrowers folding.
London and the buy-to-let market are just two of the most obvious and worrying symptoms of a wider housing market that is super hot right now.
Odey’s point seems to be that this is propping up growth right now and, whether or not there’s another crash around the corner, the housing market has proved to be an unreliable growth engine in the past. We should be looking to alternatives.
When Odey talks, people listen. He founded £13.7 billion London hedge fund Odey Asset Management in 1991 and is one of the industries best-known names in Britain.
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